Commercial downturn, is it good?

Admitting being a banker today is like admitting you are a serial killer. Well, thank goodness right now I can say I WAS (past tense) a banker! I retired from one of the biggest banks currently in the news, Bank of America, after 25 years of sincere service to my clients. So, in defense of the many honest bankers out there, I want to share some insight and commiserate out loud with anyone who is interested.

My bank employment experience is pretty boring. I went through finger printing and background checks before I was hired, and was bonded during my employment. I made a good living working ten hour days (forget what you hear about banker’s hours!), I put money into my 401k, and I had great benefits. I raised two great daughters, mostly as a single mom during my employment, and they are now responsible citizens. I was never engaged in crooked investment schemes like Bernie Maddoff or sub-prime lending like Countrywide, and I never, ever got anything close to a million dollar bonus!

Just a Little History About Bank Mergers during the 1990’s

During my Bank of America career, I actually worked for four different banks who merged one into the other until it became the bank from which I retired. I was first hired by The Arizona Bank, which was one of the biggest three banks in Arizona during the late 70’s. In 1986, The Arizona Bank was acquired by Security Pacific Bank, a California based bank. Bank regulations were changing during this time and many banks scrambled to take advantage of new interstate banking laws that allowed them to operate branches in multiple states. The easiest way to do this was to acquire the smaller state-chartered banks.

Security Pacific Bank was in an aggressive bank acquisition mode during the 80’s in pursuit of becoming a leader in the interstate banking race. However, things took a downturn during the real estate crash in California, and the bank’s finances deteriorated due to lending decisions. The Savings and Loan crisis was in full swing during this same decade and according to Wikipedia’s article, ” Savings and Loan Crisis”, 747 S&L’s eventually failed. The primary reason for the many failures was unsound real estate lending practices. (Sound familiar?) As outlined in the Wikipedia article “Security Pacific Bank:, “Banking regulators, concerned problems at Security Pacific could compound the emerging savings and loan crisis, placed the bank under heightened scrutiny.”

The list of bank mergers and acquisitions during the 80s and 90s is an astounding one. There was a point where we bankers gave up trying to remember which bank merged with which bank. The evolving and turbulent times during the 80s resulted in continued mergers in the 90s, including the 1992 merger of Security Pacific Bank and BankAmerica, which is now called Bank of America. Wikipedia states that at this time,”this was one of the largest bank mergers in history”. They became the second largest bank in the U.S.

Big Bank Mergers Required Divestiture Back Then

Now, I’m sure most people don’t remember this, but many times when the larger banks merged during the 90s, they were forced to divest part of their holdings if the merger gave them too large a market share in any one state. For instance in order to complete the merger in 1998, Federal Regulators forced BankAmerica to sell the Security Pacific franchise in Washington State (Rainer Bank). They were also required to divest and sell off some Arizona branches (I think it was 13, but can’t substantiate that number) from the Security Pacific franchise. (These branches eventually became Caliber Bank).

As outlined in her Knight Ridder/Tribune Business News October 14, 1998 article, “Norwest, Wells Fargo Merger Forces Sale of Arizona Bank Branches” Catherine Reagor writes, “To consummate their $34 billion merger, Norwest and Wells Fargo banks must sell 14 Arizona branches”. My point in all this is that, the Feds were very concerned during the nineties about banks becoming too big.

Bank Deregulation

Now here’s the part where things got out of hand. In his book, U.S. Bank Deregulation in Historical Perspective (Cambridge University Press, 2000), Professor Charles W. Calomiris outlines how the upheaval of the 80s and 90s led to two subsequent decades of bank deregulation. Government leaders and economists felt that the financial issues of the time were caused, among other things, by restrictions on interstate banking, obstacles to bank takeovers, and limitations on bank activities. Their eventual alterations to the banking regulations were in an effort to foster better business opportunities and create more U.S. wealth.

In 1999, the Professor reminds us, Congress repealed the Banking Act of 1933 (which had originally separated commercial and investment banking), and expanded bank powers to include other industries, such as insurance. Calomiris tells us, “in 1999 (Alan) Greenspan argued that the “global dominance of American finance” would be undermined unless Congress repealed the archaic restrictions under which U.S. Banks continue to operate”. Deregulation in full swing, other businesses were allowed to add banks to their list of owned businesses.

At the height of the deregulation discussion, Nationsbank acquired Bank of America. According to Wikipedia, this new bank resulted in combined assets of $570 billion. They remark, “Despite the mammoth size of the two companies, federal regulators insisted only upon the divestiture of 13 branches in New Mexico.” You see, branch divestitures are only required if the resulting company ends up with more than 25% of the FDIC market share in one particular state or a total market share of 10%.

We all know Bank of America didn’t stop there. Since 2001, they have acquired an impressive book of business: FleetBoston Financial, MBNA (credit card giant), U.S Trust, ABN AMRO N.A., and LaSalleBank, Countrywide Mortgage, and lastly, the purported forced acquisition of Merrill Lynch. Since all this heady spending, they have been recipients of Federal TARP money due to the financial stress on the U.S. banking system.

Banks Too Big to Fail

Isn’t it interesting that possibly the U.S. Government deregulated our banking system to the point that it is now, with many financial institutions falling into the “Too Big to Fail” category? And aren’t we glad that the government repealed that 1933 Banking Act, so that now commercial banks are intermingled with investment banks? What ever happened to the practice of having controls in place to keep banks from becoming too big?

The Government will probably “re-regulate” to reimplement some of the safeguards put in place back in 1933 plus a few more. Now every taxpayer is paying the price for poor decisions made by the government which were coaxed by the powerhouse economist at the time. Now we are faced with daily news stories lamenting huge CEO salaries and bonuses. Now we watch investment brokers being hauled off to prison because they became so greedy that they bilked investors out of millions of dollars from their lifetime savings. Now we have financial institutions that are too big to fail, but whose fault is that?

Sure, I WAS a banker, but it could have been worse, I could have been a Congresswoman during these past two decades. You know, like one of those people who are now raking bankers over the deregulated coals.

Informational Resources:

Wikipedia.com, “Savings and Loan Crisis”

Wikipedia.com, “Bank of America”

Highbeam Research, Highbeam.com