What’s To Bank On?

“The Company maintains balances in the moderate five figures,” the letter said, closing with “we recommend the principals quite highly for their well-documented credit requirements.”

It was code, and it took me more than a few weeks in the Bank’s credit training program to master it. That was when junior credit analysts like me would draft letters (sent by the Postal Service!) to “correspondent” banks in other cities who, on behalf of one of their own customers, had inquired about the credit worthiness of one of the Bank’s customers.

“Moderate five figures” was $20-40,000, sandwiched between “low” and “medium.” At the upper echelon was “good” ($60-80,000) and “high” ($80-99,000). Bank credit people were into euphemisms, seldom hard numbers – at least not in their credit letters.

“Quite highly” meant not quite highly. The use of “quite” as a modifier diminished the value of the word it modified. And specifying “well-documented” indicated that our banking brethren should make sure that they had adequate collateral.

I lasted four months in the banking business – a useful hiatus which allowed me to scrape off the barnacles of the U.S. Navy and reacquaint myself with financial statements before heading off to B. School. But those four months stayed with me, four months of risk assessments with the largest bank in New England.

The basic precept was that bank debt didn’t take risks; that’s what equity was for. You worked on a thin – 3% – margin, so it could take as many as 33 positives to offset one negative, one wipe-out. Bankers were cautious, conservative, dull. That wasn’t me, I thought, eventually moving in a higher-risk direction.

But caution and conservatism has its place. I thought of that over last weekend when I read, “Wachovia and Citigroup are wrangling in court with a $50 million hedge fund located in the Channel Islands. The reason: A dispute over two $10 million credit default swaps covering some CDOs [collateralized debt obligations]. The specifics of the spat aren’t important. What’s most revealing is that these massive banks put their faith in a Lilliputian fund (in an inaccessible jurisdiction) that was risking 40% of its capital for just two CDS. Can anyone imagine that Citi would, say, insure its headquarters building with a thinly capitalized, unregulated, offshore entity?” ( Fortune, October 13, 2008 – emphasis added)

I thought of conservatism in a different way last week when I had lunch with two community bankers, Jerry Peterson and Pete Donovan of Cambridge Savings Bank, which in the previous week had just closed a new financing package for a locally-based manufacturing client of mine. The 30-year-old, 55-person company for most of its history had struggled to establish a foothold in its market, twice dipping into Chapter 11 bankruptcy reorganization. In the past four years, however, the stars have aligned: revenue is up 150%; profits have moved from -15% to +15% of sales; order backlog is approaching four months.

My client’s company was just another cog in the wheel of the multinational bank that had provided a highly-secured, “moderate” six-figure loan “accommodation” without taking the time to learn the business. The real need was for a “good” six-figure credit line for growth, coupled with a loan to purchase the equipment needed to reduce the backlog. Pete got the deal done in a matter of weeks, having invested in understanding the company, its principals, and its principles.

The story repeated itself a week later with a different client and another banker, this one at TD BankNorth. The closing was scheduled for 4:00 p.m. on Monday, September 29th. Two hours earlier, the U.S. House voted down the “bail-out bill” and the stock markets began their race to the bottom. I waited all evening for my client’s call to say that the deal was done, even as I feared that it had been wiped out by the avalanche.

But our banker had invested seven months with us in putting this complex financing together, involving real estate, the SBA, lots of equipment, a competitive analysis, and some family dynamics befitting a 60-year-old firm. Documenting the deal took them into Monday evening, but for the first time in years, my client woke up on Tuesday morning no longer worried about having to stretch his payables for yet another day.

This, I am yet again reminded, is where small business puts its money. You invest it with the people and institutions that will help you grow. You develop relationships. You provide information, voluntarily. You talk to your banker regularly, keeping him or her up to date.

The market consensus is that we’re in for some tough times. Reportedly, businesses are reining in. But banks aren’t going to make money investing in T-Bills. They have to put their deposits to work. There may be no better time to borrow. If you’re running your company well and seeing opportunities in your environment, you can take that to the bank.

Alligator Bites

“More oversight of financial services is definitely coming.

“There is broad agreement in Washington that more scrutiny is needed…more monitoring of complex financial instruments and better disclosure of risks.

“But not regulation of the broader economy, as we saw before 1980.

“No price controls on gasoline, a ’70s mistake that created scarcity and long lines to buy gas. We’ll grumble about high prices but let them float.

“No setting of airfares and routes. There was a time when every carrier charged the same on a given route…and fares were much higher than today.

“No reregulation of trucking and rail freight rates. Firms once needed to get permission to carry a specific load to a particular place at a set price.

“And no return to federal approval of prices for telephone services, either.

“Even financial services won’t see a reprise of government price-fixing. Remember when every stockbroker charged the same high commissions…sometimes $60 for a small trade..compared with today’s sub-$10 commissions? Remember when all banks paid the same interest on deposits and were barred from paying interest on checking accounts? Those days are not coming back.

“This financial rescue is not the deepest intervention in the economy since the New Deal. It’s not even close to the level of routine market control that was dismantled by bipartisan consensus in the late ’70s and early ’80s.

“Deregulation stimulated competition, innovation and economic growth in energy, transportation, financial services and telecom…a positive legacy.”

The Kiplinger Letter, October 3, 2008

Draining the Swamp

Top Massachusetts banks by deposits

Branches Deposits
1. Bank of America Corp.308$33.4b
2. Royal Bank of Scotland Group PLC 259 23.7b
3. Sovereign Bancorp 231 13.0b
4. Toronto-Dominion Bank 165 7.6b
5. Eastern Bank Corp. 74 4.9b
6. Middlesex Savings Bank 27 2.9b
7. Independent Bank Corp. 62 2.5b
8. Boston Private Financial Holdings, Inc. 9 1.7b
9. Salem Five Bancorp 18 1.7b
10. Cambridge Financial Group, Inc. 16 1.6b


– Source: SNL Financial, reported in The Boston Globe, 10/4/08