Local Execs React To Wall Street Mess
Central Massachusetts’ bank presidents are quick to point out that their stuffy, conservative institutions didn’t participate in subprime mortgage lending or other risky, inappropriate financial behavior.
But in their innermost personal thoughts, the gray flannel crowd has a good deal of venom for the financiers and investment bankers that turned Wall Street into a roulette wheel, and for a Congress that proved useless as gaming regulators.
John R. Heerwagen, chairman, president and CEO of Natick-based Middlesex Savings Bank, wouldn’t say bankers should’ve or could’ve seen at least some economic reckoning coming, but he would say his bank and others knew what businesses to stay out of.
“Anyone who says they could predict the severity and timing of the downturn three years ago is probably dreaming,” he said. But three or four years ago, “the market was changing. There was more activity, more emphasis on what was then subprime and Alt-A lending. We said, ‘We’re not joining the fray, we’re not going to participate,’ and we lost market share as a result.”
The thing is, community banks didn’t have to keep subprime mortgages on their books in order to be in trouble now.
Strata Bank of Medway, for example, is facing massive charges and write downs related to the worthlessness of its Fannie Mae, Freddie Mac, Lehman Brothers and AIG holdings.
“Those are credible kinds of investments community banks often make,” Heerwagen said. “I don’t think anybody up until a month ago thought this would be the end. I don’t think a year ago anybody could’ve looked at Fannie, Freddie or Lehman and said, ‘They’re toast.’”
Southbridge Savings Bank certainly wouldn’t have. Philip Pettinelli, the bank’s president, said the bank does have some Fannie and Freddie holdings, but is well-capitalized enough that “we’re going to come out on the other end okay.”
“You have to do what you have to do, and it’s not fun,” Pettinelli said, but “we held them in our portfolio because they were strong investments. A lot of us are on the tail end here, and you feel like a pawn and someone else is moving you around the chess board.”
Pettinelli predicted that banks that took risks with their investments would “get back to basics,” especially as their customers begin tightening their belts.
“We’re already seeing some of our commercial customers pull back. The timing is not right” for those businesses to spend, he said.
When the market was hot, it was hot and “sometimes, when you have high capital, you take more risks because of the income,” Pettinelli said. He said Southbridge Savings would be considered “well capitalized” even after its Fannie and Freddie holdings shake out.
Strata Bank probably won’t be as lucky as banks that kept all of their risk in their loan portfolios.
“Their problems were more than just the holdings,” Pettinelli said. “They went into it with some serious asset quality issues on their portfolio.”
For some of the region’s largest companies, it’s another kind of portfolio that’s cause for concern: The retirement fund investments of their employees.
Shenanigans
“We employ a lot of people,” said Douglas Starrett, president and CEO of the L.S. Starrett Co., which employs more than 700 people at its Athol headquarters and nearly 2,200 worldwide.
“If you have money invested, we’re concerned about our 401(k)s, our pension assets. You’re not going to swim upstream when the market is doing what it’s doing.”
Starrett said his company is “in a good cash position,” has no problems getting credit and doesn’t expect to have any problems in that regard “in the near term.” That’s in contrast to many large companies that rely on the now-frozen commercial paper market to maintain day-to-day cash flow and operations.
Still, Starrett is not pleased with Wall Street, Congress or the federal regulators he says are sending a message with the $700 billion bailout, or rescue plan, that there are no consequences for poor judgment or bad behavior.
To say he dislikes the bailout plan is an understatement.
“The banks who were the crux of the problem are getting special treatment,” Starrett said.
“It smacks of Enron, where part of the problem was the accounting profession, and look who benefits from Sarbanes Oxley: The accounting profession.”
And when regulators aren’t busy rewarding the institutions that got the international financial markets into this mess, they’re penalizing “the rest of us” by banning the short selling of securities, Starrett said.
In late September, shortly after the NYSE banned short selling, Starrett sent a scathing, two-paragraph letter to the heads of the New York Stock Exchange, the U.S. Securities and Exchange Commission, U.S. Sens. John Kerry and Edward Kennedy and U.S. Rep. Barney Frank.
So far, only the stock exchange has responded, he said.
“The rest of the publicly traded companies are being treated differently from the banks,” Starrett said. “The issues here are so complex the public, the Senate and the House don’t understand what’s really happening. It’s an unlevel playing field.”
Kenneth Redding, president and CEO of Whitinsville-based Unibank for Savings, would agree. “They say if you watch sausage being made, you may never have another bite of sausage, and unfortunately, in Washington, there’s a lot of sausage being made,” he said.
“Every year, there’s been a call for stronger regulation for Fannie Mae and Freddie Mac, and every year it’s overlooked and ignored,” Redding said.
“They’re a big political player down there and it’s well beyond Democratic or Republican politics. It’s a much more serious problem than that, and it’s been going on for a very long time.”
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