ICBA - Publications - CEO Alerts - "Let Them Eat Cake"



Those famous words attributed to Queen Marie Antoinette of France, when told that her people were suffering and starving, perfectly sum up the seeming attitude of the top financial policymakers of the U.S. government when told that scores of community banks could suffer and be hurt by the abrupt nationalization of the housing GSEs. When asked about the impact on the nation's banking system, several top policymakers stated that the impact would be immaterial to the banking system—only a few smaller banks would be hurt. In effect, "Let them eat cake."

On Sunday, Sept. 7, 2008 (a day that will live in financial infamy) the U.S. Treasury, the Federal Reserve Board and the newly minted Federal Housing Finance Agency (FHFA)—or as I call them, the Triumvirate—nationalized two of the largest financial firms in the United States. In a move that would have made Hugo Chavez proud, the top financial policymakers of the United States engineered a weekend coup and wiped out thousands of individual and institutional investors with the stroke of a pen. What's more, the takeover came despite the fact that both Fannie Mae and Freddie Mac were still adequately capitalized under statute.

Perhaps these breathtaking actions were necessary, perhaps not; only time will tell. However, what is truly outrageous to ICBA and thousands of community bankers is the cavalier attitude displayed toward the community banking industry by our top U.S. financial policymakers.

Would the Treasury, Fed and FHFA have been as cavalier had Citi or JPMorgan Chase held $400 billion of GSE preferred stock? I think we all know the answer to that. The answer has been confirmed time and again during this current financial crisis. If you are a mega-Wall Street firm or if you are too "interconnected" to Wall Street or world markets, your counterparties have nothing to fear. Even your firm will be given considerable forbearance.

But if you are a community bank going about your business serving your community, you are just too small to be of concern. And if your balance sheet becomes impaired by actions of our government and through no fault of your own—well, be afraid, be very afraid—you are too small to worry about, my friend.

While there is no doubt that every banker is responsible and accountable for what is on the bank's balance sheet, there is no doubt that in recent years, bankers were encouraged to diversify their assets. In many cases, regulatory examiners and outside accounting firms condoned and, in some cases, encouraged the purchase of GSE preferred stock as a good asset for diversification. In fact, the stock was designed by the agencies for institutional investors and even had built-in tax advantages to induce purchases—all blessed by the government regulators.

So, the actions taken last weekend and the subsequent statements by our government's top financial policymakers that "only a few smaller institutions will be affected" are particularly egregious and outrageous to the scores of institutions that are affected.

Community banks are the engines that in many regions of this nation keep local markets going day to day. To simply write them off as inconsequential is outrageous to ICBA and community bankers everywhere. Wall Street cheered the action because Wall Street gets what it has wanted for years, the bludgeoning to death of the GSEs, which have always been resented by the Wall Street money makers. Now they have a clear field in the mortgage markets to do their will—and community bankers and consumers beware. There is now no impartial counterweight to keep the big guys honest.

To paraphrase the words of the old country song: "Wall Street got the gold; Main Street got the shaft."

Every community banker in this nation, whether a member of ICBA or not, should be very upset about how easily our policymakers dismiss billions of dollars of GSE equity held in community banks as "only affecting a few smaller institutions." What precedent does this set for future hits community banks may take as the result of our government's actions?

At ICBA we are thinking of another famous quote: "I'm as mad as hell, and I'm not going to take this anymore." At ICBA our focus is community banks and only community banks, and we are going to do everything in our power to protect and advance the community banking point of view on this issue and any issue of vital concern to the franchise health of all community banks. I hope all community banks—members and non members alike—will join us in fighting for your franchise rights.