Talk of an economic recovery may be premature and we certainly are not through the commercial real estate crisis. Certainly 2010 has been better than 2009 and hiring trends are also looking positive. Recent data indicates a mixed picture with some local banks returning to profitability, others reducing their non-performing loan portfolios while still others are adding the collateral backed loans to their balance sheets as the borrowers default on their loans. No surprise which loans are the worst performers – real estate both commercial and residential. Many banks with insufficient capital issues are living on borrowed time. Small businesses are facing their own issues as the uncertain economy causes cash flow worries and getting a loan is hard to accomplish. Despite the talk coming out of Washington, D.C. the loans are not forthcoming. This is a result of banking regulators putting pressure on banks to get their balance sheets in better shape and businesses reporting losses making them less attractive loan candidates. Many small businesses are having their lines cut as banks deal with their own issues and cannot continue to maintain smaller relationships especially. Survival will be the measure of success for many small businesses.

The new legislation will certainly increase consumer compliance requirements. This will imply a cost as the consumer protection agency ramps up. Small banks have less flexibility to offset costs. FDIC fees will be increased, although not as much as in the big banks but increased costs nevertheless. There will be no new TARP money for the few small banks that had considered that route. One piece of good news is that trust preferred securities will still be allowed to be included as capital and phased out over time. Still many small banks are stretched to their leverage maximums particularly since those limits have been unofficially reduced. Unfortunately we will see several banks in our community unable to meet the capital requirements and solve their real estate loan problems. For them time is not on their side.

According to the South Florida BizJournal BankAtlantic plans to raise $25 Million in a stock offering later this month (June 14th).  The bank lost $186 Million in 2009 and more than $20 Million in the first quarter of this year. The article continues by saying the bank is expected to continue to lose money throughout 2010. Read More Here.

Last week The Senate passed financial reform, making way for The President and The House to begin working on combining this bill with The House approved bill passed in December. The bill expands the roll of The Federal Reserve ad includes many new rules for the trading of derivatives.  What this means for most banks is more regulation a new set of hoops to jump through with regards to risk-mitigating derivatives.

Only time will tell how much safer this makes the financial markets.

Read more about the bill at the NYtimes.

The cost of BankUnited’s failure has ballooned by $815M according to an article in the South Florida Business Journal. The total cost to the FDIC fund now totals over $5.7B. This goes down as the second most expensive bank failure in history after IndyMac’s 2008 failure.

Rather than being too big to fail, some institutions have become too big to succeed, having outgrown the ability of management to supervise and control. The Financial Recovery bill, trying to control these institutions, lists them as too big to fail. The soon-to-be-passed bill has four key parts; the too big to fail provision, regulatory reform, control of derivatives and consumer protection. The bill itself is too big to succeed as it attempts to cover too many complex issues in one bill – issues which are connected only by the thread of the financial industry. In the rush to punish and control Wall Street, Congress needs to be careful that it does not destroy Wall Street.
This Bill’s unintended consequences are not necessarily good for the country, as it is based on a composition of misinformation and emotional issues that need to be separated out and addressed from an informed, not vindictive, perspective.
Misconceptions start with the concept of lumping all types of financial institutions together. Investment banks are not the same as commercial banks, and are not really banks in the true sense of the word. Investment banks need different controls. Not all derivatives are bad and structured to bilk the public. Most are set up to alleviate and moderate risk. One set of rules does not fit all. There are always two sides of a trade as the participants seek to protect their investments against a perceived risk. Some derivatives are set up to take collective rather than individual risk. Wall Street is not homogeneous, and not all individuals and firms on Wall Street are dishonest, and there are some of those on Main Street in equal numbers. Some people make more money than is reasonable and that should be addressed via reforms in the tax system, for making money itself is not evil, but has always been considered the true American dream.
A four part financial legislative bill will be passed. Many changes are yet to be made and we will only know the final score long after the bill is passed and the regs are written. At that time we can assess the damage. Let’s hope Congress, in the need to correct inadequacies and weakness in the system, doesn’t leave behind a bigger mess.