Congratulations. You’re A Banker

by Peter G. Miller
October 17th, 2008

As a taxpayer you now own a big piece of the nation’s nine largest banks. It’s in the form of preferred stock, so you’ll get dividends — but curiously you won’t have a right to vote. Somehow I can’t imagine Warren Buffett making such a deal, stock without a vote.

And, if the government has its way, it will invest in thousands of other banks, whether they welcome such investment or not.

Many community banks, of course, have no interest in government money. The reason? They didn’t make stupid loans. The underwrote mortgages with care. In most cases they provided conventional, FHA and VA financing.

With FHA mortgage financing, of course, you can’t screw around with the loan application. You have to document income and employment. You have to get an appraisal. But in return you get a good loan without surprise rate hikes or predatory prepayment penalties.

Now we have a lot of smaller lenders claiming foul. They have good reason to be upset. They played by the rules and now Uncle Sam is picking winners and losers among lenders, effectively bailing out big lenders who harmed their shareholders and borrowers by making lousy loan decisions. In the world of capitalism such lenders should fail and their managers should not be allowed to get outsized incomes and benefits. But we no longer have a capitalist lending system given that the federal government has actual bank ownership.

It didn’t have to be this way. Don’t believe it? Hudson City Bancorp in Paramus, NJ has just issued its third-quarter results.

“Alter the worst week in history for the stock market, we decided to accelerate our earnings announcement in order to bring you some good news.

“Hudson City finished the third quarter with record earnings of S121.9 million or $0.25 per share versus last scar’s third quarter earnings of $74.4 million or $0.15 per share. In fact, our earnings per share for the first three quarters of the year of $0.65 per share surpasses our entire total for the year 2007 which was $0.58 per share. We are on pace to have our tenth straight
record year of earnings against a backdrop of tremendous chaos in the financial world.

“It is evident that our conservative model that emphasizes the underwriting of each individual loan application and tremendous system-wide cost control, while averaging 2O% annual average asset growth over the last ten years, has been successful.”

And, said Hudson:

“As you probably remember, we became a fully-public company in June 2005 when we issued the remaining 53% of our common stock and raised $3.9 billion of capital. During the third quarter of 2008. we were able to generate a 10.19% return on average equity and a 0.97% return on average assets. Both of these achievements occurred much sooner than we had forecast”

Just a thought, but maybe we should have Hudson City running the bailout. They seem to know what they’re doing.

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