Giving Credit Where Credit Is Due

Bankers have become the new public whipping post as they bear the brunt of the public’s anger over the recession. While I agree that some greedy big-firm investment bankers and their corporate directors had a hand in causing our current economic mess, some of the blame belongs to others.

Those others include the media and members of Congress, as well as members of former and current presidential administrations, who don’t understand the complexities of the issues or are primarily interested in blaming others in order to cover their butts.

Whatever the reasons, bankers are being given a bad name. There’s a misperception that they are not lending the capital made available through the Troubled Asset Relief Program (TARP) in late 2008. It seems that Congress and the Bush and Obama administrations thought that lending cheap money to banks would be a quick fix to what is, in reality, a very thorny conundrum that built up over years.

The truth is, many banks are lending and are using TARP capital to fund their loans, but only to credit-worthy customers. Banks are caught between a rock and a hard place. On one hand, they are being pressured to stimulate the economy by extending credit, while at the same time they are being aggressively regulated to not give credit to high-risk customers. (And who’s not at risk in a recession?)

It’s a convoluted issue, so rather than rely only on my own experiences in banking, I consulted my friends Mike Doyle, former chief credit officer at U.S. Bancorp and president of Credit Risk Advisors, LLC, and Greg Cleveland, president and CEO of BNCCORP, Inc., a bank holding company in Bismarck, North Dakota, where I am chairman of the board of directors. BNCCORP is a recipient of TARP funds. The following is our attempt to expose the common myths about TARP funds and bank lending today.

The 2008 Financial Crisis

Our conversation started with a brief summary of the 2008 financial crisis. We all agreed that the root cause was (and still is) the bursting of the bloated real estate market. What began as a laudable social goal to increase affordable housing during the Carter administration, and expanded in the Clinton administration, resulted in the high-risk subprime mortgage market. Further, in the 2000s, many other homeowners leveraged their home equity through second mortgages. This market grew from zero in 1993 to $625 billion by 2005.

To provide the capital needed to support the growth of new home ownership, mortgage originators started to securitize those risky mortgages by creating an investment bond that’s collateralized by a pool of loans. From 2000 to 2006, about 75 percent of all mortgage loans were securitized.