Apparently insider lending is common practice at banks, with banks regularly giving loans to executives and directors. Okay, it's not really a shock that muckety-mucks in banks would have special access but when you read this article in the Charlotte Observer it becomes apparent that the insider dealing went to pretty high extremes at North Carolina's own Bank of America and Wachovia.
Charlotte's two big banking names are among the biggest insider lenders.
At Bank of America, those loans more than doubled last year, to $624 million – the biggest dollar jump in the country. The largest of them likely went to three directors or their companies. The surge came during the third quarter as credit markets froze, the government prepared to infuse banks with billions in tax dollars and the board approved the purchase of troubled Merrill Lynch.
Wachovia ended 2008 with $747 million of insider loans, second only to the much larger JPMorgan. All of the loans were held by Wachovia directors or their companies, with just five holding the largest. Last year, the company had to sell itself amid staggering losses in part due to a 2006 deal.
According to the article the lending at BofA really accelerated in 2008 at a time when the credit markets crashed and when the bank was the recipient of a rather large government bailout. I'm thinking that the bank's directors were VERY happy to have their seats last year.
The article also points out that the loans are highly regulated, that the terms of the loans must be identical to those available to non-insiders and that mega-banks like BofA have government regulators on site. That's all well and good, but I'd imagine that an insider would have a very big advantage in actually getting a loan compared to someone coming in off the street and that's exactly the kind of perception that's causing the financial industry to have a public image worse than ambulance chasing lawyers or even politicians.
Of course we wouldn't be paying too much attention to the bonuses if the banks were doing well, but since they're struggling the insider deals look even worse. The most recent issue of Fortune has a grim article titled
"Will the banks survive?" that points out that on February 20 BofA stocks were trading at less than $3 per share and Citigroup's at less than $2 per share which means their combined market cap was less than Kraft foods. Oh, and it points out that the trouble has just begun for the banks:
How can it be that the banks are tottering after the government fortified them with hundreds of billions in bailout cash and guarantees on their troubled assets? For the past 18 months, the banks' problems with toxic securities, especially collateralized debt obligations (CDOs) and other exotic products that packaged subprime mortgages, attracted most of the attention – and alarm. Now the storm is entering an entirely new phase that's potentially even more dangerous: a historic meltdown in the bread-and-butter businesses of credit card, home-equity, and mortgage lending.
The scale of potential losses in consumer and business loans swamps what's left from the securities debacle by a factor of three or four to one. And the next wave, the looming defaults on commercial real estate loans financing the likes of half-leased retail malls, will soon cause a fresh round of pain. "We've now moved from the securities phase to the lending phase of the banking crisis," says Tanya Azarchs, a managing director in S&P's financial services ratings group. "For 2009 we expect that loan losses will be much worse than for 2008 and that securities write-downs will be much less."
Ouch.
