3 KEY WORDS TO A SECURE BANKING SYSTEM: CONFIDENCE, CONFIDENCE, CONFIDENCE
When I was the youngest bank officer, in the west Texas town of Tulia, Texas, the bank president, and patriarch, Marvin Carlile, called me into his office and said:
"Young man, there are 3 words key to banking." I listened "Confidence, confidence, confidence."
"The banker has to have confidence in any customer who puts money in his bank. Is it stable? Is it from a good source? Will the bank be able to invest it for a profit?" he continued.
"Our bank is solid because the people trust me. Trust our board. Trust our ability to make solid loans and trust our ability to invest their deposits in safe investments."
So we were safe, secure, and kept ample reserves and watched the markets for bonds and other safe securities, to be sure our investments were solid. Plus every loan we made was scrutinized with care. I recall as a young banker, with more eager enthusiasm than experience, had a young lady walk into my office. I couldn't keep from noticing that she was lovely to look at, and her legs became even more attractive when she sat down and more leg appeared.
"Mr. Boothe, I need to borrow $8,000." She said as she crossed her legs and managed to show even more as she wiggled into her chair.
"Well, what do you have for collateral?" I said with as much confidence as I could muster.
She said: "Well I don't have any collateral, but my character. I make pretty good money and can pay it back if you can give me reasonable payments." she said.
"So what can your income support. Just what do you do?"
"I do work for hire, some places a secretary, some places a bookkeeper, even one bank puts me by the front door as a greeter!" She said. (Her dress seemed to ride up an inch of two as she settled deeper into her chair).
I made the loan. Unsecured. I felt like a King, when she smiled and said something like:
"I really appreciate this. If I can ever do anything for you let me know", and she winked as she walked out.
The next morning at our loan committee meeting we had 4 men at the table that were all in their 80's, and me. They said: "Oh Mr. Boothe has a new loan, already funded to the customer." The other men looked at the details of the loan. "Hmmmmm, an unsecured loan." Mr. Griggs said. "What is her source of income, Mr. Boothe?" I managed to stumble out and sound confident: "Oh she does several odd jobs for men around town." He grunted, and smiled. "Yes I know of her. She seems to be popular around town." The other elderly men on the loan committee seemed to smile at each other.
"How would you define this loan, Mr. Boothe?" he asked. I hesitated, and another of the older men spoke up. "I think Mr. Boothe has made his first leg loan...", when he said that they all seemed to laugh, but then cleared their throats and frowned back at me.
Then the bank President spoke. He was very serious, but also kind and businesslike. "Mr. Boothe, your first loan is a leg loan. You were probably more attentive to her legs and her smile than her financial assets." When he said that everyone laughed but I could tell, I needed to stay quite. "But, here is the deal. If you make a leg loan, you are responsible to see that this loan is paid back, in full...DO YOU UNDERSTAND!?. If there is any trouble on this loan, you will be responsible." No one smiled when he said that, and I wanted to crawl under the table. They were right. I was more distracted by her attractive legs, than I was her financial statement. Heck I didn't even know her job or her income.
I worried a lot about that "leg loan" but thank goodness she made her payments...indeed invited me out to lunch a few times. I never had the courage to say yes. I never made a "leg loan" in my banking career again. But those old men sometimes would kid me. "Made any more of those 'leg loans' Mr. Boothe?" they would chuckle.
Well in the modern banking environment, when we see multi million dollar banks suddenly do things that cause investors and clients to lose confidence, they often have done far worse than make a few "leg loans". In many cases they have not balanced their assets and liability balance, and have not monitored their deposit base and carefully analyzed their risk.
So we are seeing people dumping "bank shares" or moving deposits to safer places, to banks where they are covered by FDIC insurance (at least the first $250,000 is insured now). Confidence is everything in the banking industry, and fear can be contagious. Stockholders and depositors would do well to remember the importance of "prudence" and "wise decisions" from their bankers. And bankers need to be more careful than ever!
I noticed this article, and we may be seeing more like it, that suggests that some people have lost confidence in the safety of their bank deposits. The sexy "legs" of high interest rates on deposits can be a dangerous risk during economies impacted by recession. We noticed this article today:
Or see this article about Credit Suisse (before rescue):
During recessionary cycles, wise investors would do well to diversify there cash assets, and keep your money in safe havens. When I was a bank President, I recall one client had 19 banks, and he kept the maximum that was covered by FDIC in each account. So his "millions" were all insured by the FDIC, even though it was a bit inconvenient to have 19 or 20 bank accounts, at different "FDIC Insured" banks, he felt confident that if the worst came...his money was safe. He didn't want a banker who would fall for the "leg loans" or sexy "high rates" some banks paid, to attract more deposits. He just avoided those sexy "rates" tempting him vs safety and insured deposits.