Wall Street is getting mad. An AIG senior manager resigned very publicly on the editorial page of the New York Times this week, pointing fingers at both AIG executives and Washington politicians. Bank CEOs have started to issue veiled threats directed at Washington in their public statements. A parade of large banks have said they no longer want the bailout money they got last fall, and plan to return it. Yet the threats are empty and the anger is more an expression of frustration than a preparation to go to battle. Wall Street has scarcely any ammunition left. Some of the Treasury money that banks say they are giving back cannot be returned until the banks earn their way out of the hole they are in, and that might not happen. Banks want to return the money because they are not using it to make loans, yet making so few loans, it is hard for them to make the profit they need to make so they can pay the money back.
The strategy of the largest banks seems to be to wait out the recession and then go back to business as usual. It is not exactly a business plan. The recession is not likely to end until the economy has shrunk another 5 percent or so, and the banking sector could be absorbing most of that decline, coming out, by some estimates, 30 percent smaller than it was at the peak of the bubble three years ago. If that is true, the rest of the economy may start to turn around 6 months from now, but the banks and closely related businesses may continue to decline for another 5 years.
The banks that are hurting the most now are those that competed most aggressively for real estate and consumer loans in 2005 and 2006. Perhaps the biggest temptation for banks in 2009 is to view the current turmoil as an opportunity to grab market share. Banks that think they can expand their footprint now and get their operations under control later may find themselves repeating the mistakes of MCI and AOL, the champions of customer acquisition when you look at the last 20 years, but companies that saw their hard-fought market positions evaporate when they couldn’t deliver.
You don’t have to look very far to find examples of bank operations that are out of control. In a bizarre story that came out this morning, Wachovia, a failed bank now owned by Wells Fargo, apparently was trying to use a preemptive foreclosure to force a borrower to accept changes in the terms of a loan. That is the way the court saw it, at any rate. The court not only issued an injunction preventing Wachovia from proceeding with the foreclosure, but will be holding a hearing to determine whether Wachovia is entitled to any of the cancellation fee it claims it is owed on the loan.
There is a legal basis for the idea of a preemptive foreclosure. If a lender can prove that a borrower will not be able to repay a loan, it might be able to initiate foreclosure proceedings even though all loan payments so far have been made on time. It is nevertheless a terrible idea, and it must have taken several layers of management failures at Wachovia to let a story like this reach the point where people can say to each other, “They made all the payments on time, and the bank still tried to foreclose!”
This kind of story is bad for business. The perception that it is no longer safe to borrow from banks already has consumers paying off their loans. The Federal Reserve calculates the household debt service ratio (DSR) as the percent of income taken up by required debt payments. DSR peaked at 14.29 percent in 2006 and 2007, then fell to 13.90 percent by the end of 2008. It may be falling faster this year, as the savings rate has jumped up from near zero in recent years to 4 percent this year. That’s a savings rate large enough to cut total household debt by about 10 percent a year. DSR could easily fall back to the 11 percent level of the 1980s, or below, and if banks try to replace the lost income by raising consumer interest rates further, it could fall even more.
When banks get a smaller share of income, it means the banks have to be smaller. This is the kind of shift that has people projecting a banking industry shrinking by 30 percent.
You might think bank failures could provide a way for the banks to shrink, but so far, most failed banks have been taken over by other banks, providing no immediate change in the size or capacity of the industry as a whole. Tonight’s failure, though, is an exception.
Omni National Bank, a billion-dollar bank based in Atlanta with 6 offices in 4 states, was closed tonight, and when its offices reopen on Monday, it is only to let people take their money out in an orderly fashion. In Houston and Dallas, Texas, Omni National Bank used the name OFSI National Bank. SunTrust Bank, a large regional bank also based in Atlanta, is taking custody of Omni National Bank’s offices and deposits.
Unlike other recent bank closings, SunTrust is not assuming the failed bank’s deposits, but instead is acting as an agent of the FDIC to operate the failed bank for one month to give depositors time to withdraw their deposits. Customers can access their accounts, make deposits, and receive direct deposits starting probably on Monday and continuing until April 27, but they should make arrangements next week to open accounts at other banks.
Omni National Bank specialized in loans for urban redevelopment, and that can become a tough business in a time when no town is a boomtown. At the end of last year, a third of the bank’s $600 million in loans were considered nonperforming. Its holding company was placed under financial oversight by the Fed last week because of concerns about its capital levels. The Office of the Comptroller of the Currency (OCC) ordered the bank closed today after finding that its capital and earnings were rapidly disappearing.
The FDIC is projecting a cost of $290 million from the Omni National Bank failure. Omni National Bank is the largest of three banks to fail in Georgia this month and is the most expensive bank failure for the FDIC so far this year.