The Future of Banking in a Troubled Economy

MS. DIANE REHM

10:06:54
Thanks for joining us. I'm Diane Rehm. Facing tougher regulation and declining demand for loans, banks are looking for ways to raise revenue. Some plan to charge higher fees for consumer services, like automatic payments and debit cards. Joining me in the studio to talk about pressures on large and small banks in a troubled economy, Kathy Dick of Promontory Financial Group, Terry Jorde of the Independent Community Bankers of America.

MS. DIANE REHM

10:07:36
Joining us by phone, Michael Greenberger of the University of Maryland School of Law. Of course, we do welcome your calls, comments, questions. Join us on 800-433-8850. Send us your email to drshow@wamu.org. First, we're joined by phone by New York Times reporter and columnist Gretchen Morgenson. She's in Rhode Island. Good morning to you, Gretchen.

MS. GRETCHEN MORGENSON

10:08:15
How are you, Diane?

REHM

10:08:16
I'm fine. Thank you. Good to hear you. Yesterday, Bank of America said it would sell its shares in a Chinese bank for $8 billion. Tell me why.

MORGENSON

10:08:31
Well, the bank is in need of shoring up its capital. Investors have become extremely concerned about the bank's financial position as, you know, claims and demands rise on the bank for, you know, liabilities associated with its Countrywide unit. These include repurchasing mortgages that were made improperly.

MORGENSON

10:09:00
There are also discussions about very large settlements, possibly between the bank and investors and attorneys general from a variety of states, and federal officials as well. So the bank has a lot of demands on it at the moment. And the fact that it can sell this asset, I think, is a way for it to possibly offset some of the fears, or assuage some of the fears, that investors have.

REHM

10:09:34
But, you know, half of all U.S. households have an account or do business with Bank of America. Doesn't that make them, the consumers, more exposed to the weak economy?

MORGENSON

10:09:53
Well, the consumer is already tremendously exposed to the weak economy, Diane, because they're still digging out from the debt binge that went on during the, you know, mid-2000s. And so the fact that the bank is under duress from investors is, I think, a material and of material interest. But the consumer is still very much in a world of hurt here.

MORGENSON

10:10:23
And so the news that these banks are going to try to raise revenues by imposing new fees on consumers is surely not good news for Main Street.

REHM

10:10:36
You know, it's fascinating. How in the world did we get to this point, even after the big bank bailouts of 2008? You wrote last week in your column about the "rescue that missed Main Street." So how did all this happen?

MORGENSON

10:11:00
Well, of course, the -- when the rescues were taking place in 2008, 2009, the Federal Reserve was, you know, throwing buckets of money at large institutions, and for the reason being that it really is important that we have a banking system that is fully operational. I certainly get that I am not, you know, against that. We need a financial system that works. We need banking system that works. We need banks that are sound.

MORGENSON

10:11:28
The problem is that after pouring all this money into these institutions during the period of 2009, there was really very little lending going on. It was really almost as if the banks were really husbanding all of its capital and not lending it. Now, there is very little demand for loans. And so their income is being hammered or being hurt by this lack of demand.

MORGENSON

10:11:55
So we just had a moment in time where the government felt it was imperative to rescue these banks with the hopes that they would lend. They did not lend. Now, there's very little demand, and so it's really in a kind of a very dangerous cycle.

REHM

10:12:13
Of course, aren't the big banks still saying that the regulatory environment and uncertainty in the market is what's causing this whole problem?

MORGENSON

10:12:33
Well, I think that there -- that's usually an excuse that companies provide, you know, the regulatory burden is too heavy. That's an argument that has been made very often. And, you know, I think we have to really question that argument because you heard the same thing during the 2005, '06 mania when people or, you know, these institutions were trying to, you know, set aside or push away any effort to regulate subprime mortgages.

MORGENSON

10:13:02
So I think that those arguments really need to be examined very closely. I would agree that smaller institutions are under more regulatory burden now, but I would argue that the big institutions already have a very considerable compliance department set up. They're not probably under that much more of a burden.

REHM

10:13:26
I'm so interested to learn about the Federal Reserve's lending to foreign banks in 2008. Did that come as a bit of a surprise to you?

MORGENSON

10:13:44
Yes. That was a surprise to a lot of people because the Federal Reserve doesn't really have an obligation to, you know, shore up foreign banks. And so I think that people who are used to scrutinizing what the Fed is doing were surprised by that.

MORGENSON

10:14:03
We saw tremendous amounts of help provided to foreign institutions, not only in these lending programs that we're only just now learning about, but in what's called swap lines, where the Fed opens up these facilities so that foreign banks can get dollars. They can't get them otherwise. That was a tremendously big amount of money. I think it was $500 billion at its peak during the crisis, so...

REHM

10:14:33
But that...

MORGENSON

10:14:34
But that has -- the Fed has become a foreign bank...

REHM

10:14:36
Yeah.

MORGENSON

10:14:36
...you know, a sister here. And that's probably not going to change.

REHM

10:14:42
And to what extent could that have hampered the economic recovery here in this country?

MORGENSON

10:14:52
Well, I think, Diane, they would argue that is was done to help the economic recovery because of interrelationships. Again, this is this too-big-to-fail problem that has not been addressed. When you have institutions that are so inextricably linked -- and we do have these relationships, and foreign banks do have investments. And we have investments in them -- that would be the Feds' argument for why they helped these banks out.

REHM

10:15:21
Tell me, what you think about Warren Buffett's $5 billion bet on Bank of America?

MORGENSON

10:15:29
Well, I think that Warren is very shrewd. He always extracts a very good bargain for himself. He is getting a considerable dividend on his preferred stock. He is well up ahead of the common stockholders if there were to be problems and a work out of Bank of America. So he is not at risk to the degree that a common stockholder is. I think that he probably, you know, feels that he's got -- he's made a very good bet here.

MORGENSON

10:16:00
He's getting very good income on it. And he also, I'm sure, understands that Bank of America is a too-big-to-fail institution.

REHM

10:16:11
So he, Warren Buffet, got preferred stock with a dividend worth 6 percent a year and very little risk. Is that right?

MORGENSON

10:16:25
Well, it's not very little risk, but it's less risk, certainly, than a common stockholder. He also, Diane, got warrants, which are a kind of an option on a stock price going up past a certain level. He will be, you know, paid. He will receive a gain if the stock price rises above -- I think it's around 7 1/2.

REHM

10:16:46
A very shrewd investor indeed. If the bailouts do not work, Gretchen, what is going to fix the banking industry?

MORGENSON

10:16:59
Well, you know, what the Fed had hoped was that very low interest rates would bail them out of their problems, in addition to the big loans that were extended during 2008 and '09. Low interest rates are now hurting the banks because they don't quite have as much of a spread on what they loan for and what they receive in income. So we really kind of lost an opportunity there for the banks to shore up their balance sheets.

MORGENSON

10:17:27
I think that what's going to fix it is we really need -- they really need to lend to creditworthy companies that will hire employees. It's really almost a cycle that needs to begin with lending so that companies can hire more people. But again, the consumer is a crucial problem here because you don't -- a business is not going to hire more people if they're concerned that the consumer cannot afford to buy their products.

MORGENSON

10:18:01
So it's really a very, very dicey moment. And I just think that we need to have banks lending more than they have done up until now.

REHM

10:18:15
Gretchen Morgenson, she is a reporter and columnist for The New York Times, author of the book, "Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon." Thank you, Gretchen, for joining us.

MORGENSON

10:18:37
Thanks, Diane.

REHM

10:18:38
And we'll be a take a short break here. When we come back, we'll get reactions from our other guests.

REHM

10:20:03
And now, welcome back as we talk about the banking industry and its future in economically troubled times. Here in the studio: Kathy Dick, managing director of Promontory Financial Group, Terry Jorde. She's with the Independent Community Bankers of America. Joining us by phone, Michael Greenberger. He is professor of law at the University of Maryland.

REHM

10:20:34
Kathy Dick, how do you respond from what you just heard from Gretchen Morgenson?

MS. KATHRYN DICK

10:20:44
I would start by saying I believe Gretchen is spot-on, that one of the critical issues in the industry is encouraging and incenting banks to lend. I believe one of the factors facing banks today, that may be different than previous environments, is a great deal of uncertainty about a couple of the key drivers of lending decision-making, which is how much capital a bank is going to need to hold for each of the loans it makes and how much liquidity they need to keep on their balance sheet.

MS. KATHRYN DICK

10:21:14
Both of these are areas where the regulators are actually making decisions as we speak and are to come out with proposed rules in the next three to six months, which, ideally, will provide greater certainty to the banking industry about what the rules are for lending and should, again, make it easier for them to feel comfortable lending going forward.

REHM

10:21:32
So this is basically clarifying Dodd-Frank.

DICK

10:21:38
It would be both Dodd-Frank and the rules that come out of the global standards setting community, which is the Basel Committee on Banking Supervision. They traditionally set the global standards for capital in each jurisdiction. So, for instance, in the United States, they would make rules applicable to U.S. banks that translate those standards into specific rules for our banking institutions.

REHM

10:22:00
And turning to you, Terry Jorde, what about community banks? How have they been affected by this troubled economy?

MS. TERRY JORDE

10:22:11
Well, Diane, I think it's important to recognize that the community banking industry is an entirely different model than that of the Wall Street banks. Wall Street banks are very transactional-based. They make their money based on trades, where community banks really make money the old-fashioned way. They do it with spread income. They bring in deposits. They pay their savers interest.

MS. TERRY JORDE

10:22:34
And then they take that money and lend it back out into the community. And that's where the challenge is right now for the community banking industry. Their customers are uncertain about what the future looks like. Their small business customers don't know what tax rates might look like going forward, what regulations might be. So there really is a lack of loan demand out there.

MS. TERRY JORDE

10:22:59
And, because of the very low interest rates, community banks are caught in this situation where they aren't able to make a spread on those funds and...

REHM

10:23:09
Now, you talked about small business. What about individuals coming to community banks? Are their requests down as well?

JORDE

10:23:21
Well, certainly, they are. You know, they're not going to buy a new car or buy a new house, for that matter, until they know that their job is safe and secure and that their future is bright, that they're going to be able to pay back that 30-year mortgage. So even though we have very low interest rates, the housing economy is down. I mean, really, housing was much better when interest rates were 7 percent versus 3.5 percent today.

JORDE

10:23:46
It's that uncertainty as to what their future is.

REHM

10:23:47
Interesting. Turning to you, Michael Greenberger, one has to wonder about this so-called uncertainty and Dodd-Frank and other regulations being clarified. Gretchen Morgenson implied, if not stated flat-out, that some banks are using this as an excuse not to lend and to raise fees. What's your perspective?

PROF. MICHAEL GREENBERGER

10:24:21
Well, first of all, I think I would just say, generally, the idea that some of these big banks are going to get smaller, I think, is -- and their business lines are dwindling. And, again, I would -- as the previous speaker said, I would distinguish community banks as something that is healthy for the American public. The too-big-to-fail concept, we were told, we can't let these big banks fail because, if they fail, they'll bring the big -- the entire economy down.

PROF. MICHAEL GREENBERGER

10:24:49
So the American taxpayer has to rescue them, even though they didn't set aside adequate capital, et cetera, et cetera. Now, Dodd-Frank has cut off certain abuses. They -- the exorbitant overdraft on checking accounts has been limited. Credit card charge abuses has been limited. The so-called swipe fees that retailers had to pay have been cut in half.

PROF. MICHAEL GREENBERGER

10:25:13
So, of course, these lines have been cut, and so now some banks are coming out and saying, well, now, we have to charge for services. The customer was paying for those services through exorbitant overdraft, exorbitant credit card interest, credit card abuses and the swipe fees. Now that's gone away, and they're going to pay a lot less by paying directly for the services.

PROF. MICHAEL GREENBERGER

10:25:36
The second thing I would say is, I believe, when the economy recovers, you will see community banks coming in and being competitive about this. Already, the big banks are altering their payments in response to the competition from other big banks. But I expect, like in the days of old, you're going to see smaller banks say, come in, we'll give you free checking. We will eliminate the customer lending.

PROF. MICHAEL GREENBERGER

10:26:02
The other thing I would say is the reason lines of business have been cut off is these banks made huge profits over highly speculative, risky investments. We saw them in the subprime industry. They completely collapsed. They were overrated, undercapitalized. And now, Dodd-Frank says, you can't do that. You can't be in that business.

PROF. MICHAEL GREENBERGER

10:26:23
Well, that's good because the American taxpayer had to be the Federal Reserve of last resort by giving these banks trillions of dollars to get them back in operation. It is a shame that the banks resisted in the debate whether, as a condition of getting that money, they should be lending to Main Street. They didn't want to do that. Why didn't they want to do that? Because they don't really want to lend to Main Street.

PROF. MICHAEL GREENBERGER

10:26:52
What they want to do is do complicated risky trading for their own book -- that is, take our deposits, take that money and then make all these wild bets, with the knowledge that if the bets don't pay off, the American taxpayer and the Federal Reserve will come in to rescue them.

REHM

10:27:12
Michael Greenberger, he's professor of law at the University of Maryland School of Law. If you'd like to join us, 800-433-8850. Kathy Dick, I'm sure you have some comments.

DICK

10:27:28
I'd like to start by saying I appreciate the comments that Terry and Michael Greenberger have made about the difference and the important distinction between community bank and large Wall Street banks.

DICK

10:27:38
But I will note that it's the large Wall Street banks that do lend to the Fortune 500 companies in the United States. And community banks simply don't have the capacity to do that. So as we talked about earlier, I think, one of the things that's important is getting clarity around the regulatory expectations for these various activities in the banking system.

DICK

10:27:58
As described in Dodd-Frank -- what's allowed, what's not allowed, how much capital a bank needs to hold in order to engage in some of these activities -- will all make it easier for banks of all sizes to feel comfortable lending into the economy and, again, I think, spurring the growth we need to see.

REHM

10:28:15
When do you expect that clarification?

DICK

10:28:19
I am very hopeful that clarification comes in the next three, six, 12 months.

REHM

10:28:24
Wow.

DICK

10:28:24
There's a lot of work for the regulators to do. And, quite frankly, one of the problems is just a backlog of rulemaking that the regulators have stacking up on their desk, trying to get this work out the office.

REHM

10:28:35
Now, Terry Jorde, to what extent are you representing community banks affected in the same way by that kind of uncertainty?

JORDE

10:28:49
Well, the ICBA represents nearly 5,000 community banks across the country, and community banks are, really, banks probably less than $10 billion. They really make up about 98 percent of all of the banks in the country. However, they only have about 20 percent of the assets because there is such a high concentration of these large Wall Street megabanks out there.

JORDE

10:29:13
And why that's important is that community banks are the primary lenders to small businesses, and small businesses create jobs. With only 21 percent of the industry assets, banks under $10 billion make 58 percent of the outstanding bank loans to small business. So, yes, we need to lend to the Fortune 500 companies, but we need to get the job market growing again.

JORDE

10:29:39
And that's where the impact of some of these regulations, the regulations that have been piling on community banks for years and years, long before Dodd-Frank, really need to be looked at. And we need to take a better approach to it and regulate based on the risk that these banks present to the system and not the small community bank in a town of 1,500 people.

REHM

10:30:01
So you would like to see community bank rulings separate from -- different from those affecting the large banks?

JORDE

10:30:12
Absolutely. The large banks create or present the most systemic risk to our economy, and we certainly saw that up close and personal in the last two or three years. The community banks do their job. They come to work every day. They make loans into their community. They're dependent on the success of their community. Their community is dependent on their success. It's a totally different model.

JORDE

10:30:34
And I know that because I was a community banker for 31 years. I actually just moved out to Washington, D.C. less than six months ago.

REHM

10:30:42
Michael Greenberger, would you be in favor of that kind of differentiation?

GREENBERGER

10:30:51
Yes. I would be in favor of it. In fact, Dodd-Frank has one major exemption from one of the regulatory requirements for banks that have assets under $10 billion. But, on the other hand, I will say this. When you have systemic risk, as we know from the savings and loans scandal, you don't know where it's going to come from. You've got to have basic standards. You've got to have financial institutions, have adequate capital, be transparent in their dealings.

GREENBERGER

10:31:23
And I appreciate the fact that community banks may feel that they're under pressure now with less resources. But the problem we had for the last 20 years was there were no -- especially for things like over-the-counter derivatives, the toxic instruments that caused the meltdown: synthetic collaterals, debt obligations, credit default swaps. There were no rules. And, yes, people have to put more capital in place.

GREENBERGER

10:31:52
That's to prevent the taxpayer from having to be the capital provider of last resort. It is taking time to put Dodd-Frank into effect because we had 20 years of laissez-faire regulation. I understand the community banks feel pressured. They probably had more regulatory pressure than the big banks did. But we've got to get these rules in place as a safety net against asking the American taxpayer to bail these things out.

GREENBERGER

10:32:20
We will have them in place, I hope, in six months to 12 months. But let me say this. The House Republicans want to starve all of these regulatory agencies by cutting their funding drastically, so they can't implement Dodd-Frank. And what may very well happen is, because of underfunding, this regulatory uncertainty is going to extend out far longer than anybody wants to see it extended.

REHM

10:32:45
Michael Greenberger, professor of law at the University of Maryland. And you're listening to "The Diane Rehm Show." Kathy Dick, what about low interest rates and the Fed's statement that it will keep rates low probably for another two years?

DICK

10:33:07
I think one important factor there is that the Federal Reserve could really only control the discount rate, which is just one rate on a yield curve or spectrum of rates that are very important, again, to the banking systems. So while the Fed can be very influential with respect to short-term interest rates, they have less control over longer-term interest rates.

DICK

10:33:28
And where this is probably most visible is in areas such as the attention that's being placed right now in the U.S. with respect to downgrading of the country, with respect to the deficit. And if investors in other locations were to really become concerned about the credit quality of the United States, the interest rate that we'll have to pay on U.S. debt will increase regardless of what the chairman of the Federal Reserve intends to do because, again, his control is really over short-term interest rates.

DICK

10:33:56
So there's a very large market factor here that's relevant domestically and globally that has significance, again, for the banking system and decisions, I think, about bankers and regulators on the future environment.

REHM

10:34:09
Michael Greenberger, how did you react to the Fed's intention?

GREENBERGER

10:34:17
I'm sorry, Diane. I didn't get your question.

REHM

10:34:19
How did you react to the statement by Ben Bernanke, that the Federal Reserve will likely keep rates low for another couple of years?

GREENBERGER

10:34:33
Well, I think that we have crossed out so many policies that could stimulate the economy that we are stuck with looking to the one institution, the Fed, that really doesn't have to worry as much about congressional oversight. And low interest rates is one of the few bullets they have left to try and stimulate the economy, but it's certainly not going to be enough. The president is supposed to make a speech on Labor Day about the creation of jobs.

GREENBERGER

10:35:06
We let a terrific opportunity fail. We flooded banks with trillion of dollars, thinking that, if the banks got better, we'd all get better. That didn't happen, largely 'cause banks went back to their risky investments that now, hopefully, will be outlawed and didn't loan to Main Street. We need to get money into the consumer sector.

GREENBERGER

10:35:26
It seems like there's a consensus now among most reasoned people that we've got to have tax revenues from people in a higher income bracket to pay their fair share. We need short-term stimulus to get the economy up again, so the people will come to community banks and make loans. Community banks are not going to get better by less regulation.

REHM

10:35:50
All right. And, Terry Jorde, what did you think about the Fed's decision?

JORDE

10:35:57
Well, Diane, I was stunned. I stared at the announcement that came out from the Fed, and I thought, surely, this is a mistake. They didn't mean 2013. They must have meant 2012. I mean, I was truly stunned. And I looked at it from the standpoint of a community banker that would have that decision placed on me by the Fed. Basically, the Fed is setting interest rates.

JORDE

10:36:21
It's going to make it very, very difficult for community banks to make that margin that they need in order to be profitable. And the bottom line is that banks are businesses. Community banks are businesses. If they're not profitable, they can't grow their capital. They can't invest in technology. They can't hire new people, and they can't serve their community. So at the end of the day, the ultimate impact is on the consumer.

REHM

10:36:46
So what your organization has said is that the Fed's decision is a backdoor bailout for the Wall Street megabanks and investment houses.

JORDE

10:37:01
Exactly. That money comes in to those Wall Street banks basically for free. And then they can take that money and use it to arbitrage and to trade and -- more than half of their income comes from non-interest income sources. So, certainly, that will boost their profits. It will -- you know, it will continue to try to prop them up while Main Street banks and Main Street communities are going to be hurting.

REHM

10:37:28
Terry Jorde, she is executive vice president, chief of staff of the Independent Community Bankers of America. Short break. And when we come back, your calls, your comments.

REHM

10:40:03
Welcome back. As we talk about the banking industry in a time of economic difficulty, here's our first email from Ian, who says, "I challenge the view that there's no demand for loans. For example, there are many homeowners like me. I pay several hundred dollars of additional principal reduction each month on my mortgage, but I can't refinance with the competitor because I don't yet have 90 percent of equity.

REHM

10:40:43
"Long term, this is suicide for these banks as insisting on maintaining the higher rates increases the overall rate of default. If my payment goes down via rate reduction, it's more likely I won't default." Terry Jorde.

JORDE

10:41:04
Well, I understand what the caller is saying. After the financial crisis hit in 2008 and 2009, the underwriting standards for mortgages has tightened up substantially. And that's really not from the rules that community banks have put into place, but it's the Fannie Maes and Freddie Macs that tightened up their underwriting standards and appraisal guidelines that also got much stricter.

JORDE

10:41:32
So it's become much more difficult for the community banking industry to qualify loans and sell them on the secondary market to be able to get that long-term fixed rate for the customer and the consumer.

REHM

10:41:45
Michael Greenberger.

GREENBERGER

10:41:47
Well, basically, it is true that it is very hard to refinance right now for the reasons said. This is swinging the pendulum back. Basically, if you put a mirror under your nose and it fogged up, banks were giving you mortgages. They were giving mortgages to cherry pickers earning $12,000 a year, giving them $729,000 mortgages. And the pendulum is swinging back.

GREENBERGER

10:42:12
I would note both on the low interest issue and on the refinancing issue that the administration is apparently in the midst of a big debate about creating a program that would allow refinancing, reduction of principal, et cetera, to take advantage of the low interest rates that Ben Bernanke has put in place. I recognize that the margins for community banks are less, but we've also got to worry about the consumer.

GREENBERGER

10:42:41
And when Congress is refusing -- especially the House Republicans are refusing to stimulate the economy. Bernanke has very few tools left -- low interest rates are one. So this may be a way, if they can get this refinancing program in place, that would help out people like the caller.

REHM

10:43:01
All right.

GREENBERGER

10:43:01
The best help would be to put money into the economy to stimulate jobs in the short run. People could flee -- flock to community banks to get low-interest loans. And they should be put in a position that they ought to be in as the principal economic builder of our job market and our community.

REHM

10:43:21
All right. To St. Louis, Mo. Good morning, Scott. You're on the air. Scott, are you there? Let's try Rita in Cleveland, Ohio. Good morning.

RITA

10:43:37
Hi. I'm an -- retired realtor. And when everything dropped to ashes in the early '80s, when interest rates moved to 19 percent to fight inflation under Reagan, all of our small realtors went out of business. Then what we were faced with was 401 (k), where the money was taken out of communities and put directly to Wall Street, consequently making all of the banks having to sell their mortgages to replenish their capital.

RITA

10:44:08
I think Terry Jorde is wonderful. And I think that we should all try to keep our money close to home.

REHM

10:44:17
Terry, I gather you would agree with that.

JORDE

10:44:21
Well, thank you. No. I mean, it's very true that, you know, community banks are relationship lenders, and customers develop long-term relationships with not only, you know, the customer, but their children, their parents. And that's something that is very special, something that we need to make sure that we preserve as we go through the -- you know, the total financial restructuring that we're experiencing now, that there continues to be a place for community banking in this country.

JORDE

10:44:49
Relationship banking is probably one of the strongest builders of communities that we could find anywhere, so we should...

REHM

10:44:57
All right. To Reston, Va. Good morning, Nancy.

NANCY

10:45:02
Good morning.

REHM

10:45:04
Go right ahead, please.

NANCY

10:45:04
Thank you. Thank you very much.

REHM

10:45:06
Sure.

NANCY

10:45:06
Okay. Well, first of all, listening to this -- what an excellent discussion. But Michael Greenberger's -- I -- this isn't what I called about originally, but his comment about lack of regulation, you know, that's what caused this. And the Republicans are trying to, you know, that is their push, coming back is to, you know, further get rid of regulation. So, please, public, you know, please, object to that.

NANCY

10:45:35
But the reason I called was -- an article, a column by Barry Ritholtz in Sunday's Washington Post titled "Stop Throwing Money at the Problem," about Warren Buffet's investment in Bank of America. And he talks about, you know, the need for transparency, the balance sheet problems, capitalization and misaligned incentives, compensation and bonuses.

NANCY

10:46:03
And then he said that, you know, maybe what we should have done with the whole banking problems, initially, was to go Swedish. In other words, nationalize them. And so, first, fire the senior management. The equity shareholders are wiped out. The bondholders get 25 to 50 cents on the dollar and then spin off the divisions that were -- that are under them at whatever price they can get.

NANCY

10:46:35
So the -- what results is, you know, much smaller, so we no longer have the too-big-to-fail. But I strongly suggest everyone to look at this because it just seems, to me, to make good sense.

REHM

10:46:51
All right. Kathy Dick.

DICK

10:46:53
Yes. I think your caller raises good points about a number of important areas that, again, banking regulators are attempting to address. Whether or not we nationalize the banking system might have been actually a very fearful decision that others had to think about a few years back when we looked at the problems the large banks were having.

DICK

10:47:12
But I think it's difficult, for one thing, to compare the U.S. banking system to other jurisdictions, just because of the size of our economy. At the same time, I think the issues raised the importance of capital and the capital expectations for large banks. And they should be different than smaller banks. Their risk profiles are much higher. The activities they're involved in certainly present systemic risks that a small bank doesn't. It needs to be clear.

DICK

10:47:35
And the regulators need to finalize those rules so that the right capital gets back into the financial system.

REHM

10:47:41
But what about the possibility of trimming back the kinds of activities that the big banks have engaged in and clearly intend to continue to engage in going forward, Kathy?

DICK

10:47:58
Yeah, and so there is, Diane, an example, the Volcker Rule, which is part of Dodd-Frank, for which we are waiting for. There's always the proposed rule making, which is supposed to clarify how it is large banks would be expected to move out of money to speculative trading businesses they were involved in. I think, you know, the general consensus, again, as Congress agreed, this is something that needs to happen.

REHM

10:48:20
But...

DICK

10:48:20
The real difficulty for a regulator is trying to write a rule that leaves no loopholes, essentially, for financial institutions to move through as they can be globally.

REHM

10:48:29
All right. Let's go to Houston, Texas. Good morning, Woody.

WOODY

10:48:35
Hi. How are you doing? I love your show, Diane.

REHM

10:48:36
Good. Thanks.

WOODY

10:48:37
My questions and comments are -- well, with the regulation of, you know, the banking, we allowed the banks to invest in foreign -- other companies. Yet we don't have -- corporate as well are sending their money to banks outside the country. Why can't we make some sort of stimulus for the companies to, rather than send their banks -- their money to other banks in other countries, make it so that they should invest their money into the banks in the United States?

REHM

10:49:14
All right. Michael Greenberger.

GREENBERGER

10:49:17
Well, you know, there is an attempt through Dodd-Frank to get regulator control over banks that have an international impact and to apply the regulatory requirements of Dodd-Frank, not only to U.S. banks but to foreign banks that have a very big presence in the United States.

GREENBERGER

10:49:36
And I think that that will have effects of putting our banks on an even footing foreign banks and tend to have investors and depositors look more favorably, again, not on these too-big-to-fail banks, which have most of the deposits, and the depositors are getting no benefits from those banks and put them in, not only into U.S. banks but to smaller community banks who are closer to the communities.

REHM

10:50:05
All right. To Chepachet, R.I. Hi there, John.

JOHN

10:50:11
Yes, Diane. Just a couple of things I just want to say. First of all, because I'm a small business person, problem is that all the Fortune 500 companies have plenty of money. They have tons of cash in their account. And I was talking to a friend of mine who's even a banker. And he said, yeah, we have lots of money to lend, but no one was actually -- needs it. All the small business people and the entrepreneurs can't get the loan.

JOHN

10:50:33
And if they -- and even (word?) loans have so many fees and everything tied to them, that it's not -- it doesn't work. What we need to do is get low-interest loans to small business people and entrepreneurs on Main Street and at lower rates. And -- what I don't understand is why the community banks can't get the low-interest loans from the Fed. Then their margins would be fine.

JOHN

10:50:55
If they're getting it to close to zero from the Fed, they should be able to loan it out at low rates to the small business people that will finally get this country moving.

REHM

10:51:03
Terry.

JORDE

10:51:04
Well, community banks aren't getting any money from the Fed. The community banks are funded by their depositors. But having said that, community banks do have plenty of money to lend, and that's the only way that they make money. They want to lend to every viable, potential borrower out there, and I know that from first-hand experience. One of...

REHM

10:51:25
John, have you gone to your own community bank?

JOHN

10:51:30
Yes. I mean, they're saying viable and all these things. The problem is like you talked about. If they're willing to lend them, the rates are so high that it -- I -- it doesn't work for me. I needed to get lower interest rates for it to work.

JORDE

10:51:43
Yeah, well, interest rates are very low right now.

REHM

10:51:51
Give me a range.

JORDE

10:51:52
Well, I mean, prime rate is 3.5 percent. So, you know, I mean, you should be able to get a small business loan in the 6-percent range, 6, 6.5 percent.

REHM

10:52:03
It still seems high.

JORDE

10:52:05
Well, when you look at it as a percent, you know, as -- if you're talking about an SBA loan, an SBA loan has some fees, as the caller has indicated, that are tied into that. And also, generally, when I was in the bank, we would look at trying to lock-in that interest rate for the business owner for a longer period of time so that they wouldn't have the volatility of interest rates going forward.

JORDE

10:52:27
Certainly, if they wanted a variable rate loan, they could probably get it more in a 4 percent area.

REHM

10:52:33
Interesting. Go ahead.

JOHN

10:52:35
How could you get an even lower interest rate loan to more people, though, with community banks?

JORDE

10:52:42
Well, when you look at where rates are right now, on average, I would say that when people put money in the bank, they're probably paying that customer around 1 percent in a lot of community banks. So in order for them to lend it back out, they generally need at least a 3.5 percent spread in order to cover the overhead of the bank.

REHM

10:53:01
So why couldn't you lend at 4.5 percent?

JORDE

10:53:04
Well, you could. You absolutely could. Like I said, if you were going to do a variable rate loan, then you would be at the mercy of what the Fed decides to do with interest rates going forward into the future.

REHM

10:53:14
But why not a 4.5 percent 30-year loan?

JORDE

10:53:19
Well, because you don't know what interest rates will be 30 years from now or even 10, 15 years from now. That -- that's why, you know, the interest rate uncertainty right now is a real concern for small business owners.

REHM

10:53:31
And you're listening to "The Diane Rehm Show." Good luck to you, John. I wish you all success. And to Greensboro, N.C., good morning, J.B.

J.B.

10:53:46
Hi, Diane. We allowed the banks to act like casinos. But I think the bigger problem is there's no demand now because there's so many people out of work. And the overwhelming majority of those people who are out of work have high school educations. And we had shift because of a disaster (word?) problem. Since 1980, thousands and thousands of factories have closed in the United States and moved overseas.

J.B.

10:54:08
And we have to -- I think we need to go back to tariffs on these goods coming in to the United States and bring the jobs back to the United States. That's the only way we're going to get out of this.

REHM

10:54:19
Kathy Dick.

DICK

10:54:21
Well, I think your caller raises a very good point, and it's one, again, that I know Terry emphasized earlier, of the very, very importance of job creation. We do need jobs in the United States in order for small business to feel comfortable lending from those community banks. And I'm not an economist, but many would say we need to, in the United States, get back to producing goods.

DICK

10:54:42
So there's different ways you can generate those jobs, but I think the caller's absolutely correct that there's a distinct connection between job growth, the economy and the banking system. And we've lost, somehow those interconnections and need to get them redirected.

REHM

10:54:56
And, finally, to you, Michael Greenberger, in -- here in Washington. David in Georgia is saying, "I own a small business, and I can tell you it doesn't matter how high taxes get, even to 90 percent. My main concerns are profits and customers. As long as I have customers ready to buy my products, I will hire as needed and borrow to make even the smallest margin." I'll bet there are a lot of folks out there who feel the same way, Michael.

GREENBERGER

10:55:39
Well, there's no consumer demand out there. Why isn't there consumer demand? Because we have -- you know, the official unemployment figure is 9.1 percent, but it's really much higher than that when you talk about people who are working part-time or who have given up on looking for jobs. And also, you've got people who are sunk with houses where the mortgages exceed the value of the house.

GREENBERGER

10:56:04
And, you know, people can say I'm applying for a loan. I think I'm good. But when the -- whether it's a community bank or whoever, when they look at a person who doesn't have a job or is in danger of losing the job or can barely make their mortgage payments or can't make their mortgage payments, then the loan isn't going to get made.

GREENBERGER

10:56:19
This all goes back to the fact that it was well understood, until conservative orthodoxy took over, that in a crisis like this, you have to stimulate the economy.

REHM

10:56:35
All right. We'll have to leave it right there. I'm sure, as the Congress comes back into session, we'll be talking about this issue a lot. Thank you all so much, Kathy Dick of the Promontory Financial Group, Terry Jorde of the Independent Community Bankers of America, Michael Greenberger, professor of law at the University of Maryland. Earlier, you heard Gretchen Morgenson of The New York Times. Thanks for listening, all. I'm Diane Rehm.

ANNOUNCER

10:57:14
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