[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
SEEKING SOLUTIONS: FINDING
CREDIT FOR SMALL AND MID-SIZED
BUSINESSES IN MASSACHUSETTS
=======================================================================
FIELD HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 23, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-19
----------
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
March 23, 2009............................................... 1
Appendix:
March 23, 2009............................................... 55
WITNESSES
Monday, March 23, 2009
Antonakes, Steven L., Commissioner of Banks, Division of Banks,
Commonwealth of Massachusetts.................................. 16
Baker, Robert, President, Smaller Business Association of New
England........................................................ 29
Bland, Toney M., Deputy Comptroller, Northeastern District,
Office of the Comptroller of the Currency...................... 11
Clancy, Mary Ann, Senior Vice President and General Counsel,
Massachusetts Credit Union League.............................. 38
Finn, Michael, Northeast Regional Director, Office of Thrift
Supervision.................................................... 13
Forry, Hon. Linda Dorcena, House Chairman, Committee on Community
Development and Small Business................................. 28
Geller, Scott, President, Middle Market Banking, Northeast
Region, JPMorgan Chase & Co.................................... 43
Koutoujian, Hon. Peter, House Chairman, Joint Committee on
Financial Services............................................. 14
Mitropoulis, Iris A., President, Ventura Industries, LLC......... 40
Oddleifson, Christopher, President and Chief Executive Officer,
Rockland Trust Company, and Vice Chairman, Massachusetts
Bankers Association............................................ 31
Pelos, Perry, Executive Vice President, Wells Fargo Commercial
Banking, Wells Fargo........................................... 39
Rosengren, Eric S., President and Chief Executive Officer,
Federal Reserve Bank of Boston................................. 5
Shea, Edwin T., Jr., President, Central Massachusetts Market,
Bank of America................................................ 44
Sloane, Barry R., President and Chief Executive Officer, Century
Bank........................................................... 35
Slutz, David N., President and Chief Executive Officer, Precix... 33
Thompson, Sandra L., Director, Division of Supervision and
Consumer Protection, Federal Deposit Insurance Corporation..... 10
APPENDIX
Prepared statements:
Antonakes, Steven L.......................................... 56
Bland, Toney M............................................... 69
Finn, Michael................................................ 78
Geller, Scott................................................ 84
Oddleifson, Christopher...................................... 88
Pelos, Perry................................................. 94
Rosengren, Eric S............................................ 97
Shea, Edwin T., Jr........................................... 121
Sloane, Barry R.............................................. 129
Slutz, David N............................................... 133
Thompson, Sandra L........................................... 138
Additional Material Submitted for the Record
Additional information supplied by Toney M. Bland............ 149
SEEKING SOLUTIONS: FINDING
CREDIT FOR SMALL AND MID-SIZED
BUSINESSES IN MASSACHUSETTS
----------
Monday, March 23, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:02 a.m., in
Gardner Auditorium, Massachusetts State House, Boston,
Massachusetts, Hon. Barney Frank [chairman of the committee]
presiding.
Members present: Representatives Frank; Capuano and Lynch.
Also present: Representatives Delahunt and Tierney.
The Chairman. If people will take their seats, we'll begin.
This is actually a step forward for me in my career. I have
been chairing the Financial Services Committee for 2\1/2\
years. My Republican friends have tried to claim that I
actually was running the committee for 12 years. But this is
the first time I have actually chaired a hearing in the
Gardner, so I'm moving up. When I was in the State House under
Speaker McGee, I never quite made the chairmanship. So getting
to chair a hearing here in the Gardner is the next step in my
career.
This hearing has been called in response to complaints that
we have heard, those of us who are here, my congressional
colleagues, and our State legislative colleagues who are
represented here as well, from businesses in our districts,
particularly small businesses, about their inability to get
loans. Obviously, we do not get out of the economic crisis we
face without businesses, particularly small businesses, being
able to function. They cannot function without credit. Indeed,
one of the points I have tried to make is, and I know one of
the things that people wonder is, why we appear to be doing
things that are to the benefit of financial institutions, and
the second thing is that our country cannot function without
healthy financial institutions providing credit.
The technical word for what they do is intermediation. The
role of the financial institutions is to gather up large
amounts of money from many people in small amounts and
agglomerate it into large amounts so it can then be available
in larger amounts to a few people who can use it
constructively. This is a central function of our economy. And
what we are trying to do is to restore the capacity of the
financial institutions to do that. Their capacity has been
impaired. Some of that impairment is their own fault--not
entirely. Some have been damaged by the bad judgments of
others. There has been a problem in that there has been absence
of rules in the system that has contributed to this.
But the point that we continue to make is that those who
take the attitude that anybody who made a mistake should be
allowed to suffer its consequences without help are condemning
the whole society to suffer those consequences as well. We
cannot get out of the economic problems we are now in without a
healthy credit system, and we cannot get a healthy credit
system without working with the people who are in the system.
We have tried, members here and others, to, at the same
time that we offer the help, put some restrictions on that
help. Indeed, while there have been some recent discussions
about bonuses to AIG--and by the way, AIG was given a loan by
the Federal Reserve System last September with no congressional
input. The $700 billion TARP program as it's called, the
Troubled Asset Relief Program, came after that. The Federal
Reserve has power under a statute dating from 1932, signed by
Herbert Hoover--so its radicalism can't be blamed for this--
which gives it the power to make loans. On the whole, they have
exercised that power in a very constructive way. I think they
made a mistake when they were new at it in September in not
putting some constraints on AIG when they made the decision.
Subsequent to that, Congress got involved, and from the
beginning of those discussions we, and particularly those of us
here, have fought hard to put some restraints on the
compensation that is paid, on the luxury entertaining, and we
have also pushed for greater loans. That's the business that we
are in today, talking about how do we increase the flow of
loans from these institutions. But I did want to set it in that
context.
We have two panels. We have a panel of regulators, and then
we have a panel of lenders and borrowers. As is often the case,
when those of us who hear the complaints about a lack of loans
inquire as to why we don't get more loans, to some extent the
banks will say it's the regulators' fault and the regulators
say its the banks' fault, and then everybody says it's awful.
So the purpose isn't to lay the blame. It is to do away with
any kind of obstacle.
So we are going to ask the regulators and we are going to
ask the lenders to talk about how we can get them to work
together so that we get a maximum flow of loans, and that's the
purpose of this hearing.
I am joined by some of my congressional colleagues, two of
whom serve on the Financial Services Committee, Mr. Capuano and
Mr. Lynch. We also have Mr. Tierney and Mr. Delahunt.
So let me ask if any of my colleagues wish to make a
statement, and I will go in order of seniority, which I think
means Mr. Delahunt. That means how long he has served in
Congress, not how old he is.
Mr. Delahunt. It is both, obviously. As I look to my left
and I see Chairman Frank and I look to my right and I see Mr.
Segel, your special counsel--
Mr. Frank. He didn't get to be chairman, either.
Mr. Delahunt. That's true.
I have this sense of deja vu, because both Barney and Jim
Segel and myself were members of the class of--well, we were
elected in 1972 to the House of Representatives, and it's
rather interesting to be here.
Let me just thank the chairman. I don't have an opening
statement. I want to thank the chairman. I think this is a good
hearing. I'm receiving, as I'm sure my colleagues are, a number
of inquiries from particularly small businesses that have
profound concerns about their inability to secure credit. It's
my intention after this hearing to convene the stakeholders in
my district and have a specific discussion in terms of what I
can do, along with State and local officials, as well as the
lenders and the appropriate regulators, to see if we can move
things along. And Barney, thank you for the great work you do
for the State and for the country. I will yield back.
The Chairman. My colleague, John Tierney.
Mr. Tierney. Thank you, Mr. Chairman. First of all, thank
you for expanding your hearing out to include members who
aren't on your committee. You're right in assuming that a
number of people in our respective districts have made this
point very clear, that they're small businesses and they're
having an incredibly difficult time expanding, those who are
lucky enough to have stayed in business, and some of them are
barely staying alive despite having good collateral, and
they're having a difficult time working with some of the
financial institutions.
Mr. Chairman, I have been in this building before as a
janitor in the 1970's cleaning up. The room doesn't look much
different now than it did then.
But I'm not going to have a big long opening statement,
other than to thank you for this hearing. I hope this gets us
closer to finding out how it is we can free up some of those
resources so people can keep the economy going. We'll take this
information back with us as well. Thank you.
The Chairman. Next, we have two members of the committee.
First, someone who is also familiar with the State House,
Representative Capuano.
Mr. Capuano. Mr. Chairman, the only thing I can add is that
usually every other time I have been in Gardner Auditorium,
there have been people here with pitchforks and knives. I don't
see any pitchforks. Any knives out there are hidden at the
moment. I'm actually looking forward to a hearing that is
educational and enlightening, and hopefully we'll be able to
make things better for some of our small businesses here in
Massachusetts.
The Chairman. Finally, another very diligent member of our
committee, Mr. Lynch, from Boston.
Mr. Lynch. Thank you, Mr. Chairman. I want to thank you for
holding this hearing today, and I also want to thank our
panelists for offering their assistance, especially
Representative Tierney, Peter Koutoujian, who chairs the
Banking Committee here in the House, as well as Linda Dorcena
Forry, who also is here, and also an old hand, Senator Paul
White, former Senator, also here today as well. Thank you for
coming.
Mr. Chairman, just to give a snapshot of this situation: I
have a small company in my district, New England Door. They
only employ about 45 people, but they're a very profitable
business in Canton, Massachusetts. They manufacture and sell
garage doors. They have a great business there. They had their
line of credit terminated at the close of business on January
30, 2009, laid off all 45 employees. The business was forced to
close because of the canceling of the line of credit. They're a
very profitable company, and I think they offer sort of a
snapshot of what's going on here in the State and across the
country with the inability of good companies, solid companies,
reputable, experienced companies, to access lines of credit.
I know the banks that cut that line of credit were fearful
on their own account, and they didn't do it out of malice, they
did it out of fear--and I must say, not necessarily irrational
fear, given the economic climate. But this type of
inflexibility and constriction in lending practices is just one
example of many that my office has dealt with over the past 6
months.
And so we need to focus on getting that money that has been
given to major lenders out into the community, out into these
smaller businesses.
One of the troubling numbers that we have seen is that
despite all of the money that has gone out to these banks,
these larger banks, commercial and industrial lenders, the
actual lending was down 7.3 percent from October through
December of last year. And that's a troublesome aspect of this.
I'm very interested in hearing the testimony of the
panelists today. I have to confess that I have to leave at
11:00; we have some bills on the Floor that I will have to
manage down in Washington, so I'll be on the 12:00 shuttle. But
I do want to again thank you all for participating in this,
especially our panel of witnesses. I yield back the balance of
my time.
The Chairman. All of us will be voting in Washington at
6:30 today, so we're going to move this along. But we did want
to accommodate in Massachusetts this particular hearing. Let me
echo what my colleague said: We are joined by two chairs from
the House, Representative Koutoujian, who is chair of the House
Banking Committee, and Representative Linda Dorcena Forry, who
has the community development side. We have been working
closely with them and will continue to do that.
I will say, while Mr. Lynch referred to our former
colleague, Paul White, as a Senator, he was also, in fact, a
member of the House of Representatives class of 1972. So we
will claim prior association with Mr. White.
With that, we will begin the testimony. What we have here
are the bank regulators. There are a lot of bank regulators,
Federal and State. Probably, if you were starting from scratch
in creating a regulatory system, we wouldn't have so many. But
we do, and we have spent a lot of our time urging them to work
together, and I'm pleased to say that they do work together
well, and they have been cooperative in this. So we are glad to
have them, as well, of course, as our State bank commissioner,
because there is what we call the dual banking system in the
United States, which has both State and Federal regulators.
We will begin with a little longer statement from Eric
Rosengren, who as president of the Boston Division of the
Federal Reserve has a multiple set of responsibilities here,
both as a regulator and as an economic policymaker. Mr.
Rosengren.
STATEMENT OF ERIC S. ROSENGREN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FEDERAL RESERVE BANK OF BOSTON
Mr. Rosengren. Thank you very much, Chairman Frank, and
thank you to the members of the committee and members of the
Massachusetts delegation.
I'm going to be talking from a PowerPoint presentation,
which is at the back of my testimony, so I'm going to be going
through a series of charts rather than reading testimony. I
think it will be helpful if you have the charts in front of
you. The first chart will be Figure 1. It should be a blue
chart, Federal funds effective rate, if everybody is with me.
First, I'm going to discuss some of the national programs
that the Federal Reserve has been doing to try to improve
business finance. And then I'm going to very briefly discuss
the situation in New England.
As we're all aware, since August of 2007, financial markets
have been severely disrupted. At the outset of this crisis, I
and many members of the FOMC were quite concerned about how the
financial crisis would spill over--
The Chairman. FOMC.
Mr. Rosengren. Federal Open Market Committee.
The Chairman. That sets the targets for interest rates?
Just so people understand: That's the entity that sets the
targets for interest rates.
Mr. Rosengren. That's correct. Since the outset of this
crisis, we have been worried about how things would spill over
to business finance. Obviously, it started in the subprime
market, but spilled over to a much larger set of institutions
and a larger set of problems.
Over the course of the last year-and-a-half it has been
clear that the situation has gotten worse. If you look at the
senior loan officer survey that the Fed conducts, it highlights
the fact that it has gotten more difficult to get financing,
and that got appreciably worse as we got into the fall of last
year.
As we looked at the problems before getting financing, our
first tool for the Federal Reserve is to move the Federal funds
rate. And the chart that you have in front of you, the
effective Fed funds rates, shows you how quickly the Fed funds
rate went down between August of 2007 until December of last
year.
I would highlight a couple of things with this chart. One
is, when we bring down the Federal funds rates, it's not just
to bring the rates down for banks. It's to bring short-term
credit rates down that affect businesses. So the goal is that
the prime rate, the LIBOR rate and other rates tied to the Fed
funds rate will follow suit, not, clearly, in lockstep, but
will come down as well. While they have come down, they
obviously have not come down to the same degree as the Federal
funds rate.
The second thing I would note is that currently the Fed
funds rate is between 0 and 25 basis points. Effectively we're
at zero. So our conventional way of conducting monetary policy
can't be done because we have hit the bottom. The short-term
rates have also come down along with the Fed funds rates. And I
would note one thing in terms of Federal Reserve policy using
conventional policy, and that is last year you will recollect
that oil prices were quite high, that commodity prices were
quite high, and the Federal Reserve was widely criticized
actually for bringing rates down as quickly as it did bring
them down. I think it was a good policy that we brought the
rates down as quickly as we did. We obviously didn't prevent
the kind of problems that we have had, but I do think it has
helped mitigate the problems to bring the rates down. I would
say that many other central banks did not move with the same
alacrity as the Federal Reserve.
As I have mentioned, if you turn to Figure 2, as we have
gotten the Federal funds rate down to zero, we would have to
move to less conventional policies. What Figure 2 does is
provides the balance sheet of the Federal Reserve. This is
normally something people don't spend much time on, but I think
it's very important because during the course of doing the
unconventional policy our balance sheet has expanded very
substantially. I would highlight just a couple of the programs.
We have a whole variety of programs I don't have the time to go
over in any detail.
But if you look at two of the programs, if you look at the
discount window lending and if you look at the central bank
liquidity swaps, so it's the blue and the green, those are two
of the areas that we have expanded the most. Now, what is the
purpose of those two programs? The purpose of those two
programs is to help with interbank lending. So one way of
looking at those is they are ways of auctioning dollars to
banks in the United States and dollars to foreign banks abroad
that are active in the interbank rate, and the goal is to try
to bring the interbank rate down. In particular, a rate called
LIBOR, the London Interbank Offered Rate, is a rate that banks
trade between each other. And so the purpose of these two
programs was to bring that rate down.
And if you turn to Figure 3, which compares the LIBOR rate
to the Federal funds rate, you can see that the LIBOR rate has
come down quite substantially. It was very, very elevated
during the end of the third quarter. It's now trading much
closer to the Fed funds rate. This is a very important rate for
businesses. The LIBOR rate is used as a base rate for a variety
of lenders. LIBOR is used for a base rate when you have a
subprime mortgage and you have a reset. LIBOR is used in many
credit cards. In fact, my credit cards are tied to LIBOR. And
many business loans are tied to LIBOR. So when you're bringing
the LIBOR rate down, you're reducing the cost of funding for
many of our businesses. So the purpose of these programs, while
it was directed to the interbank rate, was really to get
borrowing costs down for a wide variety of businesses, in that
small, medium, and large businesses are all frequently
borrowing at the LIBOR rate.
If you turn to Figure 4, as well as the interbank rate, we
have had a variety of programs that have been designed to
impact the general market conditions. General market conditions
have been seriously impacted, particularly as we got into the
fall. This just highlights two of those programs. One is the
commercial paper funding facility, which provides an ability of
organizations that are having trouble issuing commercial paper
into the general market to issue it directly to the Federal
Reserve. And the other is the AMLF program conducted out of the
Federal Reserve Bank of Boston, which was intended to provide
stability to asset-backed commercial paper and to money market
funds. I will describe that a little bit more in a minute.
For large businesses, large businesses frequently do borrow
in the commercial paper market. It's an important source of
short-term financing. But it's not just large businesses that
benefit from commercial paper. Organizations like GE and many
other organizations fund themselves in the commercial paper
market and then lend to small and medium-sized businesses. So
everything from inventories to floor plan financing to other
types of financing are indirectly financed by organizations
like a company like GE getting access to the commercial paper
market. The commercial paper market and money market funds were
badly disrupted. We created these programs to provide funding
in the commercial paper market to try to make up for the fact
that it was very difficult for issuers to issue directly into
the market at that time.
You can see in the next chart, which looks at the asset-
backed commercial paper, that, as with the LIBOR rate, the
asset-backed commercial paper rates have come down quite
dramatically, as have commercial paper rates more generally. So
both those types of rates are now trading much closer to where
the Fed funds rate is currently trading. This has an impact on
businesses both directly and indirectly to the extent that
they're dependent on the commercial paper market.
So again, these are programs to stabilize more general
financial markets, but the purpose really is to get the cost of
financing down to businesses small, medium and large.
If you turn to Figure 6, it highlights what was happening
with our money market funds at the end of the third quarter of
last year. Money market funds were very badly disrupted. Why do
we care about money market funds? We care about money market
funds because--most people think of money market funds on the
deposit side, where they're finding their own funds. But on the
other side of their balance sheet is a variety of short-term
financing. In particular, they're buying a lot of the
commercial paper market issued by firms. So if money market
funds are stabilized, it helps to stabilize the commercial
paper market.
The purpose of our AMLF program was to try to stabilize the
money market funds. There were other programs that went into
place as well, like the insurance fund. You can see that while
there were very dramatic declines in money market funds in
terms of funds flowing out of the money market funds in the
third quarter, over the last 4 or 5 months, it has been quite
stable. That's good news for commercial paper. It is good news
for CD's. It is good news for the types of assets that these
types of organizations are participating in.
Just this last week we started a new program, the term
asset-backed securities loan facility, it's just in the process
of starting up. It's intended to help with the securitization
market. There has been virtually no securitization going on
since the fall of last year. The securitization market is
important because a lot of short-term credit was actually
financed through issuing securities more generally. If you
can't issue those securities, there is not an easy way for
financial institutions to unload some of the short-term credit
that they're getting. That affects student loans. That affects
small business loans. That affects credit card loans. So a wide
variety of loans are impacted if we're not able to get the
securitization market back up and running. So this program is
designed to do that.
I think it's a little preliminary to know exactly how well
that's going to work out. I'm optimistic it will work out and
that it will be a successful program, but we're just at the
initial stages. That's one reason I don't have a chart on it.
It was just this last week.
Figure 7 highlights what has been happening in the mortgage
market. Last week we had an FOMC meeting, and there was a very
substantial announcement come out of that FOMC meeting. At the
Federal Open Market Committee meeting, we agreed to purchase an
additional $750 billion in mortgage-backed securities on top of
the $500 billion that we had already purchased. We announced
$500 billion in November of last year. You can see that prior
to that announcement, mortgage rates were trading around 6
percent. Since that announcement, they have been trading much
closer to 5 percent. The hope is with this announcement that
mortgage rates will fall even further.
Now, that not only helps homeowners who are able to
refinance, it also helps small businesses. The reason for that
is many small businesses actually depend on their home equity
lines, on their regular mortgage loans. And so to the extent
that people are able to refinance or get financing through
their home, to the extent that we're able to stabilize housing
markets, that's good news for many small businesses, because
that's usually the first place that people turn when they're
starting from scratch to start a business. The reason for that
is financing costs on your home are usually much lower than
costs from other types of sources. So while it's primarily
focused on housing, it does have collateral benefits that are
very important for small businesses.
Turning to Figure 8, getting more to the banking system:
What this chart shows is, it separates out organizations
nationally that are CAMELS Rating 1 and 2, the strongest
institutions, from institutions that are CAMELS 3, 4, and 5,
those institutions are weakest. It breaks up into four
categories: Total assets; total loans; commercial/ industrial
loans; and commercial and real estate loans.
What you can see is those institutions that are healthiest
have tended to continue to expand lending. Those institutions
that are most troubled have tended to decrease lending. It
highlights the importance of trying to get our banking system
restored to health 6. Yes, Chairman Frank?
The Chairman. Just to reinforce the reason we're here, if
people look at that chart, the largest drop has been in
commercial and industrial loans. That's just a reinforcement of
the point that has brought us here, that is, people trying to
do business who--the decrease in commercial and industrial
loans is by far the greatest. And that, of course, really
underlines the need for this hearing. Please go ahead.
Mr. Rosengren. It highlights the importance of trying to
get our banking system as well as our securitization system--
The Chairman. But it also, there is a disproportionate hit
here on commercial and industrial loans, businesses, small
businesses. There is no point in trying to sugarcoat this.
Commercial real estate, not as bad. Total loans, not as bad.
The heaviest hit here are the commercial and industrial loans,
and that is why we have to address this issue.
Mr. Rosengren. And just turning to the last chart, Figure
8: What this provides is the CAMELS 3, 4, and 5 nationally and
in New England. So you can see nationally over the last year
there has been a dramatic increase in our most troubled banks.
It has gone from roughly 6.3 percent to over 13 percent, our
CAMELS 3, 4, and 5 nationally. You can see in New England it's
roughly 5 percent.
The Chairman. Have you explained what CAMELS means to
people who are not in the banking business?
Mr. Rosengren. It's a way of measuring the financial
strength of banking institutions, so it's Capital, Asset
Quality, Management, Earnings, Liquidity, and Sensitivity to
interest rates.
The Chairman. CAMELS is an acronym for these things?
Mr. Rosengren. It's an acronym for how we rate banks.
You can see that in New England, we don't have as many
troubled institutions as other parts of the country. This is
one time where New England hasn't been as badly impacted in a
recession as some other regions. Obviously, places like Miami,
San Diego, Arizona, and Las Vegas are areas where they had many
more construction loans and many more problems as a result in
their banking system. While we have more healthy banks,
obviously we have some banks that are having difficulty, and
obviously if the economy gets worse, it's going to be a problem
for even some of the institutions that are currently healthy.
So in conclusion, I would just highlight a couple of
things. Initially, the Federal Reserve used conventional
monetary policy to lower interest rates. The purpose of that is
to lower interest rates not only for households and other types
of financing, but also for small, medium, and large businesses.
As we got to the floor on the Federal funds rate, we have had
to turn to alternative policies. Those alternative policies
have looked at a variety of different ways that we can bring
interest rate spreads down. Most of those programs are designed
to try to provide financing that will be important for
businesses. Most of these programs will hopefully help the
situation in terms of reducing the cost to businesses and
hopefully providing greater availability than we would have in
the absence of those programs. Thank you.
[The prepared statement of Mr. Rosengren can be found on
page 97 of the appendix.]
The Chairman. Thank you. We will get to questions. But I do
want to emphasize: Having interest rates go down is a good
thing, but not to people who can't get loans. And that figure
you gave showed the commercial/industrial loans have been hurt
most; there has been the biggest drop. That's the focal point
of this hearing. We need to figure out how we can allow these
job-generating businesses to get the advantage of these lower
interest rates.
Next, and I appreciate her coming here, because we were on
the same plane yesterday, is Sandra Thompson, who is the
Director of the Division of Supervision and Consumer Protection
of the Federal Deposit Insurance Corporation.
STATEMENT OF SANDRA L. THOMPSON, DIRECTOR, DIVISION OF
SUPERVISION AND CONSUMER PROTECTION, FEDERAL DEPOSIT INSURANCE
CORPORATION
Ms. Thompson. Chairman Frank and members of the committee,
I appreciate the opportunity to testify on behalf of the FDIC
regarding the availability of credit to small and medium-sized
businesses in Massachusetts.
The FDIC is acutely aware of the--
The Chairman. Ms. Thompson, can you move the microphone?.
Ms. Thompson. The FDIC is clearly aware of the challenges
faced by banks and their customers during these difficult
economic times. Liquidity in the marketplace has been adversely
affected since the credit disruption began in mid-2007. Lack of
liquidity and the slowing economy are having a profound effect
on the availability of loans nationwide for both businesses and
consumers.
The focus again is on the ability of borrowers to repay
their loans, which means determining that loans are affordable
and sustainable over the long term. Few would argue that we
should return to the loose lending standards of recent years
that have resulted in so much damage to the financial system.
While prudent underwriting may mean that some borrowers who
received credit in past years will have more difficulty
receiving it going forward, it should not mean that
creditworthy borrowers are negatively impacted.
Unfortunately, in returning back to basic lending
standards, there is a risk that some lenders will become overly
risk-averse. As bank supervisors, we have a responsibility to
assure our institutions, regularly and clearly, that
appropriately underwritten loans are encouraged. The financial
data for banks in Massachusetts and the Northeast in general
reflect a lower risk profile, fewer delinquencies, and nominal
asset losses, in large part due to more prudent underwriting
standards. The institutions here that did not take undue risks
have nonetheless been affected by the national credit
disruption as liquidity has become scarce.
With regard to the supervisory role, in the period leading
up to the credit market disruption, regulators should have been
more aggressive in their supervisory approach to certain
concentrations of credit risk that put us where we are today.
The FDIC understands the critical role that credit availability
plays as the lifeblood of the national economy, especially for
small businesses. A number of discussions have taken place with
the FDIC supervisory management team to underscore the FDIC's
proper role and to raise sensitivity to issues of credit
availability. FDIC senior management has reiterated that
examiners should be encouraging banks to continue making good
loans and work with customers who are facing financial
difficulties. Prudent, responsible lending is good business,
and it benefits everyone.
Community banks are uniquely equipped to meet the credit
needs of their local markets. They have a proven tradition of
doing so through good times and bad. And most community banks
here in Massachusetts have largely avoided the undue
concentrations and reckless lending practices that led to the
present issues in the financial sector.
Massachusetts community institutions continued to grow
their loan portfolios in 2008, although at a slower pace than
at the peak of the expansion. Surveys of small businesses were
conducted by the National Federation of Independent Businesses
last fall and early this year. Most of them reported that
finance and interest rates were not the problem, that the
economy and poor sales were the biggest problem. Most of the
institutions here in Massachusetts have a solid capital and
solid funding base, and they will be in a good position to help
finance the recovery. The FDIC believes that banks should be
encouraged to make good loans, lenders should work with
borrowers who are experiencing difficulties during this
challenging period whenever possible, they should avoid
unnecessary foreclosures, and they should continue to ensure
that the credit needs of their communities are fulfilled.
Thank you for the opportunity to testify today, and I would
be happy to answer any questions.
[The prepared statement of Ms. Thompson can be found on
page 138 of the appendix.]
The Chairman. Thank you, Ms. Thompson. Next, we have Toney
Bland, the Deputy Comptroller for the Northeast District of the
Office of the Comptroller of the Currency.
STATEMENT OF TONEY M. BLAND, DEPUTY COMPTROLLER, NORTHEASTERN
DISTRICT, OFFICE OF THE COMPTROLLER OF THE CURRENCY
Mr. Bland. Chairman Frank, members of the committee, and
members of the Massachusetts delegation: Thank you for this
opportunity to talk to you today about the OCC's role in
ensuring availability of credit for small and mid-sized
businesses in Massachusetts. I have been a national bank
examiner for 28 years, and I have served in a variety of
positions in the field and in our Washington, D.C.,
headquarters before taking my current responsibility as Deputy
for the OCC's Northeastern District. In that capacity, I am
responsible for the oversight of nationally chartered community
banks in the District of Columbia and 14 States, including the
Commonwealth of Massachusetts. The OCC has long recognized the
importance of small and mid-sized businesses to the overall
health and vitality of our economy, and we believe the
Administration's small business and community lending
initiative will have a positive impact on the ability and
willingness of commercial banks to lend to that important
sector.
Like much of the United States, Massachusetts is coping
with serious economic challenges. Consumer-loan delinquency
rates are rising as home prices and labor markets decline, and
commercial real estate is also suffering. Many Massachusetts
firms have responded to the downturn by scaling back their
operations. The vast majority of these small businesses are
still fully viable. They continue to produce goods and
services, and they still need access to credit.
As bank regulators we recognize the important role that
credit availability plays in the viability of these companies,
and we have encouraged banks on an interagency basis to meet
the credit needs of their small and mid-sized business
customers. Yet in times of recession, bankers may be more
cautious about the level of credit risk they assume and more
selective in the loans they choose to make, especially if they
find their capital or access to funding constrained. This is
one reason why we stress the need for strong risk-management
systems, capital and liquidity planning.
Fortunately, most banks have such systems in place and
remain well-positioned to meet their customers' demand for
credit. Indeed, our examiners indicate that most community
national banks in Massachusetts expect to see modest growth in
their small business loan portfolios this year. Various Federal
and State programs, including the Small Business Administration
loan-guarantee program, can be especially valuable in this
environment in helping bankers meet the credit needs of small
and mid-sized businesses.
In evaluating the underwriting and quality of small
business loans, the OCC views government guarantees or support
provided to these programs as effective mitigants of credit
risk. In fact, our guide to examiners specifically states that
those portions of credit having a government guarantee should
usually be accorded a pass rate. National banks with strong
encouragement of the OCC are active participants in these
programs. The OCC also encourages lending to small and mid-
sized businesses through our evaluation of the bank performance
under the Community Reinvestment Act, or CRA, our extensive
community affairs activities, and our formal outreach programs.
I know that some people believe that CRA contributed to the
current credit problems. We at the OCC disagree. CRA encourages
each insured financial institution to help meet the credit
needs of the community in which it operates, but it does not
ask banks to make bad loans. In fact, CRA lending has been a
profitable business for most banks and a business that has had
very significant benefits for communities across the country.
The OCC's CRA examination process ensures that a national
bank's lending to small and mid-sized businesses is carefully
assessed and subject to public scrutiny and that these
activities have a direct influence on the institution's CRA
rating. This creates an additional incentive for banks to lend
to creditworthy small business borrowers.
The OCC's community affairs department provides important
information and resources to examiners, bankers, industry
associations, and community groups. Ten OCC community affairs
offices are located in major metropolitan areas across the
country, including Boston, and these individuals actively
promote existing programs and innovative ideas for advancing
small business lending.
We also have a number of activities and publications
specifically aimed at increasing awareness of programs that
promote lending to small businesses. For example, the OCC and
other bank regulatory agencies regularly convene seminars for
Massachusetts financial institutions, focusing on prudent
lending and promoting bank involvement in Community
Reinvestment Act activities, including small business lending.
My written testimony contains more information on these and
many other OCC efforts to advance small and mid-sized business
lending.
Let me close by emphasizing that the OCC will continue to
support and encourage lending to small and mid-sized businesses
in Massachusetts and throughout the country. Thank you. I look
forward to your questions.
[The prepared statement of Mr. Bland can be found on page
69 of the appendix.]
The Chairman. Next, Mr. Michael Finn, who is the Northeast
Regional Director for the Office of Thrift Supervision.
STATEMENT OF MICHAEL FINN, NORTHEAST REGIONAL DIRECTOR, OFFICE
OF THRIFT SUPERVISION
Mr. Finn. Good morning, Chairman Frank, and members of the
committee. I appreciate the opportunity to appear on behalf of
the OTS this morning to discuss ways to expand credit to small
and medium-sized businesses in Massachusetts and throughout the
country.
I would like to begin today by thanking you, Mr. Chairman,
for your leadership during the House passage of bills supported
by OTS in two consecutive Congresses that allowed thrifts to
expand lending to small business, which is fully consistent
with the thrift charter and consumer and community lending. We
stand ready to work with you again this year and to see these
important changes enacted into law.
OTS supervises 19 savings institutions with home offices in
the State of Massachusetts. They range in size from $25 million
in total assets to $2.5 billion. At the end of 2008, these
institutions collectively held about $10.5 billion in assets.
For OTS-regulated thrifts, total loan originations and
purchases declined 11 percent from 2007 to 2008. However, in
several categories of loans, including small business loans,
the numbers actually increased during that period from 2007 to
2008.
Nevertheless, the current law limits the ability of thrift
institutions to extend credit to small businesses, and many
thrifts are unable to achieve efficiencies of scale that might
make small business lending profitable.
The Home Owner's Loan Act, which places a cap on commercial
loans at 20 percent of the savings institution's assets, states
any commercial loans beyond 10 percent must be in small
business. The legislative proposal that OTS supports would lift
the cap on small business loans entirely and increase the cap
on other commercial lending from 10 percent to 20 percent.
We are also working on a new proposal within OTS to provide
additional flexibility for savings institutions by redefining
small business loans to replace the current dollar limit, which
is set at $2 million, with a standard that will reflect more
changes in economic conditions, either based on geography or
institution size. OTS will also propose a change that would
increase the permissible community development investments for
OTS-sponsored institutions.
These changes would be consistent with the spirit of the
thrift charter as a consumer and community lender and would
make credit available to more neighborhoods and businesses. The
changes would also diversify the thrift business model to make
institutions more resilient when a slump hits one single sector
of the economy, such as we have seen in the housing market.
Thank you again, Mr. Chairman, for inviting me here today.
I look forward to responding to your questions.
[The prepared statement of Mr. Finn can be found on page 78
of the appendix.]
The Chairman. Next our colleague in government, the House
Chair of the Banking Committee, Peter Koutoujian.
STATEMENT OF THE HONORABLE PETER KOUTOUJIAN, HOUSE CHAIRMAN,
JOINT COMMITTEE ON FINANCIAL SERVICES
Mr. Koutoujian. I was hoping my testimony would start with
a bang, but--
Chairman Frank, Congressman Capuano, and Congressman Lynch,
and a special thanks as well to Congressmen Tierney and
Delahunt, who are not even a part of the committee but care
enough to learn what is going on, especially here in
Massachusetts, thank you very much.
I'm going to speak and the overarching arc of my speech
will be regarding the strength and soundness of Massachusetts
State-charted banks, the challenge of finding ways to help
small businesses obtain loans, and some closing comments and
approaches as well.
I have sort of derived this information through myself and
my staff's investigation of not only statistical information
bearing on Massachusetts but also in speaking with the banking
and the business community as well.
Topic 1, strengthen soundness of Massachusetts State-
chartered banks: The banking industry facing economic
challenges is due in part to these issues surrounding subprime
mortgage loans. Though in Massachusetts we are not immune from
the ailments encountered, these State-chartered institutions
are faring better than their counterparts in other States. The
reasons? There was a limited involvement in some of the
subprime market. There was an exercise of due diligence and
safety and soundness procedures in issuing loans that in some
cases might have been greater than in other places.
As of September of 2008, the Massachusetts bank outstanding
loans were approximately at $173.8 billion, and as of December
of 2008, State-chartered institutions' reserves to noncurrent
loans and loans in arrears and leases was 96.45 percent and the
United States was at about 68 percent. I think this shows that
we have a strong and stable reserve system here in
Massachusetts. Also, the noncurrent loans and leases to total
loans and leases was .97 percent and the United States was 2.64
percent, almost 3 times as much.
And then the State-chartered institutions' net charge-offs
to loans and leases or losses was .16 percent and the United
States was 1.1 percent--again, a significant difference.
The results of these statistics show that Massachusetts
State-chartered institutions fare better than the U.S. average;
and also in speaking with local representatives of some of the
banks, we are hearing that most State-chartered community
institutions have few if any foreclosures, as some have
indicated.
With regard to savings, we know that much of our sort of
economic concerns are as a result of people saving more.
Massachusetts State-chartered banks have seen an increase in
savings deposits due in part to consumers moving money from
riskier investments to more stable investments, such as money
market and CD accounts, possibly--no hard statistical data--
possibly as much as 6 percent. While FDIC covers deposits up to
$250,000, State-chartered banks and credit union deposits are
covered in full, which could also be a reason that people are
pulling their money out of other institutions and placing it
into the State-chartered, bringing that number up to 6 percent.
Finding a way to help small business obtain credit is part
of, I think, our greater challenge here. There is a desire by
banks to resume lending to business, but current economics make
credit decisions more difficult and complex for commercial
lenders. There is a key factor--a key factor in a lender's
decision is the borrower's ability to pay back the loan. Such
determination is made by evaluating the strengths of the
borrower's business plan as well as the overall market for the
product. In this economy, where markets are contracting and
consumer spending is down, the complexity of this determination
becomes more difficult. Another factor affecting credit
availability for small to mid-sized businesses in Massachusetts
is the decline in value of real estate or capital equipment,
which may prevent a business from accessing a lower cost of
debt for refinance. Current economic conditions have forced a
lot of nonbank lenders as well to pull out, a major source of
credit for business in the last decade. And larger banks, a
major source of funding to mid-market companies, have curtailed
lending to address bankwide risk concerns. Some other feedback
from the business community is that they have said that they
have been receiving feedback--excuse me, that they had been
receiving feedback of businesses being denied loans, as well as
a feeling among some businesses that applying for a loan is
simply not worth it due to the belief in a lack of loan
availability, based on many media reports. Another business
community representative recognizes that lending has been
tough, especially in certain sectors such as construction, but
is receiving some feedback that there has been a small increase
in lending in the last few weeks and is hoping that the trend
will continue.
According to the Associated Industries of Massachusetts,
the business confidence index fell to an all-time low in
February, to 33.3 points, 3 points below December's previous
record. It's also AIM's, or Associated Industries of
Massachusetts's, feeling that many companies are simply not
applying for loans. Companies are in a pullback mode, trying to
preserve their resources and ride out what they perceive to be
an economic downturn. This is much like consumers who are now
also contracting their own spending and enhancing their own
savings.
I think also the fact that the most recent data in
Massachusetts shows the jobless rate climbing to 7.8 percent,
creating more unemployment, perhaps less opportunities for
companies to market and sell services and wares, is also
something of great concern to them.
I think that, as I close my testimony, there are items that
our committee is willing to work and desirous to work with the
banking community and the business community to identify if
there is anything legislatively and, something we're hoping to
learn today, if there is anything legislatively hindering what
they're hoping to do, restrictive statutes or regulation.
I also think, Mr. Chairman, that we have to be
considerate--and I don't know what the answer is to this yet,
but I'm interested in exploring this. We need to be careful, I
think, with regard to Federal banking regulation and the fact
that the State has no say whatsoever in that. So while we may
be hindering by too much regulation on one side, perhaps we're
not helping by having some say in what's going on with regard
to Federal banks.
I think also we can silo--I hate this new word--information
that we need to expand. It's not just about banking. It's sort
of like ``shovel-ready.'' For me, it is a new word we have to
use too much now. But we need to be thinking about business
banking and many other markets and opportunities. I think that
we need to work together, as Congressman Frank said recently,
the Federal, the State, and the regulators, all working
together to help all the industries here in Massachusetts.
Thank you very much.
The Chairman. Thank you. Commissioner Antonakes.
STATEMENT OF STEVEN L. ANTONAKES, COMMISSIONER OF BANKS,
DIVISION OF BANKS, COMMONWEALTH OF MASSACHUSETTS
Mr. Antonakes. Good morning, Chairman Frank, and
Congressmen Lynch, Capuano, Delahunt, and Tierney. My name is
Stephen Antonakes, and I serve as the commissioner of banks for
the Commonwealth of Massachusetts. I commend you, Mr. Chairman,
for scheduling this timely hearing on the credit needs of small
and mid-sized businesses. The ongoing success of our businesses
and their access to credit is critically important to both the
Massachusetts and our national economy.
The two primary points of my testimony are that local
financial institutions continue to lend and that the Patrick
Administration is working to encourage public/private
collaboration to assist businesses during these times.
Certainly the well-chronicled difficulties being experienced by
some of our large nationwide money-center banks have resulted
in the restriction of credit.
However, the experience of community banks and credit
unions has been strikingly different. I have just completed a
series of roundtable discussions across the Commonwealth and
have heard from hundreds of bank and credit union officers on
their perspectives of what is happening on Main Street. Many
Massachusetts State-chartered institutions report increased
lending as a result of reduced competition from some of their
largest bank competitors. This is yet another example of how
our diversified and decentralized system of banking continues
to serve our Nation well.
This contention is supported by our analysis of FDIC call
report data, which shows that Massachusetts State-chartered
community banks' balances for commercial real estate loans and
commercial/industrial loans increased 14\1/2\ percent from 2007
to 2008 and nearly 26.9 percent from 2006 to 2008. The
Massachusetts community banking system and credit union
movement remain fundamentally sound and continue to serve as
sources of strength.
I also note that the opportunity for the U.S. Treasury to
provide TARP funds to Massachusetts banks has been
significantly restricted. More than 5 months after the largest
banks were provided TARP funds, no term sheet has been released
for mutual banks. Massachusetts has the largest percentage of
mutual banks in the country. Accordingly, TARP funds are still
not an option for the majority of community banks operating in
the Commonwealth. This has had the effect of unnecessarily
restricting increased lending opportunities that might
otherwise be available through the use of TARP funds.
Finally, events beyond the control of community banks have
and will continue to affect their ability to lend in the
future. The conservatorship of Fannie Mae and Freddie Mac as
well as proposed significant deposit insurance assessment
increases will significantly impact the earnings of State-
chartered community banks and in the case of the ongoing issues
in the corporate credit union system State-chartered credit
unions as well. It is important to note that these actions will
not threaten the capital base of any Massachusetts State-
chartered bank or credit union. However, the availability of
credit to consumers and businesses alike will be reduced
across-the-board as a result of these increased operating
costs.
In sum, the ability of local institutions to continue to
lend will not be impacted by their bad acts but by the bad acts
and aggressive risk-taking of others.
Massachusetts has also had a proud history of attempting to
leverage partnerships to increase opportunities for small
businesses to flourish. The Massachusetts Small Business
Capital Access Program, or CAP program, involved an initial $5
million State appropriation in the early 1990's to provide a
cash collateral guarantee or credit enhancement to small
business loans. Today, over 100 banks participate in the CAP
program.
Since the banks utilize their own underwriting criteria and
directly provide the funding, the loans are simpler to
originate than loans made through SBA. Participating banks also
receive credit under the Massachusetts Community Reinvestment
Act. In 15 years, a total of $10 million in State funding has
been leveraged into $241 million in loans to over 3,800 small
businesses, with an average loan amount of $51,000 and loans as
small as $1,000. CAP program loans have helped create or retain
26,000 Massachusetts jobs and brought in over $100 million in
payroll taxes to the Commonwealth.
The Massachusetts Banking Partners small business loan
program provides greater access to reasonably priced credit and
banking services to small businesses as well as access to vital
business assistance. The program recognizes that many startup
and small business owners need help with recordkeeping, general
management, and preparing a business plan and financial
statements. The Banking Partners program matches small business
owners receiving technical assistance and training with small
business assistance providers with participating banks.
In addition, the Patrick Administration is currently
working to develop additional programs to further assist small
and mid-sized businesses having difficulty accessing credit. As
we continue to work our way through the current economic
downturn, small and medium-sized businesses will face
increasing challenges. I thank you for the opportunity to
testify today. I would be happy to answer any of the
committee's questions. Thank you.
[The prepared statement of Mr. Antonakes can be found on
page 56 of the appendix.]
The Chairman. To begin, Mr. Antonakes, two of the issues
that you mentioned that are relevant: First, we are working
closely with the FDIC and the Chair, Sheila Bair, to reduce
that increased assessment. If the legislation passes the House
and, suitably amended, passes the Senate, and the lending
authority of the FDIC is sufficiently increased, that increased
assessment will be cut by two thirds. Instead of going from 6.3
percent to 20 percent, it will go from 6.3 percent to 10
percent. And we have the Chairwoman's word on that. That's
pending. We are very optimistic that will happen. So that is
going to happen.
Secondly, your mentioning the problem of Massachusetts
suffering disproportionately when there is not a means of
getting Federal TARP money to mutual banks: A letter will be on
the Secretary of the Treasury's desk tomorrow signed, I
believe, by all the members of the Massachusetts delegation,
including those of us on the committee, insisting that be done
very promptly. Apparently, I'm informed by my staff that--we
have expressed an interest in this--they are having
difficulties finding what type of collateral to take since
mutual banks don't have stock. We will find something. I will
be talking to the Secretary of the Treasury today. I guarantee
we will get very prompt action and the funds will be made
available to the mutual banks.
Now let me ask you--I apologize, I should have structured
this differently. I should have begun with the businesses,
because here's the problem, frankly: When we get to you, then
we wonder why we're here, because everything is good. But
everything isn't good. It doesn't mean people are bad, but
there are problems. We hear from a lot of businesses that they
are not able to get loans. I have a business in the New Bedford
area, a very important functioning business, that is having
problems getting their credit extended. So we know there are
problems here.
What I should have done is had the businesses come first
and hear their complaints, and then the banks would explain in
the second panel what they're trying to do but, and then you
would have come last, because you would have heard businesses
complaining, and the banks, frankly, saying that, yes, part of
the problem is the regulators. And you have a dual mandate. You
have as members of the Federal Government the mandate of
getting the economy going, but you also have the safety and
soundness mandate. People sometimes overlearn lessons.
So I'm going to ask the bank regulators, the three Federal
bank regulators, less so the Federal Reserve--and this does
come from both the large banks and the community banks--I want
you to respond to the charge we get that while you are for
lending in general, some of the people who work for you are
sometimes not for lending in particular. We can't make loans in
general. I mean, we do have those numbers that Mr. Rosengren
showed us that commercial and industrial loans have been
disproportionately hit, and we have people who come and show us
balance sheets--we're not experts--that seem to us to justify
loans. So what are you doing to make sure that your examiners
don't err on the side of safety and toughen up too much? Ms.
Thompson, let's begin with you.
Ms. Thompson. I would admit that we do hear complaints all
the time about this very issue. The FDIC as insurer, we insure
the deposits of over 8,300 institutions. But we are the primary
Federal regulator for just over 5,000 institutions, and most of
the institutions we supervise are community banks. What we're
finding, and particularly in Massachusetts, is that as some of
the larger banks are pulling out, some of the community banks,
especially the ones here in the Commonwealth, are regaining
access to borrowers that they may have lost for competitive
reasons prior to the credit issues in the economy.
Two things: One, we supervise over 133 institutions here in
Massachusetts, and we have noted that their lending has
increased. And we have specifically told our examiners that
they are to strike a balance. We want to encourage institutions
to make loans, to make responsible loans. There are 30
institutions in Massachusetts that have applied for TARP funds.
As mentioned before, 18 of them are mutual, three are C corp.,
and 9 are public. And it's interesting to note that when the
TARP was first implemented in October, it was for the publicly
held companies, and we have been working diligently with the
OTS to try to come up with a term sheet to help get the mutuals
in play for the TARP money.
There have been some allocations--I think there have been
12--10 that have been given, 10 awarded to--
The Chairman. Ms. Thompson, two things: First, I want to
see that term sheet. It doesn't have to be perfect. The term
sheet people can understand the terms under which mutual banks
will be able to get TARP funding. The Secretary is going to be
coming back for some more help. I don't know how he would
expect myself, Mr. Capuano, Mr. Lynch on the committee and the
others to be responding to requests for more authority if a
significant chunk of the banks in our State can't get it. So
please understand that is not now a nice thing to happen; it's
a prerequisite for further cooperation.
Secondly, let me ask you, and I'll ask all the others as
well: We get complaints from banks, I will get a complaint from
a constituent--it's delegated. I'm not a lending officer. I
don't want to be. But I have a responsibility to ask: I was
told, ``Yes, we would like to do that, but we're worried about
the regulator.'' I want from you and staff a way I can get
those complaints with sufficient anonymity. Because you
understand a banker doesn't want to sign his name to a
complaint about a regulator, human nature being what it is. But
we really need a complaint process. I appreciate you're trying.
You have a lot of people under you.
Here's the deal: I think a lot of people--and it's not
their fault--who work for you figure they are more likely to
get in trouble if they approved a loan that went bad than if
they denied a loan that didn't happen and that should have
happened. I appreciate that. I do want to move on. Do you have
anything further to say?
Ms. Thompson. I offer our ombudsman, to the extent people
want to work out a complaint--
The Chairman. Ms. Thompson, we have heard--as I look at the
complaints, many of them have been from the larger
institutions, where the Fed obviously would have a role. What
is the Federal Reserve doing to see that there is not
overrestriction, in our concern for safety and soundness.
Mr. Rosengren. I would agree with your observation that I
think a disproportionate number of the problems are at our
larger institutions. As the chart that I showed for New
England, we have a lot of community banks that are actually
well capitalized and are able to provide lending, but they can
only do it up to the capacity of their capital. So for many
small businesses, I think there is access to our community
banks. And in terms of the advisory councils that I--
The Chairman. Don't tell me the good stuff. Talk about the
bad stuff.
Mr. Rosengren. In terms of the bad stuff, for the larger
institutions, they do have more capital issues than our smaller
institutions. Some of the issue has to be that we have to get
them restored to health. That's part of the purpose of some of
the TARP funding. We also need to get some of their bad assets
off their balance sheets. Secretary Geithner was talking about
that this morning, on ways to try to remove bad assets. I think
both of those are critical to getting the large banks in a
position where they feel comfortable lending to medium and
large businesses.
The Chairman. If in fact the plan the Secretary is
announcing, with getting private capital and public capital
together to try and bail the banks out with some of the things
that went bad, but in a way that promises that there will be
some public return if things get better--if that were to work
in a couple of months, could we look for an increase in
lending? I think these people need to know that if in fact
there is this program of buying the toxic assets--which is a
very bad term. I think the opposite of a toxic asset is a
nurturing liability, if we're inventing terms. But if we are
able to help the banks divest of some of the bad decisions that
are weighing on them or the bad results, could we count on that
leading in part to increased lending?
Mr. Rosengren. I think it will improve the situation. It
won't happen overnight. It takes time for both the bad assets
and it takes time for the good bank that's left to start
thinking about future prospects of the problems in the
portfolio.
The Chairman. Please advise the good banks that will be
left that they should start thinking about it now. Seriously.
If it is sequential, it's going to be a problem. They know
what's coming. They should start looking at these things now,
start the conversations now, because I will tell you, if in
fact we go ahead with this--and as I understand it, the
Secretary is not asking for further congressional help to
implement this--but if this goes forward, and I think it is
necessary--but if it doesn't pretty soon start to produce some
results, then the anger is going to be such that we're going to
lose some capacity to do these things. Mr. Bland.
Mr. Bland. Chairman Frank, back to your original question
about our examiners. As Ms. Thompson said, it is a balancing
act. One of the things we have to do is periodically check in
with our examiners and make sure that they understand the
environment we're in and what are the right calls to make. We
do that constantly, with meetings and also instructions that go
out to them. We realize that, from the past, we make sure that
we're making calls that are consistent not only within
Massachusetts but around the country. And that is one of the
big things we learned especially from the 1980's that is very
important, to have some oversight and some quality control
around decisions that we make.
The other thing I want to mention is, in terms of
improvement, I think the Administration's proposal on small
business lending will be very important. I think we should see
some traction starting fairly soon. On June 30th, the
regulatory agencies will start tracking the Small Business
Administration's small lending activity. That should be
important.
The Chairman. The reason being that if the banks then make
loans that qualify there, they get a guarantee that should make
it easier for them--
Mr. Bland. Up to 90 percent. My last point is, in terms of
customers who would like to anonymously lodge complaints or
inquiries into situations with their banks, we have a customer
assistance group that allows them to call in--
The Chairman. By ``customer,'' you mean the banks you
regulate?
Mr. Bland. Banks we regulate, but also a customer of a
bank.
The Chairman. I appreciate it. Mr. Finn.
Mr. Finn. Chairman Frank, I appreciate your attention on
mutual institutions. As you know, OTS has a very large mutual
bank population, and it has been a difficult issue.
But beyond that, in talking about our approach towards
supervision, just this past week, I was up here in Boston
meeting with my Boston staff and on Friday with the rest of our
regional staff. We're trying to send clear, steady messages to
staff to be prudent regulators, to identify concentrations in
risk early, so that institutions can deal with them in a
capable way. If you wait too long, it becomes a problem where
you need very severe actions to bring about the right change.
So we are closely looking at risk. But we also talked about
the availability for creditworthy borrowers. The Agency put out
a statement back in, I think it was November of 2008, and while
that didn't have binding rules, it's a message that needs to be
reinforced to regulators.
The Chairman. The regulators together, we have heard some
acronyms here. You've been spared one of the most unpleasant-
sounding ones, I think, which is what these people when they
get together call the FFIEC, the Federal Financial Institutions
Examination Council. We have most of the members of the FFIEC
here today.
But there have been some statements. Let me say this, and
then I'm going to move on to my colleagues: We're part of the
problem, we the politicians. We tend to be somewhat too harsh
and go after the mistakes. As an example, AIG, a lot of
problems with the bonuses they should not have been granted,
and the retention bonuses I think were frankly a form of
extortion--although I do want to say, the people who got those,
we're not talking about Madoffs here, we're not talking about
criminals. I think some of the vitriol needs to be toned down.
Bad policy doesn't mean they are horrible people. We need to be
able to control the policy.
But in fairness to the Federal Reserve and Secretary
Paulson, who was there under the Bush Administration as well,
some of the people who have been very critical of the decision
to deal with the debtors of AIG were equally critical of the
decision not to deal with the debtors of Lehman Brothers.
Lehman Brothers was allowed to go under and the debtors got no
help. AIG, the debtors got help. There were people equally
critical of both. What we need to do is get a system so we can
avoid both of those extremes.
I want to say this: Please convey to your examiners, all of
you who have examiners--I am chairman of the committee. I talk
to all of the members of this committee. I know in the past
they have been afraid that if there were failures they would be
attacked for laxity. I will work very hard to say, look, we are
asking for there to be more balance. I understand, if there is
more balance, that means more good loans being made and
inevitably it means more bad loans being made. There is no way
I can tell you to have your people approve only good loans. We
hope to get the percentage fairly high.
I will tell you that I will urge my colleagues to
understand that. We urge you to take a little bit of a risk now
on the side of more loans because we think credit is too tight.
As you get it more relaxed, yes, we won't get it perfect. But I
think that is what we need to do. And I will tell you that to
the extent that we in Congress are involved, our reactions will
reflect that.
Let me go next to my colleagues on the committee. Mr.
Capuano.
Mr. Capuano. Thank you, Mr. Chairman. I would like to
start, because it was a new issue to me, with what Commissioner
Antonakes mentioned on the mutuals. I hadn't heard that before.
And Mr. Frank's comment that they have no stock is an issue. Do
you have any suggestions? I'm not trying to put you on the
spot. If you want to do it later, or just let me or the
chairman know, suggesting items for collateral that we might be
able to support.
Mr. Antonakes. I would be happy to follow up with you,
Congressman. But I think, as the chairman indicated, there is
always a way to get it done. We would favor different ways of
looking at things, be it subordinated debt through the holding
company. Some kind of a deposit at the mutual bank has been
discussed as well. And even, you know, perhaps rather than a
cash infusion and perhaps, you know, as the Secretary of the
Treasury's statement today, we'll work on it, the means of
moving some troubled assets off of bank balance sheets, not
just the five largest banks in the country, but even a few
community banks. There are a very small number that are
struggling. The ability to move just one or two bad loans off
the balance sheet could immediately restore them.
The Chairman. The lack of a means for applying for TARP
funds doesn't carry over with the assets.
Mr. Antonakes. Correct.
The Chairman. The fact that they're not eligible for the
funds yet would not intrude--wouldn't mean they couldn't
participate in that other program.
Mr. Antonakes. Yes, Mr. Chairman. I'm just hoping the
program on--that allows us to move the assets out is flexible
enough to deal with small asset issues versus large asset
issues.
Mr. Capuano. Mr. Commissioner, I'm happy to look at the
suggestions, but you have to understand you're talking to
someone who hates what is about to happen this week. I think
what the Federal Reserve and the Treasury are doing this week
is horrendous. I think it is incredibly dangerous to take
almost all the risk and put it on the taxpayers' backs. Why do
you think the market is going up today? Because the market sees
a killing. I don't blame them. I would be doing the same thing.
They see a killing, a massive shift of taxpayer money to
private enterprise. I hate it. I will take it up with both
Secretary Geithner and Chairman Bernanke this week as they come
before the committee. I know I am a voice crying in the
wilderness. I get it. But I respectfully disagree with taking
those assets off. I also know that I'm in the minority.
I do believe there are other ways to do it. I think there
are plenty of ways to leave those assets on the books of the
people who took the bad gambles, which for the most part are
not our community banks. Very few community banks took these
humongously bad gambles. Most of them were made by the big
guys, and everything is rolling downhill. I think there is a
way to do it, to leave the risks on the back of the people who
took that risk, as opposed to taxpayers. That's a different
issue. We'll be dealing with that next week.
I guess I do want to follow up on what the Chairman had to
say, what Chairman Koutoujian had to say: I agree that a lot of
it has been people backing off. It has also been exactly what
Chairman Frank said, which is everybody in the whole system,
both the regulators and the bankers and community bankers, are
afraid to make not a bad loan but anything other than a
perfectly excellent loan to a guaranteed payer. Again, I really
think that the most important thing is to comment to the
regulators that you have to talk to your own people. Again, I
understand there is a balance. I understand that. I think it's
perfectly fine if the instruction goes out to loosen it up
again, to make sure that Congress knows that, you know, there
is a little bit of extra risk.
I can only analogize it to 2004, when the convention was
here in Boston. It was a couple of years after the 9/11 attack.
Every single security agency in Washington was up here trying
to protect us. I understand that. Every one of them wanted to
close down every road for 14 square miles. And we had no--
because nobody wanted to be the guy who said, ``Open up Route
93,'' in case, God forbid, there was a problem. I understand
that. I respect that. It's exactly what's going on in the
banking industry right now.
The balance is, when you make these commentaries, when you
enlighten your regulators, that you also document it and let us
know. I think the chairman is 100 percent right: We understand
that if things open up a little bit better, that some
additional loans might go bad. That is better for the economy.
It is better for everybody if one or two go bad. Nobody wants
to go back to the bad old days of just throw it out the door.
But there is some balance. And I am not trying to ask you to
put your own reputations or your people's reputations on the
line. If it's done in an open and transparent way and a
thoughtful way, I think that there will be plenty of Members of
Congress who will stand up and do the right thing.
With that, Mr. Chairman, I yield back the balance of my
time.
The Chairman. Mr. Delahunt.
Mr. Delahunt. I'm going to ask Mr. Bland to focus on the
Community Reinvestment Act, and if you have data that would
indicate delinquencies and defaults from institutions that
operate under the--operate within the Community Reinvestment
Act. Because I think there is a perception out there that the
CRA in no small measure is responsible. And my understanding of
the data is that is entirely inaccurate. I think it's important
that we lay out for the record once and for all the impact of
the CRA. So reflect on that for a minute, but let me just take
another minute to reflect on I think what you're hearing from
the chairman as well as Mr. Capuano. I just think it's very
natural for people to err on the side of caution when there is
a crisis like the one that we have now. I remember vividly back
in the late 1980's or actually in the early 1990's the term
``performing/nonperforming loans,'' and actually institutions
that I believe--lending institutions, banks, that could have
survived did not because of fear of lack of discretion maybe,
lack of flexibility.
And I think the message that you're hearing from members of
the panel is to go back to your personnel and tell them to
exercise judgment. Don't become so concerned that what we have
is the ability to lend but a reluctance to lend because of the
mood of the moment. That is really defeating in terms of what
we as an institution, in terms of Congress, and the
Administration is attempting to do. Exercise judgment. Don't be
too reluctant.
Now is a good time to be in the market. There are a lot of
good buys out there. One only has to see what the Chinese are
doing worldwide. I read recently a quote from one of the
Chinese leadership that said this is a once-in-a-century
opportunity, so therefore the Chinese, who I believe have in
excess of a trillion dollars, are all over the globe now
buying. Again, I'm not suggesting that we all run out and be
rash, but at the same time, let's strike that balance. It's
important that we do. Mr. Bland, will you speak to the issue of
the CRA?
Mr. Bland. Representative Delahunt, I don't have the
specific numbers in front of me, but I would be happy to get
those for you. But I can safely say with all confidence that
the CRA loans, the loans made under CRA, have not fared worse
than loans outside of CRA.
Mr. Delahunt. Say that again, and say it a little more
loudly so everybody can hear.
Mr. Bland. I can say with 100 percent confidence that loans
under CRA have not performed any worse than loans outside of
the CRA.
Mr. Delahunt. Let me suggest to you, from what I have been
able to gather, is that in fact they're doing better than loans
outside of the CRA. So I would like you to get that information
and provide it to me and start to focus your public comments,
or whoever you report to, on the realities that exist out in
the marketplace. With that I yield back.
The Chairman. And to make the question complete: What we're
looking for is a comparison not just of CRA loans versus non-
CRA loans in the banking system, but CRA loans versus all
loans--because I believe statistics are pretty clear that the
great majority of loans that got us in trouble were made out of
the banks, not credit unions, that the credit unions and banks
were not making these loans. We need to remind people CRA only
covers the banks. So it's loans made by mortgage finance
companies and others where I think there is a disproportionate
part of the problem. That's the comparison we could get, not
just in the banking system and CRA, but in the banking system
and other loans, many of which were outside the system. Mr.
Tierney.
Mr. Tierney. I don't want to recover a lot of ground we
have already covered. I think the questions were right on
point. But am I correct in saying that all of your
organizations have authority to step in and take some sort of
corrective action if in fact people are having bad lending
practices? But if they're not lending enough, if they fall down
on the balance, where you don't think they're lending enough,
there is not much more than jawboning that you can do? Is that
a fair assessment? Is there something else you can do where you
see a bank making decisions that are somewhat on the side of so
overly cautious that it belies reasonable judgment? Mr. Finn?
Mr. Finn. Yes, Mr. Tierney. We do have the CRA Act, which
if they're not doing enough lending within their designated
community, they would get rated either less than satisfactory
or needs to improve. And we can require certain corrective
actions when they receive an adverse rating like that.
It also impacts their ability to get approval on certain
applications as well. So it does come with a cost. There is
some mechanism when institutions are not out lending in the
community--
Mr. Tierney. And you are monitoring that?
Mr. Finn. We do monitor that.
Mr. Tierney. You have found nobody on the other side of
that so far?
Mr. Finn. We do occasionally have institutions that obtain
that rating. Typically in the thrift industry, and I think
across much of the banking system, we have a large portfolio of
small institutions, typically the only loans that they make are
in the community. So it's not an issue. But from time to time
we do come across institutions that don't make loans, and
again, we would rate them adversely.
Mr. Tierney. Any other tools? Ms. Thompson.
Ms. Thompson. The CRA is a good tool. In fact, we just
recently--
Mr. Tierney. Would you say that again?
Ms. Thompson. CRA is the best tool that we have to monitor
the banks' lending efforts and initiatives. I would like to
mention that on behalf of the FDIC--
Mr. Tierney. Can you speak right into the microphone?
Ms. Thompson. On behalf of the FDIC, you do have my
commitment and also the Chairman's that we are telling our
examiners to make sure that they strike a balance, that banks
are--we're going to encourage banks to make good loans, and we
are encouraging them to modify loans and work with borrowers to
avoid unnecessary foreclosures. This is a good time where
judgment comes into play. Many of the people who work for us
have been through the 1980's and the 1990's, so they are
capable of making good judgments about financial institutions
and lending. As we go back to basics, we want to make sure that
the fundamentals of lending are still in play.
The Chairman. Mr. Capuano has a question or further
comment.
Mr. Capuano. Thank you, Mr. Chairman. Number one, the CRA
is an annual rating. You don't get to do it every month or a
couple of days. It's a tool, but it's a weak tool at best.
Number two is that actually some of the things we had hoped,
many of us had hoped that would happen through the TARP
legislation, is that as we're giving taxpayer dollars to some
of these institutions, that they would then be required to put
some of it out in loans. In my opinion, most of that has
failed.
There are two other comments I wanted to make. Again
following up on Chairman Koutoujian's comments--yes, I think
there has been some retrenchment on some loans, but I think a
lot of that is tied to a lot of smaller businesses actually
supply larger businesses. If the larger business can't get a
loan to do something, then the smaller business can't get a
loan either, either because their potential or the purchaser of
whatever it is they make isn't there, or they don't have the
stability that the loan is perfect.
And the last comment I wanted to make is, for, again,
particularly for the smaller, more community-oriented or
statewide banks: One of the problems I'm hearing is from the
FDIC. Right now they're struggling to deal with the increased
fees to get the FDIC to pay for something they didn't do. I
understand fully well the FDIC has certain capitalization
requirements of their own. I get it. You know that we're
working on trying to increase access to capital.
But I want to make sure that if that--actually under any
circumstances would be nice, but particularly if Congress is
able to increase the access to capital for the FDIC, that you
then go back and either repeal or reduce or reverse or even
rebate some of these fees going on, and only because it is
exactly the opposite of what should be happening. The banks
that have been the least guilty of engaging in risky behavior
are now paying to stabilize the FDIC, for understandable
reasons, in order to support the activity by the most risky
behavers. It's completely the wrong way to go.
I understand it's the only tool you have at the moment. I
get it. But I also think it's critically important. That's
millions of dollars on the books of some of our more local
banks that would then have it available to loan out.
The Chairman. Mr. Tierney.
Mr. Tierney. Thank you. Just closing on that, I think the
next time that anybody contemplates waiving those fees for any
lengthy period of time, maybe we would rethink that and
understand that that is an assurance against the day, it might
be something like the experience we're experiencing today.
My last question would be: I hear stories over and over
again that regardless of the SBA's programs, banks continue to
not be anxious to lend utilizing the SBA. Are you hearing the
same thing and making those observations? If you are, what
needs to be done either through legislation or through
regulation by the SBA or in some other way, so that more banks
utilize the resources of the SBA and then be able to pass that
on to borrowers?
Ms. Thompson. I think the announcement by the President
last week of increasing the guarantee from 80 percent to 90
percent for an SBA loan and also the Treasury's purchase of
assets backed by the SBA, will do a lot to increase SBA
lending.
Mr. Rosengren. I agree with her observation. SBA lending is
not very substantial in New England. It's much more substantial
in other parts of the country. We have had meetings with
community bankers to try to encourage them. I'm a little
skeptical that it's the amount of the guarantee. I think it's
the paperwork. It's viewed as a very onerous system, both by
the borrower and the bank.
The Chairman. Let me note, because we do have the vendors
of the Small Business Association on the next panel along with
the bankers.
Mr. Tierney. I'm hearing what it is--is that it on that?
These are things I want to ask the next panel.
Mr. Rosengren. I think it is a good thing to ask the next
panel. But we have had the same observation, that many banks
have been reluctant to do the program. I don't know that the
staffing of the program has been as great as the funding for
providing the loans. So I think it may be an opportunity to
look at whether they have enough staff to push it out to
financial organizations and also ask--I know they have tried to
streamline the programs. I know they have made improvements in
the program. But what we talk to bankers, there are probably
more improvements that need to be done to really make it a
streamlined program that they're actively using.
Mr. Koutoujian. If I may add, Congressman, you may want to
ask some later panels. The SBA typically guarantees about $20
billion in loans annually, and new lending this year is on
track to fall below $10 billion at this point.
The Chairman. We will have on the next panel the president
of the Smaller Business Association, and representatives of the
borrowers. We will hear directly from them and from some
community bankers.
I thank the panel. We hope to be able to follow up on the
supervision, and we will be pursuing the mutual term sheet.
The next panel will come forward. As they do, let me note
that, through my error, we forgot to add the credit unions, who
will be represented, as well as State Representative Linda
Dorcena Forry, who is the chair of the Community Development
Committee in the House. We will take 2 minutes to change.
[Discussion off the record]
The Chairman. Our next panel includes both representatives
of the banking industry and of the borrowers. We are going to
resume the hearing, if people will please either take a seat or
leave. If you want to stand up, it's okay as long as you don't
talk.
We'll begin with Representative Dorcena Forry.
Representative? I know you guys get criticized for excess, but
spring for a couple of microphones here.
STATEMENT OF THE HONORABLE LINDA DORCENA FORRY, HOUSE CHAIRMAN,
COMMITTEE ON COMMUNITY DEVELOPMENT AND SMALL BUSINESS
Ms. Dorcena Forry. The press would probably kill us for
that. I want to thank you, Chairman Frank, and Congressmen
Capuano, Delahunt, and Tierney for holding this hearing today.
My name is Linda Dorcena Forry. I'm a State Representative for
the 12th District, newly named chair for community and small
business. I think it's great that we have the two panels this
morning. To hear the panel of regulators and how they are going
to try to ensure the adequate extension of credit to small
businesses is very important. I look forward to hearing from
the lenders and borrowers as well. I'm here with two staff
members, John and Lou, who are each analysts. I cannot stay for
the whole thing, but they will be here taking notes.
As we have heard this morning, small businesses are the
economic engines in our communities, not just in Massachusetts,
but throughout this country. It is important and really a
timely discussion that we're having today on how are we going
to help these businesses on Main Street remain viable.
Expanding credit to small businesses and mid-sized businesses
is what's going to help us move out of this economic situation,
this economic meltdown.
In the wake of the crisis, our banks have become risk-
averse. However, despite the lack of available credit, our
local businesses cannot afford risk-aversion. They have
invested everything into keeping their businesses afloat, at
times tapping into their home equity to make capital
investments, purchase new inventory, or even to make payroll.
And even businesses that have not been as actively affected
have found themselves losing their lines of credit. I'm not
speaking merely about average business owners. I'm referring to
colleagues, my colleagues, in State Government, in the
Legislature, who are still investing in their businesses. I
have a colleague who had a line of credit, a $50,000 line of
credit, for several years, always paid on time, never used it,
paid the rate that you need to pay every month to make sure he
sustained his credit. Recently, he received a letter from his
lender telling him that the line of credit is no longer
available to him. This is the time, you know, that he may need
to have access to that line of credit even more.
So I think that it is important that we are here, and this
is a good thing. But we have to ensure that the TARP funds
trickle through the banking system and into our communities.
Stimulus money should not only go to purchase bad loans from
failing institutions while letting them tighten their
underwriting criteria to the other extreme. If we are going to
bail out the banks, then they need to continue to support small
businesses with access to credit. I say this recognizing that
this can be done while still making their underwriting criteria
more reasonable than it has been in the past. They can be
reasonable lenders without abandoning our small businesses. I
think that's why this discussion is important today. I thank
you all for holding this hearing.
The Chairman. Thank you, Representative Forry. You and
Representative Koutoujian, being here at the State level, you
hear even more than we do the complaints from regular people.
We want you to get together so we can work together to resolve
them. I'm going to go next to Mr. Robert Baker, who is
president of the Smaller Business Association. Obviously, there
is a great deal of interest in this.
STATEMENT OF ROBERT BAKER, PRESIDENT, SMALLER BUSINESS
ASSOCIATION OF NEW ENGLAND
Mr. Baker. Mr. Chairman, I'm president of the Smaller
Business Association of New England. We have about 700
businesses. We represent about 700 businesses, small
businesses, including banks, accounting firms, but mostly
manufacturing and high-tech companies throughout New England. I
was a banker for 8 years. I also ran a quasi-public loan fund
for the Commonwealth called the Economic Stabilization Trust.
So I have a pretty good perspective about what happens in a
credit committee and how public money can play a role to
supplement, enhance, and help companies on the margin receive
financing.
As a trade association, one of our core competencies is to
actively aggressively seek capital for small businesses'
sustainability and growth through bank and nonbank services. In
Massachusetts, we are blessed. We have a number of quasi-public
entities, private entities that have public purposes, the
Massachusetts Community Development Corporation, the Economic
Stabilization Trust, the Property and Casualty Initiative, the
Business Development Corporation of New England, the
Massachusetts Capital Resource Company. They are numerous,
which makes a big difference to us in Massachusetts, as opposed
to other States.
So at any one time, I'm engaged in identifying
comprehensive capital solutions for probably 8 to 12 companies.
My observations are really grounded on my transactional
experience with these companies. You know, a great deal of
conversation has been generated, and I'm probably a better
public lender than I was a private lender. Understand that I
think intervention in credit markets is good, and I think the
banks are pretty supportive of that. We haven't found any
resistance. You know, it's not a straight up-or-down decision,
but when you bring to them a collateral enhancement or an
infusion of new money from a quasi-public lender, they're
pretty receptive in this State. So I will say that.
However, you know, small businesses, the banks are driven
somewhat by the economic performance of these companies.
Unfortunately, I think our high-tech sector is doing pretty
well, but our traditional manufacturing has been doing, you
know, more poorly than it has in the past. And I think this has
somewhat contributed to poor earnings. And when you have poor
earnings, the regulators do come in and classify those loans as
nonperforming loans.
The question is, how do the banks deal with that? What we
found is the banks have been very patient about dealing with
those small, middle-market credits and giving them an
opportunity to identify additional financing rather than
forcing them to liquidate.
The options to the businesses which they're utilizing right
now, rather than risk of closing, is they're seeking--there are
a fair amount of out-of-State factoring companies, finance
companies, not regulated by the banking sector. But businesses
have to pay a premium because the risk profile is greater, I
would say 18 to 24 percent. I think that's minimizing it. So
what happens, if a company loses money and they come to us and
we look at a factor that looks at the receivables and inventory
and we finance the balance sheet rather than the performance of
an operating company.
You know, I think that's a better alternative than the
company going out of business. We had a company, let's say, a
knife-sharpening company in Medford. Two years ago they lost
money. They were asked to leave the bank or move over to the
managed asset portfolio. That bank exercised a fair amount of
patience. In sequential order what we did for this company was
the following: We found them a finance company, and yes, they
charged 18 to 24 percent, since March or June of 2007. However,
the company, that has 50 to 60 jobs, did stay in business.
Sequentially we found the Massachusetts Community Development
Corporation to pay out another of the bank's loans. And this
week the company will return to private banking, thus paying
off finally the real estate loan of that bank and paying off
the expensive line of credit.
Those situations I don't think are unusual, of what's
happening day to day. I think the biggest challenge is
overcoming the stigma of losing money, and then it's very
difficult to regain your footing without a couple of years of
earnings to get back into traditional banking. I think that's
the hurdle that people are facing today.
I was appointed by Governor Patrick to the Economic
Stabilization Trust. There are only five of us. We make working
capital available to manufacturers both on the upside and the
downside. Companies may have had a bad year but have 3 months
of break-even or profitability. We make loans between $100,000
and $750,000. You know, unfortunately, the two quasi-public
corporations that do the most risk lending in Massachusetts are
probably the least capitalized. So I think that's something we
would like to propose to the State Legislature in terms of
going forward.
The Chairman. But you're not before the Legislature.
Federal issues would be--
Mr. Baker. Excuse me. I know. Anyway, the SBA package I
think would be helpful. It gives the banks a chance to--it
incents them by raising the guarantee from 75 to 90 percent. It
drops all the fees. A pretty interesting component: it makes
business stabilization loans, so that a company can get $35,000
from a bank to defer principal and interest payments for about
6 months, if it lasts that long, so they won't go on the
nonperforming list. So I think that's--
Finally, there is a 504 modification, so if you bought a
piece of real estate 10 years ago, you had a million-dollar
loan, the bank's share was 50 percent of that, you've paid down
your balance to $250,000, you could actually recast that now,
probably get a lower interest rate, and put the money back in
the company. So there are some tools. Thank you very much.
The Chairman. Thank you. Next, Christopher Oddleifson is
the president and CEO of Rockland Trust, and someone I know
from experience has been a very creative participant in some of
the Federal programs we have had planned out with the community
agencies. Mr. Oddleifson, let's get you the microphone.
STATEMENT OF CHRISTOPHER ODDLEIFSON, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, ROCKLAND TRUST COMPANY, AND VICE CHAIRMAN,
MASSACHUSETTS BANKERS ASSOCIATION
Mr. Oddleifson. Good morning, Chairman Frank, and
Congressmen Delahunt, Capuano, and Tierney. I'm Chris
Oddleifson, President and CEO of Rockland Trust Company. I'm
also the vice chairman of the Massachusetts Bankers
Association, on whose behalf I'm testifying. I appreciate being
here. Thank you.
As we have heard this morning, community banks in
Massachusetts are in fact lending to creditworthy businesses.
In fact, one of the ironies of this environment is that it has
turned out to be a tremendous opportunity for community banks
because of the retreat of a lot of these other lenders, the
finance companies, the institutional investors, insurance
companies, and larger out-of-State lenders. There is a breach
that has been opened, and community banks have stepped in.
We're seeing a sharp increase in demand, and we're seeing an
increase in our portfolios. I'll share some statistics in a
moment.
As you've heard this morning, Massachusetts banks are well-
capitalized. We're well-positioned to lend. We didn't get into
any of that crazy stuff that got all the smart guys in trouble.
And we don't have significant foreclosure problems. We on the
whole have managed our risk well, which as you also have heard
this morning includes sometimes saying no to businesses we have
less confidence in their ability to repay the loan. Loan-loss
reserves are far more than the national average, almost twice
the percentage on hand that we had in the last massive crisis,
in the late 1980's and early 1990's.
As evidence that the local banks are lending, looking at
sort of the community banks, commercial loan balances in
Massachusetts have increased from $5 billion in the end of 2007
to $5.7 billion in 2008. I have heard from my colleagues
throughout the State that in fact they're seeing unprecedented
demand. That is good news for us. I mean, it helps our
business. But it's in the context of bad news overall.
Let me give you sort of a specific anecdotal example of how
community banks are provided credit by just citing a couple of
statistics from the bank I lead, Rockland Trust Company. We
have $3.6 billion in assets. We have offices and locations
throughout eastern Massachusetts and Cape Cod. A year-to-year
comparison between 2007 and 2008: In 2007, we originated $318
million of commercial loans. In 2008, we originated just over
$400 million. That is a 26 percent increase. As I say, many of
those opportunities were as a result of lenders leaving, and
allowed us to actually build some fine relationships with great
local companies in our trade area. I would say that while our
first quarter numbers aren't public, we are seeing in 2009
good, continuing, robust lending activity.
The Massachusetts Bankers Association would like to
encourage the community--I think we have talked about this this
morning--to help responsible lenders expand their capacity and
be careful not to make it too loose, where we have some of the
egregious practices sort of come back on in. But the balance
that we have talked about this morning I think is very, very
important.
To further revitalize the commercial credit market here in
Massachusetts, the Massachusetts Bankers Association, along
with our member institutions, have been working with the
Patrick Administration over the last several months on
initiatives such as Soft Second, which has a little bit of a
guarantee to a commercial loan to incent the commercial lender
to extend credit. In addition, the Association is hosting a
commercial lending summit that will bring together bankers and
Federal and State government officials and academics to discuss
the State's climate and look for ways to work this issue.
I would like to take the opportunity to make a couple of
comments on related topics. First, the issue of perception:
Quite simply, a better distinction needs to be made between the
banks that caused this problem and the banks that are part of
the solution, the traditional local banking community; and the
Massachusetts Bankers Association is certainly working hard on
this, and we appreciate the chairman's comments on this issue.
But the misperception continues that all banks are having
problems; and especially those banks that took Capital Asset
Program funds, part of the TARP funds, those banks are
especially problematic. There are a number of banks which took
those funds from an offensive point of view, to expand credit,
not from a defensive point of view, and that is completely lost
on many. To the extent we can solve that, we'll increase public
confidence, we'll make consumers believe that the loans are
available, and I think it will assist the overall economic
recovery.
The second point I would like to sort of mention is, we
certainly applaud the committee's work on mark-to-market
accounting issues. As you know, many of the losses suffered by
local banks are largely accounting rules, and inflexible rules
have led to a loss in earnings and capital, which inhibits
their ability to loan. This is sort of the performing/
nonperforming loan all over again and performing/ nonperforming
securities. One great example is the Federal Home Loan Bank of
Boston, which is a critical partner to local lenders, extending
credit to the communities, had to take a $340 million
writedown, and their economic loss is only anticipated to be
$22 million. Take out $340 million of capital but you only
expect to lose $22 million. That is astounding. I think it's
the performing/nonperforming issue.
The current proposals released by FASB are a good first
step, but they don't go far enough to really sort of addressing
this issue.
The Chairman. By FASB, we have a Federal Accounting
Standards Board, which we are talking to about changing this
form of accounting.
Mr. Oddleifson. In conclusion, Massachusetts community
banks are currently experiencing good loan demand. We're
actually growing our balance sheet. We're doing it in prudent
and responsible ways. We want to be a part of the solution and
solve the problems that we believe for the most part others
created.
[The prepared statement of Mr. Oddleifson can be found on
page 88 of the appendix.]
The Chairman. Thank you, Mr. Oddleifson. I very confidently
misidentified the FASB, which is the Financial Accounting
Standards Board, not the Federal. Next time I explain
something, I'll try to get it right.
Next I want to call Mr. David Slutz, who is the president
and chief executive officer of the Precix Corporation, which I
should note is active in the district I represent. We have had
conversations, and I am troubled that we haven't been able to
make more progress. This is an example, in my judgment, of
where we have a business suffering unduly because of this. Mr.
Slutz.
STATEMENT OF DAVID N. SLUTZ, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, PRECIX
Mr. Slutz. Thank you, Chairman Frank, and members of the
committees, for providing me the opportunity to speak this
morning. What I would like to do this morning is actually talk
about our company briefly--we are a small manufacturer based in
New Bedford--to provide an overview of our borrowing situation
with our current lender and offer some recommendations that we
think would help the situation, many of which have already been
mentioned before, but from my perspective, I'll mention those
again.
My name is actually David ``Slutz.'' My wife prefers
``Sloots'' over ``Sluts,'' but that's okay. I have been called
that for many, many years now. I'm the president and CEO of
Acushnet Rubber Company. We're doing business as Precix. We
were part of that golf ball company that was the Acushnet
Rubber Company until 1994.
One of my key roles in my position is lender relations, and
over the past years, I have dealt with lenders of various sizes
and negotiated the day-to-day relationships. Acushnet in New
Bedford has been around since 1910. We are a manufacturer of o-
rings and custom seals for customers within the automotive,
aerospace, and chemical processing industries. The automotive
piece is primarily why I'm here today, because, as we know, the
build rates have gone from $16 million to less than $8 million,
and with those build rates, our sales levels have gone down
accordingly.
In New Bedford, we have 225 associates. Our average tenure
is 24.8 years. I have worked for three elastomer companies, and
I can honestly say that we have some of the best, if not the
best, work force with whom I have ever worked. Our products go
in every car manufactured in North America, every aircraft,
over half of the automobiles and aircraft built in Europe, and
25 percent in Asia. Twenty percent of our business goes
overseas. For a small company in New Bedford, we touch an awful
lot of vehicles.
Like most in the supply chain in automotive, the last 6 to
9 months have been, for lack of a better phrase, just plain
miserable. Our sales have dropped by half, through no fault of
our own. We have taken $4.2 million in operating expense out of
the business. Our work force is down by 25 percent. Those of us
who remain, including myself and my senior staff, are all going
through rolling layoffs. We actually get paid for a week and
then are off for a week. So we're trying to preserve as much
employment as we possibly can. They can't write a textbook for
what we're going through at this point in time.
All of our stakeholders have had a hand in getting us
through this difficult time. Our employees have sacrificed pay
and reduced hours this year. Our equity sponsor is accepting
zero return, and our venders have are allowing us to stretch
payables. The only stakeholder not really participating has
been our senior secured lender.
Our relationship with our current bank began in late 2007.
Our loan is pretty simple. It's a long-term debt, also a short-
term revolver. Since inception, we have paid down the long-term
debt by more than $625,000. We have made all our payments on
time and had clean audits. Quite frankly, we're a good and
boring customer.
In November of 2008, we saw the downturn getting worse, and
we notified our lender of our tightening credit situation.
Built into our current loan is a 350 holdback, $350,000. We're
not talking about a large sum of money. We simply asked the
bank to allow us access to the pre-existing 350 holdback, and
at that point, they flatly said no. On top of that, they have
actually been imposing additional restrictions and making our
lives more miserable.
It's important to understand that my company is not one
that was going through a leveraged buyout. We're not overly
leveraged by any means. We're simply caught up in the revenue
decline because of automotive. We have provided the bank with a
reasonable business plan and recovery scenario going forward,
because the good news on automotive is what comes down will
eventually come back up. And the good news is over the past
couple of weeks, we had started to see our business slowly
start to increase, so we're slightly optimistic.
Despite being over-secured by over $3 million in excess
collateral, the bank denied our request and now is seeking to
reduce my borrowing availability and raise my operating costs
through increased interest rates and the imposition of
consultants and additional reporting requirements, the
specifics of which are located in my written testimony.
From our vantage point, they're not helping us, by any
means. Rather they're working to push us under. They're living
to the letter of the law of our 2007 loan agreement. That was
written when the world was a different place. This is an
institution which I will not be naming specifically, but is a
TARP recipient.
So in summary, I would like to point out, our Nation's
economy has gone through some very difficult and challenging
times. Our employees via downsizing, rolling layoffs, vendors
taking extended payment terms, management deferring payments,
and the owners forgoing dividends, have all contributed to the
cause. The only stakeholder not working with us to get to the
other side is our lender, who without Federal aid probably
would not be here today. Our note then and now has been fully
collateralized, yet they will not release the $350,000 holdback
or work with us in any way. Instead of helping us, it seems
like they're trying to push us under and put 225 people out of
work.
So my message to the committee is this: It's imperative
that if the banks that are recipients of the TARP funds truly
want to support economic stabilization and recovery with more
than just words, they should be willing to provide reasonable
and prudent assistance to companies such as ours; companies
that are not overleveraged. We have strong collateral support;
we're simply going through a tight cash time. They should be
ready, willing, and able to provide temporary working capital
and credit availability in situations where: (A) there is
tangible collateral support; (B) there is a reasonable,
detailed operating forecast showing the amount and duration of
the temporary financing need; and (C) the needed incremental
credit availability is small relative to the current loan
balance, like in our case; leverage is not at excessive levels;
and there are domestic jobs with good benefits at risk.
So instead of quoting loan agreements that were crafted in
a world that has changed since 2007, the lenders should be
businesspeople first and, to quote a major banking executive
who testified in Washington, D.C., ``Americans first and
bankers second.''
I am certain there are other small to medium-sized
manufacturers like us that are experiencing a similar set of
circumstances. So if economic stabilization and recovery is to
occur, it is imperative that banks take a more measured and
reasonable approach to providing temporary support to companies
like Precix using the guidelines I have suggested.
Thank you for your time and the opportunity to speak to you
to inform you about this aspect of business lending for medium-
sized companies.
[The prepared statement of Mr. Slutz can be found on page
133 of the appendix.]
The Chairman. Thank you. Next, we're going to call on Mr.
Barry Sloane, who is the president and chief executive officer
of Century Bank, not the lender in question.
STATEMENT OF BARRY R. SLOANE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CENTURY BANK
Mr. Sloane. Right, Mr. Chairman. Thank you. Good morning.
Thanks for the privilege of appearing before your committee,
gentlemen. I would like to share our perspectives on the
current state of the credit crisis. I am joined today by my
three sons, Marshall, Jack, and Charles, who I think, after 2
hours of a congressional hearing, can't wait to go back to
school.
Just a word of note on Century Bank: Century was founded 40
years ago by my father, Marshall, on a corner of Mystic Avenue
in Somerville in a temporary office trailer. He is today our
chairman, and as we approach our May 1st anniversary, we are
proud to be the largest family-controlled bank in New England.
My brother Jonathan and I are the co-CEO's of an
institution with $2 billion of assets, 22 branches in
Massachusetts, 400 employees, and now a member of an exclusive
club, an increasingly exclusive club, those community banks who
are increasingly profitable. Our earnings were up 15 percent
last year, with growing local deposits of 12 percent, and we
did not need, nor accept, the TARP capital from the Treasury.
Century was founded under the concept in 1969 that there
was a powerful case for a community-based lender to business, a
premise that is remarkably even more compelling today. We
proudly service over 6,000 business clients, and since 2004, we
have made over 1,500 small business loans, many in partnership
with the SBA. Our total loan portfolio is over $900 million and
has grown in an upward slope since the early 1990's, increasing
15 percent last year. We are safe, we are sound, and with
abundant liquidity to expand our loan portfolio. We are ready
and able to lend to the business community.
Why have we done well and others have not? In our view,
there are three simple reasons: First, we have a culture based
on risk management. We are lenders. We live and breathe our
loan portfolio through a highly centralized process. Second, we
lend only in our local market. Market intelligence is critical
to a successful loan policy. And third, we seek and nurture
long-term relationships with all of our borrowers. A single
transaction without relationship continuity is discouraged.
So how can we make a contribution to today's dialogue to
seek solutions to enhanced business credit availability? In our
view, there are two pathways: One, to make the banks stronger
so they can make more loans; and two, to make the small
business community healthier so they can become stronger
borrowers. Let's take a look at the banks first.
In our view, far too much emphasis has been placed on bank
capital, and not enough on earnings. The TARP program provided
capital to banks with marginal or adequate capital ratios but
at a high price. It became an instant drag on net earnings, or
profits. Net profits build branches, hire lenders, feed the
loan-loss reserve, and expand the capabilities of the
institution in its local market.
How could the Congress help the profitability of the
independent banks, improve their efficiency and their relative
competitiveness? Here is our five-point agenda: First, simplify
the regulatory structure. It's obvious from the previous panel,
with all due respect to the professionalism and dedication of
the regulators presenting, that this is the opportunity to
reform and merge the five bank safety-and-soundness regulators
into one Federal system. We at Century are regulated by three
agencies. It is an inefficient structure. And please, do not
burden the independent banks of the United States with the
proposed systemic risk regulator. We always thought there was
such a thing, and it was called the Secretary of the Treasury.
We are worried about a proposal that, based on my recent
reading, takes some 300 pages to just explain the question.
Second, please change the FDIC premium structure. Convert
the premium charge from a bank expense to a user fee that is
disclosed, transparent, and much more economically efficient.
The pending 2009 FDIC special assessment will have a
significant negative earnings impact on the independent banks.
Why should the banks that practiced sound lending have their
earnings negatively impacted by the irresponsible behavior of
others? The 2009 assessment will effect a contraction of the
lending of sound banks through the shrinkage of earnings. The
FDIC premium should be paid by the depositor as a discrete tax
paid on the health of the fund and not a charge to individual
banks.
Third, reinstate the Glass-Steagall barriers between
commercial and investment banking. Admit the failure of that
experiment and acknowledge that commercial bankers are risk-
based asset managers and investment bankers are fee-based
originators. They are two very different genetic animals and
are poisonous together. The short-term high fees of the broker/
trader will devour the good judgment of the banker/ lender. Get
the brokers out of the banking business, and please stop this
wild proliferation of bank charters to institutions that
neither have the temperament, geographic focus, nor long-term
relationship culture to be known as a bank. Level the
competitive landscape so that once again community banks can
make loans at fair prices to their local customers and stop
losing business to the ``Street.'' You in Congress control the
competitive equation. Put the emphasis back on community
connectedness and away from globalism.
Now let's talk a little bit about the health of the small
and medium-sized business community. These entrepreneurs are
experiencing two reinforcing negative impacts: The dramatic
fall in real asset values; and the staggering collapse of their
cash flows from double-digit sales declines. This vortex has
especially impacted the firms that are in the automotive,
housing, and consumer discretionary sectors, where sales have
fallen 20 to 50 percent. There is no way for a small business
to survive a market cycle with such a severe fall in cash flow
if they have any meaningful level of debt.
The SBA does a fine job. Few people realize that the SBA
has until recently recouped all of its loan defaults from the
guarantee fees charged borrowers. There was no subsidy from the
taxpayers. We are a so-called preferred lender and use the SBA
credit enhancement frequently. The recent changes in the 7a
program, especially increasing the guarantee to 90 percent, is
a good thing for small business, as is the elimination of new
guarantee fees. However, you must keep in mind that a loan we
don't like at a 75 percent guarantee, we won't like any better
at 90 percent. It probably fails due to inadequate asset
valuations and/or cash flow. We're not inclined to make a loan
because we lose less money. It's either a good credit or not.
Higher 7a guarantees do not transform a marginal applicant into
a good credit.
The combination of this recession and the credit crisis
have been a tsunami for small business. Frequently, I sit
through urgent meetings with business owners of, in many cases,
multi-generational family businesses that are floundering on
the shoals of this crisis. This is the Hurricane Katrina for
small business. They don't need more debt. That's the last
thing they need. They need equity. They need help, and they
need it soon. This is figuratively more a challenge for FEMA
than it is for the SBA. Lifetimes of resourcefulness and
initiative in small business are melting away with each GDP
contraction.
In summary, if this government has the capital to keep Bank
of America's planes in the air, Citi's corporate retreat
staffed to serve lunch, and even pay the AIG bonuses, then it
must find the capital to help mitigate so many of the family
business tragedies playing out every day in bank conference
rooms across the Nation. I don't have to tell all of you in
Congress of the importance of small and mid-sized businesses in
the economy and the employment health of the Nation. They need
their own TARP program. Let the banks administer it. Make it an
equity investment. Take the pressure off these business owners
who are watching their dreams evaporate day by day. My dad, my
brother, my sister, and I, sincerely hope to see it. Thank you.
[The prepared statement of Mr. Sloane can be found on page
129 of the appendix.]
The Chairman. Thank you. Mary Ann Clancy, from the Credit
Union League.
STATEMENT OF MARY ANN CLANCY, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, MASSACHUSETTS CREDIT UNION LEAGUE
Ms. Clancy. Thank you, Mr. Chairman. Mr. Chairman,
Congressman Capuano, Congressman Delahunt, Congressman Tierney,
for the record, my name is Mary Ann Clancy. I serve as senior
vice president and general counsel of the Massachusetts Credit
Union League, our State trade association, serving just over
200 State and federally chartered credit unions, about 2.4
million consumers as credit union members.
I am very humbled and honored to be included on this panel
today and with the opportunity to provide some assistance. I
have a few oral comments and would like the Chair and the
committee's permission to submit a written statement at the
conclusion of this.
The Chairman. Certainly.
Ms. Clancy. As you all know, the credit union model is a
not-for-profit financial cooperative model for the delivery of
financial services to both consumers in Massachusetts and
across the country. There is no other like it. We provide
access to credit and savings services to all of our members,
including small businesses. We celebrate our 100th anniversary
of credit unions in the birthplace of credit unions here in
Massachusetts this year, and in light of the current economic
challenges, we believe that this is an important model, with
built-in ethical and member service standards that's important
to preserve.
Credit unions are healthy, but they are not immune to the
current challenges in the financial services arena. We do,
however, throughout this time, remain focused on providing
access to credit at every opportunity. From a historical
perspective, small business lending, or member business
lending, as we call it in Massachusetts, is not new. It started
in 1926, with a loan to a variety store in Fall River and a
cemetery in Dorchester. Our history underscores the hallmark of
this lending. We loan where others have vacated or are
unwilling to loan, and we loan based on the capacity to repay
over time. Over time, credit unions have become an increasing
resource for member businesses as well as consumers. The
average size of a member business loan in Massachusetts is
about $250,000. Nationally, it is about $213,000. We are
slightly higher because of the commonality of multi-family
properties that are investment properties, that many consumers
come to us to buy the old home in the neighborhood, so to
speak.
Most recently and due to changes in the marketplace, we are
seeing requests for about $500,000 up to $1 million. We are
regulated by the Division of Banks and the National Credit
Union Administration in this area for State-chartered credit
unions and by the National Credit Union Administration for
federally chartered credit unions. However, regardless of our
charter, we do face a cap of 12.25 percent of assets. That was
in place over 10 years ago, and many of our credit unions are
approaching that limit.
About one third of the credit unions offer member business
loans. It's about 6 percent of our total loans outstanding. It
is a growing part of our portfolio. And we keep a majority of
our loans in the portfolio, which allows us to stay in the game
during these tough economic times. Our loan charge-off rates
for member business loans is about .32 percent.
The heart of our lending is for sole proprietors and small
businesses. We don't do big commercial loans or dealer floor
plan financing. But we do estimate based on a national
perspective that about $10 billion in new funds for member
business loans without an impact to the Federal or State
government would result if we were able to eliminate the 12.25
percent cap. We view this as an important economic boost. We
also view it, particularly as the labor markets continue to
deteriorate, other people try to jump in and start their own
small businesses, as a way to try to reach these people and to
serve them.
Thank you for the opportunity to provide these comments
today, and also in particular to bring this focus, to bring
this light here in Massachusetts, and keep us on the forefront
perhaps of possible solutions.
The Chairman. Thank you. Next, Mr. Pelos is the executive
vice-president of Wells Fargo Commercial Banking.
STATEMENT OF PERRY PELOS, EXECUTIVE VICE PRESIDENT, WELLS FARGO
COMMERCIAL BANKING, WELLS FARGO
Mr. Pelos. Thank you very much. For a guy from Minnesota, I
appreciate you guys ordering the weather particularly for me.
It feels like home. Chairman Frank and members of the
committee, my name is Perry Pelos. I'm an executive vice
president and group head of Wells Fargo's commercial banking
group, and it is an honor for me to be here to speak to all of
you today. I worked for almost a quarter of a century at Wells
Fargo, the entire time in either commercial or corporate
banking.
First, allow me to describe our commercial banking
customers. We serve middle-market businesses with annual sales
of between $20- and $750 million. We serve over 12,000 of these
businesses around the country. In New England we have full-
service relationships, including loans and lines of credit,
with companies in energy, agriculture, manufacturing,
transportation, and high tech, and although our market share at
the moment is smaller, much smaller, in Massachusetts relative
to our industry peers, we view the State and this region as a
big opportunity for growth for us.
Wells Fargo has remained open for business while many other
banks have pulled back or exited from commercial lending. Now,
as always, we want to do what's right for our customers, and we
have never stopped lending. We have been able to increase our
lending to creditworthy customers over the past year-and-a-
half. That is partly because we were building capital and
actually shrinking our balance sheet in 2005 and 2006, when
credit spreads were unrealistically low and not priced for
underlying risk.
Here's how we have increased our loans specifically: In the
last 18 months, we have made $63 billion in commercial loans
and commercial real estate loans. Our middle market portfolio
in the Northeast grew 11 percent from year end 2007 to year end
2008. I would add that our middle-market portfolio in my
business in commercial banking grew 55 percent in Massachusetts
last year. Our commitments to government and education in
Massachusetts and five other Northeast States are $543 million,
and in 2008, we achieved double-digit growth in asset-based
middle-market commercial real estate and specialized financial
services, which includes capital markets and relationships with
Fortune 500 companies. At the end of the fourth quarter of
2008, we had $68 billion in commercial real estate and
construction loans, up 6 percent from the third quarter.
To address the committee's question about the effect of
Federal laws and regulations on credit availability, we urge an
approach more consistent with past economic downturns. We
believe the chairman's efforts with respect to mark-to-market
accounting will allow the entire financial-services industry to
continue supporting the credit needs of our customers more
effectively. In January of this year, we made $14 billion in
commitments to commercial banking customers, and half of these
dollar commitments were to new commercial banking customers.
Overall, we extended $51 billion in loan commitments in
January, and that brings the total credit extended to our
customers to $144 billion in the last 4 months. That is nearly
6 times the $25 billion capital investment made by the U.S.
Treasury in the fall of last year. Our integration of Wachovia
into Wells Fargo is proceeding better than expected. In New
England Wachovia's commercial banking portfolio is about $6
billion in loan commitments, including government and
education, in year end 2008. We're committed to the financial
success of all of these New England companies and institutions,
and we look forward to long-term relationships with all of
them.
After the Wachovia acquisition, we stepped into open lines
of credit for some businesses whose access had been shut down,
especially cities and not-for-profit hospitals, which until
very recently have been part of my group. When the debt markets
for these borrowers were compromised last fall, Wells Fargo
substantially increased its support and level of commitment to
this area. As we continue to integrate the Wachovia businesses
and manage through a very difficult economic time, we'll
continue to work with our customers. Mr. Chairman and members
of the committee, thanks for listening and I'm pleased to
answer any questions you have.
[The prepared statement of Mr. Pelos can be found on page
94 of the appendix.]
The Chairman. Next, another borrower, Ms. Iris Mitropoulis,
who is president of Ventura Industries.
STATEMENT OF IRIS A. MITROPOULIS, PRESIDENT, VENTURA
INDUSTRIES, LLC
Ms. Mitropoulis. Thank you for holding this hearing today
and for giving me the opportunity to be here and participate.
My name is Iris Mitropoulis. I am president of Ventura
Industries, a Massachusetts company I formed in 1996 to acquire
manufacturers of custom machinery. In 1998, I purchased
Kingsbury Corporation, located in Keene, New Hampshire, with
funds provided by BankBoston and CIT Group Equipment Financing.
For the last 5 years, Ventura Industries has been in the top
100 women-led businesses in Massachusetts. I also serve on the
government relations committee of AMT, the Association for
Manufacturing Technology. AMT is a trade association whose
membership, mostly small businesses, represents more than 400
manufacturing technology providers located throughout the
United States, almost the entire universe of machine tool
builders who manufacture in our country. We are the companies
who build machines that make things. Seventeen of AMT's members
are located in Massachusetts.
My industry is really the foundation upon which all other
American manufacturing rests. We provide the manufacturing
technology essential to a wide array of industries, from
cutting, grinding, forming, and assembly machines to inspection
and measuring machines and automated manufacturing systems.
There can be no cars, airplanes, washing machines, air
conditioners, or medical devices without our member companies.
There can be no green initiatives without companies like ours,
which design the machines and systems needed to produce the
parts that go into green engines. Furthermore, our member
companies are a critical part of our defense industrial base.
As crucial and necessary a part of our American
manufacturing sector as we are, however, our credit needs are
not presently addressed in the stimulus and aid packages. We
are not surviving the current economic chaos, in significant
part because lack of credit is endangering the continued
existence of virtually all of our member companies.
The recent meltdown in the financial services sector has
basically frozen credit to companies like mine. For the last 20
years, I have been the CEO or owner of small businesses that
belong to the AMT. I have raised over $100 million for these
businesses, and I have never seen a time when it is more
difficult to raise credit.
My company does not produce commodity machines. My company
is an engineering firm that designs and manufactures custom
machines to solve the customers' manufacturing needs. New
programs and productivity improvement are the two drivers.
Recent customers, for example, are United Defense, now part of
BAE, for machines to manufacturer tank track links.
My company has been on a 2-week shutdown because all new
programs evaporated last fall and we have been unable to obtain
a loan even though we have a history of profitability until
recently and collateral to offer. We actually were unable to
send a serviceman to Precix because of that. Today, I think one
of our service people is there.
The shutdown we are currently on is jeopardizing the launch
of a major new transmission program for one of the Big Three.
We are making assembly machines that will assemble a key
component to that transmission.
Two weeks ago, I met with the director of the New Hampshire
Business Finance Authority and the New Hampshire District
Director of the Small Business Administration to see if they
had any programs that could assist my company during this
credit market turmoil. The Business Finance Authority already
had a 90 percent guarantee program, and the SBA district
director was anticipating that certain SBA programs would see
their guarantee increased to 90 percent. Even with 90 percent
guarantees, I was most discouraged to hear both say that they
do not expect to see an increase in lending anytime soon. The
only loans they saw closing were loans to prom queens.
Unfortunately, given the extreme downturn in the economy and
business, most small businesses will not in the near term be
able to meet normal credit standards. We do not qualify at
present as prom queens.
I also met last week with staff of the New Hampshire
Economic Development Authority. While sympathetic to our
plight, they were frustrated that even with funds coming into
the State from the Financial Stability Act, there were no
programs available to them to assist companies such as
Kingsbury, a company founded in 1894 that employs 100 highly
skilled engineers, machinists, and electrical and assembly
technicians and is one of the few remaining U.S. custom
builders of highly engineered mid- to high-production metal
cutting and assembly systems, a company that purchased over $15
million of goods from New England suppliers in the last 5
years, $7 million of that in Massachusetts.
I appreciate that this is a hugely complex issue
legislators are dealing with, and I do not presume to know the
correct answer. As a small business owner who has run up
against obstacles recently to obtain financing, I see two areas
that may help critically needed funds flow to AMT members and
others. With respect to funds going to States under the
Financial Stability Act, if the States were allowed to
reallocate and create new uses for some portion of those funds,
they may be able to use their discretion to save companies and
jobs that are vital to their State economy. In the case of the
SBA, since the SBA's programs are intended to lend to small
businesses that can't otherwise get credit, I suggest that SBA
preferred lenders be allowed to make loans without regard to
traditional evaluation of repayment ability if a loan is needed
in order to save jobs and other credit considerations have been
met. Even if this modification were allowed until September 30,
2009, it would be a tremendous boost for small businesses.
In closing, I would like to point out that AMT used to be
known as the National Machine Tool Builders Association--that
is, until there were too few of us left to support an
association. Membership has broadened to include manufacturers
of other forms of manufacturing technology. Since the economic
crisis began last fall, two to three AMT members per month have
failed. There is no evidence that this number is abating, and
very well may increase if something is not done.
Due to the financial pressures of my company, I did not
attend the last AMT government relations committee meeting in
February. When I called the committee chair a few days later to
ask about the meeting, he responded, ``It was the scariest
meeting I have ever attended in my entire life. You are all in
the same boat. You all need credit, and it's not available.''
As I stated earlier, I do not pretend to know the answers.
I have a green crystal ball on my desk but I can't see through
it to predict the future. All I know is that our industry needs
access to credit yesterday. America cannot afford to lose the
few remaining machine tool companies in the United States today
and still be a world leader. Thank you for allowing us to
testify.
The Chairman. Thank you. Mr. Scott Geller, from JPMorgan
Chase.
STATEMENT OF SCOTT GELLER, PRESIDENT, MIDDLE MARKET BANKING,
NORTHEAST REGION, JPMORGAN CHASE & CO.
Mr. Geller. Good afternoon, Mr. Chairman, and members of
the committee. My name is Scott Geller, and I am the president
of Middle Market Banking for the Northeast Region of JPMorgan
Chase, and I'm also responsible for our Financial Institutions
Group nationwide within our commercial bank.
I'm pleased to represent our company at today's field
hearing. We at JPMorgan Chase are working hard to restore
confidence in the U.S. financial system. Although the economic
environment continues to be difficult, we have endeavored to
responsibly deploy the TARP funds as Congress intended: To
restore stability and provide liquidity to the financial
system; to ensure credit flows to businesses and consumers; and
to stabilize the housing sector by modifying as many mortgages
as possible.
Each month, JPMorgan Chase provides to the Treasury
Department a snapshot of the intermediation activity in which
we have engaged as a result of our participation in TARP.
Although we have seen an increase in mortgage originations as a
result of lower interest rates, demand for credit in most other
areas remains low. It's important to note that during a
recession, it is normal to see generally flat to lower
applications for loans across-the-board. However, we are open
for lending. During January we extended almost $50 billion of
new lines of credit and loans. We have also committed to extend
an incremental $5 billion in lending to government and the not-
for-profit sector over the next year.
JPMorgan Chase also continues to implement our mortgage
modification plan to keep as many homeowners in their homes as
possible. This effort covers more than $1.4 trillion of
mortgages, having been expanded to include not only loans that
we own ourselves, but also investor-owned mortgages that we
service. To date, we have modified over 330,000 mortgages, and
we plan to double this number by the end of 2010. I'm proud to
say that the re-default rates we are seeing are significantly
better than some of the numbers that have been published by the
regulators.
In addition to the numbers we have provided detailing our
lending activities, I would like to talk about New England
specifically. As you are aware, branches are important to our
middle-market clients, and we would generally not expect a bank
to do much business in areas where it doesn't have a footprint.
Although our commercial bank has an office in Boston, we do not
have any branches in Massachusetts or in New England. As a
result, our focus has been on larger commercial and industrial
clients, governments, nonprofits, health-care, and other
companies that are less branch-dependent. Keeping this in mind,
let me address some of the issues we are facing and some of the
successes we're seeing in Massachusetts and nearby.
Overall, demand for commercial lending is down across the
United States, as small and mid-sized companies are rationally
responding to the difficult economy by carefully managing their
liquidity and spending less. The impact of the recession is
being felt as businesses across-the-board see lower sales and
are therefore reluctant to take on additional debt. The reduced
pace of business activity has resulted in less demand for both
working capital loans and fixed asset spending.
Although small, our business in New England actually grew
by approximately 14 percent year over year, primarily because
of health care and higher education. We have $140 million in
new or increased business in our pipeline, including a major
transaction with a hospital here in Massachusetts. We have
lending relationships with 108 New England companies, and 16 of
these relationships were added in the past year, an increase of
more than 10 percent. We also serve as a correspondent bank for
12 other financial institutions in New England.
Banks are a vital part of the overall lending picture, but
it's important to note that the capital markets are very
different today than they have been historically. Going into
the current recession, banks accounted for only 20 percent of
the lending activity that took place in our economy. Fifty
years ago, this number was closer to 60 percent. The difference
is made up by money market funds, securitizations, and bond
funds, just to name a few. The erosion of this nonbank lending
will continue to be a factor in the recovery almost regardless
of what traditional banks can do on their own.
Lending is our business, but it comes with a duty to lend
responsibly. All of us at JPMorgan Chase are trying to meet the
needs of creditworthy borrowers in a safe way, and we look
forward to continuing to work with this committee to find
solutions to get our financial services industry and our
economy back on track. Thank you again for the opportunity to
appear today, and I'll be happy to answer any questions.
[The prepared statement of Mr. Geller can be found on page
84 of the appendix.]
The Chairman. And finally, Mr. Edwin Shea, who is the
Central Massachusetts market president of Bank of America.
STATEMENT OF EDWIN T. SHEA, JR., PRESIDENT, CENTRAL
MASSACHUSETTS MARKET, BANK OF AMERICA
Mr. Shea. Most importantly, I run our business banking
group from Boston out through central Massachusetts for Bank of
America.
Good afternoon, Chairman Frank, Representative Capuano, and
Representative Tierney. I appreciate the opportunity to share
our views on the current state of lending to small and medium-
sized businesses. For over 200 years, Bank of America has been
serving business clients and weathered many economic cycles
with them. Today we have relationships with more than 4\1/2\
million businesses across the country and serve these clients
with a wide range of products and services. Our testimony today
will focus on small and medium-sized businesses, with annual
revenues up to approximately $20 million.
In my daily interactions with clients, I hear about their
declining sales, difficulty collecting receivables, and more
stringent terms from suppliers. Consequently, the bank itself
is feeling this downturn in our small-business loan portfolio,
with a steady rise in delinquencies and companies reporting a
weaker financial condition. We also see that the recession is
having a disproportionate impact on businesses at the smaller
end of the spectrum, those with revenues less than $500,000.
Larger, more established businesses are faring better but are
also responding to the slower economic climate by lowering
capital expenditures, reducing inventories, and laying off
employees.
In light of these challenges, we continue to take actions
to help small business. We are actively marketing our full
suite of services and credit products, and we are working more
intensely than ever to restructure loans for distressed clients
wherever possible. For our small business customers, we have
increased the use of our fixed payment programs, where we
significantly reduce the interest rate and monthly payments.
For example, in 2008, we assisted over 40,000 of these
customers, representing $550 million, by modifying payment
structures to improve their cash flow. Another way we are
helping small business is through our commitment to community
development financial institutions. These organizations play
important roles as conduits to provide credit to small
businesses and community organizations. We are a leading
financial-service investor in CDFIs, with more than $450
million in direct lending investments in 2008.
In Massachusetts, we have built strong relationships with a
number of CFDIs, such as Boston Community Capital and ACCION
USA. In 2009 we do expect to see a decrease in new loan
commitments to the smaller businesses in the segment. This is
due to several factors. The first is a decreased demand for
loans overall. Applications for new loans have been declining
for well over a year. The primary reason for this trend appears
to be an overall reluctance of business owners to take on new
debt during a time of economic weakness.
The second factor is that more loan applicants are
experiencing deteriorating financial conditions. We have seen a
noticeable increase in applications from clients that have hit
a time of serious financial stress in their business and
personal finances. In these circumstances, we may not be able
to approve them within our prudent lending guidelines.
The third factor is underwriting standards. During the
period of 2005 to 2007, Bank of America expanded its focus on
small business lending, particularly for the smallest
businesses as a segment. Our underwriting guidelines at the
time reflected a positive economic outlook as well as the
experience of prior years, generally a period of economic
strength, with relatively low delinquency and loss levels for
very small firms.
As we began approving and booking more loans, however, we
started to see a deterioration in these small businesses'
ability to pay us back. The economic downturn has exacerbated
this problem and has led us to return to more prudent,
sustainable underwriting standards to ensure acceptable credit
quality for new loans.
From our perspectives, these three factors are creating a
contraction in new credit that we are seeing in our own client
base. Given this current outlook, government assistance and
loan programs have made a difference to our clients. Bank of
America received a $45 billion preferred stock investment
through the TARP program, and we are lending significantly more
with that investment than we would be without it. Also, the
recent actions by the Obama Administration will create new
opportunities for lending to new businesses, through reducing
fees and increasing guarantees on SBA loans. Bank of America is
a longtime participant in SBA loan programs. We are currently
the No. 1 lender in loan volume in the 504 program and actively
participate in the 7a express program.
In summary, Bank of America remains committed to small and
medium-sized businesses. We continue to market our services,
including credit products, to this segment, while adjusting our
business model to meet the needs of our clients during this
economic downturn. We are making every effort to approve as
many clients as we can during this time within prudent lending
guidelines, and we will continue to extend credit to this very
important segment. Thank you for the opportunity today.
[The prepared statement of Mr. Shea can be found on page
121 of the appendix.]
The Chairman. Let me begin. There are six representatives,
six bankers, on the panel. One of our concerns was whether or
not regulators were exerting pressure for standards that might
deter some of your activity. I would ask each of you, have you
encountered that? Is that a factor? Have you made fewer loans
than you might otherwise have made in any number because of the
regulators? Mr. Pelos?
Mr. Pelos. Are they still in the room? I guess there are
two ways to answer that. The first is, I don't think that
anything the regulators have done specifically has caused us to
lend less. Those are the things that are already being done.
But I do think, with this whole stress-test concept that's
out there, it's causing a lot of stress in a lot of places.
Because part of it is that none of us has the answers to that.
So if you set a standard that will allow the financial services
industry to get through a very, very severe recession as your
standard for the stress test, you might cause that to happen by
causing people to hoard capital to get them through a really,
really bad recession, and it may be a self-fulfilling prophecy.
The Chairman. You have not encountered that yet in specific
issues with regulators, but you are concerned that the stress
test would have an impact?
Mr. Pelos. Yes, but we don't know--
The Chairman. Let me say this: The regulators understand
that we have a certain role here to play. I'm not suggesting
that anyone would be penalized by anything they said here. I
know we're joshing. But that's not going to happen. We need to
get honest answers. That's a relevant point to us. We have to
make sure the stress test doesn't become a source of that. Mr.
Sloane?
Mr. Sloane. Mr. Chairman, I would not blame the regulators
for the condition we're in.
The Chairman. I didn't ask you to blame them. I asked a
much different question. Have they in your experience been too
tough either in general or in specific cases?
Mr. Sloane. No. I think they are expecting us to live up to
the loan policy of the institution. If valuations have fallen
and cash flows have collapsed, the loans will become less
attractive to all concerned.
The Chairman. You said you have a 300-page proposal on
systemic risk. I'm not aware of one.
Mr. Sloane. It's the one from the Congress.
The Chairman. We haven't put out any 300-page proposal.
Mr. Sloane. There are three proposals. Congressman Capuano
sent them out for his roundtable. There is one from the
Treasury Department.
The Chairman. Is that Mr. Paulson's from a year ago? Don't
worry about that one.
Mr. Sloane. There is a third which is about 200 pages long.
And isn't there a congressional task force on the systemic risk
regulation? Which one is it?
The Chairman. Oh, that's the TARP oversight panel. Let me
say, Mr. Paulson's plan, which had the credit unions and the
State-chartered banks and everybody in an uproar, don't pay
attention to that. Mr. Paulson did some good work, but there is
no 300-page or other page--you got a proposal from the
congressional oversight panel, which is useful to look at. But
those are private citizens. Mr. Oddleifson?
Mr. Oddleifson. The short answer is no, but I would add
that our last exam was a year ago, and they have in the past
had very, very thorough, very granular looks at a number of
specific loans very carefully, down to the utmost detail. Their
focus is on ability to repay. I suspect with the deteriorating
environment around us, that threshold will be tougher to
overcome.
The Chairman. Mr. Shea.
Mr. Shea. That isn't my area of expertise. My area is
business banking space in Boston out to central Massachusetts.
I can tell you that in our space, we're trying to make every
good loan we can.
The Chairman. And you're not running into any resistance
from the regulators?
Mr. Shea. Not from my experience, my area of expertise, no.
We are trying to make every good loan and win every new client
relationship we can.
The Chairman. Mr. Geller?
Mr. Geller. Chairman Frank, nothing specifically. The
regulators continue to scrutinize us. They always have. But
they haven't really changed anything, nor have I noticed
anything.
The Chairman. I think the thing about the stress test is a
relevant one. Let me ask Mr. Shea--I was struggling--I didn't
expect you to tell us that Bank of America expects to increase
the loan limit. There were two issues, one was the lack of
demand, and obviously no one's expecting you to subpoena
borrowers, so we realize that.
But there were two others that sort of have an overlap
which troubles me. One is the weakness of the individual
potential borrower. But the second, which is the troubling one,
is the weakness in the economic climate, which would appear
logically to have to mean other than the individual borrower.
That's Mr. Slutz's problem. You get dinged if you are in
trouble yourself, but you get dinged if you're not in trouble
because the economy is. That is the part about self-fulfilling
prophecies that I worry about. If you enumerate those two
separate issues, it seems to me we're getting to Mr. Slutz's
issues, which is a question of, I'm okay and I can show you
that I'm okay, but a loan, a credit that I was supposed to have
access to a couple of years ago, I can't get now because there
is trouble in the economy generally. How do we deal with that?
Mr. Shea. A couple of things. First, I stated there were
three major contributing factors.
The Chairman. Right. One was the lack of demand. I
understand that.
Mr. Shea. Lack of demand, deteriorating financial
condition, and we're taking a harder look from an underwriting
perspective.
The Chairman. Two and three were, it seemed to me, the
individual borrower, but then the general economic atmosphere.
The underwriting standards--in other words, you're being
tougher. Even if the borrower is in the same condition as the
borrower was in a couple of years ago, it will be harder for
that borrower to get a loan.
Mr. Shea. One of the things we look at in lending credit is
the conditions you're lending into. The current environment has
changed. We're in a recession. There are more delinquencies.
It's a greater risk profile to lend into, and we need to be
more prudent when we make credit decisions.
The Chairman. That's what troubles me. We're saying, again,
that a company--to some extent, the frustration for the company
is, how do they deal with that? How do they show you they're in
good shape? This notion that the environment as a whole--
I guess the question is: You said that the $45 billion in
advance in the TARP--and we should be clear: In fairness to
Bank of America, part of that was because Bank of America, at
the urging of the Federal Treasury and the Federal Reserve,
agreed to take Merrill Lynch--I'm not asking you to take on--
when I think Bank of America would have been just as happy to
kiss it good-bye. But they were urged strongly not to do that,
and the TARP money--and in fairness, that ought to be taken
into account.
But you say that the $45 billion is helping you lend more,
and I think it has. But that doesn't affect the underwriting
standards. I guess the question is, without the $45 billion,
would you have been up against some limitation given your
capital? How has the $45 billion helped you to lend more? Has
it affected or not affected the underwriting standards? So is
it you have more capital and you can lend more?
Mr. Shea. I'm not prepared to discuss the impacts of TARP.
The Chairman. But you said that the $45 billion helps you
lend more.
Mr. Shea. It shores up the bank's capital, and we can
therefore make more loans. My area of expertise is the business
banking space, companies that generally--
The Chairman. I understand, but I need to know how--I don't
think it's an unfair question--how does the fact that the $45
billion is available help you to make more loans? Is it that
you have more capital, you were against a limitation? If you
can't, I'm going to ask somebody in the bank to explain that,
because that's obviously a very critical question. But it
doesn't help us with the tightening of underwriting standards.
Mr. Shea. I can get back to you with a better answer,
Congressman.
The Chairman. Mr. Pelos, let me ask you, and then also Mr.
Geller: It is the larger banks that we are talking about. Have
your underwriting standards tightened? Is that part of the
reason why an individual institution which would be in the same
economic position, a business, that it was in a couple of years
ago--would they find it harder to get a loan today?
Mr. Pelos. I would provide this: Everything we do is
custom-made, so there aren't many programs in the commercial
banking space. So I think in general I would say that our
underwriting standards have remained the same for all this
crisis. That's why we're getting more loans, even though
commercial lending--
The Chairman. So a business that had some arrangement with
you a couple years ago shouldn't find any difference?
Mr. Pelos. No, to me, let's say we have a company that we
have an agreement with, and we say, ``As long as you don't lose
money, the agreement stands.'' That would probably be the same
agreement we have today. The problem is, that company may be
losing money today. So the risk profile of the borrower is
different. We would underwrite the way we would have
underwritten a--
The Chairman. If the company wasn't losing money and there
was no significant deterioration of the company, the prior
agreement should still be available for them.
Mr. Pelos. If the company's financial characteristics were
the same 2 years ago as they are today, we would probably
underwrite it the same way. If the financial characteristics of
the company were different, we would underwrite it the same.
The Chairman. Let me ask Mr. Geller.
Mr. Geller. I think each company needs to stand on its own
merits. To the extent that a company continues to make money
and is in the same financial condition that it was in 2 years
ago, then we would look to lend to that company. To the extent
that the financial condition has deteriorated, obviously you
have to relook at that and underwrite it accordingly.
The Chairman. So with you, it would be the focus on the
company, the underwriting standards would not have tightened.
Mr. Geller. Again, each individual borrower needs to stand
on its own.
The Chairman. There does appear to be a distinction, Mr.
Shea said, that in addition--it seemed to me that both of you
were citing one factor where they were citing two, and that is
something I'm going to want to pursue further. Mr. Pelos?
Mr. Pelos. Again, we have 12,000 customers, and every deal
we do is custom-made. I'm sure within that band of 12,000, you
are going to find a couple hundred where that may not
necessarily be the case. But in general, our underwriting
standards are simple.
The Chairman. Because this is our problem. The Federal
Government--some of this TARP money is being advanced. We don't
want the banks getting into serious trouble. But I think it is
reasonable to say, recipients of TARP money, it ought to make
some difference in your own risk profile, that people ought to
be a little bit less risk-averse after taking TARP money than
before; and I'm not sure that has always been the case, and
that is what we need to pursue. Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman. It's like two
different worlds. I'm hearing from all the bankers that,
``Everything is fine, we're comfortable.'' I'm hearing from all
the businesses, ``We can't get any money.'' I understand that
we all come from different positions. But there has to be
something in the middle. Are you not hearing each other? Did
you not just hear what the other side said? Have you not
witnessed it? Have you not had businesses come to you and say,
``We cannot get a loan.''
It just seems like we're in this vortex of, ``Well, we have
to tighten up our standards. Okay, but we're not doing it
because we're being told to by regulators.'' Okay. So are you
just doing it because you want to? And, ``We're doing it
because businesses aren't selling.'' Why aren't businesses
selling? Every business, every economist I have talked to says
the major problem with this economy is the lack of availability
of credit--every single one of them, no exceptions. They may
have differences of opinion on how to settle it. But the
problem has been identified by everybody as the same problem.
We have some businesses here--I can't imagine you haven't heard
it from others--``We don't have access to credit.'' Yet
everybody is telling me, ``Fine, we have credit.'' Ms.
Mitropoulis, how much do you need?
Ms. Mitropoulis. $2 million.
Mr. Capuano. Who has $2 million? A million-and-a-half? Mr.
Slutz, how much do you want?
Mr. Slutz. I'll take $700,000.
Mr. Capuano. Half of what she wanted. Do you see the
problem?
The Chairman. It's actually a third.
Mr. Capuano. Well, she went down. Do you see the problem?
There is some disconnect here. Now for me personally, I voted
for TARP, and I still support the concept of it, because I'm
trying to bridge that disconnect. The truth is, I don't really
care if a few banks go down. I don't like it, I don't want it,
but that's not why I voted for TARP. I did not vote for TARP to
strengthen your bank or your bank or anybody else's bank. I
voted for it and I still support it because I want to take that
money and give it to the businesses so they can get back to
buying and making things and getting this economy going. I
don't mean to be disrespectful. It's not the banks that keep
the economy going. You're just the grease. We tried to provide
some additional grease, and yet you're not doing it.
I know that not everybody can. I know all that. I
understand different people have different roles in the
economy. I get it. But you're telling me there is not a single
bank in Massachusetts of any level of any size that can provide
capital to one of our best companies in the State, an
internationally known company?
Do you understand the disconnect I'm having? I don't quite
get it. What are we supposed to do? How do we get you together?
If it's not the regulators who are tightening it up, who is it?
Do I have to talk to you to say, ``Look, talk to your loan
officers and calm them down.'' I understand your standards have
to go up. Do they have to go up all the way? Is there no middle
ground? Because if not, then everything we have done thus far,
everything we might do, is a waste of time. We are dooming
ourselves unless everybody, not just the regulators--apparently
not the regulators at all, according to this panel--takes a
half a step back and reopens their wallet. Who has an idea for
me. What am I supposed to do? What else can Congress do to
loosen this up, to get money back into the economy--I'm not
asking you to throw money away--into good manufacturing
businesses that actually produce things or build things? What
can I do? Anybody?
The Chairman. Let me parse the question, to the extent that
I have heard suggestions: We are working hard to get the FDIC's
assessment cut very substantially below what it had been, and
we are working hard to get the mark-to-market rule made much
more flexible and the consequences more flexible. I think we
will be successful in both of those. Those are two of the
suggestions we are working on.
Mr. Baker. Take the current situation over here. It may be
at what cost. There may be other options for some companies
that have failed in the bank's mind to meet standards, so they
may have to pay a premium, or then they'd have to ask for
supplementary capital. That's available in Massachusetts. Every
situation is different. But, I mean, there are situations
where, as I have talked about, near your backyard, Medford,
where companies slip out of favor with a bank.
The other issue is how patient is the bank going to be, how
flexible? Is it going to be a liquidation situation, or is it
going to be, ``Let's work through it; let's rehab this credit;
let's give the company time?'' This gentleman has taken out
$4\1/2\ million in cost. If he's cash-flow-neutral or cash-
flow-positive, there may be another way to go about it than a
strict vanilla situation from a conventional lender.
Mr. Capuano. That's a fair answer.
Mr. Baker. It is customized. It's a case-by-case situation,
because all loans are risk-rated at institutions. You know,
when it's a criticized asset, you sometimes have to deal with
it.
The Chairman. Here's the point we're trying to get to: With
$350-plus billion in TARP funds already advanced and more
coming and some other flexibility, has that had an effect on
the risk profile the banks are willing to take, or not? That is
one of our key questions we have going forward. If the answer
is no, it's not conducive to further congressional support.
If I could, Mr. Slutz, you gave--are you cash-positive now?
Are you making money?
Mr. Slutz. Over the past several months, no.
The Chairman. What is your projection?
Mr. Slutz. The projection is the build rates in automotive,
basically you get above 12 million vehicles per year, we all
get healthier.
The Chairman. Your collateral hasn't deteriorated?
Mr. Slutz. Not at all.
Mr. Capuano. One of the things we heard a week or two ago,
maybe 2 weeks ago now, we had all the major banks in, and they
were complaining about some of the regulations, some of the
requirements both on the TARP money and additional requirements
that people like me would like to put on. When asked, ``Why
don't you give it back,'' they said, ``We can't.'' ``What do
you mean, you can't?'' You can't because if you do, you then
have to fill that hole with your own capital. So you can, but
you choose not to. It's similar to this.
So they can look at each individual circumstance and
understand that this is a long-term, good business that has
actual assets--I understand fully well, I want to make it very
clear, I'm not asking any bank ever to invest or to loan a
penny to naked, vacant paper. That's how we got into the
problem we have. We're talking manufacturing here. We're
talking, not here, but in other places, housing. We're talking
things that have real, hard assets. To not be able to look at
those individually and understand that, you know what? Your
loans, your economy? Where do you think the banks are going to
go if there is nobody left to loan to? How does this work? You
have to make loans to substantial businesses.
And if there is any way you could find to suggest to me how
we could help encourage that--and again, I'm not looking to
throw money away, as has been done. It was a horrendous thing
that was done through business--which, again, to me is where
Government comes in. How do we help you get to the point where
you make thoughtful loans to substantial businesses that have
hard, fixed assets?
If you have any ideas, please let us know, because I for
one am struggling how to get this done. If not today, tomorrow
is fine, next week's fine. I'm not trying to put anybody on the
spot. I'm trying to emphasize where my problem is, trying to
get this money loose.
The Chairman. Mr. Oddleifson.
Mr. Oddleifson. Mr. Sloane and I will sort of put ourselves
out there first. One thing, one program that we're involved
with that actually has--we have some money out in more recent
situations is a program which encourages lending in what's
called hot zones, economically distressed areas. We have
extended the kind of allocations from the Department of
Treasury, and that's worked quite well.
I will tell you that they are more risky, because we are
working out a couple of them right now. We did put ourselves
out there for a tax benefit, but they were getting a chunk of
it back through credit loans. And I believe in the stimulus
package there is some additional allocation above and beyond
what was there originally.
Mr. Sloane. I would just add, Congressman, that it would be
my pleasure to review both of these situations. We don't know
either client. But on behalf of our loan committee, I would be
happy to review them both to see if there is anything we can
add.
Mr. Capuano. Swap business cards. I want to add, there is
no finder's fee.
Mr. Sloane. But to your earlier point: It's not so much
that conditions tightened or loan conditions tightened. It's
the gravity of the depth of a business cycle will make that
happen automatically, so that the valuation of real property,
the value of receivables--imagine being in the automotive
industry, being a tertiary player there, and having the Big
Three receivables or even their parts manufacturers. There are
a whole series of automatic discounts that happen in cases like
this, and that oftentimes is how you evolve a situation here.
The Chairman. Mr. Tierney.
Mr. Tierney. I appreciate that offer, Mr. Sloane, and I
suspect that it goes back to a point where it used to be that
as part of assessing the loan, you had the character of the
borrowers. We hear all the time the too-big-to-fail thing. Some
of our banks are too big to deal with their borrowers. They
don't know them under circumstances intimately enough to add
that to the mix. That certainly is a part of this, and it may
be why one of your bank or banks would be able to look at this.
You can look at the situation. You know the local situations.
I'm stunned that nobody wants to go beyond what the line
says. It's easy to run the formula down and kick somebody out
the door. That has to be part of that. I'm talking about small
businesses in particular, it has to be part of assessing the
character, the community, the situation you're in--looking for
other things, as Mr. Baker said, but also making a judgment
call as to whether or not the outside situation may be getting
worse, whether this particular borrower is going to be good for
it, is going to at least try as hard as you could expect to
make it. I think that might be part of the answer. That might
work. I think it does.
The only other thing I would add: Mr. Sloane, you've made
the comment during the course of your remarks that got my
attention on that. I think you said that you thought the
deposit fees on guarantees for deposits ought to be paid by the
depositor. I have a real adverse reaction to that. My
understanding is the purpose of those guarantees is so that
lenders--so banks, rather, will be able to entice borrowers to
have confidence and put money in their bank. It's for the
benefit of the bank. Why do you want to tag consumers with yet
another fee? They have to pay to go to the ATM, which is
supposed to save us money. It's not saying us a dime. They have
to pay everything all the way down. This is something uniquely
for the health of the banks and for the banks to get deposits,
and yet you want to turn it around.
Mr. Sloane. Sure. That is a very thoughtful analysis. I
appreciate that, Congressman. I think my view here is that
there is an inequality that is evolving between those
institutions with a high-quality balance sheet and those with a
low-quality balance sheet, and that the premiums necessary to
fund the entire deposit insurance process are being placed
across the whole industry. My view is that the FDIC premium
ought not to penalize the successful institution and its
earnings, and it ought to be clearly assessed as a user fee,
because it ultimately gets passed through to the depositor in
one form or another. It is an expense of our business. The way
it is functioning now, you have a large percentage of
institutions that have done poorly, and those premiums
necessary to restock the fund are falling on everybody's
balance sheet.
Mr. Tierney. Maybe we should make some differentiation.
The Chairman. May I say, there is an effort to require you
to be more risk-based, and the FDIC is doing that. But the
point is this, you couldn't do that if it was an individual
charge. You can only do that through institutions. That is, the
FDIC can allocate that institutionally, and in addition to
lowering it in general, we have asked them to look at making it
somewhat more risk-based. That does so.
Mr. Tierney. Thank you, Mr. Chairman.
The Chairman. I thank the witnesses. We are going to be
pursuing this. Again, I appreciate the fact that to get the
economy fully functioning--I think we're making some progress.
Things are better than they would have been, although that's
not encouraging to people when they're still in a negative
situation. But the kinds of efforts going forward that we
continue to need require a good deal of public support. One of
the things I would urge on the banks is this: The programs we
are talking about are, A, trying to improve the whole economy.
But the institutions you represent are inevitably the direct
beneficiaries. And you benefit both in that way and you benefit
from the whole going forward.
We are at risk of that kind of activity stopping, and when
we ask you to think about your lending standards, factor that
in. It's not simply your own bottom line, but your interest as
an institution in this economy, in our being able to go
forward. And if we aren't able to get a better response out of
the larger banks in particular, I think you are going to find
that when we talk to you and you urge us to do this or that or
when you complain about restrictions on your compensation or
your travel--Mr. Sloane, you referred to, oh, we can afford
this or that. In fact, we have been putting some very tough
restrictions on that, to the point where both the New York
Times and the Washington Post in the last couple of weeks,
there were complaints from the banks saying we're not doing
this, that we're being too tough on them.
But I do have to say to bankers: If I were there and if I
believed that it was important that this government has the
capacity to continue to do the kinds of things that we need to
get the credit system functioning again, I would factor it into
my lending decisions, because continued tightness, a drop in
loans going forward because of underwriting standards
tightening up, that will have negative consequences in the
ability of the government to respond in ways that you'd like us
to.
The hearing is adjourned.
[Whereupon, the hearing was adjourned.]
A P P E N D I X
March 23, 2009
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