Smaller Banks "Punished for behaving prudently"

This story hit me yesterday (but I was too busy to comment)smaller, community banks are worried that they, the only real prudent financial institutions around are going to get sucked into the nationalization of the banking industry.

Community banking executives around the country responded with anger yesterday to the Bush administration's strategy of investing $250 billion in financial firms, saying they don't need the money, resent the intrusion and feel it's unfair to rescue companies from their own mistakes.

But regulators said some banks will be pressed to take the taxpayer dollars anyway. Others banks judged too sick to save will be allowed to fail.

The government also said yesterday that it will guarantee up to $1.4 trillion of private investment in banks. The combination of public and private investment is intended to refill coffers emptied by losses on real estate lending. With the additional money, the government expects, banks would be able to start making additional loans, boosting the economy.

President Bush, in introducing the plan, described the interventions as "limited and temporary."

"These measures are not intended to take over the free market but to preserve it," Bush said.

On Capitol Hill, lawmakers from both parties praised the plan and scrambled to take credit for writing provisions into the law passed almost two weeks ago that allowed the government to switch from buying bad loans to buying ownership stakes in banks.

the Post had this quote from a local banker:

Peter Fitzgerald, chairman of Chain Bridge Bank in McLean, said he was "much chagrined that we will be punished for behaving prudently by now having to face reckless competitors who all of a sudden are subsidized by the federal government."

At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady Adams said he has more than 2,000 loans outstanding and only three borrowers behind on payments. "We don't need a bailout, and if other banks had run their banks like we ran our bank, they wouldn't have needed a bailout, either," Adams said.

Indeed.

Common sense on a smaller scale. Maybe if more banks acted like these community banks, who make decisions based on objective criteria like credit-worthiness and risk, rather than simply on what will make them the most money quicker, we might be in this situation.

But these executive are right, the federal government forcing banks to take government help is intrustive and wrong. My guess is that if you talk to these same small bankers, you will find that to a person each would say that the banks who made bad decisions should be allowed to fail, regardless of size. I would agree, it is the best and fastest way for these insitutions to learn their lesson.