TARP
There have been a couple of comments sent to me stating that Frontier never took TARP funds. That is correct. They did apply for funds but as far as I know never received them. On the other hand Washington Federal did take TARP funds and has repaid them back. On reviewing my last Post I can see the confusion caused. My rant regarding TARP comingled with my comments regarding Frontier’s condition can imply that Fronteir took TARP funds and that it was part of the cause of the present situation. That is not the case. Here is the link to what I know about the situation regarding TARP and Frontier.
http://seattle.bizjournals.com/seattle/stories/2008/11/10/daily21.html
Here is my point regarding TARP and the overall November 2008 legislation that had a lot of new regulatory rules as a result. First the overall legeslation was very damaging to the regional banks since elements of the TARP legislation and ancillary legislation did not allow banks to advance funds to a borrower in default. This precluded work outs with assets that were partially completed which only further hammered the value causing massive write downs which starved both banks and borroers of their capital. In past down turns banks would work with trustworthy borrowers who had depeleted funds but would usually direct pay subs to get either homes or subdivisions completed so their full asset potential could be realized under the terms of the loan. The FDIC interpreted under the new guide lines interpreted this as “enriching the borrower”. The second element of the November 2008 legislation that really caused things to spiral downward was that banks were not allowed to engage in “risky lending”, i.e. real estate development loans. This took away the second work out tool which was to sell assets from weak borrowers to financially stronger borrowers or to finance finance foreclosed assets. Basically the FDIC wants the regionals out of the real estate lending business. They wanted their risky assets reduced, regardless of the quality of the borrower. If for example you received a subdivision back what I used to see happen is the bank would take a write down and then resell the asset to a new financially stronger borrower. This in essence was a back door capital raise since the borrower reduced the bank’s exposure by placing a large downpayment in the deal and then finaincing would be supplied for the balance. This allowed the bank to receive income in addition to the equity placed in the deal which allowed an income stream to offset future losses.
The problem with some of our regionals is that a lot of their business was real estate based lending. They now have to fill that profit pipeline with a very competitive retail lending environment. These banks were not set up to be retails banks they were community banks who were supposed to lend to local small businesses, their business model was jerked out from under them. They are now in a position of being forced to take massive write downs on these assets and no way of generating income to offset the losses. The money center banks have a deep pool of retail banking income to offset losses in other segments. Look at Wells Fargo as an example. The argument from the regulators and other parties is many regionals do not have the capital to lend; in my opinion a lot of the reason for that is because of the requirements discussed above which starved their capital and cut off their source of income. The other problem with TARP is that it took the emphasis of capital raising and made the government the first resort not the last resort.
Now some regionals would fail no matter how much money they have because they didn’t do good underwriting and were fee driven to excess. However I beleive a bank like Frontier left to the more normal and customary past ways may would be in much better shape than having been put in a straight jacket. They have basically good loan officers at the street level who understood the game but the rules were changed on them and they were not allowed to work out of their troubled in an orderly manner. There are many small businesses and employess who are dependent on these banks and the loss of these insitutions will only make things worse. If you are a surviving small business owner your only alternative will be an 800 number at Chase which will set you up on a line with credit card interest rates.