Challenging economic conditions have industry leaders pondering the current state of affairs and where the nation is headed. Manuel J. Perez de la Mesa,president/CEO of distributor giant PoolCorp in Covington, La., offers some insights.
I don’t know where “bail-out” came from, but I think it’s a media-contrived term.
The government and banks screwed it up collectively. The government has done things, and continues to do things, that made the situation what it is. And politicians aren’t very good at accepting responsibility.
The media and Congress are always looking for sound bites that “Joe Plumber” can easily grasp, but unfortunately, it’s a little more complicated than that.
The essence of [the legislation that] was passed, if handled properly, will genuinely help the economy and could be done at no cost. Unfortunately, the guys who caused some of these real issues and participated from a business standpoint are the ones who are now engaged in trying to fix it. So my cynical nature tells me that in spite of the fact that this could help the economy with no cost to the taxpayer, in reality, it could make it worse and will cost the taxpayer.
The changes being made by SEC and the Financial Accounting Standards Board on the accounting will definitely help. That’s the first thing that should have been done a couple of years ago.
The old accounting rules say if the house value, the underlying security, is less than the loan, you have to adjust your [loan] down. The new rules state that you have to mark the value to whatever those loans are trading for in the marketplace. In a normalized environment, they’d be trading [OK]. But many stopped buying those mortgages. The market froze, and only desperate sellers ended up selling. In that scenario, if someone needed cash immediately … the later transactions drove an artificially low valuation.
If you’re a bank sitting on $300 billion worth of these mortgages, 90+ percent of the mortgages are perfectly fine. A small percentage, maybe 3 percent or 4 percent, are some sort of foreclosure or foreclosure risk. But because of these mark-to-market rules, you have to write down those $300 billion worth of mortgages by maybe $50 billion.
Based on the sum of what they can borrow and their own capital, banks will loan money out. If Wachovia has to write down its capital by $50 billion, that means they can borrow less money, [and] they can lend less money. Then they need liquidity. It’s a vicious circle, and the root of this vicious circle is this mark-to-market accounting rule.
Of course, with a slowing economy, some issues still exist. But now they’re multiplied by a factor of five, 10 or 20 times.
Where Congress is at fault is [when it] comes in saying a certain percentage of your loans have to go to these types of consumers. If not, your buying capabilities are reduced. The bankers, say, “If I play [Congress’] game, I can make more money, at least in the short-term.”
It’s not a bad desire from a human standpoint because they want more people to own homes. But if an individual has a bad bill-paying record, the bank still thinks by making a few bad loans, it will be able to make more good loans, and more money overall. But someone has to pay for those bad loans.
If Congress and the administration support the financial institutions to ensure liquidity in the markets, they may need to borrow from the treasury. So be it.
If the accounting issues get fixed, you’ll see banks reporting what will be referred to as huge profits inside the next 24 months. But just as they reported huge losses, those ... profits won’t be real either. Politicians’ reaction to [such] profits will be to create an excise tax. They’ll say the banks they helped are making huge profits, “which they wouldn’t have made without our help.”