The Fourteenth Banker Blog

May 17, 2010

Meredith Whitney is Wrong

Filed under: Running Commentary — thefourteenthbanker @ 7:44 PM

Meredith says that the banking reforms will result in a credit crunch for small businesses.

The state caps on interest rates, she said, could make rates in one state lower than in another, causing banks not to lend in certain states.

“It’s going to make accessing capital so difficult for pockets of the country,” she said, particularly for small businesses that often depend on credit cards for funding.”

News flash, small businesses are already in a credit crunch.  Saying that credit cards with high rates are essential for small business to make it in this country is to concede that the status quo is the way things should be.  What has really happened with large banks in this country is that they have created a two tiered credit system for consumers and small businesses.  It is easiest to explain for consumers.  Either there is bubble money that is too cheap and abundant, pushed out the door in order to create other profit opportunities (mortgages/securitizations/CDOs/CDS), or there is expensive money (credit cards), designed to maximize profitability and create other profit opportunities.  There is not middle ground because costs must be minimized.  (worked for BP for awhile)  You cannot make a consumer loan at 7-9% because that requires judgment and judgment requires paying an individual to make a decision instead of running volumes of applications through a computer.  All the capability to make judgments, sit across from a consumer and advise them with skill is gone in our large banks.

Small business credit is the same story.  First of all, understand that really small businesses borrow on their personal credit cards.  Business cards are primarily for convenience and are paid in full each month.  These cards still generate huge profits for the banks through interchange fees.  It is all about profit.  So, businesses that meet very tight standards that will be approved by a computer or with no more than a few hours of an overworked underwriters time in some remote city, are available at really quite attractive rates.  Any business that is not in an approved industry or requires a deeper judgmental analysis is generally declined or approved with such onerous conditions that it won’t be accepted. There are exceptions of course, but the gray area is very small.  The individual that is most familiar with that business for the bank is really an expert in sales, not credit or offering advice.

This system was devised by math geniuses just like the ones on Wall Street.  They run the business on “metrics” which invariably assume that cost cuts do not reduce service quality and do not materially increase attrition.  You see, cost cuts are measurable in the period they are realized.  There are a myriad of costs which are not easily quantifiable and so are not considered in the decisions to build these processes.  Customer attrition, banker attrition, future training needs, losses that the model can’t anticipate based on historical analysis but that result from the lack of a qualified banker overseeing the application, are simply not counted.  So these processes appear to make sense.  There is also institutional forgetfulness.  By focusing on the present and the hypothetical future, one never has to address that things actually were better or that some favored manager was actually wrong.

So Meredith, you are right about one thing.   Absent any evolution in our system, there may be a tightening of credit.  But we can evolve. Regulation which invalidates the existing models will force evolution.  It may not be comfortable for the dinosaurs to have someone nipping at their heels, but that is exactly what will happen.

What businesses need to be aware of if that they have to pay for this financing capacity.  If small business wants a system where loan margins are 2%, there will not be enough credit to go around.  They may get their loan but they may not have any customers or suppliers. Big banks have had to offer 2% margins to the few credits that fit their risk model because their service is poor.  Then, because the loan spread is so thin, they have to be even tighter with approvals or when there is a hiccup, toss the business to the collection group to minimize losses without relationship considerations.  Businesses need to be willing to have a higher loan spread so that every bank does not have to be a Wal Mart bank.  6%-7% is a lot better deal than the other end of the spectrum, borrowing on your credit card.  You see, greed has done you in as well.  You put nice clean banks out of business. You took your business to the lowest bidder, not realizing they would not be there for you when the rains came.  The Community banks had to make risky real estate loans and now many don’t have the lending capacity to make new loans.

Small businesses, new and existing banks need to build a better future together.



  1. Shocking, just shocking conclusion that banks might actually have to do some banking!

    Comment by lucyhoneychurch — May 17, 2010 @ 8:25 PM | Reply

  2. Since when can family lawyers fight homicide cases?

    With all due respect if you spend 10 hours of your day in Manhattan you’re not qualified enough to comment on what goes on in the trenches. Intelligence is not an absolute substitute for experience.

    Mr. 14 you’re dead on, there are good banks waiting anxiuosly to serve the customers that the TBTF may not want, unfortunately right now they’ve been driven out of the market.

    Another thing that Meredith doesn’t get is that the TBTF lend less than 10% of their deposits any way. So why would they leave, the way they work is by giving away the deposit services, such as free online banking, free bill pay, free checking account, free funds transfer between accounts, free sweep to money market account to cover for overdrafts, free free free!!!

    It is Walmart banking, exept finance is not clothes. It’s nice to be able to afford a new wardrobe every season, it’s not so much fun to change your accounts every season. Or to have your banker change on you every season. But and that’s where our societal values come into play that as Americans we love cheap, free stuff. We’re paying big time for that love, but until te pain reaches a critical mass I can’t see how change will happen.

    In fact I don’t think this credit card fee cap is going to change anything. The only regulation that can truly affect change is to break up the banks, and that we know is already history….for now.

    Comment by Vocalbanker — May 18, 2010 @ 11:36 AM | Reply

  3. have patience. it’s going to settle any time soon

    Comment by Jaluzele Exterioare — March 23, 2011 @ 11:37 AM | Reply

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