Washington's recent decision to pour $250 billion into investment banks in return for shares made the government a major investor and owner in the banking industry. What is the government's appropriate role in financing and the economy?
To capture the thoughts of an industry veteran as he is observing events unfolding in Washington, on Wall Street, and ultimately on Main Street, Business Lexington turned to Steve Trager. As Chairman and CEO of Louisville-based Republic Bank, Mr. Trager oversees $3.1 billion in assets and 45 banking centers in Kentucky, Indiana, Florida and Ohio.
TM: On the day of this interview the headlines tell of the federal government taking over private banks. Articles proclaimed the end of one era in the nation's political economy and the beginning of another. Did you ever think you would live to see the day?
ST: Well these are certainly very, very interesting times. It is very concerning to me when the government, in the political process, gets involved in the financial services industry. Republic Bank is in the best position that we've ever been in to compete ... it has put us in a position where we have become, as have many community banks, the banks of choice. Like other community banks, we are lending and we've had a very good lending volume this year.
TM: Have any of the actions taken by Treasury Secretary Paulson been to your advantage?
ST: No, fortunately we are experiencing the best year in our company's history. We will not qualify for any bailout fund, we do not want any bailout funds. And as a matter of fact we've seen a rash of business growth.
TM: How was your third quarter?
ST: Our earnings are up over 75% of what they were at three quarters of last year. So we've been fortunate enough to make some good long term risk decisions over the last several years and that's what we're doing, we're in it for the long term we don't make short term decisions to generate income and sacrifice long term like unfortunately some others have in our industry.
TM: Is credit drying up?
ST: ... In my world, funds are available and funds are being loaned on a prudent basis. Now I'm not saying that something didn't need to be done because I think in the world of mega-credits that impact large institutions that certainly have an impact on our economy, there apparently is a shortage of credit. I can't begin to understand or grasp like certain economic experts what the right answer is. It is troubling when the government gets involved because whenever the government gets involved you know there is a political aspect to it. And that certainly has not proven to be the best way to make a lot of these decisions.
TM: For the business that might have been contemplating applying for credit just as this scenario began to take shape and form, what's changed? What do they need to know now as they go forward?
ST: ... The things that we want to look at, and the prospects for that business in the risk-sharing between bank and customer, the savings that a customer has and the cushion that a customer has to withstand down periods of time are all relevant factors today. I think some banks and some borrowers did not always take those ingredients into consideration like they are today. That's a good thing.
TM: Is this an indication that the pendulum is swinging back towards stronger government and perhaps more regulation?
ST: On one hand, I'm an advocate of regulation because we participate and are heavily regulated in our business. There are certainly going to be bank failures because certain banks took more risks than they should have. Overall, it's not going to be like Wall Street where the whole industry collapsed. You know, there are 12,000 banks in this country and there have been 11 bank failures. There are going to be more bank failures. But I don't think you're going to see a whole industry collapse and I can safely look to the regulatory environment as being a reason. That's the good aspect of it. The negative aspect of more regulation is that it certainly does limit the window of activity that banks can participate in. It also can be very political. You know, our primary regulators are the FDIC in the state of Kentucky; the heads of both of those organizations are political appointees. So they change with every administration. Their form of regulation can be very political and I think that the most highly publicized example of that is Community Reinvestment Act, which is this piece of legislation that some point to as being a reason or one of the ingredients that created this sub-prime mess by encouraging certain lenders to loan money to low and moderate income borrowers that probably weren't capable in that regard.
TM: Can you help us understand what we need to watch for, what indicators we can look at to see if this is working?
ST: ... Fortunately, the decisions made here in Kentucky and surrounding areas were relatively prudent decisions. We didn't see the big boom in irrational exuberance that you saw in some other markets because I think people from this part of the country are a bit more conservative by nature. ... We have not experienced the shortfall in the real estate market and home market that you see in other areas of the country. ... I think folks are now taking more seriously their analysis of risk. Certainly from a selfish perspective I advocate on behalf of bank deposits. For the last few years there has been an outflow from bank deposits - - folks seeking a higher return. Make no mistake about it, the more return you seek, the more risk you are taking. That is the nature of our free market system. So there is no free ride. No one can outsmart the market. Bank deposits today, as a low risk alternative, look better than they have ever looked and certainly have a place in everyone's portfolio. Not to say that people should never take risk, but whenever you are getting a higher return, whether it be in real estate or the stock market, you are taking a risk. And I think that people have come to appreciate that risk.