Two days later, and the e-mails continue to arrive about my two hour long interview with William Lobdell, author of Losing My Religion: How I Lost My Faith Reporting On Religion On America –and Found Unexpected Peace. The podcast of the first hour is here, the second hour here. I have been forwarding e-mails to Lobdell, but you can write him directly via email@example.com. His website is here.
From my anonymous bank CEO, whom you can reach via firstname.lastname@example.org:
FACT: Banks are making loans.
Maybe not all banks but many banks are making good loans. My bank and many of my competitors are making loans. Having said that, we are not getting a lot of loan requests and loans that we do make are on conservative terms to existing relationships or a few key prospects where we will get a relationship. Relationship means that we have all or most all of the customer’s balances and the customer’s other banking business.
When a bank makes a loan it uses capital. For every dollar loaned, a bank generally reduces capital by ten cents. In a recession where loan losses are probable and capital is very scarce it must be rationed carefully. Conversely, if a banks needs to increase capital it can do so by reducing loans. So if a regulator or the market says you need to raise capital, then you will not make loans and will reduce them.
This raises the topic of TARP capital. The treasury purchased perpetual preferred shares from banks. That investment pays the Treasury a dividend of 5% currently; in addition the Treasury received an option to purchase shares equal to 15% of the amount invested. Banking 101 says that you safely invest capital in order to support deposit taking and lending activities. As noted above, one dollar of capital will support about $10 dollars of deposits and loans. Politicians asking if a bank has loaned its TARP capital do not understand banking. Banks are intermediaries; they take small deposits, aggregate them, and loan them to creditworthy borrowers. They make money by charging more for the loan than their cost of deposits, expenses, and loan losses. (I know this is elementary but it seems so few understand the basics.) If the government wants to increase lending, they should make low-cost deposits with banks which they could then lend.
Let me return to the fact that banks are making loans. My bank and many other banks in my area are making loans on these terms: The borrower must have collateral, like real estate or liquid assets. Loan-to-values would range from 70% to much less depending on the quality of the collateral. Borrowers need to have strong cash flow that well services the loan. We generally will charge Prime plus with a floor of 5.5% or more depending on deposits and the overall relationship. Favored borrowers are commercial and industrial businesses, especially with owner-occupied real estate, income-producing properties, professionals, and individuals. No loans are being made for real estate development or speculative home building. Every loan is with recourse to the individual owner or investor.
We are making some mortgages on single family residences that are above Fannie and Freddie limits. The loan-to-value is at least 80% and the debt-to-income ratio is below 35%. We only make one, three, or five year adjustable rate loans with a 30 year amortization. We charge at least 6.5% for a three or five year loan.
This is the kind of lending that makes sense. It is based on sound credit principals, provides adequate return on capital, and supports good business and the growth of the economy. We are not competing with unregulated non-bank lenders who had much lower capital requirements and lower cost of funds or ignoring credit by snowing rating agencies with complex models resulting in bogus AAA ratings.
President Obama’s budget is built on a massive tax hike on upper income families. From the Washington Post:
Individuals who earn more than $200,000 a year and families who make more than $250,000 would also lose the tax cuts enacted during the Bush administration, meaning their top income tax rate would rise to 39.6 percent from 35 percent, their investment income would be taxed at 20 percent rather than 15 percent and their deductions for mortgage interest, state and local taxes and charitable contributions would be reduced.
The attack on the mortgage interest rate deduction and the charitable deduction are simply hidden ways to increase the top rate beyond that of the Clinton years, but by using the deception, the Obama plan would devastate churches and charities that depend on the generosity of their highest income donors while also slamming the value of homes by reducing their value to borrowers.
I have argued with the FairTax advocates for years that their plan was a dangerous one because it struck at these two deductions which undergird so much of the American safety net and Americans’ wealth. If President Obama wants to raise rates above 39.6 percent, he should do so openly and honestly, and without doing enormous damage to the not-for-profit and housing sectors.
Democrats who vote for this scheme are voting against every church in the land and against the equity every American has in their home. Radical plans like this one make academics happy and voters angry. Very angry.
The GOP must immediately make clear that it will do all it can to defend churches and homeowners against this assault, and they must identify the 50 Democrats must vulnerable in 2010 and begin a very detailed web-based watch on what they say and do on these issues. It will be easy to explain why the plan assaults churches, synagogues, veterans’ organizations, childrens’s hospitals, private schools and not-for-profits of all sorts, and only slightly more difficult to explain that destroying part of the appeal of a home purchase hammers the entire housing market –from entry level to mansion– but these arguments have to be made again and again.
It is a radical plan, and no amount of smoke will cover that fact. Today’s Wall Street Journal editorial quickly covers the enormous, permanent expanision of government the budget proposes. President Obama did not push these radical ideas on the campaign trail, nor did any Democrat I am aware of. The Republicans and moderate Democrats have to stand up and refuse this invitation to fundamentally alter the American economy and its deeply embedded values of giving and home ownership.
Read Michael Totten’s account of the attack on Christopher Hitchens, Jonathan Foreman and himself in Beirut. A very close call for them all, and the sort of reporting that brings the crisis in Lebanon into better focus.