11. What’s around the next corner for the banking industry is about to come into view.
The budget plan unveiled by President Barack Obama’s administration Thursday sheds some light on the future of the government’s controversial and seemingly opaque rescue effort for the financial system. To get an idea of the scope of the price tag thus far, the U.S. Treasury Department through the end of last week has spent more than $1.1 billion buying stock in 11 Tennessee banks from one corner of the state to the other.
That money was doled out as part of a $700 billion rescue effort that’s straddled two presidential administrations and which the Obama administration has signaled may have to be enlarged. The budget blueprint Obama officials released last week calls for setting aside a reserve of $250 billion on top of the $700 billion already allocated by Congress to the financial rescue.
“The existence of this reserve in the budget does not represent a specific request,” the budget plan said. “Rather as events warrant, the administration will work with the Congress to determine the appropriate size and shape of such efforts, and as more information becomes available the administration will define an estimate of potential costs.”
Figuring out the landscape
Local players in the banking industry are wondering what that means for them, as well as how rules for a new round of federal capital infusions into banks will affect them. The Obama administration also announced last week that it would begin “stress tests” of the nation’s largest banks to see how a prolonged economic slump will affect them and if they’ll need more capital to survive.
“Shortly before this Report was filed, the U.S. Department of the Treasury, the Federal Reserve Board, the (Federal Deposit Insurance Corp.) and the (Office of the Comptroller of the Currency) announced the initiation of a new Capital Assistance Program (CAP),” reads a regulatory filing made by Memphis-based First Horizon National Corp. Thursday. “Under the CAP, the capital needs of the major U.S. banking institutions are to be evaluated under a more challenging economic environment.
“If that assessment indicates a need for additional capital, the affected institution will be allowed to seek additional private capital and, failing that, may be required to issue mandatory convertible preferred shares to a government agency. … At this time it is not known whether the CAP applies to the Bank or the Corporation nor, if so, whether additional capital will be required or the terms upon which such additional capital may be issued.”
Meanwhile, the first part of the $700 billion shock treatment to the economy first set in motion by the Bush administration still has not run its full course. Cobbled together late last year at a time of broader upheaval in the housing market and the collapse of giant financial firms such as Lehman Brothers, the $700 billion effort was designed in part to spur banks to keep making loans to prevent a collapse of the economy.
To shore up bank balance sheets enough to do that, the government began buying preferred shares of stock in banks to give them immediate access to fresh capital. Of the $700 billion Congress approved for that effort, $250 billion was determined to be enough to cover all the money the government would send out to banks throughout the country that needed the money or could use it.
As of earlier last month, the government has finalized almost $196 billion worth of those transactions, meaning more banks have yet to get their capital boost.
More to come?
Greg Gonzales, commissioner of the Tennessee Department of Financial Institutions, told a panel of state lawmakers last month that 40 banks in Tennessee to date have applied for the federal aid, with fewer than a dozen of those applications having been accepted so far.
Tennessee’s commercial banks, which shed almost 3,000 full-time equivalent employees in 2008, collectively lost $260 million in net income last year, according to the FDIC. One Memphis-area banker said he was at a recent social function where Citigroup chief financial officer Gary Crittenden told him the economy was likely to remain in a broad slump through the end of this year, with unemployment numbers, among other things, continuing to rise.
The banking industry as a whole is thus in the process of trying to wrap its arms around new rules purportedly designed to help it regain its footing. Jackie Prester, a shareholder in the Memphis law office of Baker, Donelson, Bearman, Caldwell & Berkowitz PC, said that’s one of the biggest concerns she’s hearing right now.
“And a lot of my clients are asking me, ‘Even if we can get our arms around these new rules – and that’s tough – what assurance do we have they won’t change the rules completely next week?’” Prester said. “The biggest wildcard (I’m hearing) is, ‘What else is Congress going to legislate that makes it difficult for me as a bank to conduct business the way I normally conduct it?’”...