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
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 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
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
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.”