Banking and the Economic Recovery
Image by Getty Images via @daylife
By: Ellis Goodman
Don’t look to the nation’s banks to help us out of this economic recovery by lending to small, medium, or even large businesses, supporting entrepreneurial ventures, or financing new construction. The unfortunate truth is that our banks are no longer bankers. They have become traders.
I’ve just had a personal experience that has convinced me of this situation. I bank with J.P. Morgan Chase in Chicago and served for nine years on the Board of one of their former subsidiaries, American National Bank, a very successful “middle-market” bank serving a wide range of Chicago based businesses. I own a real estate investment company, which banks with J.P. Morgan Chase and they also handle my personal accounts and my not insubstantial family assets. On that basis, I thought I was a pretty good customer. I recently approached the bank for a short-term bridging loan on a real estate transaction, involving commercial real estate in central Chicago anchored by national tenants including – J.P. Morgan Chase! I was seeking this short-term loan on a 60% LTV (loan-to-value) basis. However, I was informed by their real estate department that they currently had “no appetite for commercial real estate,” and that this particular transaction, which I admit was somewhat complicated, did not fit their “strategic platform.” I was very unhappy with this response.
After further meetings, and volumes of email communications with various departments within the bank, they finally came forward with a proposal which provided an absolute no-risk scenario to the bank, but required me to personally guarantee their proposed loan and indemnify them against any possible risk. Since I already have two other offers, which are not as restrictive as the ones from my bank, I have declined to move forward on this transaction with my bank.
I have to admit that, in seeking support from my bank on this particular transaction, I was really creating a “test.” Does J.P. Morgan value long-term personal relationships? Are they interested in middle-market business? Are they truly my bankers or are they only there to charge me fees and try and sell me a wide range of higher-risk products?
Regrettably, I found out that personal relationships do not count anymore. J.P. Morgan Chase does not really want to be in the middle-market banking business. It’s boring and far less rewarding than trading with my money and the other public’s bank deposits on which they pay us virtually 0% interest, but on which they are earning substantial trading returns. Of course they are gambling with our money, but the past two years have shown that, even if they make bad bets, because after all they are “wagering,” they will be bailed out by the government – i.e., us the tax payers.
Now I don’t really care if J.P. Morgan Chase want to be traders. That’s fine with me, but I don’t think it should be part of their banking business. I think these activities – dealing in derivatives and other complicated instruments – should be separated from a bank’s business through a legal entity that would not be able to use depositors’ money for this risky activity.
Until we address this issue – and I’m not sure that the current finance reform bill going through tortuous hearings in Congress will deal with these matters satisfactorily – we will have to face the fact that our banks will not be leading any economic recovery in the United States for the foreseeable future.
Ellis M. Goodman, author of Bear Any Burden: www.bearanyburden.com
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