20081022-cover-0101.jpg
 photo by Terri Fensel
 
The subprime mortgage meltdown, the federal government’s $700 billion bailout, the national credit crunch. To try to make sense of it all, we brought together the local heads of the three publicly traded banks headquartered in Lafayette for a roundtable discussion on the unraveling national economy and what it means for us locally. Participating in the discussion on Thursday, Oct. 16, were John Bordelon, president and CEO of Home Bank; Rusty Cloutier, president and CEO of MidSouth Bank; and Pete Yuan, Lafayette president of IberiaBank. Their optimistic local forecasts were tempered by a healthy dose of concern as the nation’s economy heads through uncharted waters.

There’s been a lot of talk about how we got into our current economic predicament — finger-pointing about who’s to blame for the crisis in the financial industry. Who do you feel is most responsible — the financial institutions, Wall Street, the U.S. government, or consumers?  

JB: It’s hard to place more blame on any one group, but I think, at the end of the day, you have to look at the end buyer, the investment banks that purchased these loans from the brokers and packaged them into CDOs (Collatarlized Debt Obligations). Without the secondary market for these risky loans, the loans would not have been made. So it was facilitated by the fact that we had end-buyers, potentially through their greed, that wanted to take on this additional risk on their balance sheets. And without the end-buyer, then there are no subprime loans.

PY: I think this was almost a perfect storm of a lot of things kind of coming together. You’ve got the consumer side. You’ve got consumers that were not disciplined enough, and they took on too much leverage. But you also had, from the beginning, government intervention to increase home-ownership in certain sectors that historically really haven’t had healthy home ownership. You had banks that frankly weren’t disciplined enough, and they were involved in some aggressive lending. You’ve got the regulatory agencies that were supposed to be the watchdogs of all this that got a little lax and didn’t really come in and intervene when they were supposed to. And then, you’ve got all these investment vehicles that were injected with all this bad mortgage and a lot of the big investment banks and commercial banks that made investments in these vehicles. They took these vehicles as collateral. So, it really just kind of spread throughout the entire financial system. It’s more than just one source that was at fault. It was a lot of things that kind of came together, and if just two or three of these didn’t come together, I don’t think we’d be in the mess we’re in today.

RC: I have to say that, if it was just a subprime crisis, as Pete said, we’d be out of this already. It started in 1998 with the Gramm-Leach-Bliley bill which freed ’em up to do all of this stuff. And then they went over to Enron and then they took it back to New York. It’s a very long story. But we’ve got so much debt out there, and the consumer is so over-leveraged. The real estate is one problem. We’re now into the car problem, you’ve got so much car debt that can’t be paid for. We’re heading into the credit card problem. We’re heading into the student loan problem. We’ve got all this debt out there on consumers that there’s no way they can pay it. And so what you’re going to have is a huge de-leveraging of the U.S. And de-leveraging is very, very difficult. That means you’ve got to cut your spending and pay your debts. And that is what is causing this recession in steps that we have not seen since the Great Depression. And I think we are pretty much not seeing it in Lafayette, La., but in other parts of the country you’re seeing it big time. To de-leverage America is going to take a long time, and it’s going to be an education process to the American people.

This week, the federal government announced, as part of its bailout plan, it will now be spending up to $250 billion to purchase preferred stock in major banks as a way of injecting more capital into these financial institutions. Treasury Secretary Henry Paulson said essentially that he, like most Americans, is opposed to idea of the U.S. government owning a stake in any private company but, in this situation, the government is left with no alternative. Do you agree with that assessment?   

PY: I do, in general, agree with his statement. I think we’re at a point where the American psyche is completely decimated right now (as is) the confidence in the financial system and in the economy. The government needed to do something to regain that confidence. Now, I think it’s way too early to tell whether $700 billion or the exact measures they took are going to fix the problem. No one knows. When you have the stock market come back up 1,000 points and then, two days later, go back down 700 points, there are no fundamentals. It’s all based on an emotional kind of hysteria. Oil prices going from $140 in July (to) $70 — there are no fundamentals.

RC: I think the government, they’re shooting arrows. Let me take you through the four arrows they’ve shot so far — this is the fifth one. You remember the program where they sent everybody in America a check and that was going to solve the problem? Well, it didn’t solve the problem. So then they came with the Home Mortgage Act. That didn’t solve the problem. Then they passed what Paulson referred to as a “bazooka law.” He said, “Give me the power to nationalize companies. I’ll never have to use it, and that’s gonna solve the problem, cause you’re gonna scare everybody into understanding I have this big bazooka I can shoot any time I want to and take over a company.” Well, as he said the other day, not only did he use the bazooka, he fired so much ammunition it was unbelievable. He took over Bear Stearns. He took over AIG. He took over Fannie. He took over Freddie. None of that seemed to stem the problem. Then, he went to Congress with the $700 billion bailout bill. Well that hasn’t stemmed the problem. One thing that’s been mistaken (about the bailout bill) is this is not meant to bail out the banks that are in trouble. It is to strengthen the good banks. They’re going to inject capital into these banks that are then going to take over the bad banks. Kind of like they did in Texas, during the ’80s when they gave tax breaks to NC&B and Bank One and made those the banks they are today. So I think everybody’s sitting back and looking at it. But look, Paulson is very open to any ideas. I attended a conference call with him and I mean, he doesn’t have the answers. (Federal Reserve Chairman) Ben Bernanke doesn’t have the answers. They’re just trying to figure out how to stop this, and I agree with Pete that the psyche of America is that the mom and pop stockholder wants out. He wants out, and I don’t think he’s coming back for a long time. The last thing making the market very nervous is the preaching of the federalist doctrine. In a capitalistic system that becomes very difficult in the business community. So I don’t think you can downplay either.

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 John Bordelon, president and CEO of Home Bank
photo by Terri Fensel
 
JB: They’ve covered a whole lot of it, but I think the greatest thing that has been done to date is the fact they’ve taken active possession of these companies. Rusty’s right, this is very similar to what happened in the ’80s where so many banks were asked to buy out other banks that were failing. Take care of the bad guys to help the overall economy move forward. While this is very good toward potentially correcting those bad banks and propping up the banks that took them over, in and of itself it is a very small portion of what’s going on in our economy and people have to understand that. Whatever mistakes the regulators and/or bankers from some of these institutions made, it really goes back to the excesses of the consumer and it hits in all areas. When consumer debt is at the highest level it’s ever been, when people are totally borrowed out on their mortgages and leveraged to the hilt, the consumer has put us to a point where more and more parts are created to allow this to happen. At the end of the day, I think we’re gonna do as we did in the ’80s. It’s a cyclical thing. Unfortunately, we don’t learn from our mistakes. We learned from the ’80s that excesses in credit create significant problems down the line.

Going back to the government’s decision to purchase stock in major banks, from your perspective, what are the implications for community banks, now that you have to compete with financial institutions partially owned by the federal government?

RC: Look, the government decided, over the weekend that the large 10 financial institutions in the world are going to be international companies driven by international principles, so they’re going to have a different regulatory environment than the community banks. But I don’t want you to assume that there won’t be a lot of community banks not taking some of this capital from the government. I’m not sure that’s not gonna happen. It’s pretty cheap capital. The only man in America I know who has way more capital is my good friend John Bordelon; he just raised $90 million (through Home Bank’s recent IPO). He’s my hero. But I think (banks) are going to look at it, sit back and say, “Well, you know what, if the government’s going to give me capital at 5 percent, I’ll take it, because there’s going be so much opportunity to acquire, like there was in the early ’80s and ’90s.” I have been told by very good sources that this whole plan is going to continue to be modified — that what the government’s trying to do is get a lot of capital in banks that have great management teams to be able to take over banks that need to be taken over or take over branches and locations of banks that need to be broken up.

JB: I think one of the keys for us, and I think this information came out two days ago, was that for the most part the community banks are feeling the effect immediately, because our FDIC insurance rates have doubled. And that’s going to happen for this year and next. More than likely, it will probably get even higher than that. So, right off the bat, the cost of doing business for community banks is significantly more expensive, just from the mere fact that we have these failed institutions and we’re having to pick up the price tag for it. I think that’s the first area of concern for us. Somewhere down the line, whether it’s community banks or taxpayers, we’re all going to have to pay the load for what the government is dishing out. If they are taking an equity position and this works, somewhere down the line, hopefully, we’ll get some of this equity back as taxpayers so that that does not increase the burden on all of us. The influx of capital by the government is the quick fix. I really think you have to kind of look at it two different ways. The influx of capital is to change or stabilize the market, but we’re going to be dealing with issues associated with a lot of different things and banks and airlines and the automobile industry and every different industry is going to be really unfolding over the next six to 12 months, and we have no idea at this particular point how devastating that’s going to be.

You mentioned that the government may end up investing in community banks as well. Do you see that possibly happening with any banks in our region?

JB: I would say that goes back to, are we going to have some opportunities in our area to be able to help out of some of these hurt banks. That money’s going to be best spent with those institutions that are trying to potentially acquire some banks that are failing, which was what was done in the ’80s. They helped out the banks that were picking up the failed banks. To my knowledge, they don’t have a significant amount of troubled banks in Louisiana. I’m sure there are some in Texas and Florida for sure, but right in this immediate area, there are no problem banks that would need assistance.

A lot of financial issues we’re facing trace back to questionable subprime mortgage lending, which has led to home foreclosure rates going up and plummeting home values in many parts of the country. That hasn’t been the case locally. How has Lafayette avoided the subprime mortgage meltdown up to this point?


PY: I’m not sure frankly we have avoided it in the sense that we don’t have borrowers that are stretched beyond their means and that we don’t have any subprime borrowers. I think what this region has avoided that other parts of the country are seeing is that currently our economy here still is very strong. We have one of the lowest unemployments in the country, and when everyone has jobs and they can pay their bills you don’t have the problems. The other thing here is that we had a very healthy building boom in the residential housing market, and it was not hyper as it was in Nevada or Florida or California so you don’t have a huge, huge oversupply of houses here. I think (the housing market) is softening a little bit; we’re starting to see it, but for the most part, the economy here is extremely strong.

RC: I agree with everything he said, but one thing is you’ve got to be careful with this White House term, subprime lending. That’s such a mild part of this problem. There aren’t any subprime loans on the beach on Ft. Lauderdale or Miami Beach or condos in Las Vegas or $2 million homes in California. And that’s where the real problem is. I guarantee you most of these markets, and I’ve talked to a lot of bankers in these markets, the subprime loans were $150,000 homes; they can chew those up all day long. The problem is the big credits where they got $2 million in a condo and nobody wants it. That’s a big problem. Here, we’ve had very strong income. I mean, where else in America can someone with a high school education make $100,000 a year working offshore?

JB: Most of the lenders that made a significant amount of subprime loans were not the community banks that are sitting at this table. They were the mortgage brokers alluded to earlier. The second thing is this economy. Until prices of houses start decreasing then there really isn’t an issue because today if interest rates went up and a subprime borrower in Lafayette or Louisiana basically couldn’t make their payments, they could still sell their house. The difference in so many other areas across the country, selling their house is impossible because they made a 100 percent loan, and now its worth 75 percent of what they made it for. So, this particular economy, we’re still strong; we haven’t seen a significant, if any, drop in housing values. Therefore, people are still able to buy and sell houses.

RC:  In the Imperial Valley in California, you can’t get rid of real estate. And I’m telling you that is kind of like it was here in the ’80s. I remind people that I think I sold the best lot in Le Triomphe in 1989 for $18,000. It’s on the 18th hole. We were selling lots in this town, in different areas, for $7,500, $5,000. Condos were $30,000. So, we’re not realizing it here right now, but when that real estate comes down it just really hits hard and that’s what’s happening in other parts of the country.

Current rates for conventional mortgage loans — those under $417,000 that are backed by Fannie, Freddie and the U.S. Treasury — are still relatively low at about 6.5 percent. However, rates on jumbo mortgage loans — those over $417,000 that don’t have any backing from the federal government — have gone up to approximately 8.25 percent with four points payment up front. What affect will these high jumbo mortgage loan rates have on the Lafayette real estate market?

JB: You have to say it’s going to have a negative affect because the market place was dictating prices much cheaper than that which allowed the borrower to buy more house. So the first thought here is that the square footage of a house may come down or all the amenities that are put into a house may come down because the financing cost is more. Is 8.25 with four points the right pricing for a $500,000 loan? I think it’ll have a lot more to do with the borrower’s ability to repay than it does with the fact that it’s over $417,000. And I think at the end of the day, this is the knee jerk reaction to what’s happening in so many markets where so many jumbo loans are going bad. I haven’t seen a house pay back a note yet. A borrower pays back a note. Therefore, if you have a qualified borrower, I think the potential is for those rates to move back down, not being as low as they were before, but move down from where they are today.

 20081022-cover-0103.jpg
 Pete Yuan, Lafayette president of IberiaBank
photo by Terri Fensel
 
PY: I think the situation right now with jumbo mortgages is really an issue of liquidity. There’s not any liquidity out there right now so that’s why that market’s dried up. I don’t think this issue of liquidity is going to be for a tremendously prolonged period of time. I think it corrects itself with some of the government measures being taken. Obviously (a high jumbo loan rate) is not going to help the housing market, but I also don’t think that it is going to crater the housing market. Houses will just stay on the market a little longer, those houses that are a half million dollars and above. So I think this is just kind of period where you’re going to see a slow down, but I personally do not believe that jumbo market going away is going to be a sustained phenomenon.

Are banks putting a higher premium on loan applicants having established credit? Could this credit crunch end up having more of an impact on young people with little credit history and their ability to get loans?

JB: I think most prudent community bankers don’t significantly fluctuate their credit underwriting standards regardless of the economy. Old saying in banking is, you never make a bad loan in bad times because you’re all concerned about risk and you’re all concerned about the problems, meaning that you do potentially have the risk of making bad loans in good times. To me the key is that you want to stay as flat as possible with your underwriting standards. I think most community bankers feel the same way. Just because the market is hot and going, we had 2 percent unemployment and we sold more houses or at least had more mortgages in 2005-2006 than in the history of this town, I would venture to say that all three of us didn’t vary our lending standards significantly during that period and should not vary them going forward to a great degree.

PY: I think the core banks here in town, my two peers here, we have all been very disciplined even in the good times. And frankly, one of the most difficult things when times are hot, the last couple of years, we chose not to do certain deals that other banks did. So there is a segment of banks that will chase after a tier of credit that we won’t, but we’re not planning to change or tighten up our credit significantly.

RC: I’m going to agree totally but on your question about will it affect young people, yes, I think it will. Have you noticed how light your mail has been getting? Guy mentioned to me the other day, he even called the post office because he was wondering where all his mail was. Well all the credit card apps are gone. All these offers that people were getting in the mail you know are gone. I think credit card companies are going to tighten up on college campuses. I mean, you could show up at UL and you’d have a credit card before you could breathe. Somebody’s going to hand you one, maybe two, maybe three. I think it is now going to be a little more difficult, and I think they are going to have to pay attention a little more to their credit. I think the external factors, the leases on automobiles and the zero down and the zero percent interest rates that none of us were doing — I’ve never made a zero percent interest rate loan in my life — all of that is now gone. So that’s going to make it more difficult on (young people). It’s not the community banks; it’s the crazy lenders that are out there that did all of this stuff that now isn’t available any more.

Commodity prices have begun to collapse in anticipation of a global recession. What impact do you anticipate that having on both the banking system and the overall economy in Lafayette?


PY: I definitely think that the declining oil prices will have an impact here. The fact that it’s gone from $140 (a barrel) to $70, if it’s sustained, it will have an impact. The local economists are saying that they think oil prices will hover between $80 and $100. And if you talk to the oil companies, that’s still a very healthy operating range. But if it comes down below that, I do think again the psyche of the oil industry will be that they need to start cutting back on some capital projects, particularly here in the Gulf of Mexico. That will have a trickle effect to the service and supply companies that are so prevalent here, and it will trickle then to the rest of the general economy here. So yes, I think if there’s a prolonged downturn in oil prices, we’re going to feel it.

RC: I was at a roundtable the other night with leading oil people in Lafayette. Paul Hilliard said the oil business is different projects: there are $80 (per barrel) projects, $70 projects, $60 projects, $50 projects. And as the price moves down, you start canceling off the projects. And he said the more the price falls, when you get below $50, there aren’t many projects left; you can’t afford it. As an example, the Haynesville Shale area, it’s starting to reach the point where the price of natural gas may be having an effect, and they’re starting to cancel things up there. I know y’all wrote in your paper about what a big thing (Haynesville Shale) was, but that’s starting to change, and it could change pretty drastically. I watch the price of oil and gas more than I do anything else, more than I watch prime rate or anything else — that’s my number one focal point.

JB: You are starting to see some signs. Haynesville Shale, I talked to some landmen the other day, and they’ve laid off a couple of hundred landmen in that area; the price is not going to justify them starting to drill. But on the other side of this you’ve got some positives. Congress could do some good things by potentially opening up drilling nationwide or in other coastal waters. We’re kind of teetering between the declining commodity price of oil and natural gas and the potential for significantly larger exploration and drilling off the U.S. coastline. So I think the government can do some very strong things here by obviously not overtaxing our oil companies, and if the commodity market stabilizes, then I think we’ll see the drilling we need to sustain our economy here.

According to the FDIC, as of June 30, 2008, there were $3.9 billion in bank deposits in Lafayette Parish. Will that number likely increase or decrease in the coming year?

RC: I think it’s going to increase. From what I’m hearing from different people, I think they want to get their money back close to home where they can look in people’s eyes and talk to them. So I think deposits are going to come home; plus people want to put more money in cash right now. I can tell you personally that my plans for the next five years have changed somewhat due to this economic situation; I’m getting heavier in cash over the next five years than I was because cash becomes king very quickly. I think it’s going to increase.

PY: I agree. Overall, there’s a good chance cash will increase. Again, what’s happening right now is happening so quickly. Consumers, their heads are spinning right now. But I think with time, as some of this stuff settles, I’m hopeful that the consumer and the general public will begin to differentiate between healthy financial institutions that were disciplined in their banking practice versus the ones that were not and got in trouble. As they recognize that, they’ll have more confidence in the local banks here. Given what’s happened in the stock market, you’re going to have a lot of people who are going to be gun shy about putting their money back in the stock market. Traditionally, if you don’t put your money in the stock market, where do you put it? In banks, in CDs; that is still considered one of the safest places to put your money.

We’ve talked about auto financing, credit cards, and student loans all becoming harder to come by. What’s your reaction to these changes? Do you see your bank expanding or contracting its market share in any of these areas in the coming year?

JB: It’s a little early to react. Surely, we want to be able to provide the credit services that our customers need. Historically a lot of those services were held by different financial entities other than community banks — not that we don’t offer credit cards, but there are some that have always provided the service cheaper than we have. At the end of the day I think we will have to sit down and evaluate what credit services are missing for our constituents and can we deliver that since no one else is.

20081022-cover-0104.jpg
 Rusty Cloutier, president and CEO of MidSouth Bank
 photo by Terri Fensel
 
RC: I would say that the community banks here are going to increase market share. It’s just inevitable that people are going to come back home, and they’re going to come back to the community bankers. Let me mention one other thing that kind of has to do with that a little bit, and that is how blessed Lafayette is that we have three very solid bank holding companies that are publicly traded. No other city in this state has that — there’s only one or two other publicly traded (financial) institutions in the state. And I will tell you, and I think I speak for all of us in this room, we are not only looking at increasing our market share in these markets, but we are expanding our influence in other markets also. IberiaBank certainly has got influence in a lot of different markets that they’re involved in. John just raised $90 million, and I know he’s not going to sit on it forever. And of course MidSouth Bank goes from Baton Rouge to College Station, Texas. That’s another advantage to this community. It’s very positive that these banks will grow market share not only in this market but other markets too as we move ahead.

As we’ve discussed, there is quite a bit of anxiety out there, especially among retailers at this time of year. What’s your prediction for retail sales this holiday season?

RC: I think in Lafayette it’s going to be better than nationwide, but nationwide it’s going to be rough. I saw yesterday that Target charged off 11 percent of its brand new credit cards. That’s not good. That means 11 percent ain’t coming in and shopping. Lafayette will do better because the economy’s better here, but I think it’s going to be a tough Christmas season.

JB: Our local economy is such that you’re probably going to see some relatively decent numbers, maybe not as good as ’05 and ’06 or even ’07 were, but surely we’re going to show some strong numbers, probably some of the strongest numbers in the state. Nationwide, it’s going to be a very slow and poor Christmas season.

PY: It’s going to be slow all over; Acadiana is probably not going to be affected quite as much, but we’ll see a slowdown. And I just think there’s been an awakening here. This whole episode has really kind of woken people up; even though consumers here still have their jobs and have money, they’re going to be more careful. They’re going to save for that rainy day because they’ve seen what not saving for that rainy day has done to people in other parts of the country. It’s an awakening that frankly is good in the long term for our region, because I do think consumers should be more thoughtful in terms of how they manage their finances.

RC: Let me just add one thing that was mentioned to me the other day. You know we always talked about the largest amount of wealth being moved from the war generation to the baby boom generation. Well one thing you’re going to see happen over the next couple of years is (the wealth being passed) from the baby boom generation to the next generation is going to tighten up tremendously. There are a lot of problems with a lot of pension plans. The other dramatic effect I have seen in my company is how many people were talking about retiring that now have come to me and said, “By the way, I’m not planning to retire. Just wanted to let you know I’m planning to work a while longer.” They’re tightening up, and that’s where a lot of the wealth is that’s distributed to other people. They usually say “Well, let me give some to my kids or grandkids or buy them a bigger Christmas present or whatever.” They’re going to pull back some. I think that’s just normal because they’re worried that they’re not going to have enough money to make it now.

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