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Banks in Crisis? This, Too, Shall Pass
Banker's hours: 9 a.m. to 4 p.m. except on Wednesdays when the weather is nice.
CD rates: Whatever the competitors are paying.
FDIC insurance: A legally required line item expense that we don't really need.
Many of us recall when these were banking truisms. Except for that angst-filled period between 1983 and 1986 when Tennessee closed more than 30 banks, we have enjoyed relative calm in the banking industry. The infamous "Butcher bank crisis" involved the domino failure of several high profile banks under the control of two brothers named Butcher [What's the difference between a pig and a bank? You slaughter a pig and butcher a bank!]. Lawyers who represented the FDIC in the failed bank cases and their opposing counsel, representing bonding companies, recall fondly those lucrative days. Some of us who were regulators were less excited about the long days and nights and the sadness of having to tell employees that come Monday morning they would be working for the successful bidder rather than the bank they thought was sound.
Then things got better. The economy soared. Developers built as much as raw land would hold, and their banks lent them the money with little or no equity skin in the game. For what seemed a very long time, bankers were fat and happy, and some of us with longer memories wondered what would happen when things crashed again and there were no young bankers in institutions who had ever seen a downturn or a bad loan. No one sets out to make a bad loan.
Subprime lending, Wall Street excesses, and concentrations in commercial real estate lending created the perfect storm and a recipe for bank failures. Government, fearing that the concept of "too big to fail" might really be true, contrived a plan to bail out the largest banks " even those who resisted the hand-out. The national media could not differentiate small to mid-sized banks from the behemoths that regulators admitted were too big to manage, too big to regulate, and certainly too big to fail. Banking regulators strongly encouraged banks of all sizes to accept taxpayer dollars (the so-called TARP funds) because they had no idea whether these banks would be able to raise additional capital from other sources should they need it. Some banks accepted the money; others did not; all have legitimate reasons for the business decision.
So where are we now and what does a lawyer who does not regularly represent banks need to know about banking in Tennessee today? While I make no rash promises, it is less likely that we will see bank failures in Tennessee than in some of our sister states. The Atlanta market, once hot with real estate development, has turned on its financial institutions, frequently causing bank examiners to point to our South with admonitions and a degree of regulatory paranoia. Nashville and other places in the state, with our more diverse economy, have fared better. Capital is king in Tennessee banking, and when a bank is well-capitalized and well-managed, even in a down economy, survival is certainly more likely than not.
Counsel to borrowers can tell them that if they have a credit report without significant dings, there are lots of banks that will finance home mortgages. Businesses with cash flow sufficient to satisfy debt service, a good business plan, and unimpaired collateral can get loans for expansion, purchase of inventory, and other legitimate purposes. Banks are getting better at their jobs: underwriting principles that once were the hallmark of safe and sound financial institutions are being resurrected. Lawyers for borrowers should emphasize to their clients that the days of making loans to less than creditworthy borrowers are over " at least until the next time. Former Commissioner of Financial Institutions Talmadge Gilley used to say that "bankers are stupid in cycles."
You can tell your clients that they have unlimited deposit insurance coverage through Dec. 31, 2009, for all non-interest bearing transaction accounts at banks participating in the FDIC's Temporary Liquidity Guarantee Program (a list of Tennessee banks that opted out of this coverage can be found at www.fdic.gov). On Jan. 1, 2010, the standard coverage limit will return to $100,000 for all deposit categories except IRAs and certain retirement accounts, which will continue to be insured up to the $250,000-per-owner limit that applies for all deposit accounts through Dec. 31, 2009. The FDIC has a handy online calculator that anyone can use to determine whether all of the money you have in any one bank is fully insured.
Bankruptcy lawyers are busy on both sides of the debtor/creditor aisle. Real estate lawyers are playing a lot of golf. Litigators and prosecutors alike are trying to figure out how to sue/prosecute the handful of crooks who have taken advantage of bank management inattention and the rocky economy. And we bank lawyers who used to enjoy the excitement of starting new banks are helping some of our clients out of the ditch. The good news is that in Tennessee, those ditches are ruts in the road, not the Grand Canyon. Better times are ahead.
KATHRYN REED EDGE is a member of Miller & Martin PLLC, a regional law firm with offices in Nashville, Chattanooga, and Atlanta. She heads the firm’s Commercial Department and concentrates her practice in representing financial institutions. She is a past president of the Tennessee Bar Association and is a member of the editorial board for the Tennessee Bar Journal. Her new column, “Bank on It,” will appear quarterly in the Journal.