Old School Banker

"When Peter Fitzgerald was in the US Senate, he refused to vote on any bill that was banking-related. He wouldn't even take part in the debate. ... Fitzgerald's family was so immersed in the banking world--his three brothers own seven small banks among them--that he felt he had to recuse himself from all banking matters that came before the Senate. ... In hindsight, it's a shame that Fitzgerald stayed on the sidelines as the nation's banks engaged in high-risk behavior. He claims that if he had immersed himself in banking matters, his political enemies would have accused him of pursuing policies that benefitted his family. ... One of Chain Bridge's hallmarks is Fitzgerald's refusal to allocate more than 55% of his deposits to loans. ... Peruse the first-quarter earnings releases that have gone out in the past couple of weeks, and you'll see that banks are now touting their loan-to-deposit ratios. ... Launching a bank in this economy may sound insane, but star bank analyst Meredith Whitney has been saying since last year that the timing couldn't be better. ... Gerald Fitzgerald, Peter's father, always emphasized to Peter and his brothers that it wasn't safe for a bank to allocate more than half its deposits to loans. ... In the 1960s that point of view was the conventional wisdom. Between 1960 and 1980, however, the loan-to-deposit ratio [LDR] for US banks rose from 51% to 85%, according to FDIC data. ... By the time Fitzgerald started recruiting for Chain Bridge in 2007, the consensus about [LDRs] had changed so radically that most of the folks Fitzgerald interviewed thought he was nuts. ... 'Well, those bankers weren't in the business in the early '90s, and they certainly weren't around in the early '80s. They were behaving as though we'd never have another recession.' Most banks are so illiquid right now that they have to borrow money to meet withdrawals, he says: 'You can see right there why they had the credit crunch.' ... 'The reason we got into this situation is in part that people didn't care what their bank's balance sheet looked like because their accounts were FDIC-insured,' says Fitzgerald. By not allowing more banks to fail, and more good banks to gain market share, Fitzgerald believes the government is creating a banking system that ensures the survival of the not-so-fit at the expense of the fit. 'They've only closed about 50 banks,' Fitzgerald says of the banking regulators. 'During the S&L crisis of the '80s and '90s, we closed about 1,300 banks. ... Today the banker-turned-senator-turned-banker thinks the major problem with the Obama administration's approach to the recession is the misguided belief that stimulating the economy and fixing the banking system are compatible goals. 'They're not,' says Fitzgerald, who contends that banks need to be making fewer loans, not more. Fitzgerald is particularly critical of the Office of the Comptroller of the Currency for not requiring banks to keep some of their deposits and assets in liquid investments. 'The OCC will not get after them,' says Fitzgerald, 'That's because the OCC wants to banks to support President Obama's stimulus program and lend as much as possible.' OCC deputy comptroller Timothy Long counters that the regulator does take liquidity risk seriously", my emphasis, Jon Birger at Fortune, 25 May 2009.

I remember at Chicago our recent grads complained about going to "practical banker school", and being taught aim for 50% LDRs, not to exceed 60%. In 1984, when the Continental Illinois National Bank failed, it had a 96% LDR. That US banks' 2007 LDR reached 113%, shows how recklessly banks were run and how poorly the OCC supervised them. If we continue to permit fractional-reserve banking, we need more Fitzgeralds than Pandits.