After a visit back in July to the Kentucky Horse Park in Lexington whetted my interest in Thoroughbred racehorses, I finally picked up a book that had been on my reading list for a couple of years - Seabiscuit. A classic and touching tale of an unlikely champion, ridden by an unlikely jockey, trained by an unlikely trainer and owned by an unlikely owner. But what proved fascinating to me was that the sensational saga of Seabiscuit was made possible by the discouraging effect on the American psyche of the Great Depression. Seabiscuit surely didn’t understand the economic indicators of his day, and they surely didn’t affect his running or his winning. But they set the stage for millions of Americans to notice and to care about Seabiscuit as a symbol of unlikely triumph in the midst of so much despair. We are certainly not yet in another Great Depression (and I haven’t been shopping for a cheap and awkward Thoroughbred colt,) but as events in the financial system have continued to unfold in dramatic fashion over the last few weeks, I’ve thought a good bit about Seabiscuit. After a year or more of proclaiming that the fallout of the sub prime mortgage crisis was “contained”, it has been quite sobering to hear expressions like the following:
- President Bush: “if money isn’t loosened up, this sucker [the US and global economy] could go down”
- Secretary Paulson: “unfortunately, there is great risk to the taxpayer today, with what we have”
- Fed Head Bernanke: there are “grave threats to financial stability”, and potential for a “deep and extensive recession”
- House Minority Leader John Boehner: “If I didn’t think we were on the brink of an economic disaster it would be the easiest thing to say no to this...”
- Multibillionaire Warren Buffett: “economic Pearl Harbor”
Those quotes came somewhere in the context of promoting the $700 Billion proposed bailout, intended to shed toxic loan collateral from the financial system in hopes of preventing a larger economic crisis. Hopefully the current crisis is just a correctable logjam in the free flow of the credit markets, and we won’t need to start listening for Seabiscuit’s distant hoof beats. At any rate, it is good timing for some perspective for agriculture producers, courtesy of Chuck Marshall of Kennedy and Coe’s Financial Institutions Group:
I’m writing this as the financial bailout/rescue/intervention package is moving through Congress. By the time you read this, a lot could be different on the financial landscape. So I’ve tried to stay with things that will most likely stay the same.
What are your bankers facing these days?
Bankers are telling us that their Ag loans and lines of credit are in the best shape in quite some time. Although the Ag sector is performing well for most community banks, bank regulators are bringing increased scrutiny to your bankers. Regulators see high land values and increasing input costs as cautionary indicators. The same regulatory agencies that are dealing with declining real estate prices and shrinking collateral margins across the country are supervising banks in our markets as well. And remember, the heads of most of these agencies were field examiners during the 80’s (Ag difficulties) and 90’s (commercial real estate difficulties), and they would like to avoid a repeat of some of those problems. Therefore, these regulators are applying lessons they learned “back in the day.” As a result, your bankers are experiencing very thorough scrutiny in all areas of their operations.
What can you expect from your bankers in the near future?
Your banker is going to be pretty traditional.
- Expect the bankers to stay pretty close to their policies and internal guidelines. Every bank has a Board-approved loan policy that outlines desirable and undesirable credit. Regulators expect bankers to follow their internal policies or provide strong explanations when they do not. This means you should expect more requests for collateral, current financial statements and tax returns, and more visits from your bankers.
- Expect your banker to be pro-active. They need to stay in touch with their customers, both to keep the good ones and to stay on top of situations that may have some signs of weakness.
- Expect your banker to hold the line on interest rates. While they will negotiate for a good deal, they will be more inflexible in exception, problem, or troubled situations.
What can you do to have a better relationship with your banker?
It’s important to manage the relationship with your banker.
- Keep the lines of communication open. Don’t just call him or her when you need to borrow. Maintain a good working relationship with your banker. You’ll want that the next time you need cash for an expansion, or when you experience difficulty in your operation. Take some time to deliver substantial payments in person.
- Provide information when and as requested. Your banker needs to document his advocacy for your borrowing in various documents, meetings and committees in the bank. Bankers see customers who are untimely or reluctant to provide information as difficult or perhaps symptomatic of a problem in the loan itself.
- Finally, help your banker understand your business. Invite him to a walk-through of the operation, and spend time helping him or her understand what’s unique about your business. He can use that first-hand knowledge when he presents your case to the bank’s loan committee.
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