That Which Does Not Kill Us Makes Us Stronger

“Leadership is a constant process of course correction.”
-Jim Keyes, CEO, Blockbuster Corporation

There are a few sayings that used to really grate on my nerves, but today they seem amazingly relevant. My boss at the community bank where I worked for 23 years would drive me up the wall when I’d go into his office to explain (whine?) about all the difficulties I was having keeping our customers happy or meeting our financial goals. His simple answer, always delivered with a caring smile: “Well, Bill, if it was easy, anyone could do it!”

Another frustrating adage, this one heard at home from grandparents and parents who grew up in the Dust Bowl in the 1930s, was, “That which does not kill us makes us stronger” – kind of a cleaned-up “survive or die.”

These are people who survived that Great Depression. My grandfather and his brother owned a tiny bank and ranching operation in the hardscrabble ranchlands of eastern New Mexico. McFarland Bros. Bank (yes, there really was such a bank – see https://www.harrold.org/familytree/webtree2/21.htm if you’re a glutton for ancestral trivia!) closed for the four-day Bank Holiday on March 5, 1933, but the bank survived into the early 1980s, when it was sold to another local family. My family was neither unique nor remarkable – there are countless more who survived in spite of even more-insurmountable obstacles. This is the generation that whipped Nazi Germany and Imperial Japan, probably the greatest threats ever to our survival as a nation.

So what are the likely outcomes of our current troubles, and what can we do about them?

• The end of too big to fail. Too big to fail really is an outrage. Last fall, the Treasury Department largely ignored the community banking industry while pumping billions into a few large organizations that were supposedly “too big to fail.” There is no doubt that large banks can leverage some things better than small organizations – technology, for instance, clearly benefits from economies of scale. But it is also without question that one of the biggest single advantages the mega-institutions enjoy is that they have an inordinate influence on legislation – they can afford more lobbyists! While policymakers now MUST subject these huge firms whose failure could pose risk to our banking system to especially close oversight, something must be done to offset these mega-banks’ incentive to grow into “too big to fail” territory.
• Special assessments. Community organizations should work to ensure that any special assessments are paid by those who created the need for it. FDIC Chairman Sheila Bair is to be applauded for her call for a legal mechanism for the orderly resolution of large troubled institutions similar to the one for FDIC-insured banks – no more lifelines for AIG!
• Regulatory reform is coming. Most community institutions are more threatened by the mega-banks than by their local competitors. What would happen if community banks and credit unions joined forces to press for insurance premiums based on total assets, tiered to reflect how much more difficult it is to regulate a B of A than, say, the First National Bank of Logan, New Mexico? Chairman Bair has been quoted as saying, “What we really need to do is end ‘too big to fail.’ We need to reduce systemic risk by limiting the size, complexity and concentration of our financial institutions… Maybe even establish an entirely different regulatory framework for community organizations than the mega-banks.”Bank regulation is not unlike asset diversification in a loan portfolio; it is easier to deal with several small problem loans than one huge problem credit. That’s why we have laws concerning loans to one borrower and asset concentration.

  There is also no doubt that those firms that are financial intermediaries in fact if not in name must be regulated accordingly. How many community organizations can get away with 25x leverage the way some Wall Street investment banks used to do?Depression-era laws repealed in a mindless surge toward deregulation will be re-examined. Financial intermediaries such as banks and credit unions really ARE special because (1) they are highly leveraged (generally keeping somewhere around 10% capital, meaning that 90% of the funding for a financial institution’s assets are NOT investor capital), (2) those funding deposits generally come right out of the communities we serve, and (3) the assets those deposits are invested in remain, for the most part, local. There has been some whining in the press recently about bailing out the banks and not bailing out “Detroit,” but the reality is that the whining would be better directed at which banks are being bailed out and why they needed bailing out.

• There needs to be renewed fair play (and stature) for local financial institutions. Why is the government punishing smaller banks and credit unions for the sins of Lehman, AIG, Citigroup and B of A? We all know that Wall Street has more to do with our current problems than Main Street. It’s time to raise hell about FDIC premium increases and NCUA special assessments, and it’s also time for local bankers to reach out one-on-one to make sure our local communities and legislators understand that few community organizations made sub-prime loans. Isn’t the SEC supposed to regulate securities? Didn’t examiners review every single security – including mortgage-backs – in your bank’s portfolio as part of your last examination? Weren’t Fannie Mae and Freddie Mac securities deemed safe for smaller institutions by people who were paid to know? It is time we made sure that the message, “We aren’t the problem!” reaches Washington and Main Street.
• Watch out for mark-to-market changes. Right now, panicky institutions engaging in fire sales can distress the entire market. How does it make sense to force banks to write down assets, artificially putting the worst possible face on them, when they are likely to pay off at or near full value when the business cycle recovers? Furthermore, the risk of an asset increases in direct proportion to the distance that asset is from the home office. Community bankers, perhaps in conjunction with local or regional regulatory staff, are better prepared to determine asset values than speculators and bottom-fishers that can make a killing buying an asset for 20 cents on the dollar when it should really sell for 75 or 80 cents on the dollar. The Financial Accounting Standards Board has just announced a re-thinking of mark-to-market, but with the FASB, “The devil is in the details!”While there is no doubt that the current mark-to-market rules need modification, at some point there needs to be a realization that accounting records are not fictional – they must have some relationship to reality. If an asset is truly worthless, it needs to be handled with alacrity – sooner rather than later. Temporary voids in marketability are no reason to exhaust a bank’s capital, even the mega-banks’ capital. William Seidman, former FDIC chairman, has blamed current mark-to-market accounting rules for much of the damage in the banking sector that made the $700 billion federal TARP bailout necessary.
• Tax reform for financial institutions is needed. How much sense does it make for the government to not allow banks to build up reserves when times are good and then force them to write down capital, or try to raise more capital, when times are tough? I’m not sure what the answer is – maybe some sort of special, 15-year averaging – but doesn’t it make sense to allow banks to squirrel away reserves when times are good against the inevitable changes in the business cycle that always occur?

Given all of these challenges, what are some of the leadership lessons to be learned from the Greatest Generation? First and foremost, we are Americans and we will survive. Second, those who survive will be stronger. It is brutal – survival of the fittest – but it is the way of the world. It’s all too easy to maintain marginal products, processes, employees or customers when times are good. When times are tough we are forced to deal with poor performance, whether in the teller line or in the loan portfolio.

Our legacy will not be determined by our intentions but by the results we produce. Here are some keys to making sure that good things start happening. These come from lessons learned at my grandfather’s knee, but they are as true today as they were in the 1930s (when I was NOT born yet, just for the record!).

1. Keep your vision for the future. Make sure you know where you’re going, and establish clearly articulated benchmarks for identifying when you get there.
2. Maintain your values. When values are clear, decisions are easy. Start with things like “Clients come first,” “The only real differences in banks are people,” and, “There is strength in diversity.” The best one of all, also a key Cornerstone principle, is, “Tell people what they need to hear, not what they want to hear.”
3. Passion is important. Love what you do, who you do it with, and who you do it for, or find something else to do. Lee Iacocca said it this way: “Lead, follow, or get out of the way!”
   
4. Create well-defined accountability for results. Don’t allow passing the buck. Make sure the entire team has plenty of skin in the game. Remember most project managers’ favorite axiom: Identify that One Butt to Kick when things don’t turn out right – and fewer things will turn out wrong!
5. Clearly define expectations. Most people will respond if they know what the expectations are.
6. Choose your trusted advisors carefully. There are lots of people out there willing to speak with great authority; speaking with gravitas is not the same as knowing the right answer.
7. Never forget that leadership is all about doing the right thing when it’s not easy to go against the crowd. We know of well-managed banks that are taking this opportunity to prepare for what comes next right now. Community banks may well be heading into a period of great profitability because funding costs are extremely low, the cost of capital is down and loan demand is good. There will be merger and acquisition opportunities in the upcoming months!

Forward-thinking CEOs are evaluating their organizations, benchmarking performance and establishing a framework for growth, raising capital, and preparing for the opportunities that will come next. Great leaders have the ability to stay the course in the face of adversity AND inspire others to prepare for the opportunities that hard times will provide to those who can capitalize on them. Fed Chairman Ben Bernanke admitted at the recent ICBA conference that “…the longer term outlook for community [institutions] is positive in light of their unique competitive advantages.”

Is the worst behind us? Consumer spending increased in February for the second month in a row, even though income levels dropped and unemployment is up to 8.5%. Is this the beginning of the end, or just the end of the beginning? I don’t know, but what I do know is that the mid-size banks and credit unions that (a) stand by their customers, (b) remain alert and prepare for the opportunities this down market will present, and (c) retain flexibility in the midst of changing conditions will come out of this crisis stronger than ever before.

Most community lenders still embody the virtues that helped America survive the Great Depression: tenacity, entrepreneurship and innovation. Those Greatest Generation values are not gone, they are alive and well in America’s community banking organizations.
-bm

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If your organization could use some assistance in developing a strategic plan that will produce the greatest, most measurable results, contact Cornerstone Advisors. Cornerstone has helped guide many institutions toward the creation of strategies that align with their corporate vision and values. We can do the same for you.