Banker: Government actions a mixed blessing

Oct 04, 2009 (Jackson County Floridan - McClatchy-Tribune Information Services via COMTEX) -- SUPRD | Quote | Chart | News | PowerRating -- Superior Bancorp President C. Marvin Scott says the past year has been a long one for him and his industry -- probably the longest year of his life.

"I understand what a 'dog year' is now," Scott said.

The president of the Birmingham, Ala.-based bank was in Marianna Friday to address the Jackson County Chamber of Commerce's First Friday breakfast.

He said the turmoil that has roiled the financial sector left government with few options. According to Scott, few people understand just how close the entire world came to facing financial disaster.

And, faced with "a gridlock unprecedented and unparalleled in our time," the federal government was forced to make some harsh decisions.

Scott said he didn't agree with everything Washington has done. But overall, he's glad the government took action.

"What they accomplished essentially saved us from financial collapse," Scott said, a collapse that could have equalled the Depression.

The problems started with the collapse of the brokerage firm Lehman Brothers a little more than a year ago. On a side note, Scott observed Lehman Brothers started out as a dry goods seller and cotton broker in Birmingham, before moving to New York and transforming into a financial broker.

This led the government to create the Troubled Asset Relief Program, or TARP, to buy riskier financial securities from banks and others. It also led the Federal Reserve to pump more liquidity, or cash, into the economy.

"Is the debt we're left with unconscionable? Absolutely," Scott said, adding however that the alternative was "unthinkable."

That said, Scott felt some aspects of the government's handling of the crisis were mishandled.

For example, it is still not clear why the brokerage Bear Sterns was rescued in March 2008, yet Lehman Brothers was allowed to collapse.

Scott also said Congress had been warned that problems were brewing at Fannie Mae and Freddie Mac, the two government-backed mortgage purchasers.

Yet Congress took no action to shore up their finances, and the government was forced to step in just over a year ago.

That affected the nation's banks, who were shareholders, as only shareholders could buy or sell mortgages with the two.

Scott said the bank-shareholders were essentially stiffed when the government restructured them; in Superior's case, the bank lost more on their collapse that on all its loans last year.

As for TARP, Scott said he takes offense when the assets covered by it are called "toxic."

"Those (assets) are people's homes, people's jobs, people's businesses," he said.

TARP was designed to take those assets off the books of banks, Fannie and Freddie, but "that never happened," Scott said.

Instead, the country's largest banks were called in and told they were taking the money. Scott said this was done to avoid the stigma banks might have faced if they had accepted, or not accepted, TARP funds.

Scott said Superior was the 73rd bank in the country to take TARP funds, "but without it, we would have been unable to make $1.2 billion in loans last year." He said Superior expects to lend a similar amount this year.

The flip side, he said, is that TARP money comes with strings attached.

He said people worry about whether the government -- and by extension, taxpayers -- will ever get their money back. In the case of banks, they will have paid $15 billion in dividends to the federal government this year.

Scott said Washington is even making it difficult for banks to repay the money, because it wants to make sure the banks don't really need to hang on to it.

And while approximately 100 banks have failed this year, "you will not lose money on your investment in banks," Scott said.

His own bank, which is traded on the Nasdaq exchange, reported a second quarter loss of $3.8 million. This included a $900,000 assessment for the Federal Deposit Insurance Corporation and a $2.6 million after-tax accounting charge for mortgage-backed securities.

Depositors have been protected in this crisis, even though shareholders in some banks have been hit hard, Scott said.

"I don't know of a depositor who has lost a dime in those failures," he said. "Some shareholders have lost, but not depositors."

He said the recent decision to make banks pay a special assessment for deposit insurance "is the best thing that could have happened to us." Scott noted that it is the banks, not the depositors, who pay for that insurance.

Scott said the current mess is not because the country didn't have enough financial regulation, but because the regulatory system failed. He said warnings were issued at various time, but were ignored.

He also noted that the derivatives used to package mortgages are overseen by a division of the Department of Agriculture, the Commodity Futures Trading Commission. Scott said this needs to be addressed, as USDA is probably not the place agency to do this.

Scott said he is concerned by proposals to create a financial consumer protection agency. He predicted it would simply create more paperwork and more rules.

"Everything we do as a bank today is regulated, either by the state or federal government," he said.

This even extends to law enforcement. Scott said banks are required to submit the name of every new customer to determine whether or not they are terrorists.

The sector doesn't need more regulations, he said, adding he would prefer it if government would simply make the regulations easier for customers to understand.

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