The Government needs to Realize Banks aren't Santa

January 2009

By Andrew Gordon

Children didn’t make up Santa. Parents did. Santa may be generous. But naughty kids get nothing but coal. Santa is a ruthless administrator of justice.

This is not a kid’s fantasy. But it is a parental one.

So my holiday message to President-Elect Obama and his new Treasury Secretary – Timothy Geithner is this...

Don’t ask banks to be your kid’s wimpy version of Santa Claus – giving out gifts to all those who ask nicely ... or scream the loudest (autos, anybody?).

Banks can make your dreams come true. Or they can destroy them.

In either case, I’d like them to lend responsibly.

I’ve seen both sides of what banks can do. And I’m sure you have too.

I remember getting a bank loan for my first home. I needed to prove that payments would take up no more than 20 percent of my disposable income. I needed to prove I had a job. I had to show a good credit rating.

Jumping through all these hoops wasn’t optional. No exceptions allowed.

When I got the loan, my wife Cec and I went out to celebrate. It was a big deal.

Then there’s the other side...

My Cousin Harvey had built his door and window business from scratch. They had so much business he applied for a loan to build a bigger facility. The company’s bank gladly gave it to them. After all, the company was flying high on the mini-real estate boom that visited the greater Boston area in the mid-1980s.

Five years later it reversed direction. Housing prices plunged. And housing construction shrank to almost nothing.

Even after downsizing, the company could barely pay its bills. It dipped into its revolving loan more and more. Until one day the bank took it away.

The company lasted a month more before shutting its doors.

I’ve seen the same thing happen to publicly listed companies like the small Texas-based oil company that seemingly was sitting on top of the world.

I was on the phone with the CEO and he was sounding his normal confident self.

The drilling was going great, he said. Every well tested so far found oil. They were ahead of schedule. Their big investment in a potentially huge oil basin off the coast of Nicaragua was also making better-than-expected progress.

Then he dropped the bomb.

The company’s bank was withdrawing their loan.

The CEO tried to cover his tracks. “As far as I’m concerned,” he said, “This gives us an opportunity to find a better bank ... a bank that really believes in us.”

But without access to bank credit, they couldn’t pay their bills. Their credit rating plunged. Other banks wouldn’t touch them.

They were forced to sell their promising parcel off the coast of Nicaragua. It bought more time for them. But that parcel was a big part of what made the company so attractive. More shareholders sold off. Their stock price plummeted.

Ten months later, they were de-listed from the New York Stock Exchange. Fifteen months later they declared bankruptcy.

It happened a couple of years ago. But I believe it gives you a sneak preview into 2009 ... except for one thing. Next year these won’t be isolated incidents. The market will be littered with dead corpses whose money lifeline was cut off.

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