TOPICS > Economy

Obama Banking Plan Focuses on Regulation, Credit Thaw

March 27, 2009 at 6:25 PM EDT
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President Obama met with banking officials Friday at the White House to discuss financial strategies that will help unfreeze the credit markets and shore up capital. Analysts assess the plan and what it might mean for banks around the country.

JEFFREY BROWN: After a week in which President Obama laid out some big proposals to cope with the financial crisis, he invited some of the industry’s biggest players to the White House today.

About a dozen CEOs from leading banks and financial institutions met with the president this afternoon. When it was over, all pledged cooperation in the months ahead.

Here’s what John Stumpf of Wells Fargo told reporters afterwards.

JOHN STUMPF, CEO, Wells Fargo: We’re all in this together. And the president invited us here today. We think that was a wonderful idea. It was a great opportunity for us to exchange ideas.

And we have a very common purpose here: turn this economy around, get people working again, you know, lend money, jobs, all those kinds of things. So it was very much a common theme throughout it.

JEFFREY BROWN: Edward Yingling was at the White House meeting today, as well. He’s president and CEO of the American Bankers Association, the largest banking trade association in the country.

Also with us once again is David Wessel, economics editor for the Wall Street Journal.

Mr. Yingling, let’s start with you, this meeting today. What were the concerns of the bankers? What did your people feel they had to tell the president?

EDWARD YINGLING, American Bankers Association: I think the main concern is that we need consistent policies and we need to build confidence in the financial system. And we think we’re getting there.

We’ve had since last fall a lot of zigzags in terms of policy. It’s confused the public, understandably. Frankly, it’s confused the banking system.

JEFFREY BROWN: I’m sorry. But you mean zigzags from the administration on what it wants to do?

EDWARD YINGLING: From the policymakers, yes. We’ve had different programs. The programs have changed their focus. And so it’s been confusing to the public and to the banking system.

We think now that the administration has put forward a consistent program, we think they have good people in place, and we think maybe we’ve reached a turning point here, in terms of this financial mess.

Symbolism of meeting important

JEFFREY BROWN: David, let me just ask you about the meeting today. Symbolic, more important than that? How do you see it?

DAVID WESSEL, Wall Street Journal: Well, I think it's largely symbolic, but symbolism is very important. We've been through a period of time in the last couple of weeks where there were a few days where I expected the president of the United States to be leading the mob to take on -- leading the mob to burn down the bank building.

So I think that President Obama was trying to move the rhetoric back in a more constructive fashion, and so I think the symbolism is important.

JEFFREY BROWN: Well, Mr. Yingling, that's obviously one of the issues here. At least a subtext today was a week of rancor in which many of the bankers were cast as villains and bonuses was very much on the table. Was that part of the meeting today?

EDWARD YINGLING: I think it was a reason for the meeting today. Interestingly enough, right before that, the financial markets were really starting to turn around. The stock prices of the major banks were going up rapidly. We had had more confidence in the programs of the administration.

We'd had an important change -- it sounds technical, but in mark-to-market accounting, which has been a real disaster in terms of this financial mess. And then all of a sudden we had the AIG flap and you saw the stock prices start back down.

And then some soothing words from the administration about, "We're not going to go crazy here. There are real problems with AIG's compensation, but we're going to do the right thing," and then the market starts back up again.

Public resentment continues

JEFFREY BROWN: Do you sense, though, in the banking community they're feeling chastised, chastened? Is there a change coming because of all this, in terms of -- especially on the subject of executive compensation?

EDWARD YINGLING: I think there's an understanding about executive compensation. The president talked about that. He talked about the need to understand the anger of the American public. All of the executives in there said, yes, we do understand it.

But one of the problems we've had as bankers is this painting everybody with the same brush of banks. And, in fact, after the president addressed the Congress a few weeks ago, I wrote him a letter saying, "You're painting everybody as though they were AIG and calling everybody banks."

We have thousands of banks across the country that never made one subprime loan. They're well-capitalized. They're lending. And so part of this is to get the rhetoric toned down, but also to be more accurate and focused.

JEFFREY BROWN: And, David, your sense is that there was -- there has been an attempt, at least at the White House, to tone it down a little bit?

DAVID WESSEL: Yes, I think there has been some. But I think that -- I know from people in the administration that they've been frustrated that some of the big bankers seem to think this is a kind of populist partisan thing rather than the politicians responding to what is really quite widespread outrage that a group of people who we were led to believe knew what they were doing didn't know what they were doing, drove the economy off the cliff, and are now taking taxpayer bailout money.

And unless the bankers understand that the public is upset about that and shows some contrition and say that there were mistakes that the banks made and executive compensation may not have been properly structured to avoid risk-taking, then I think we'll have continued tension. I don't think it's going to go away.

But I do think that it took a turn for the healthier. Now they're talking about the substance of the issue rather than calling each other names or accusing them of having vile motives.

Determining real market price

JEFFREY BROWN: All right, well, let me move to one other piece of substance. A big piece this week was the bad asset plan that was put forward by the president and Secretary Geithner.

One of the issues -- and we had a debate on the program the other day -- one of the issues is, do we fully understand, do the banks really know how deep this problem is? Do they have a grasp of the depths of the so-called bad asset problem?

EDWARD YINGLING: I think they do. But one of the big issues, of course, has been pricing. And this gets back to mark-to-market accounting.

We have an accounting system which hopefully they're beginning to change which causes institutions to mark assets down to a market that doesn't exist. And so, if the banker looks at that security, say, they say, "Well, I can look in there, and I can look at the mortgages, and this is now worth 90 cents on the dollar, and the market is 20 cents on the dollar."

We had the Federal Home Loan Bank of Seattle took a $304 million paper write-down when the true cost loss was $12 million. That caused them to have a big capital hit. That causes them to be able to support less lending by their local banks.

And so part of this has to do with the accounting. The major -- a major point here is to try to get a market price so everybody -- that's a real market price, not an artificially low one.

JEFFREY BROWN: And then you know the actual...

EDWARD YINGLING: And then you know what they're worth.

JEFFREY BROWN: Well, David, a few days later after this plan was put out, do you -- is there any consensus out there about whether it's working or whether it might work down the road?

DAVID WESSEL: We don't have any idea whether it's working. It really was just announced. It's going to be a couple months before we discover whether there are willing buyers, both for the securities that the banks have on the books and the loans, and whether there are willing sellers.

That seems to me the real interesting question is going to be on the loans, because, as Mr. Yingling points out, those loans are held on the bank's books for what they expect to get over time.

And when -- if people come forward and make offers that are far below that level, that is, if the market price proves to be much lower, then the banks have it on the books, will they be willing to sell? We don't know. It will be the end of April before we have a clue.

Traditional lending unfrozen?

JEFFREY BROWN: In fact, Mr. Yingling, is this a months-long process or years-long process? How difficult is it to unwind these assets?

EDWARD YINGLING: I think it will be a months-long process, but I want to emphasize that we keep hearing this phrase, "We have to get the toxic assets off the books so banks will start lending."

Bank lending is actually up at most of these banks. A number of the bankers in the meeting with president talked about double-digit gains in their lending.

So it's not like this has to take place so that banks will lend. I think a lot of this is about the market being able to figure out exactly what the price is or at least a narrow range of the price and the value of these assets.

JEFFREY BROWN: But your sense right now is that lending is beginning to happen, because that's what this is all about, right, unfreezing the credit markets and getting banks to lend?

EDWARD YINGLING: There's been a big misperception about the credit markets. Only one-third of the credit market really is traditional bank lending. Two-thirds is what's now called the shadow banking system, securitization. That market is in the tank, and that market needs to be fixed. But actually bank lending has held up remarkably well, given the fact that we're in a recession.

JEFFREY BROWN: And David Wessel, a final word on that? Do you see an unfreezing of the credit markets?

DAVID WESSEL: Well, I think that part of the goal here of the administration is to get those securities markets, as Mr. Yingling mentions, going again. That's another piece of this complicated plan they've put on the table, is to lend into that market at very generous terms, with a lot of money from the Federal Reserve, to try and get people buying those securities so that the kind of consumer loans that are made, not through banks, but through other outfits will actually begin to take place.

JEFFREY BROWN: All right. David Wessel and Ed Yingling, thank you very much.