(Michael Chamberlain/Nevada Business Coalition) – Part II of our interview with Bank of Nevada President and COO John Guedry. Today’s segment focuses on where we are now and the roles of industry and government in getting us through.Part I is here.
NBC: Isn’t a problem that we have that people do things that are already illegal or unethical then we try to make laws to deal with that behavior? That pushes those same people into doing different things that are illegal or unethical.
John Guedry: The bad people always seem to find a way around the system. It’s the good people who wind up suffering from their actions. Unfortunately, there were enough bad people in the system that most of us are suffering from it, if not all of us.
In some form or fashion because of lack of responsibility or ethics or whatever it might be we’ve all seen an impact in our retirement plans and our housing values and our jobs and in the overall economy. In some form or fashion we’ve already suffered for it.
I just hope that we’re careful enough not to overreact to it, which is the standard pattern that happens and seems to be happening again. That we just take a step back and look at what was already in place. What could we have done, using what was already in place, that would have prevented it?
I think that what they’ll find is that there were a considerable number of stopgaps in place that would have prevented it or, certainly, lessened the impact had they been more closely followed, both by the agencies that were responsible for regulating and the companies that were responsible for following those regulations.
NBC: What can banks do in this environment to help improve the economy?
JG: I think first and foremost we need to be really on top of what’s happening in the market and what could improve the market that we contribute to. Some of it is just little things, like holding ongoing discussions with our clients about what’s happening in the market –what are the trends looking like, providing information that can help them make more informed decisions.
Some of it’s more direct like recognizing that we’re seeing improvements in certain areas and providing resources. Whether that’s additional capital, capabilities through electronic means of moving funds around so that a business that’s mainly based here that sells goods and services internationally – what do they need to do to protect themselves so they can sell their service and make sure they’re collecting funds. There are things that banks can offer, products that we offer, that can help them do that.
We just need to continually find ways to help the markets we serve be more successful, hopefully provide them enough information so that we avoid making too many mistakes. In good times you can usually get away with a few of them. In bad times, mistakes can be a death knell. So we just want to make sure that we’re doing what we can to help clients and help the market. We do a lot of community work in the market to help it recover.
NBC: From your perspective are there any legislative or regulatory policies or changes that could help facilitate this?
JG: I’m sure if I thought about it I could come up with several but I’m kind of the school that less may be better here. We may be doing a little too much and may be getting in our own way. I mean that more federally than locally, although there’s probably some on the state and local level that would be the case as well.
We just need to find the areas that government is intruding on progress and try and get them out, clear that path. And find the areas where government can actually aid progress, whether that is on a federal level – reforming the tax code, just streamline and simplify it so businesses are a little clearer on not only what taxes are today but what they could be in the future.
I guess that would be the one thing I’d probably put at the top there – that there needs to be more certainty in the marketplace. I think there tends to be a lot of focus on taxes being the primary issue, and I don’t think anybody wants to pay any more taxes than they absolutely have to, but I also think there’s a bigger concern.
The bigger concern is that as a business executive I need to know where policy is headed. I need to be able to count on that and have some certainty. So I can make decisions and know that those decisions aren’t going to have to be backtracked a year or two from now because of a new policy or a new guideline or a new requirement.
NBC: Is it true that the legislators’, the regulators’ and the elected officials’ timeframes are a lot shorter than what the businesses are looking at?
JG: I think that one of the problems, a systemic problem in politics, is that the structure of politics is very short-cycled.
Whether it’s a two-year elected position, a four-year elected position or a six-year elected position, and whether there’s term limits or not term limits, there always seems to be an immediacy in creating policy. Almost to the extent that that’s how you recognize a successful politician – how much policy you created in that short window you were there. That’s really kind of counterproductive.
To me having a more long-term view of society, the needs of society, the role of the government and understanding what that role is going to look like not only today and tomorrow but five years out. We recognize in our world, and this is probably no different from home budgeting, you can pretty much estimate what your needs are going to be and what your budget’s going to look like twelve months out. You won’t be exactly right but you’ll be close.
When you start getting further out than that – three years, four years, five years – it becomes less certain. Throw on top of that a lot of uncertainty where policy changes may affect your business, regulations may affect your business, tax changes may affect your business. Now you’re going to be really reluctant to predict what three, four, five years from now looks like.
Unfortunately, the ability to predict that, or reasonably predict that, affects longer term decisions, like hiring. I don’t look at a hire as a short-term decision. It’s a long-term decision. You go through a lengthy process to make sure you find people who not only have the skill sets you’re looking for, culturally fit into the organization. You go through a lot of effort to do that and integrate them into the company and you need to know that person’s going to be there as a long-term asset for your company.
If you don’t know what your long-term picture looks like, you’re going to hold off making that decision. So I don’t know the solution to that.
I think that’s systemically one of the problems with politics in the US is that you’ve got to get elected officials to recognize that it isn’t about what they accomplish in the first term, second term, however many terms they serve, it’s about their ability to actually have consistency in what they do and that they serve those who elected them.
They have to have consistency to where you know this is what I can expect from this elected official. I may disagree with it but at least I know what I can expect from that official. If I don’t know, it’s even worse.
NBC: There’s also the element that you’re having a meeting with the other officers of your company and you’re discussing plans you’re making five years and ten years out. At the same time the politicians are in their offices and they’re making decisions that are going to take affect 60 days from now and 90 days from now and the beginning of next year. Those may radically change what is the best policy for you to pursue five years or ten years from now.
JG: The ones they’re talking about today and that they’re discussing with the leadership in the communities you can plan for. But then we have a whole new set of elected officials in two years and another new set two years after that and two years later another new set. Is there going to be consistency in their thinking patterns?
I would say in my almost thirty years of business this has probably been the most muddled future, not just because of the economy but because of the uncertainty. I don’t know what’s changed in politics during that timeframe. At least I don’t recall twenty years ago or twenty-five years ago that there was so much uncertainty.
NBC: The banking industry has been the subject of criticism by the media, elected officials and the public. What can the industry do to burnish its image?
JG: I think this probably is true of most industries. There needs to be more self-policing, starting with yourself. Not the “my neighbor did this wrong”, but what did we do wrong and what can we learn from it?
I remember when I left my last position with City National Bank we had a couple of fairly young bankers, in their twenties, who’d been with us for a couple of years. I said to them, “Pay really close attention to what happens in the next couple of years and dissect what’s happened over the last couple of years and you’ll get a better education than if you went to any Ivy League in this country.” There are things we can learn from what we just went through that will make us better at what we do and make us understand where we were flawed. And we were.
Everybody’s going to be a little different and every company’s going to be a little bit different, but I would say on the lending side everybody was aggressively looking to grow their balance sheets. That’s how you make more money and, in order to do that, you need to lend money out, bring deposits in.
We were competitively fighting with each other to get that business. And probably you start to slip a little bit. You cut corners. You look at things a little differently. You start to justify to yourself why that’s a loan you should be making. Maybe price it not in accordance with the risk. In short, you don’t follow best practices because of competition or whatever your reasons might be.
I would say as an industry and as a company we all need to look at where we fell short of where our expectations would be under normal conditions. Normal conditions being we’re not in an overheated market, we’re not fighting each other for the deals that are out there but we really are doing what’s best for the client first, which will ultimately be what’s best for the company.
I would say the commercial banking industry, nobody was faultless in this, but they were probably less a contributing factor to the problems. The investment banking industry was probably a much greater contributing factor.
I think it’s important because when you hear talking heads they always say “banking.” There are a lot of different types of banking. Commercial banking still is a pretty well-regulate industry, with very tight controls in place as a result of the 1934 Banking Act. There were capital requirements. There were appropriate firewalls. There were limitations on the types of investments and loans that could be made.
When those lines got blurred between commercial banking and investment banking that’s when the problems got worse. I don’t believe that was the cause, by the way. In fact it was just one more contributing factor to the very big bubble that just got bigger and bigger.
NBC: Bank stocks have been pretty hard hit lately. What should banks do to help their stock prices recover?
JG: I think the biggest thing is that when we start to see a recovery in the economy bank stocks will start to come back. I think the concern, and this is purely speculation, on the part of what the investment community is thinking, in part, stems from this: If this bad economy becomes more protracted and we’re dealing with another two to three to four years of no growth or limited growth and more asset quality problems – loan portfolio weakens further because businesses just aren’t expanding, their revenue’s shrinking – then I think the market’s anticipating, if that were to happen, we don’t want to be underwater on these stocks.
So a lot of bank stocks are trading below book value. In part what’s driving that is those same banks have had losses. So, if I buy at book value, I know they have potentially more losses coming. And I’m recognizing that I’m probably overpaying for the stock based upon what I anticipate the future value to be because of those losses.
I think as banks start to show profitability, and we’re a good example of that – this bank for a couple of years had quarterly losses and we’ve now had promising, trending profits for the last two quarters. Our holding company’s even better. Some of the banks within the holding company have actually had even more than that but Bank of Nevada’s had two consecutive quarters.
As that trend continues, I think the market will look at our holding company’s stock, Western Alliance, and say, “we’re confident we’re not going to see more losses,” unless they see something on the balance sheet that creates some concerns for them.
It’s very transparent. Mark-to-market rules apply. As assets are impaired – the underlying collateral – balances are written down.
I think that the astute investors, which are really where the bulk of the funds are being managed, are going to recognize when a bank is healthier and invest in those banks. But I think as an industry there’s a concern that the banking industry has got some more problems to deal with until the economy gets better. Specifically, their loan portfolios are going to continue to struggle, their borrowers are going to continue to have difficulties in making payments on their loans – not all of them but a significant enough portion of them that it could, on an ongoing basis, affect our earnings.
Typically how it’s affecting the earnings is, if the portfolio isn’t significantly improving, the bank is continuing to add more reserves and more reserves. That’s coming right out of our profits.
So at some point we’ll probably end up being over-reserved. And we’ll probably wind up having the IRS coming back and saying, “now wait a minute, now you’re managing earnings.” We’re not there. [laughs] But that will likely happen.
NBC: Earlier this week figures came out saying that foreclosures are up. Every time there is some good news, it seems, we get another bit of bad news. Do you see any light at the end of the tunnel?
JG: Unfortunately this market was one of the two or three hardest-hit in the country so, no. I don’t think we will, honestly, until we start to see job recovery.
The two things that I think will need to happen in order for the housing market to start stabilizing and, hopefully begin moving in the right direction, are unemployment needs to come down – people can get back to work and afford their mortgage payments – and housing values will eventually need to start showing a trend upwards.
I think the first one’s far more important than the second. But the two combined, if you’re underwater, you’re feeling like you’re going to get further underwater and you don’t have the income to service the mortgage payment, at some point many people are going to just throw their arms up and say, “I don’t know why I’m fighting trying to keep this asset. It’s not worth anywhere near what it was two or three or four years ago.”
Personally, I think there are other reasons. Credit, you want to make sure you maintain your credit. You have an obligation to repay. Most important, it’s your home. That’s what it is.
I mentioned earlier there are a lot of industries you can point the finger at who had some blame in the problems we’re having.
The housing sector’s a whole bunch of industries and I had a chance to speak to a residential real estate group. It was a regional company, probably three years ago, when the market was really starting to go south.
One of the things I said was exactly one of the things I said to you – that you have to look inward and see what part did your industry and your company and, specifically, you play in leading to this. What I said to this group in this room that wasn’t a popular comment was, “You’ve got to quit selling houses as an investment.”
Historically, they’ve not been good investments. Over the course of a hundred years in this country from the late-1800’s to the late-1900’s, less than a 1% annual growth in value in homes. It’s all about timing. There’s a decade when they went up and another decade when they went down and if you can time it out right you can probably make money on it.
Purely as investments go, housing is not a good investment. Housing should be bought, at least in today’s environment, for what you can afford, for shelter, potentially for tax advantages – you’re able to write off your interest on your mortgage payment. But investment is pretty far down the list of what should drive that investment.
When someone says to me, “I’m kind of upside-down in this, I probably should just turn it in,” what I say to them is, “Did you buy this as an investment or did you buy it as a place to live?” If you bought it as an investment maybe that makes sense but if you bought it as a place to live you’ve got to think about, so where do I go live? Yes, I can probably go rent something but I’m probably going to be renting for a long time.
(Michael Chamberlain is Executive Director of Nevada Business Coalition.)