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A new meaning for ‘too big to fail’

By: Pat Dalrymple |Post Independent|Monday March 13, 2017

A few weeks ago, the administration hosted a conclave for business bigwigs and bankers.

One of the prominent personages at the conclave was Jamie Dimon, chairman of JP Morgan-Chase, one of the alpha males among the big dogs in banking.

Jamie was lauded as a paragon of business acumen, and that’s probably a valid assessment. He smiled modestly at the kind words because, well, he has a lot to smile about.

His warm, fuzzy feeling may have come because TBTF (Too Big to Fail) may have taken on another meaning, completely different from its original definition. We all thought it meant that, no matter what bad thing happens to a big bank, the government, i.e. taxpayers, will step in and make things right because, if the bank fails, the economic sky will fall.

But it may mean that, barring a death ray that renders every employee and exec at, say, Chase, brain dead, the institution really can’t fail, because, simply, it’s making too much money.

Sounds crazy, doesn’t it? But, there are clues. Take a look at what’s happened over the past three years or so to the Wall Street behemoths: A few billion-plus fines paid to the U.S. Treasury? Didn’t matter. The settlement of investor lawsuits over toxic mortgage backed securities totaling billions? Didn’t matter. The “London Whale,” the rogue trader, gambles with other people’s money and loses a billion plus in the process? Didn’t matter.

In 2016, Chase netted almost $7 billion in profits. Other big banks are doing well also, and their stock is thriving on the market.

The reason that TBTF may have taken on this new meaning is because money center financial institutions have so much leverage in revenue generation that they can weather occasional disasters, if not cataclysmic catastrophe. A high percentage of all of the capital in the world flows through their balance sheets in one form or another. There are myriad ways of making money when that much loot passes through your corporate fingers, and the guys and gals of Wall Street know every one of them.

This isn’t necessarily bad. A global economy is reality, no matter how some in Washington might wish otherwise, and it must have conduits and depositories; it’s far better that the users pay the freight than taxpayers.

Such isn’t the case with small banks, the so-called community banks. They’re related to the TBTF’s the way a Pekinese is a cousin to a pit bull: hardly at all. Take the issues of compliance with the Dodd-Frank Act, and the oversight of the Consumer Financial Protection Bureau. The cost of complying for Chase is a tiny fraction of 1 percent of net income, but it’s a big item for First National of Smallville, USA.

Some regulatory relief may come for all banks, but it means a lot more for the little guys, and they’re anxiously waiting for some positive news on that front. So far, nothing at all along this line has been presented by the administration, despite promises (when it does come, they hope it doesn’t come from Kellyanne; they’d kind of like it to be true).

When the changes do come, and some inevitably will, they’re likely to be more procedural than relating to loan underwriting standards. Which still could be a pretty big deal for many smaller banks. Navigating the complex regs, especially in mortgage lending, can often imitate a game of Simon Says. Underwriting standards for home loans are about where they were in, maybe, 1979, but a maze of procedural, documentation and strict timing requirements are choking residential mortgage lending.

Relaxing standards relating to income, liquidity and other credit side issues in banking could well see little change at all. For example, back in 2005, many small banks successfully competed with their bigger competitors by making so-called “Black Sheep Loans.” Mostly, these were collateral-based deals, meaning that the borrower might not be too strong, but the collateral securing the loan, the property, was. It worked well for a long time: a 50 percent loan to value, even if the borrower’s financials were weak, got paid off just about every time. Then, the real estate bubble burst in 2008, and those 50 and 60 percent LTV loans suddenly became 110 percent deals.

It’s not likely that bank regulators will acquiesce to this lending profile, nor, really, will bankers, until senility sets in 20 years from now, and memory fades.

Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is [email protected]