Published: October 04, 2008 01:32 pm            

Guest column: It takes common sense and fiscal conservatism

Serving for several years on the board of First Financial Bank of Cleburne, an affiliate of First Financial Bankshares, a publically traded financial holding corporation, gave me a certain perspective on American business and lending that went beyond what I learned from studying business at three Texas universities.

Not that my formal education was not extremely valuable, but being in a position to vote thumbs up or thumbs down on loans and having the fiduciary duty of a bank trustee puts matters in a completely different light. I found the entire experience invaluable.

When one works with strong people such as Matt Reynolds, George Marti, Bob Childress, Jim Easdon, Gary Bennett, Gene Joslin and Albert Archer, it is impossible not to learn.

Through deliberating with these individuals on bank business, augmented with continuing trustee education, and by listening to our experienced officers, such as Matt, Linda Hall, Derek Schmidt, Ellen Parnell, Brad Evans and Craig Beskow, I learned that by applying common sense and fiscal conservatism then appropriate business risks and fair profits are not mutually exclusive. Both objectives could be achieved.

It was Matt that taught me about the “5Cs” of credit.

Capacity is arguably the most important “C” in that it answers the question, “How will the loan be repaid?” Is there adequate cash flow to service the debt?

Capital answers the question, “Is the borrower putting enough money into the project?” Alternatively, as is said in golf, does the borrower have “skin in the game?” The borrower needs to “feel the pain” if the loan “goes bad” by having some personal risks or exposure.

Collateral is a well-known concept. What security is being offered? Are assets available to repay if the loan becomes nonperforming?

Conditions. Two thoughts here: How will the proceeds from the loans be used and what is happening in the particular industry, in the region, and in other businesses that would affect the loan?

Finally, character, and this deals with the person asking for the loan. Is he or she trustworthy? Do they keep their word? What do people say about them?

In my opinion, this current situation is a result of too many subprime mortgages, poor underwriting practices in commercial and mortgage banks — ignoring the 5Cs — investor demand for ever higher yields generated from securitized mortgages and slipshod governmental regulations.

A word about regulation. In a capitalistic system, there are both successes and failures — the “invisible hand” of the marketplace must be allowed to work.

But I believe the government’s role is to make certain all follow reasonable rules; therefore, some regulation is clearly indicated. Some people will simply not play fair without regulation. In this current situation, the federal government must act. Failure to do so would be very foolish and could even lead to the short-term collapse of our financial system. We cannot take that chance. We should do all we can to encourage our federal government to take prudent steps to avoid such a catastrophe, or even a prolonged recession such as gripped Japan in the late 1990s. Guarding against clever lobbyists expanding the bailout will be a challenge.

However, there is something that bothers me about proposed solutions to the current crisis, and that is that certain greedy lenders and vote-seeking politicians, who actually encouraged subprime lending regardless of whether a person could afford a mortgage, will get the message that ripping off investors and the American taxpayer is a thing to be rewarded.

By the way, prudent management and lending practices are not just the style of the First Financial bunch but are also the practices of many other good Johnson County bankers, such as Robert Stewart, Stan Gray, Mike Lehrmann, Peter Bennis and the great Stretch Smith, when he was active in banking.

In the proposed bailout, the innocent and the quality bankers could actually be disadvantaged, while those who are on the edge with their questionable practices will be “made whole” and subsidized by the American taxpayer.

Here’s my point: I wish we had more of the wisdom of Main Street in Cleburne on Wall Street in New York.

        

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