Local bankers say Paulson had to act on
Bankers and economists reacted with caution Friday to the broad outline of a government plan to take on troubled loans and other "bad" assets from banks in an attempt to unclog the nation’s financial system.
With most of the details yet to be worked out, bankers and others had more questions than criticisms of the plan. Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben Bernanke and congressional leaders are expected to work out the details this weekend.
Left unclear were the answers to four key questions:
— What assets will the government accept, and what entity will accept them?
— Who will set the price for the assets?
— Will the government hold the assets for the long term, or will it sell them back into the market once the economy improves?
— Will the government accept assets from all banks, only large banks, or only the banks that are in trouble?
"I think action is certainly required," said Terrance McCarthy, chief executive of First Banks Inc. of Creve Coeur. But he was not sure taking bad loans off bank balance sheets would restore healthy sales of houses or free up the mortgage market.
Steve Marsh, president of Enterprise Bank & Trust in Clayton, said, "My initial reaction is that I’m glad to hear that there are serious proposals being considered because it’s clear that we’re facing unusual risk today."
Marsh said he was concerned about the burden the bailout could place on taxpayers. He said he hoped it would not benefit only the biggest banks. Marsh also expressed skepticism that a solution could be approved by Congress with elections less than seven weeks away.
Radical rescue: Hundreds of billions for bailout Local bankers say Paulson had to act on “bad” assets NICKLAUS: In the short term, we are all going to be socialists NEWSWATCH: How much is TOO MUCH? NEWSWATCH: Will bailout help housing market? Wall Street ends wild week with biggest two-day rally in 38 years Area financial advisers survive storm STROUD: Market turbulence can test your level of risk tolerance Missouri regulators reassure AIG policyholders Credit market remains tight, but avoids collapseTom Chulick, chairman and chief executive of UMB Bank in St fast cash. Louis, said Paulson’s proposal calmed the market, but he wondered if the government can come up with an orderly means for assets to flow to and from whatever trust or institution the government designates.
"We think it’s going to be a net plus," Chulick said.
Todd Solomon, president of Pinnacle Financial Services Inc. in Chesterfield, said the plan could make it easier to get mortgages approved. Banks have been adding conditions on mortgages that can make it nearly impossible to close a deal. For example, he said, one lender asked that the borrower name it as a beneficiary of a life insurance policy.
Radhakrishnan Gopalan, an assistant finance professor at Washington University, said banks will have to take losses on the bad loans, even if they do sell them to the government. The loans now are difficult to value; removing them from the banks’ books could make bank financial statements more transparent and restore trust in the market, he said.
Anne Villamil, an economics professor at the University of Illinois at Urbana-Champaign, said she was concerned about how the losses from the financial institutions would be allocated among taxpayers and the private sector.
"I take (Paulson) at his word that this is designed to fix the fundamental problem," she said. At the very least, it will break the vicious cycle some institutions found themselves in of having their capital erode, being forced to raise more capital and then be downgraded because they had too much debt.
J. Fred Giertz, also an economist at Illinois, said he believed action was needed to "keep the financial system from exploding" and sending the economy into a long and severe recession or even a depression.
Although it may seem unfair that big banks and investment firms have gotten the most help from the government so far, the government had to do something to stop what could have been a deep downward spiral, Giertz said.
"It is a temporary fix, but if it’s done correctly and followed through on, it could be a step to a more stable situation," he said.
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