This is the story of big guys who get what they want at the expense of consumers like us and smaller banks such as Cashmere Valley Bank with its motto, ‘The little bank with the big circle of friends. That’s according to Ken Martin, its CEO and president.
“I need to vent about what consumer protection regulation is doing to us as bankers and you as consumers,” he told Wenatchee Rotarians recently.
His bank is a commercial bank with 215 employees managing checking and savings accounts of its friends and lending their money to make consumer, commercial and mortgage loans. It has $1.2 billion in assets with a stock (sym: CVYF) market value of $115 million.
Those numbers are dwarfed compared to $1.9 trillion assets at Citigroup, a commercial and investment bank. That’s like comparing a $250 thousand home with a $400 million castle.
Investment banks invest their own money and other people’s money to underwrite, sell and trade stocks and financial instruments.
In 1933 Congress passed the Glass-Steagall law to separate commercial banks and investment banks after speculative investment banking caused bank closures.
“The 50 years following the passage of the Glass-Steagall Act constituted by far the longest running period of financial industry stability in U.S. history,” said Stacy Mitchell, senior researcher on community banking at the Institute for Local Self Reliance.
Large commercial banks coveted investment banking profits and convinced Congress and President Clinton to approve the 1998 merger creating Citigroup, with Sandy Weill as CEO.
After the 2007 financial industry collapse from risky and fraudulent mortgage loans that led to TARP bailouts, Weill said it was a mistake.
“What we should probably do is split up investment banking, have banks be deposit takers, have banks make commercial loans, have banks do something that’s not going to risk taxpayer dollars, that’s not too big to fail,” Weill said in July 2012.
Martin’s bank was not a cause of, or threatened by, the banking crisis.
“Cashmere Valley Bank didn’t take TARP money or participate in any of the other government programs,” Martin said. “As far as I can determine we are the only bank in the state that can make that statement.”
Obama and the democrats demanded more regulation and battled fifteen hundred banking lobbyists and almost all Republicans to pass the Dodd-Frank bill, a 2900-page behemoth. It increased consumer protection regulations. It regulated investment banks and imposed taxes to create funds to rescue them.
But analysts and legal reviews concluded the law has serious weaknesses regarding the separation of investment and commercial banking transactions. And large banks, like Citigroup, succeeded in getting provisions to receive more bailout loans from taxpayers under “unusual or exigent circumstances.”
Meanwhile Martin is troubled by new regulations.
He said it would be illegal today to get the special treatment he got for a loan to buy a car in 1971.
“Under the current law you must treat every customer the same, including ones you have never met. So guess what? You don’t do it for anybody.”
He said loans for education expenses require banks to withhold funds for 30 days. A housewife who applies for a credit card in her name must be denied if she does not have independent, documented income. The qualified mortgage rule cuts to the core of Martin’s service concerns.
Martin said qualified mortgage loans have 20 percent down-payments and meet conservative financial and property targets.
“The unqualified mortgage may not have 20 percent down, perfect ratios or perfect property. This is the loan product that built Cashmere Valley Bank. It has helped a lot of people and been one of our best performing products.”
Consumers given unqualified loans may claim their rights were violated, stop their payments and keep the house.
“How many of those loans do you think the bank is going to make in the future,” Martin asked?
Martin ended by committing to offer the level of customer service we’ve come to expect, with a caveat.
“Please understand that many of these consumer protection laws [that] sound so honorable have unintended consequences that make it difficult to deliver financial services in the manner you expect.”
Some of this difficulty will occur to us as consumers and banks like Cashmere Valley bank because we’re the smaller guys without the biggest big circle of political friends.