Former Federal Reserve board member discusses financial crisis, recovery
"Currently, one in 10 homeowners owes more than his home is worth. " -- John Heasley Texas Bankers Association
By DAVID LOWE Staff Writer

PHOTO BY DAVID LOWE Ray Upp, left, chats with David Barnard, center, former board member of the 11th District of the Federal Reserve Bank, and Ryan Shahan of The National Banks before Barnard's discussion with the Lampasas County Conservative Club about congressional response to the United States' recent financial struggles.

The United States' mortgage failures and tight credit have caused great uncertainty for many investors, David Barnard, former board member of the 11th District of the Federal Reserve Bank, told the Lampasas County Conservative Club in a recent presentation about the response to the country's credit crisis.

Texas' economy -- including real estate and community banks -- remains fairly strong, though, Barnard said.

Barnard, chief executive officer and chairman of the board of The National Banks of Central Texas, said his bank, for example, only lost $85,000 last year out of a $370 million loan portfolio and has 30 percent more earnings than in 2007, when the bank set a company record.

"We do have a real strong balance," he said.

Before taking questions from the audience, Barnard showed a Web video discussion of the recent credit problems led by John Heasley, executive vice president and general counsel of the Texas Bankers Association.

Heasley's explanation mentioned some of the main causes of the U.S. financial uncertainty, including subprime mortgage failures and banks' hesitancy to lend to each other.

The lenders primarily at fault, Heasley said, were non-banks or mortgage companies whose brokers in the last five years increasingly gave loans to what Heasley called "NINJA" -- "no income, no job or assets" -- borrowers.

About half the homeowners who got a mortgage since 2004 paid no down payment, and those who did made an average payment of just 2 percent, Heasley said. In the 1970s, the average down payment was 18 percent, he said.

"A big part of this all goes back to the government and the fact that they forced banks to loan to people who didn't have the money to pay them back," Lampasas County Republican Party Chairman Skipper Wallace noted during a question-and-answer session after Heasley's presentation.

As borrowers defaulted on their mortgages, companies holding what Heasley called "bad loans" began to suffer.

In addition, the TBA executive said 1.7 million to 2 million homes nationwide are in the process of foreclosure. That number may swell to 3 million by the end of 2009, Heasley said.

Currently, one in 10 homeowners owes more than his home is worth, Heasley estimated, although he said the figure actually may be closer to one in six.

Florida, Nevada, California and many Northeastern states have faced the most severe problems with mortgages, Heasley said, and inflated home prices in those areas have fallen substantially.

"Compared to some other parts of the country we are still strong," he said of the Texas real estate market.

Along with the suffering housing market, decreases in inter-bank lending and tightening bond markets for municipalities have slowed down investment and business growth, Heasley said.

Barnard noted that mortgagebacked securities -- which Barnard said The National Banks and many other Texas community banks never held -- rather than actual mortgages, disrupted the national economy.

"It's the securities, or bonds, that got us in trouble, not the actual loans," he said.

Heasley noted that the Emergency Economic Stabilization Act of 2008, the "bailout" legislation passed Oct. 3, allows the government to purchase $700 billion in mortgage-backed securities. Some large banks will receive as much as $25 billion, Heasley said, although Barnard noted some banks initially did not want to receive any government funds because of the regulations attached.

Even though he does not like the idea of tax revenue supporting only certain banks, Barnard said he thinks Congress' passage of the Emergency Economic Stabilization Act prevented a total stock market collapse similar to the one in 1929.

"If [Secretary of the Treasury Henry Paulson] hadn't taken that action and had done the same thing as the Fed and Treasury in the 1920s and 1930s, we'd be heading straight for a depression," Barnard said.

The bank official said he respects the Federal Reserve's power, and that of foreign countries' national banks, to inject money into the economy when credit tightens.

"The central banks in all these countries have a tremendous amount of power in the economy," Barnard said.

"They can make it stand up and dance, especially if they work in unison."

The Federal Reserve is cooperating with central banks in Europe and China to cut interest rates in the institutions' respective countries at about the same time, Barnard said. Such coordination keeps any one nation's currency from losing its value rapidly, he said.

"Whenever we all cut our rates at the same time, then it doesn't disrupt our individual currencies," the banker said.

Near the end of his presentation, Heasley said he expects greater regulation by the national government -- particularly of general derivatives and credit default swaps -- in response to the country's financial problems.

The government might create a new "super-regulator" similar to the FDIC, Heasley said.

With Congress' recent enactment of economic recovery legislation, Federal Deposit Insurance Corp. insurance has increased to $250,000 per customer per bank. This level of insurance will remain through 2009 and then will revert back to $100,000 per customer per bank, Heasley noted.

Barnard added that money market accounts also are safe because the federal government insures them with no limit. Many Fortune 500 companies and major industries obtain loans from funds in banks' money market accounts, he said.

The United States is seeing signs of recovery, Barnard said in an interview after his Conservative Club presentation. Because many countries still patronize American banks, more money flows into the U.S. than out. As a result, he said, the dollar has gained about 15 percent in the last month.

"If we can just regain confidence and fight people's fear, this thing can get better," Barnard said.