• Monday’s Huffington Post presented a blog written by the “Co-Director of the Center for Economic Policy and Research” (whatever that is) titled, “The Banks have stolen enough; it’s time to take them over.”

• On the same day, the Financial Times featured a headline with a German focus, “SDP chief attacks ‘beatniks and gangsters of finance.’”

• Over the weekend the Financial Times presented an interview with James Chanos who runs Kynikos Associates, the world’s largest short-seller. Chanos said about the banks: “Prior to this the banks would lend to anybody with a pulse, and now even J.P. Morgan himself probably couldn’t get a loan.”

As the above suggests, the image of the banking industry appears to be at an all-time low. Unfortunately, many banks and bankers have brought this upon themselves:

• The same Monday Huffington Post presents a headlined story with picture, “Bailed out Citi’s $50 million jet splurge,” about the bank’s new corporate jet

• Everyone now knows about John Thain and his $1.2 million office refurbishing at Merrill Lynch

• BofA’s recent moves caused one respected analyst to ask: “How could the Bank of America chief not have known that Countrywide and Merrill Lynch were virtually bankrupt?” A fair question.

The Interests of the Commercial Banking Industry and the Biggest Banks Differ
Healthy commercial banks, the vast majority of all banks, need to respond proactively and positively to the media concerns and the big banks’ stumbles. The interest of the biggest banks and the rest of the industry (about 8,000 banks) are not aligned. John Allison, the recently retired Chairman of BB&T, got it right when he said in September that the U.S. Treasury is “totally dominated by Wall Street investment bankers” who “cannot be relied on to objectively assess all the implications of government policy on all financial intermediaries. He went on to say that it is “inappropriate that the debate is largely being shaped by the financial institutions who [sic] made very poor decisions.”

Regional and community banks now need to shape the debate more directly in part by communicating more effectively with their stakeholders. Without action, the position of trust that most commercial banks have established with their customers may be permanently destroyed.

What should the broader industry be communicating?

* The problem is concentrated. The current Institutional Risk Analyst (IRA) newsletter states that four banks are generating most industry losses: “IRA’s estimate for accumulated bank charge offs for 2009 is in the neighborhood of $1 trillion vs. $1.5 trillion in Tier 1 Risk Based capital at all US banks today. Good news, though is that 2/3 to 3/4 of that loss number comes from the top 4.” Customers do not understand the degree of concentration, often lumping well performing banks in with poor players. While certainly many banks are suffering from loan losses, the vast majority of them have the capital to make it through the downturn without government intervention.

* Banks are lending. Monday’s Wall Street Journal headline proclaims: “Lending drops at Big U.S. Banks” and focuses on the falloff in lending from those banks benefiting the most from the TARP program. You have to read through to the last two paragraphs of that lengthy article to find that in fact Key Corp, for one, “saw a $1.3 billion leap in its commercial, financial and agricultural loans” and also renewed $5.7 billion of loans in the last quarter. While total loans were down by just $200 million, apparently the decline resulted from a smart decision to stop making student loans “unless they’re backed by the U.S. government.”

The article suggests banks are not lending; the reality is that banks continue to lend. However, in many cases they are being more selective, stepping up in some areas while reducing exposures in others, a prudent approach in this environment. Most customers have no idea of how active their banks continue to be in lending; it is the bank’s responsibility to make that known.
 
* A banker is not a banker is not a banker. Commercial bankers are not mortgage brokers; commercial bankers are not investment bankers. Yet, commercial bankers are allowing themselves to be tarred with the same brush, even though (unfortunately for them) few commercial bankers benefited from the obscene compensation that investment bankers enjoyed. The commercial banking industry has allowed the end customer to see all bankers as the same. The one exception to this may be the small town community banker.

There are two sets of winners from this homogenization of the investment/mortgage/commercial banking that has occurred in the media’s and the end customer’s minds. Credit Unions are winning by taking consumer and small business share; they are seen by an increasing number of customers as white knights that really do represent the customers’ best interests.

The other winners are the investment and big commercial banks that created this disaster. The more they can portray themselves as part of the larger industry rather than aberrant players, the better for them and their chances of survival.

Concluding Thought
The broad banking industry, the thousands of banks that may have some credit deterioration but are basically sound, need to protect their interests. On reflection, accepting TARP money may have been a mistake for many of them. Being further dragged into a deeper partnership with the government will be an even greater mistake.

The thousands of banks that are long-term survivors need to communicate that they are solid financially and solid citizens. They also need to distance themselves bluntly and explicitly from the few that are destroying their industry. Not demonstrating how they are different carries a much greater risk than avoiding intra-industry confrontation.