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Angry, Party of One?

Posted on Wednesday, April 29, 2009 in Diversification, Real Estate

Remember growing up, there was always one kid that had to have his way? If the ball game wasn’t going his way, he would threaten to storm off, and take the ball with him. It put the other kids in a tough spot; work with the kid, or cancel the game and go home.

It is sad to say but those behaviors are playing out today and not on the playground but in our local banking industry, and what’s at stake is not a ball game, but the region’s prospects of recovery.

Let me share with you what we are seeing.

Starting a few years ago, local banks went on a loan-approval spree, doing deals with real-estate developers at record levels and approving real estate loans at record numbers. Developers courted bankers and bankers excitedly approved loans, buying into the developers’ visions of great profits.

For a period, it seemed as if every developer in town had unfettered access to capital from community banks, and these banks started feeling good about the loans and the anticipation of big profit.

What the banks found, of course, was that Shakespeare was right: All that glitters is not gold.

The mood of those bankers is a great deal more somber today, and many of those golden fields of investment opportunity are now fallow. The builders, hamstrung by the current economic conditions, are handing the keys back to the banks. The banks, in turn, wholly ill equipped to own property, are posting these properties and projects as losses on the books.

Yesterday, we met with a local banker who is holding a portfolio of troubled real-estate projects. We wanted to discuss the possibility of buying some of these properties and moving the projects forward. We thought the bank would be very receptive to moving these real estate loses off the books.

As my partner Jeff and I found, this banker - and many like him - is filled with anger.

On one hand, we understand the anger. This CEO, like thousands across the country, was enamored with the prospects of an upswing in the economy, but paid little heed to the possibility of a downturn. Now the bank’s balance sheet looks as red as a slaughterhouse floor, and many of the bankers - our guy included - don’t know how to fix it.

Compounding the problem are the regulators peering over banks’ shoulders, telling the banks to get the house in order, or face federal action.

I don’t know if our banker experienced the tough-love of the FDIC, but I can project that his world is certainly different than it was a few years ago. He most likely has employees expressing concern about their jobs, and investors and customers pinging him about the long-term stability of the bank.

Regardless, you, the CEO of a small north end bank, must now defend yourself from all quarters - customers, the board, federal regulators and employees.

To make matters worse, company stock is so low it seems like your life’s work is in shambles and perfectly timed with horrible synchronicity with the sunset of your career. At the end of the day, you are simply angry. Angry with your borrowers, angry with your customers and angry that you let this all happen.

Who knew that lending $150,000 to a builder to buy lots would end with a 50 percent write down?

This anger is what we witnessed in our meeting. It is that anger that we hope does not cloud a turn-around for the Puget Sound’s real-estate market.

If you are the banker in this scenario, it’s time to get past the anger and view this as an opportunity. There are buyers who want to take property off your hands and treating these buyers as potential problems solvers can make a world of difference.

Our advice - don’t put yourself in a situation where the phone stops ringing. You don’t have to take the first offer and if you don’t like a potential buyers price say no, but leave room for negotiation. Don’t take the ball and leave the game.

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