Leader Publications

By JOHN EBY
Dowagiac Daily News

“Let’s straighten out a few things in the media that are not true,” Robert Eady Jr., chief financial officer for the American Bankers Association (ABA), began in Dowagiac Thursday noon.

He lives in Virginia, about 25 miles outside of Washington, D.C., and spoke about NINJAs as the guest of his father, Rotarian Robert Eady Sr.

“Even though I work in D.C. and I live in that area, I’m not one of those people,” he emphasized. “They’re entertaining to say the least, and there are a lot of myths.”
Financial institutions are generically referred to as banks, without any distinction being made between commercial banks and investment banks.

“They blame ‘the banks’ for everything,” Eady said. “Ninety-four percent of all of the problem mortgages were done by mortgage brokers – not banks. A high 90 percent of the banks in the United States are in well-capitalized positions. There are some banks in trouble,” with more than 70 which have failed already in 2009.

“We’ll have probably another 60 banks which will fail next year,” he said.

“The FDIC (Federal Deposit Insurance Corp.) keeps pretty close tabs on them, and when they think that they’ve gone across the line, on a Friday they will go in there, shut them down at 5 o’clock and open them up on the following Monday with a new name, a new owner and business as usual. The beautiful thing about our banking system is that it works. We have protections in place so people don’t lose money.”

Investment banks such as Goldman Sachs dominated headlines during the fourth quarter of 2008 when the world financial system seized up.

“Those aren’t ‘banks,’ ” Eady asserted. “Those are investment banks. The banks we represent at the ABA are all commercial banks. They’re highly regulated institutions. Some of them got themselves in trouble, but for the most part, the entirety of the banking system in the United States is still very, very strong.”

Commercial banks “are very, very worried about what’s going on in Washington,” he said. “Regulators want to go in there and ‘fix’ a lot of problems. Well, the problems commercial banks have don’t need fixing the way Washington wants to fix them. It’s almost like our health care system. In the United States we have probably the finest health care system in the world, yet Washington wants to go in there and fix it. They’re doing a lot of the same things with the banks, so our bankers are very troubled about some of the new regulations they’re talking about coming down the pike.”

In the last 12 to 18 months, Eady continued, “since the meltdown in the third quarter of 2008, government intervention is a staggering $14 trillion,” from auto bailouts to TARP, the Troubled Asset Relief Program.

“That’s why our debt is ballooning,” he said. “That’s why something has to change. At the ABA, what we try to do is go in there and try to influence some of the things that they’re talking about doing. Stopping them from doing some things. Altering things that they’re proposing to make it better for the industry so that they work on a practical basis. There’s a lot going on in Washington right now. They’re all out of town, which makes August one of the greatest months to live in Washington. Unfortunately, it’s the best month to come to Michigan, too.”

Turning to housing, Eady said markets “got a little out of control.”

Phoenix “shot up” 40 percent in a short amount of time, so it stood to reason it “came down the hardest” when the bubble burst to -34.2 percent – even worse than Detroit’s -24.5 percent.

Dallas, by comparison, has a more stable market, so didn’t get hurt as badly (-4.1 percent) when the market crashed.

“Detroit is a sad market,” Eady said. “Our incoming treasurer on our new board is a banker in Detroit. Talking to him at the board meeting three weeks ago, he said he sold a house for $5,700. The median price of a home in the Detroit area five to seven years ago was $75,000 to $80,000. Now it’s more like $5,500 to $6,000. It’s bad.

“He gave another example. Detroit is laid out in one-mile grids. If you take a square mile and imagine 100 homes in that square mile, they have square miles that 80 percent of those homes are empty and looted. People come in and tear up the copper pipes, the furnace, the water heater, commodes – anything they can pull out. They just gut them and the houses become worthless. A third example he gave was getting in the mail a citation from the City of Detroit for weeds growing at a foreclosed property the bank was sitting on. He said the cost of the fine for that ticket was more than the property taxes on the house.”

Eady, acknowledging “negative equity,” where a home buyer owes more than the residence is worth, said a lot of the mortgage mess can be attributed not to classic customers who put down 10 to 20 percent, but 2 percent or even NINJAs – no income, no job and no assets. Adjustable-rate mortgages start out at “teaser” rates, but ratchet up 2 percent a year for the next four years until they’re mired in trouble.

California (42 percent) and Arizona (51 percent) “are hurting bad,” as are Florida and Georgia, he said. “Michigan is not as bad as I thought it would be” (48 percent, compared to 66 percent in Nevada). Nationally, the negative equity rate hit 32.2 percent in the second quarter of 2009. Those same states correspond to where bank failures are cropping up.

On unemployment, Eady said, “We’re predicting it’s going to hit at least 10 percent in the first quarter of 2010.”

National leader Michigan was already at 15 percent in July.

“This tells you that when unemployment peaked in November 1982, it took 74 months for it to come down to a more normalized, regular level, which we consider to be somewhere around 5 percent. We’re going to have unemployment for the next five to six years. It’s going to be a very slow recovery.”

“Less than 10 percent of (President) Obama’s big stimulus package has been spent,” he said.

A “good piece of news for people from Michigan” is projected budget shortfalls, considering California’s 40-percent shortfall.

North Dakota and Montana have no such gap.

When people lose their jobs, they fall behind on mortgages and credit card payments become delinquent.

“That’s exactly what we’re seeing,” Eady said. “Job losses are not going to go away any time soon.”

In 2009, the 75 or so bank failures cost the FDIC $27.5 billion. Last year there were about 25 at a cost of $17 billion.

“The FDIC is predicting $26 billion more in failures in 2010″ before falling off to $6 billion in 2011. He counts Bank of America as one bank, even though it has 8,000 branches.

“These are bigger losses by individual banks, like IndyMac, but the savings and loan crisis failures were multiples of this. Much worse,” Eady told Charles Gratz.
Republican Prosecutor Victor Fitz asked what would have happened if there had been no Wall Street bailout by the Bush administration and continued intervention by the Obama administration. “What if they had just left it alone and let the market correct itself?”
“What you had back in the third and fourth quarters last year was the markets froze,” Eady answered. “Our economy in the United States, or even the world for that matter, if it doesn’t have a financial engine to make it run .. it’s like oil in the engine. If you don’t have any, you’re not going anywhere. And if you don’t have a free flow of money with willing market participants to buy and sell, then our economy doesn’t work.

“What the government came in and did – rightfully so – was provide temporary liquidity by pumping trillions of dollars. That kept the engine running. Nobody knows (the precise answer to Fitz’s query).  It would have been a scary, scary sight. There’s no way to predict how bad it could have gotten. If businesses just go under completely, there could have been violence, rioting, civil unrest. It could have been very ugly.”

“I don’t know if you all know the story” of TARP, Eady said, but the reason some banks accepted government assistance they later said they didn’t want stemmed from a December meeting with Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke.

“They called the 12 largest banks in the United States into Washington,” Eady said. “They basically said they were going to take this money whether they needed it or not because they didn’t want to single out any one bank and make it look bad. So they decided to make all of the largest banks take it. Then, after the fact, they wrote rules, like you can’t do bonuses with it or go to a resort anymore. It got out of control. Banks were willing to take funds because the terms were favorable until they started putting restrictions on how you could run your business. Most of them have now paid all that money back – and the government has made a ton of money on those TARP funds. Goldman Sachs took $10 billion of TARP money, paid $500 million in interest, I believe, and the government made $1.25 billion profit.”

The ABA was founded in New York almost 140 years ago and moved to Washington in the ’70s.

There are approximately 8,000 bank charters in the United States, of which about 5,000 belong to the ABA.

“We have 149 of the top 150 banks in the country,” he said.

“Bank of America, Wells Fargo, they’re card-carrying members of the ABA, as well as Fifth Third Bank here in town and a lot of small community banks around the nation. Those big banks at the high end are over $1 trillion in assets. Local community banks are typically $50 million, $60 million, maybe $100 million in total assets.”

Asked why banks would loan 110 or 115 percent of the value of a house, Eady replied, “It goes back to Alan Greenspan (federal Federal Reserve chairman). He cut the Fed rates to 1 percent. People who invested in the Federal Reserve, two things happened. Their rates of return went down. And the cost of money for investment bankers also went way down. Then you add in continually-increasing residential real estate prices. You give all that to an investment banker – not a commercial banker – who has starving investors on one side that are looking for a place to earn a rate of return. You’ve got this mortgage market that is steadily going up.”

Eady, who moved to Washington from Chicago in 2001, noted the price of his home doubled by 2007.

“When your underlying investment is going up like that, you can afford to give somebody a 100-percent loan because the banker is secure,” Eady explained. “But what happened in this mess was they started lending money to subprime folks who weren’t putting 10 or 20 percent down. When the market turned and housing prices stopped going up and started going down, people got under water, foreclosures started and it snowballed.”

Given the existence of NINJA loans, does that mean greed played a part?
“Absolutely,” he agreed.

Judd Lumber Co. President Dick Judd asked Eady about the prospects of getting back more local control.

“Fannie and Freddie are another conversation we can have,” Eady said. “That peanut farmer from Georgia, Jimmy Carter, the head of Habitat for Humanity, he’s still building houses and housing is his main goal in life. Back when he was president he created this regulation called the Community Reinvestment Act. It was all about banks reinvesting in their communities. The government used Fannie Mae and Freddie Mac as financing entities to help banks facilitate low-income housing. Fannie sat on all that paper. You could walk into your commercial bank and write that mortgage, but before you got into your car in the parking lot, that banker ran out the back door and sold it to Fannie Mae. The banker skimmed a few bucks off the top and the banker serviced that mortgage, but the underlying mortgage would be with Fannie Mae. As we all know, Fannie and Freddie are both on life support.”

“I just refinanced my house,” Eady offered. “For 4.25 percent. What bank would lend money for 30 years at 4.25 percent?”

The ABA’s average-sized member totals $125 million in assets, “so the people who get the most value out of the ABA are the small banks around the country,” Eady told Dowagiac Rotary Club Thursday noon at Elks Lodge 889.

A graduate of Western Michigan University, he is married and has two daughters – one has graduated and the other is in her last year of college and studied in Spain.

Eady, who grew up in Detroit, met his wife in college when they worked together at the Great Lakes Steakhouse in Kalamazoo.

She teaches in Virginia, where they bought a barn, gutted it and refurnished it with modern technology for their home.