Bankers: No reason to worry

By Don Shilling

A treasury bond is better than hiding your money, a professor says.

Though some local residents are so shaken by the nation’s financial crisis that they are taking their money out of banks, experts say local banks remain sound.

“Some customers are overreacting and putting their money in safe deposit boxes,” said Steve Lewis, president of First Place Bank in Warren.

Though the nation’s financial markets are in peril, the situation isn’t that bad, he said.

“Is your money safe in a safe deposit box? Absolutely. Is your money safe in the bank? Absolutely,” he said.

No one should be putting money in a safe deposit box or under a mattress, said Peter Chen, associate professor of finance at Youngstown State University. He noted that each bank deposit is backed with federal insurance up to $100,000.

“There should be no cause for concern,” he said.

Chen suggested another safe haven for money — a U.S. Treasury bond known as an I Bond. These bonds pay a fixed rate of interest, plus an extra amount that is adjusted semiannually for inflation. The bonds are 100 percent backed by the U.S. government.

Lewis wouldn’t estimate how many people have chosen to take their money out of the bank for safety, but he thinks it is happening in small doses at all banks.

Frank Paden, president of Farmers National Bank in Canfield, and Bob New, president of First National Bank in Hermitage, Pa., said they aren’t aware of anyone withdrawing money for safety’s sake.

All the bankers said their companies are operating normally and aren’t directly threatened by the crisis on Wall Street.

Paden said his banks rely primarily on their customer’s deposits for the cash used to make loans, and those deposits remain strong.

New said it was unfortunate that President Bush said in a speech Wednesday that “banks in your community” could fail if Congress doesn’t approve a finance package for investment banks.

The president was so vague that people are thinking banks everywhere are in danger of failing, New said. He noted that First National hasn’t been plagued with bad debt problems of other banks because it stayed away from subprime loans.

“We have money to lend, and we’re still taking deposits,” New said.

Chen said, however, that Main Street businesses and average citizens will be hurt if Congress doesn’t rescue the nation’s investment banks with large sums of cash.

“This is worse than many Americans realize,” he said.

The credit market is freezing up because of troubles at the investment banks, which endangers companies that rely on credit to keep their operations running, he said.

Among the companies that couldn’t operate for long without borrowed money is General Motors Corp., he said.

Without the government investment plan, GM would have to stop production soon because credit could dry up, he said.

“They wouldn’t have the money to pay suppliers, and they wouldn’t have the money to pay employees,” he said.

The ripple effect would go on from there, as the suppliers would have to shut down and then the companies that provide parts to suppliers would close, he said.

Pretty soon, the growing unemployment would hurt retailers as well.

The Bush administration’s proposal to spend $700 billion to buy troubled securities from the nation’s large investment banks should stop such problems, Chen said. The investment banks then would have the cash to loan to companies.

Chen calculates, however, that the actual amount needed by the investment banks is $1 trillion.

He said he thinks the government is likely to receive a return on the investment someday. Behind the troubled securities are mortgages that aren’t being paid and foreclosed homes. If the government buys them for about 20 percent of their value now because no one else wants them, it should be able to sell them for at least 50 percent of their value once the economy improves, Chen said.

“Housing is pretty bad right now, but I think houses should be worth 50 cents on the dollar,” he said.

Local bankers agreed that the government can make money on the deal. The plan shouldn’t be seen as a bailout but as acquiring assets that can’t be traded today but still have value, New said.

Government action is critical because it has the ability to wait for values to recover, Lewis said. He pointed out that similar programs devised by the government, such as aid given to Chrysler in 1979, produced revenue in the end.

Lewis said one question is whether smaller banks such as First Place would receive any direct benefit from the government’s plan.

“Are they going to walk in with a check and buy the stressed mortgages that we have? You know what my guess is. I doubt it,” he said.

shilling@vindy.com