The Fourteenth Banker Blog

June 8, 2010

Rich Banks Poor Banks

Filed under: Running Commentary — thefourteenthbanker @ 9:04 PM

This blog has been focused on big banks and related issues.  As this ZH post points out, there are also many other stories involving many other banks.  The author if this post knows the folks at Santa Barbara Bank and Trust and thinks a lot of them.  He/She is not being critical of the bank but is using this example to make a case in point about economics and how not to solve the banking crisis.  This viewpoint is primarily about boom and bust and the mistaken attempt to partially reflate the bubble as a way to prevent more profound crisis.  It is a point well taken.

However, in any enterprise of this sort, there will have been some who supported the strategy that led to the current situation, and some who opposed the strategy.  I would love to hear from those who opposed, who may have seen changes in the management and culture that lead to excessive risk taking and who can comment on the motivations of decision makers as well as those who “got on board”.  I would also love to hear what happened to voices of dissent.

Further, though this bank did receive TARP, I would be curious how they are impacted by subsidized competitors.

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1 Comment »

  1. No matter what kind of stimulus was forced or otherwise engaged in by SBBT, the bank lent money out to people that ultimately had failed cash flows. Banking , by it’s natures, lends out long term. There is no question that lending must be reasonably prescient about future prospects of creditors and be ever on top of providing security to cover the bank’s collections if things go poorly. Poor sick Piero di Medici had that problem in 1460 but understood the problem. SBBT forgot the problem was ever present or bamboozelled themselves that such problems no longer existed. So, do we not have another peculiar delusion presenting problems in a society with ever more delusions over time. Silly bankers in a silly country?

    Every problem creating SBBT’s potential demise pre existed TARP and all other remedies. The only question is how harsh a remedy must be to salvage the institution from failed collections. SBBT could have been or perhaps should be forcibly recapitalized. All non deposit debt and some uninsured deposit debt should be recapitalized to Common Stock and the creditors receive the stock. The creditor stockholder now runs the bank. They fail and the bank is recapitalized again. The lesson is you lend money to a money lender you get paid back in extremis for your losses out of future profits. If you do not like the deal , do not lend to a bank. Of course, current lenders had no such possibility in mind when they should have. Might not TARP be just a lot less disruptive?

    Comment by Jerry J — June 9, 2010 @ 2:10 PM | Reply


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