In his history of the Great Crash, economist John Kenneth Galbraith noted, “Congress was concerned that commercial banks in general and member banks of the Federal Reserve System in particular had both aggravated and been damaged by stock market decline partly because of their direct and indirect involvement in the trading and ownership of speculative securities.
“The legislative history of the Glass-Steagall Act,” Galbraith continued, “shows that Congress also had in mind and repeatedly focused on the more subtle hazards that arise when a commercial bank goes beyond the business of acting as fiduciary or managing agent and enters the investment banking business either directly or by establishing an affiliate to hold and sell particular investments.” Galbraith noted that “During 1929 one investment house, Goldman, Sachs & Company, organized and sold nearly a billion dollars' worth of securities in three interconnected investment trusts--Goldman Sachs Trading Corporation; Shenandoah Corporation; and Blue Ridge Corporation. All eventually depreciated virtually to nothing” ...
Scholes’ and Mertons’ fundamental axioms of risk, the assumptions on which all their models were built, were wrong. They had been built on sand, fundamentally and catastrophically wrong. Their mathematical options pricing model assumed that there were Perfect Markets, markets so extremely deep that traders' actions could not affect prices. They assumed that markets and players were rational. Reality suggested the opposite—markets were fundamentally irrational in the long-term. But the risk pricing models of Black, Scholes and others over the past two or more decades had allowed banks and financial institutions to argue that traditional lending prudence was old fashioned. With suitable options insurance, risk was no longer a worry. Eat, drink and be merry...
That, of course, ignored actual market conditions in every major market panic since Black-Scholes model was introduced on the Chicago Board Options Exchange. It ignored the fundamental role of options and ‘portfolio insurance’ in the Crash of 1987; it ignored the causes of the panic that in 1998 brought down Long Term Capital Management – of which Scholes and Merton were both partners. Wall Street blissfully ignored the obvious along with the economists and governors in the Greenspan Fed.
Financial markets, contrary to the religious dogma taught at every business school since decades, were not smooth, well-behaved models following the Gaussian Bell-shaped Curve as if it were a law of the universe. The fact that the main architects of modern theories of financial engineering—now given the serious-sounding name ‘financial economics’—all got Nobel prizes, gave the flawed models the aura of Papal infallibility. Only three years after the 1987 crash the Nobel Committee in Sweden gave Harry Markowitz and Merton Miller the prize. In 1997 amid the Asia crisis, it gave the award to Robert Merton and Myron Scholes...
The nature of the fatally flawed risk models used by Wall Street, by Moody’s, by the securities Monoline insurers and by the economists of the US Government and Federal Reserve was such that they all assumed recessions were no longer possible, as risk could be indefinitely diffused and spread across the globe... F. William Engdahl, The Financial Tsunami, http://www.globalresearch.ca
The community was shaken Thursday by the news that County Bank (corporate headquarters in Merced) was experiencing difficulties. It's stock had lost 90 percent of its value in two years, down to $3.76 a share on Wednesday, having lost half its value from the previous day. The CEO retired.
With the exception of a rather dramatic graph on the first page -- a jagged descending line showing the drop in stock price -- the McClatchy Chain covered the story as a momentary "blip." It called upon Valley economic gurus Tappan Munroe and Lon Hatamiya (former state commerce secretary under Gov. Gray Davis) for perspective. Munroe's insoucant metaphor, a "souffle with the air slowly leaking out," aptly caught the perspective of our witless Valley economic gurus.
But, that wasn't, and no doubt isn't, the end of the County Bank story. On Saturday, McClatchy reported that the bank stock had rebounded an astounding "72 percent," to $6.48. Problems over? A local builder, both a stockholder and client of County Bank, expressed his "personal opinion" that the bank is "very strong and very well-managed but the (real estate) values declining as rapidly as they did -- it just caught them by surprise."
McClatchy's Modesto outlet published a reassuring story Monday to the effect that local commercial banks didn't invest in subprime home loans and, while developers aren't always paying their loans at the moment and auto loans are a problem, their portfolios are adequately diversified to withstand the fallout from the general collapse of real estate values and foreclosures.
We'd like to go on record as saying that, beyond the stock price and information from public bank documents about its losses, we don't believe a word McClatchy has written about the problem. And the unasked questions are too numerous to list, but one could begin with the compensation for the retiring CEO, compensation for the economic gurus, was it involved at any stage in bundling subprime loans, and how will its losses affect it local agricultural lending this season?
What has happened is a massive loss of confidence, the end of every speculative bubble since the Dutch Tulip. We recall the early boosting of the bubble in Merced, when the same local builder was managing the reelection campaign of former state Sen. Dick Monteith, then claiming to the "real Mr. UC Merced." The builder and his candidate was "confidently" claiming UC Merced was a "done deal" when, in fact, as they knew well, it was not. So, forgive us for our skepticism that the local finance, insurance and real estate industry, bought politicians and McClatchy "were caught by surprise." The only real local question is: Who got to the souffle before it went flat?
The predatory lending practices that have caused a world credit crisis as well as our local crisis, were done here face-to-face by local lenders together with local realtors to local and speculative buyers. Judging by the rate of foreclosures in the north San Joaquin valley, one of the highest rates in the nation, there was an enormous amount of fraud committed here. In fact, it might be said that today the area is floating on a sea of "Liar Loans."
From the incredible amount of lying behind UC Merced, in which the local newspaper was thoroughly involved, to the rise and fall of the real estate value souffle, to this unhappy news about County Bank, there has been fraud, political manipulation, wholesale denial of environmental law and regulation and public process laws on the local, state and federal level, and a pattern of harassment of members of the public who asked any questions. This deceit has been broadly spread among what passes for "leadership" in Merced -- from the builder-politician to the Great Valley Center, UC regents and administrators of UC Merced and their boosters, municipal and county government, state and federal legislators, landowners, developers and lenders.
Saddest of all, few if any of the perpetrators regarded this as fraud or deceit. It was just good business. Alchemical formulas emanating from the nation's financial centers "proved" that risk was not risk and the more bad loans made the better. There were a few dissenting voices, but they were ignored as being, at the least, unpatriotic.
Local legacies of local greed include: a campus born with "complications," tremendous destruction of regional natural resources and wildlife habitat, the worst air quality in the nation, decreasing water quality and supply, local governments with swollen salaries for elected officials and department heads and shrinking budgets, unfinished subdivisions with empty houses and nervous residents, shaky banks, political corruption, bad news for the newspapers to cover over as best they can, and the same old compulsion to boost and to deny.
Badlands Journal editorial board
County Bank parent company anticipates first loss
CEO Thomas Hawker announces that he will step down when a replacement can be found....LESLIE ALBRECHT
Shares of Capital Corp of the West, the Merced-based parent company of County Bank, were hammered Wednesday following news that the company expects to post its first-ever yearly loss.
Capital Corp said it anticipates it will lose $4 million for 2007.
Shares were trading at $3.76 -- a seven-year low -- when the Nasdaq market closed, a 64 percent decline from the day's opening price. The one-day percentage drop was the largest recorded on any of the major U.S. stock exchanges Wednesday. A year ago, Capital Corp's stock traded at $26.55.
The company blamed its anticipated loss on "the rapid decline in real estate values in California's Central Valley in the fourth quarter of 2007." It was then that Merced led the nation in home-value depreciation, with prices plunging 19 percent between 2007 and 2006, according to the Office of Federal Housing Enterprise Oversight.
The drop in real estate values means the collateral backing County Bank loans is worth less than it was when the loans were made one or two years ago. Capital Corp must now reclassify those loans as riskier. That, in turn, means the bank must back the reclassified loans with more money than what's required to back more secure loans -- money that comes directly out of Capital Corp's revenue stream, Smith explained...
The loss isn't tied directly to the subprime mortgage meltdown, he added, because County Bank doesn't make many home mortgages or invest in subprime loans. However, the company does lend money to developers buying land, and that land is less valuable than it was a few years ago. "Even though the guy is still paying his loan, by federal law, we have to downgrade the loan because the quality of collateral has gone down," said Smith.
Capital Corp's current problems were foreshadowed in the summer of 2007 when the company reported that a foreclosed loan to a housing developer had put a $5 million dent in its quarterly income compared with the previous year...
Bank's shares bounce back 72%
Analyst says volatility a reflection of economic conditions and lower Valley real estate values...LESLIE ALBRECHT
Capital Corp of the West, the Merced-based parent company of County Bank, saw its stock rebound strongly Thursday, shooting up 72 percent from the seven-year low it hit earlier this week.
That drop had come after the company announced its first-ever yearly loss. Capital Corp expects to post a $4 million loss for 2007, the result of plunging real estate values.
At the Nasdaq's market close on Thursday, Capital Corp's stock price had risen to $6.48 a share, compared with $3.76 on Wednesday...
On Thursday Capital Corp put the focus on the present, announcing that unaudited internal financial reports from January and February show the bank has adequate capital on hand. The company had previously told federal regulators that it had fallen below what regulators consider "well-capitalized" status.
Joe Morford, a San Francisco-based analyst with RBC Capital Markets, said while the company's projected loss may be unsettling, it's typical of the problems California banks will probably face over the next year, especially in areas hard hit by the real estate slowdown.
"Six to 12 months from now, this is not going to look that unusual," said Morford. "We think there's going to be problems for several other banks both in the Central Valley and throughout the state."
He added, "A big part of the success of a community bank is the strength of its local market. Right now Merced and the Central Valley are having a real tough time. You're seeing the banks share that pain."...
On Wednesday, the company announced that it's forming a committee of board members to oversee bank operations; CEO Thomas Hawker will now report to the committee. Capital Corp also said it's hired financial advisers.
Those moves could be a sign that federal regulators are closely watching the bank, Morford suggested. "It looks like (regulators) are telling the bank that you need to raise capital, and there needs to be some changes in management," said Morford. "The regulators don't want to see County Bank fail, so they're doing what they can to ensure that doesn't happen."
Meanwhile, bank clients sounded a cautiously positive note Thursday. Local builder Bob Rucker, who's both a stockholder and client of County Bank, said he's watching intently. "The whole banking system is going through a major crisis right now with liquidity," said Rucker. "My personal opinion of the bank is that they're very strong and very well-managed, but the (real estate) values declining as rapidly as they did -- it just caught them by surprise."...
Valley's smaller banks eluding upheaval in financial industry
Area firms steer clear of most home loans, limiting fallout from crisis...BEN van der MEER
While giant banks such as Bear Stearns implode as an indirect result of the housing crisis, many of the community banks based in the Northern San Joaquin Valley report being largely insulated from such upheavals.
That's true even after last week, when Merced-based County Bank announced a $4 million loss in 2007, and then saw its stock lose more than half its value in one day before rallying late in the week.
Jeff Burda, president of Modesto Commerce Bank, said most community banks don't make many home loans, including the subprime loans that prompted the recent housing meltdown...
Other banks, like County Bank, may have avoided subprime securities, but made substantial loans to commercial builders. With new housing at a virtual standstill, those builders aren't building, Burda said, and loans aren't being paid...
Credit agencies that monitor banks over time on the basis of criteria such as earnings and liquidity take a more measured stance.
Bankrate.com, a consumer finance Web site, gave five valley community banks, including County, Bank of Stockton and Farmers & Merchants, ratings of three or four stars -- the same ratings most banks receive, with five stars being the best, according to the site...
Chancellor Kang's humility, skills seen as good fit for UC Merced...MICHELLE HATFIELD
MERCED -- Steve Kang has become a road warrior.
A different kind of leader
Carol Tomlinson-Keasey, who stepped down as founding chancellor to return to teaching, is remembered for her stiff demeanor and commanding presence. (After going back to the classroom in 2006, Tomlinson-Keasey quietly retired in June, moving to Georgia. She couldn't be reached for comment.)...
Kang said he believes the best leaders are those who earn trust by example.
"You have to be part of a team...
"(Tomlinson-Keasey) never really went to small events. Chancellor Kang goes to everything. I think that's why he's so popular among students," said Brenda Ramirez, a psychology junior.
Goals and plans... Focus on students urged...
Getting UC Merced closer to permit approval from the Army Corps of Engineers for campus expansion and an adjacent university residence community
Starting a strategic planning process to guide the university's academic future
Drumming up community support for a medical school
Beef up student recruitment
Solve budget issues facing the campus, including lack of physical space for professors, students and research
Continue paving the road to a UC Merced medical school
Continue research initiatives among professors, focusing on issues specific to the Central Valley such as agriculture and water and air quality
Academic planning -- "Where are you going to be putting your resources? What do you want to be the best in the world at? You can't be the best at everything," UC President Robert Dynes said.
UC Merced Facts
Year opened: 2005
Number of students: 1,800
Number of employees: 884
Annual budget: $100 million
Size of campus: 18 buildings, 105 acres
Academics: 17 majors, 17 minors
Number of alumni: 76
Estimated amount of money generated by university: $1.2 billion since 2000 ...
Expansion compromise for UC Merced campus...Editorial
It took six years for the University of California Board of Regents to choose where in the San Joaquin Valley to build its 10th campus. It's already taken more than seven years for UC to figure out how to position the campus and the adjoining community on its selected site east of Merced.
What was the hang-up? Limiting the damage to wetlands and to native plants and animals, such as the bald eagle, fairy shrimp and Colusa grass...
Finally, last year, some meaningful conversations started taking place among UC, the corps and two other federal agencies, the Fish and Wildlife Service and the Environmental Protection Agency. By October, the university announced it had a revised map that reduced the size of the campus and the placement of the community. Last month, the university submitted its formal permit application, which triggers an environmental review process that typically takes 12 to 14 months...
UC needs the Corps' permit to continue with its long-term campus plans, but it is just as essential that there will be shops, restaurants and other amenities close by for students and staff. Some current students and a number of prospective students complain about the isolation of the campus and how far it is into town.
Downsizing the campus by 100 acres does not reduce the academic choices or activities that UC Merced will offer. In fact, it is appropriate that the campus -- which already has won awards for environmental design and energy conservation -- should have a footprint that does the least possible damage to the environment.
It took too long, but we commend university officials and regulators for reaching what appears to be a good compromise.
If anyone can fix (or help) UC, it's this guy...Short Takes
The University of California system -- 10 campuses, five medical centers and three national laboratories -- is at a crossroads. With its leadership stepping down after five years; with UC's share of the state budget declining; with the economy changing rapidly; and with a need for innovation greater than ever, a new UC president will step into an extremely challenging environment. On top of these long-term issues is the need to recover from the 2005 controversy over administrative bloat and bonuses, stipends, relocation packages and other forms of unreported compensation to top administrators. Then there's California's short-term budget crisis, which will likely require increases in student fees and rethinking of financial aid. Fortunately, in Mark Yudof, a search committee has tapped the right person to serve as the next University of California president. This first-rate constitutional scholar and teacher has served as chancellor of the University of Minnesota system (1997 to 2002) and the University of Texas system (2002 to now). The UC system really needs someone from outside the system to bring in fresh ideas, fresh personnel and shake up old ways of doing business. Yudof is ideally suited to do that. An extremely effective manager, imaginative thinker and savvy political leader, amazingly he still finds time to teach. He knows how to deal with politicians and the state budget process, create endowed professorships, increase financial aid for students and encourage research partnerships. The UC system needs this kind of president. In a reduced and changing presidency, Yudof is perfect. The regents vote Thursday. They should approve him with unanimous enthusiasm.