Thursday, September 18, 2008

Local bankers examine crisis


As shockwaves from the government bailouts of mortgage firms Fannie Mae and Freddy Mac and the $85 billion takeover of insurer American International Group continued to wreak havoc on Wall Street yesterday, local bankers and economists met at the Lobero Theatre to discuss the local implications.
The consensus seemed to be that while extreme risk remains when it comes to investing, local banks remain strong and the economy on the South Coast continues to modestly grow despite a sluggish forecast throughout the state.

Attempting to lighten the mood in the nearly packed theatre, Bill Watkins, executive director of the UC Santa Barbara Economic Forecast Project, said the “crystal ball” is abnormally cloudy at the moment, but no need to panic.
“The thing is,” he said. “It’s just money and there’s a lot of things more important than money, right?”
His humor aroused few chuckles from the audience, which seemed more focused on understanding the ins and outs of how money is insured and how the U.S. government can sustain itself in the midst of a war by throwing a few billion here, a few more there, and oh yea, $85 billion over there.
Watkins said that’s the easy part.
“We’re not going to run out of money because we can always print more,” he said.
However, he said at one time or another, the government will have to pay off its immense debt, and at least a portion of that payment will likely manifest itself in the form of inflation and increased taxes.
Watkins, who was once an economist at the Board of Governors of the Federal Reserve System in Washington D.C., said the government bailouts were necessary to thwart a Great Depression-like scenario, where allowing large firms like Fannie Mae and Freddie Mac to fail would have had devastating impacts on the economy.
He said the reason the economy has survived to the extent it has, despite the current turmoil, is the bailouts, which have stemmed the bleeding.
“The reason you’re seeing the bailouts is to prevent that domino [from falling],” he said, adding Federal Reserve Chairman Ben Bernanke knew he needed to “stop the bleeding now and we’ll worry about the cosmetic surgery later.”
Watkins said he doesn’t foresee the nation entering a recession, and pointed out that the country saw 3.3 percent growth in the second quarter of 2008, which he called “amazing” given the climate over the past year.
However, during the same time, he said jobs have been lost, which he attributed to increased productivity.
Watkins said the current situation is akin to a “train wreck,” and a large part of the problem over the past week, which saw the collapse of investment bank Lehman Brothers, the buyout of Merrill Lynch by Bank of America Corp. and the massive government bailout of AIG, is uncertainty.
He said at this point, markets can’t distinguish the bad banks from the good banks, and as a result, have been in a state of general panic. That panic manifested itself with a 504-point loss on the Dow Jones Industrial Average Monday, its largest single-day decline since Sept. 17, 2001, the first day of trading after the Sept. 11 terrorist attacks. Yesterday wasn’t much better, with the DOW falling 450 points.
While there’s little doubt this is far from good news, Watkins said he believes the nation’s biggest economic problem at the moment pertains to lack of credit, which he anticipates will get worse.
He said 80 percent of the country’s banks reported plans to tighten credit in the second quarter, prior to the most recent events. He said a deeper credit crunch would stifle the economy’s growth and suffocate the availability of capital for small businesses.
“This financial crisis is indeed serious,” he said. “It’s certainly one of the biggest since [the Great Depression].”
The event, dubbed “Fact, Fiction and Reality: What you really need to know about banks,” was sponsored by Montecito Bank & Trust.
In a pamphlet handed out to attendees, Montecito Bank & Trust Chairman Michael Towbes said he opted to put on the forum in order to clear the air of “misinformation in the news these days.”
“We thought it was important to provide some unbiased information to help the members of our community make good decisions about their financial institutions,” Towbes says in the statement.
To that end, the second speaker of the event was Edward J. Carpenter, chairman and CEO of Carpenter and Company, a California based investment bank and consulting firm that works with Montecito Bank & Trust.
Carpenter said small banks are the “fabric of small towns throughout the country,” and said Montecito Bank & Trust remains a viable, safe choice in a time of economic turmoil.
He cited the bank’s total assets, roughly $767,799 compared to its debt load, which is several hundred thousand less.
Of the 7,500 small banks in the country, Carpenter said five failed last year, less than one percent of the industry. And that’s reason enough for him to have confidence in Montecito Bank & Trust.
“Montecito is one of those banks where everything is up year after year,” he said. It’s “healthy and doing well.”


Joe said...

As a tax payer, now that I am an investor in AIG, when do I get my first dividend check?

Geoffrey J. Gowey said...

about as soon as we stop sending other countries billions of dollars in food, healthcare, military, and education assistance (some of whom repay us by training suicide bombers) and put those resources to use in this country.