Wednesday, October 15, 2008

Bigger Isn't Always Better

Posted By on Wed, Oct 15, 2008 at 4:00 AM

What a strange time for banks to be bragging about how big they are.

Within the last week, Regions Bank proudly announced in a press release that it is the largest bank in Tennessee, with 300 branches, 15.5 percent of the market, and $16 billion in deposits "which surpassed its closest competitor by $1.2 billion."

A few days later, its "closest competitor," First Tennessee Bank, countered that boast with one of its own: It is the largest bank in Memphis with 36 percent of the market, compared to 15 percent for Regions.

Do the banks know something that customers don’t? The source of the rankings is the Federal Deposit Insurance Corporation's (FDIC) quarterly report based on deposits as of June 30th.

That's three months before the stock market crash, the passage of the bailout bill, and the government’s latest plan to buy stakes in nine of the nation's largest banks -- not exactly a current snapshot. Bank stocks rallied Monday, but Regions is down 70 percent from one year ago, and First Horizon, parent of First Tennessee, is down 50 percent and has stopped paying cash dividends.

While the banks are spinning selective numbers in the FDIC quarterly report as good news, the report is actually full of bad news. The three-page summary, which can be viewed at fdic.gov by clicking on the "quarterly banking profile" link, includes these headlines:

"Second-quarter earnings are 87 percent below year-earlier level."

"Market-sensitive revenues remain weak."

"Net charge-off rate rises to highest level since 1991."

"Capital growth slows despite cutbacks in dividends."

And, most ominous of all: "Two more banks fail in second quarter" and "the number of institutions on the FDIC's 'Problem List' increased from 90 to 117 during the quarter."

In a speech last month, FDIC Chairman Sheila Bair said "more banks will come on the list as credit problems worsen," although 98 percent of FDIC-insured institutions are well-capitalized.

Are you, like me, feeling confused by all this? I understand why banks want to see the glass as half full. Their doors are open, and by all outward signs our deposits are safe. As a Memphian, I want Regions and First Tennessee and all of our banks to survive as employers, sponsors, lenders, and community builders. As a tiny stockholder, I hope the stock price moves up, not down.

The FDIC's "Problem List" is like a shark in the water because the problem banks are not identified, and that feeds the rumor mill. I don't blame banks for talking big if it makes them look like survivors or takeover candidates, although I would rather they simply issue a statement that says, "We are not on that list."

As a voter, investor, and reporter, I feel like this whole bailout bill (or "rescue bill" as some were calling it) and financial crisis is a huge mismatch, and I"m scrambling but not catching up.

If you remain glued to CNN and read three national newspapers a day, you will get a diet of dueling economists. Each one sounds persuasive until you hear the next one, who sounds equally persuasive from exactly the opposite point of view. The Nobel Prize in economics was awarded this week to Paul Krugman, a liberal columnist critical of the bailout that is also the bane of many conservatives.

A "blame the super-rich" response may satisfy some people, but a close look at the proxy statements of First Tennessee and Regions and other financial firms shows that the super-rich have taken it on the chin along with the rest of us.

Neither of our presidential candidates has offered much clear thinking on this crisis in the first two debates. Barack Obama talks more about tax cuts than recovery, and John McCain seemed patronizing when he suggested to that guy in Nashville that he had probably never heard of Fannie Mae and Freddie Mac, even though those institutions are quite familiar to anyone with a mortgage or a student loan.

We're left with opening our 401(k) and IRA statements and deciding whether to be in the stock market or stay on the sidelines as the market swings up or down 5 to10 percent in one day. I just hope the big talkers are right.

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