Men's Breakfast Report, December 2008
The Men’s Breakfast group met Saturday, December 13 with Robert Perryman, president of First State Bank in Clute.
Robert is a native of Brazosport. Old timers present remembered his father who was a doctor here. Robert has been president of First State Bank of Clute for several years.
The main discussion was about the economy and the banking crisis. The crisis originated in the operations of banks and financial institutions maximizing their short term profits. Brokers and some local banks would make loans to people who could not easily repay them. Some of these loans were called NINJA loans (No job, no income, no assets). The banks did not care about the risk because they were sold to investment banks that bundled them into collateralized debt obligations that were then sold to big investors, including pension funds and foreign governments. These were assumed to be safe because it was assumed that house prices would continually increase so the borrower could always sell at a profit if he ran into difficulty. Another hidden assumption was that all the loans were independent so trouble with one borrower did not mean trouble with other borrowers. However, once the economy started to go bad and the housing bubble started to collapse, it meant that all the home prices would go down, causing all the mortgages and collateralized debt obligations to become suspect and worth much less. This led to the insolvency of the large investment banks that the Federal government is trying to correct.
The local banks have not had the problems that the major investment banks have had. The local housing market has not gone through a bubble and collapse so few mortgages are underwater. Since the local banks are relatively small, they are not willing to make large loans on single dwellings. There is much more due diligence by local lenders in the mortgage lending. Robert’s bank actively investigates any applicant for a loan and verifies income and ability to pay. He also walks around any house that he is loaning on, something that New York banks can’t do.
Some parts of the bank bailout program are available to local banks. Robert rejected the option of having the Fed provide capital for the banks which would have enabled it to make more loans. The terms of the capital infusion are fairly onerous. The capital is provided as preferred stock paying 5% dividends and escalating to 9% after five years. These are much higher rates than are readily available to solvent borrowers so Robert finds them unattractive. They are attractive to major insolvent banks that do not have required capital reserves to support even the loans they have made, much less new loans. A program that he has accepted is the expansion of Federal Deposit Insurance to larger accounts. This is important for small businesses that may need to have checking accounts with more than $100,000 to support their operations.
There was also some discussion about the types of loans made by the bank. Mortgages and consumer loans are well known. He also loans on receivables. Receivables are the bills that the company has sent out but which have not yet been paid. For example, Dow may not pay a bill for 30 days after receiving it, but the small business needs the cash to pay its workers for the work it has done. Since Robert’s bank is small, it commonly has more deposits than good local loans available. It can not make direct loans to large corporations such as Dow, so money is loaned to large banks which consolidate money from many banks to make these large loans.
A major conclusion of the discussion is that the local banks are in good shape and our money is safe. The men had an interesting discussion and a good breakfast. The next meeting will be January 10, where Pastor Tom Watson of Eastern Branch Missionary Baptist Church, who is involved with prison ministry, will be our featured guest.