Banks Are Squandering Our Wealth

Bank failures and takeovers. Real estate loan portfolios loaded with delinquent and defaulted loans. Debates about the doctrine of “too big to fail.” Debates as to whether regulators moved too fast in taking over banks or not fast enough. Worries about tight credit and the loss of local institutions.

Those topics are merely the highlights of the current debacle in American banking, an industry hit harder by the Great Recession than almost any other.

But we might also be talking about the savings and loan crisis, the Third World lending crisis, the oil patch lending crisis and dozens of regional real estate collapses that wrecked balance sheets of banks with concentrations of loans in those markets.

No industry is immune to cycles of expansion and contraction, or to the hubris born from success that leads to a comeuppance born from technology, competition or the economy.

Even so, for an industry whose principal job is protecting our money, banking has demonstrated an uncanny ability to stumble into a distressingly wide variety of ways to squander that wealth.

Washington has had its share of participation in those squanderings, from the oil patch loans that nearly did Seafirst in (and forced its sale to Bank of America, opening the door to interstate branching and acquisitions) to the S&L crisis that claimed a few institutions in the Northwest to Washington Mutual’s ill-fated excursion into subprime lending. Now the state’s community banks, which bet heavily on the real estate construction-and-development horse, are losing big.

Given that track record, the question arises why banks didn’t seem to learn anything from their painful experiences. It could be argued that no business, especially one tied so intimately to the economic and monetary systems, could reasonably expect to escape the effects of a recession this severe. But it could also be argued that the recession was so severe precisely because of the behavior of the banking industry.

Here’s a thought about why: None of those prior disasters was widespread or systemic enough to scare everyone straight.

The regional real estate collapses were just that, limited to a handful of markets in one corner of the country. Third World lending was a playground only a few very large banks cavorted in. And while the S&L crisis was national in scope, it involved only a piece of the financial services sector, operating on a model many thought was irreparably obsolete anyway.

Compounding the problem, at least in this state, is that bankers have had it good for a long time.

It’s no great talent being a good banker in a growing economy, if success is measured in the loans you generate today. Unfortunately, the quality of a banker is truly measured in how well those loans hold up in a bad economy.

“It’s been some time since we had this kind of comprehensive economic malaise,” says John Rindlaub, chief executive of Wells Fargo’s Pacific Northwest region. “There have been a lot of newly minted bankers … a lot of bankers who haven’t been through this kind of challenging time when you see what happens to borrowers.”

Rindlaub believes those bankers “now understand why you need to be conservative around how you structure deals,” why it’s good to have at least two ways to be paid (cash flow or collateral of some sort) and the importance of matching the maturities of assets and liabilities.

“A lot of bankers now get it specifically because of this environment,” Rindlaub says.

But do they really get it? The recession delivered its message of responsible behavior with a bellow. If the point didn’t get through this time, it never will.

And yet history is not encouraging. Lots of bankers in individual companies, sectors and regions have been through intensely rough times, but that didn’t create enough of an institutional memory to keep the industry out of trouble this time.  

Americans are well known for their short-term memories; when the recovery comes, we will forget the recession and its lessons and neglect preparations and protections for next time.

Which is not good news. Because as long as there’s a banking industry, there’s sure to be a next time.

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