Wednesday, January 19, 2011

Applying lessons from a failed bank

Georgia has endured a rush of bank failures in the past few years. For much of the time, Georgia has led the nation in the number of banks closed. I haven't crunched numbers lately to see if we're still "number one."  Suffice it to say, we've had a lot.

A civil lawsuit filed by the FDIC last week gives insight into what the agency says led to one of those failures. And the circumstances laid out in the filing seem to involve a principle with ramifications well beyond banking.

The suit, filed in U.S. District Court, against eight former directors and officers of Integrity Bank of Alpharetta, Georgia alleges:

"State and federal regulators repeatedly warned the Defendants of the increasing risks associated with the banks's  excessive growth rate, heavily concentrated loan portfolio and lax oversight and control of the lending function.  The Denfendants had actual notice of these risks and a growing awareness of adverse changes in the real estate market but made little or no effort to diversify the bank's portfolio..."

The suit goes on to allege defendants "continued to choose short-term profits over prudent lending, including  by approving the Loss Loans, betting that demand for real estate in the Bank's chosen markets would continue  indefinitely."

The FDIC charges these bank officials knowingly pursued an unsustainable growth strategy, and failed to take steps toward a more sustainable footing. The FDIC is now suing to recover about $70 million it says was lost as a result.

Sustainability is a concept many in business and government no longer seem to comprehend. The case of Integrity Bank appears to be an example. But the impact of unsustainability extends well beyond banking. Sustainability requires a long term view, anticipating bad times as well as good.

Many government budgets are crafted with the same unsustainable recklessness alleged in the Integrity Bank suit.  In the bubble years, many local governments assumed real estate prices, and the resulting property tax revenue, would continue to climb forever.

Now these governments must scale back, and learn to live within their means, often while paying for excesses they inflicted upon themselves during fat times. For government entities funded by property tax, this means operating on revenue based on a tax digests that are significantly smaller than they were a few years ago. For some, there's temptation to slow or forgo a rollback in assessments. We must hold these governments accountable. If you own real estate, check your tax assessment. Make sure your property is not taxed beyond its present market value. If your assessment is too high, challenge it.

Another temptation for many governments will be to simply raise tax rates. But it is our role as citizens to challenge the assumption that the answer lies in boosting taxes. Higher property taxes may be the final nudge  that puts some struggling owners over the line, triggering foreclosure. This is especially tempting for those already underwater with their mortgages.

Higher property taxes deter potential home buyers, especially if a nearby community offers an alternative at a lower tax rate. Higher taxes also deter expansion or other investment by business in community.

As citizens, we need to apply pressure on our local officials the same way the FDIC says attempts were made to pressure Intregrity Bank to mend its ways. We should encourage only prudent spending, and cuts where possible. We have to remind, and in some cases educate, our leaders on the issue of sustainability.

The FDIC stands ready to bail out depositors when a bank fails. A healthy bank is usually found to acquire a failed one, and business continues as normal for the consumer. There is no similar prearranged agency or mechanism for a smooth transition and overnight bailout if our cities or counties run an unsustainable course to the point of failure.

The principle of sustainability applies to the federal government too. The federal debt is now over $14 trillion, and racks up billions more each day. Do the decision makers in DC really believe that's sustainable?  It's time to communicate concern to your congressman and senators.

No comments:

Post a Comment