PORT ANGELES — Most community banks have the capital to survive the current recession, the head of one of them told the Port Angeles Regional Chamber of Commerce on Monday.
“But we’re all very much aware that the end of the current economic challenge is nowhere in sight, and additional losses are quite likely,” said Karen McCormick, president and CEO First Federal of Port Angeles.
“Because of this, banks are preserving their capital against future losses as opposed to making loans with it.”
McCormick spoke on the state of the banking industry at the Chamber of Commerce’s weekly luncheon Monday at the Port Angeles CrabHouse Restaurant at the Red Lion Hotel.
Capital is king, McCormick said.
Capital is the net worth — the amount available to absorb losses and cushion against hard times. In light of the collapse of the sub-prime lending industry, banks are holding onto the capital they have for dear life, McCormick said.
“And that means that Main Street isn’t getting the capital it needs in the form of loans,” McCormick said.
McCormick was named one of the 25 Most Powerful Women in Banking by U.S. Banker magazine in October 2003.
She has held her current position at First Federal since 1997, and began her career there as a bank teller in 1977.
In her remarks, McCormick outlined the trickle-down effect that the sub-prime lending industry has on Main Street.
“Without access to loans, businesses are going to fail, and jobs are going to be lost,” she said.
“If employees think their jobs are at risk, they’re going to stop buying.
“And there’s your one-two punch: That those business will fail, those jobs will disappear, people will stop spending.
“So this is not just a banking problem.”
In her wide-ranging presentation, McCormick described what went wrong in the lending industry, the government’s response to this point and initiatives put forth by the Federal Deposit Insurance Corp. and U.S. Treasury.
‘Morbid’ environment
“I can tell you, the environment right now is as morbid as I’ve ever seen it,” McCormick said.
Closer to home, McCormick discussed the effect of the sub-prime meltdown on Washington state banks, and what consumers can expect to see going forward.
About five years ago, the global economy was awash in capital.
Interest rates were historically very low and the demand for mortgage loans was very high, she said.
Wall Street took notice.
“If you really want to boil it down to one word as to what happened to our economy and financial industry, there is one word, and one word alone,” McCormick said.
“That word is greed. Greed is at the root of what we have just seen.”
In the past, consumers took out a mortgage they could afford. The bank knew they were creditworthy and asked for a 20 percent down payment.
“Sometime about five years ago, somebody threw out the book,” McCormick said.
“‘Credit problems? No problem.’ That became the slogan for mortgage loans.
“‘Down payment? Why should you need a down payment on your loan if the value of your home is going to be increasing 10 percent per year? No down payment necessary.'”
Fannie and Freddie
Fannie May and Freddie Mac, created by the U.S. government to facilitate the flow of mortgages and capital throughout the country, packaged mortgages into mortgage-backed securities and sold them to investors.
“The rates on adjustable-rate mortgages started resetting at higher levels, leading to rising defaults for sub-prime borrowers,” McCormick said.
“The banks responded by tightening credit, and soon the volume — the demand — started slacking off and home prices started to fall.”
Real estate values have been in a free fall, and “the end is nowhere in sight at this point in time.” McCormick said.
Banks and investment firms began failing in rapid numbers, with Bank of America and J.P. Morgan Chase being two of the few “megabanks” that survived.
“Essentially, Wall Street as it used to be is dead,” McCormick said.
Regional banks without large real-estate exposure are “hanging in there,” she said. Smaller community banks are holding on because they still have the capital.
“There’s about 8,500 community banks out there,” she said.
“Very few of them, if any, have made a single sub-prime loan, and that includes First Federal. So the bankers of the country right now, the vast majority of them, are very angry. As are you.”
“We all have cause to be angry at what has happened. Most of us never made a single sub-prime loan but we are certainly paying a price.”
Historical perspective
There is obvious strain in the banking world, but it’s nothing compared to the Great Depression, McCormick said.
It is generally believed that the Great Depression of the 1930s was caused when the supply of money contracted. The banks closed off access to capital, and the government did not want to intervene.
Ben Bernanke, Federal Reserve chairman, is a scholar of the Great Depression.
“They recognize that if banks quit making loans and capital contracts, businesses are going to fail and jobs are going to be lost,” McCormick said.
“So everything they are doing right now, or attempting to do, is aimed at getting banks to resume making loans and supplying money to the economy.”
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Reporter Rob Ollikainen can be reached at 360-417-3537 or at rob.ollikainen@peninsuladailynews.com.
