“Capital Insights” with Jack Kern: Bankers Away…

“I am not worried about the deficit. It is big enough to take care of itself.”
President Ronald Reagan

Colorado National Bank, Colorado Springs, Colo. just failed. It was taken over by Herring Bank, Amarillo Texas. (I wonder what the logo is for Herring Bank?)
Teambank, N.A. of Paola, Kan. just failed. It was taken over by Great Southern Bank, Springfield, Miss. FirstCity Bank of Stockbridge, Ga. just failed. They couldn’t find a bank to take it over.

So we have real distress in small town America – Colorado Springs, Paola and Stockbridge. Not exactly household names, but representative of how the financial meltdown is shaping up across the nation. When a recession hits small towns, you know we’re at the bottom.

FDIC finally closed on the sale of Indymac Federal Bank, in Pasadena, Calif. and selected OneWest Bank, a “newly formed Pasadena, Calif.-based FSB organized by IMB HoldCo.

Who in the world is IMBHoldCo?

A consortium of equity and hedge funds, counting among their investors J.C. Flowers and Co., Dune Capital Management (Steve Mnuchin, a former Goldman Sachs guy), John Paulson, who made billions betting against the U.S. housing markets, global financier George Soros, who almost single handedly brought down European currency markets with his monumental trades, and computer scion Michael Dell, among others. The new bank is also being run by a former Merrill guy, Terry Laughlin.

With the attractiveness of lending at the Fed window, and TARP, TALF and HASP in full swing at this point, it seems traditional lending and bank ownership is running upside down. As you might imagine, the Federal budget deficit looms, and is running at an unprecedented rate. The numbers are so large at this point that it pales by comparison to earlier historical norms.

So why do we care?

As the banking industry is reinstated as a matter or course, it is unavoidable that failed institutions will be absorbed by better-funded entities that pass the stress test. The Fed will make sure that plenty of liquidity flows to whatever sectors of the economy need it in order to avoid an even deeper recession. Smaller banks will be increasingly bought by larger banks and ultimately, the Colorado Springs, Paola and Springfield communities will be worse off because of it. It is safe to say that this economy and some of the Fed policies are going to be the death of community banking and the end of the kinds of innovative local lending that helped these small towns in the first place.

You see, the growing Federal deficit has a rather curious, somewhat unintended consequence. As the investments are made at the institutional level, the huge deficit actually redistributes wealth to the larger segments of the banking industry, and causes the most vulnerable to merge or be put into receivership, an end in either event. What control existed from the Citibanks and Bank of Americas before will only be magnified.

The most egregious part of the congressional earmarks, beyond the immediately corrupting influence they have, is that they add needlessly to the deficit. Ultimately this financial engineering is going cause the greatest loss in commercial freedom we’ve seen since the start of World War 2, and the negative numbers are just coming in now. The real fear isn’t higher inflation, but higher prices that affect everything. If the deficit doesn’t get resolved quickly, expect to see more stress in markets and even lower consumer confidence.

There is a solution to ending the federal deficit. Just ask yourself, how much are you willing to give up?

(Jack Kern is the managing director of Kern Investment Research. He can be reached at 301.601.900 or jkern@kernIRC.com.)