Post-TARP, it's like the banks have a really bad case constipation. In a ham-handed attempt to regain control of the banks, the government has created a double-bind. With money available to them at artificially low rates, if you're a bank, the easiest thing is just to park that money in U.S. Treasuries. Why go through all the hassles of lending to local businesses? Plus, thanks to the government's ill-conceived efforts to micro-manage its TARP recipients, my banker claims there are so many restrictions on lending that the banks are virtually incapable of putting money into circulation were they inclined to do so. He sounds sincere when he says, "In all my years in banking, this has been my least favorite time with my customers."
Ditto. I mean, my company has been consistently profitable for 25 years, never missed a loan payment, and is growing like topsy. Yet, for reasons that are hard to comprehend, we recently learned that since becoming a TARP recipient, our bank shifted us into a high-risk "classified" category. That accounts for why a modest loan that we repeatedly requested to make safety improvements in our building was rejected over and over without explanation. It's why our line of credit was subject to mysterious interruptions for days on end, throwing our ability to make timely payments to our vendors and employees into upheaval. Turns out, our "category" calls for a monthly freeze and review of our line of credit, but up until now our banker wouldn't reveal what the heck was happening or why.
Taking a Guantanamo approach to risk management, TARP recipients were told "if you think it could be an eight, make it an eight," according to our banker. At this point, neither he nor any of his peers at other area banks have a single business client above a level 5, with 10 being the lowest grade. Basically, at least in suburban Philadelphia, this means that no small to medium-sized businesses are deemed truly creditworthy. "We don't have any 1 to 4-rated accounts; it's crazy," he says. To make matters worse, once you're downgraded, it's very difficult to get out. The banks are simply too occupied with the really bad risks to expend the considerable time and effort required to upgrade an account.
Compounding the problem, our banker explains that the line of credit renewal process is "backlogged at all the banks". The government's new reporting requirements have become so onerous, complex, and frequent that, he says, banks simply don't have enough credit analysts to keep pace. (Guess that's one way to create jobs.) Calling it "paralysis by analysis," our banker complains that the process is bogged down by such requirements as monthly and quarterly analyses of companies that typically would have been subject to only annual reviews in the past. "We've gone too far on screening and due diligence," he contends. "It's certainly not helping the recovery."
Look, they call it capitalism for a reason. To grow, small and mid-sized businesses need funds for facilities, equipment, marketing, and hiring and training, all of which capital quickly multiplies into more and more jobs. If the Obama administration had held the banks accountable for all that low-interest rate money, imposing clear directives to lend to fairly rated, viable small businesses, U.S. employment would be up considerably by now. Those workers and their bosses would be buying houses, cars, and refrigerators, furthering the recovery. They might even be voting Democratic.
But, perhaps because small businesses are seen as the domain of the Republican Party, the Democratic leadership has been impervious to our need for capital. Or, perhaps they were foolhardy enough to assume that the now-chastened banks would return to their traditional roles. Unfortunately, it's evident that today's banks have been deprived of their traditional tools, stripped of their expertise, and tempted by the many still legal lures of fast profits available through subprime mortgage bundling and other channels.
If we needed any proof, the decade of deregulation, culminating in the global financial meltdown, showed that when big bonuses are at stake, the banks have no interest whatsoever in acting responsibly towards their clients, their shareholders, and the general public. What we need is a return to the homespun values the Glass-Steagall Act embodied. But, what I fear we are likely to see instead after Election Day, is just another round of destructive deregulation.
Get ready for "Banks Gone Hog Wild II".
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