You are Going to Hate This But...

June 18, 2009 - PRLog -- The banks that led us into this financial maelstrom are the same banks poised to lead us out. Because this article was not written for lemmings, but instead discerning individuals who cannot fathom placing their financial future in the hands of those who helped decay it, the following questions and concerns must be addressed: 1) Why would banks, that have recently proven their irresponsibility, salvage the failing economy? 2) Should the banks be trusted? 3) How exactly will the banks rescue the economy?
 
It is difficult to understand why the banks and not the valiant government, responsible for throwing out quite a few platinum-plated life rafts, would pave the way for a healthy economy. However, the answer is simple: banks are the most adept at providing personal and company loans. No other institution, not private equity groups or even the government, is as capable of dispersing these loans as banks. Moreover the government charged itself with bailing out the banks and a few choice large cap companies, not individuals or the mom and pop shop down the street. So, the government will not directly be providing loans to them or you; the banks will.

As the government provided the banks with the capital and confidence, through the TARP program, to start lending again, the banks are now poised, nay expected, to provide responsible individuals and companies, with excellent credit, with loans. Moreover, banks are internally set up and designed to provide loans. They have distribution channels already established to place money in the hands of interested parties. The short term success of the economy is dependent on the lending ability of the banks. In short, the banks will catalyze the recovery of the economy.

Although many banks made some poor choices in who they lent money to and how they set up the terms in which that money was to be paid back, trust, in the form of active government regulation, to push the economy forward should be given to the banks. The government that provided the banks with bailout money will now heavily scrutinize bank lending practices and, thus, provide oversight which had been missing in the past when banks made bad loans. Any future missteps made by the banks will result in fines and a loss in profits. Thus, providing risky loans to those incapable of fully paying them back will soon become a thing of myth.
 
Along with the government, individual shareholders are keeping watch on bank operations and decisions to a degree that they have not done in the past. These shareholders, many of whom have seen their bank share prices plummet, are much more astute about bank lending practices. They are questioning the bank executives who give loan officers the clearance to provide loans. Thus, there is tremendous pressure on loan officers to provide loans that can be repaid. The banks now have to answer not only to the ever-watchful eye of the government, which is engaging in true regulation, but also to their increasingly savvy shareholders.
 
With scrutiny coming from shareholders and the government, who expect responsible lending, banks, loan officers in particular, are warily giving out loans. So, who are they going to lend to to salvage the economy? As noted above, banks will lend to responsible individuals and companies. However, the real recovery will come from the banks lending to large U.S. companies. Larger companies tend to have more experience with attracting and utilizing financing in the capital markets. They have solid relationships with lenders; they understand the contracts and negotiations processes; they have long histories of producing financial documents which lenders require for their own analysis; and their management teams tend to be better known to the lenders. In short, large companies are known quantities, and, therefore, their risk is easily assessable. Smaller companies tend not to have experience in the capital markets, and the banks, rightly, fear what they do not know. Although some banks will lend to large foreign companies, they will do it a risk that they really cannot take right now. There is political risk, as a foreign government could negatively impact the operations of companies in its territory. And, fluctuations in exchange rates could obviate the profitability of the loan to the bank. Thus, most banks will lend to solid, large, U.S. companies.

So we may not like them, but the grim reality is that we need the banks. And we need to give them the opportunity to earn our trust once more.

The above article was created by the professionals at Generations Financial Services. They can be contacted at info@generationsfinancialservices.com or at 800-260-1615.

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Generations Financial Services is a full service firm dedicated to helping individuals and companies achieve their long term financial goals.