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The best way to have a good idea is to have a lot of ideas.
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Author Archives: Harris Simmons
Rethinking: Banking Today
Back in the 1980s, a period, like today, of great stress in the banking industry, I saw a bumper sticker that read: “Don’t tell my mother I’m a banker. She thinks I play the piano at a bordello.” Bank-bashing has once again become a popular sport with little, if any, distinction made between the great majority of well-capitalized, customer-focused and community-minded commercial banks who have acted responsibly, and the few institutions — primarily in the investment banking industry — that have become poster children for excessive risk-taking and eye-popping compensation practices.
Many traditional bankers have grown tired of the high-pitched ranting by media “talking heads,” politicians and others who overnight have become self-proclaimed authorities on banking. Here are a few of the questions being asked, and some answers you’re not hearing: Read More
Rethinking: Understanding Why Banks Fail
While there are many reasons a bank might fail, the common pattern is excessive loan losses followed by a lack of confidence from depositors. The actual closure of a bank may be triggered by a run on deposits, or regulators may step in if it appears that capital has been exhausted due to large losses. Bank failures over the past year have generally followed this pattern. For example, the failures of Washington Mutual and IndyMac happened as a result of unwise expansion and risks taken during the housing bubble, including an inordinate number of subprime mortgage loans that defaulted when the housing bubble burst.
There are many factors that can lead to excessive loan losses. Expanding rapidly into new geographic areas may result in banks taking on risks they don’t fully understand or trying to “buy” market share by liberalizing credit underwriting. Some may expand into new product types without fully understanding the risks involved, as was the case with subprime mortgages. Banks may also simply be lax in enforcing credit standards when the economy seems robust. Occasionally, a bank may acquire another company without fully understanding the risk in that company’s loan portfolio. Read More
Harris Simmons
As the nation’s credit crisis has continued to make headlines, the United States Department of Treasury has continued to develop new tools to engender confidence and strengthen liquidity in the financial system. A major new element of the government’s response is the Capital Purchase Plan, an element of the Emergency Economic Stabilization Act recently passed by Congress, by which up to $250 billion is being invested in healthy banks that form the backbone of our economy. This new capital is being provided in the form of senior preferred stock, with a coupon rate of 5 percent for the first five years, after which the rate increases to 9 percent. Warrants to purchase common stock at current prices, in an amount equal to 15 percent of the total investment, are also provided to the government. The structure of the program virtually ensures that these taxpayer funds will not constitute a “bailout,” but rather an investment that will be fully repaid by the many banks receiving this investment. Read More
