Paul Nitze: Guest Opinion
Larry Seastrom dreamed big when he founded New Frontier Bank back in 1998, selling $10 shares to friends and family, and operating out of a double-wide trailer in Greeley. Along the way up to $1 billion in assets in 2006, and then during a dizzying growth spurt in 2007-08, he had a taste for the grand vision.He would talk about how New Frontier was changing Weld County’s agricultural economy, providing the capital to turn Greeley into a mecca of modern farming and ranching. He’d wax confidently about how the big banks gave the cold shoulder to entrepreneurs with solid business plans, and how New Frontier stepped into that gap. Even when New Frontier’s balance sheet imploded, and his bank was seized by the feds, his grandiloquence didn’t change. Just his tone.His little bank became more famous on the way down than the way up, even gracing the front page of Tuesday’s Wall Street Journal. Seastrom told a reporter for the Journal that New Frontier’s collapse “has more effect on this region than the effect on New York if Citibank fails.” Among the dozens of small banks that have failed over the last year, New Frontier has touched a nerve that the others haven’t.When Seastrom’s bank failed, it was the financial equivalent of an anthrax attack. A tiny amount of dry powder, the initial slug of capital that was raised in 1998, was leveraged in a manner that has brought Weld County’s economy to the precipice. Of the $2 billion in loans on New Frontier’s books on April 10, more than one-third were to farmers and ranchers. Those loans are now being sold off to other banks for pennies on the dollar, and even the loans that aren’t delinquent have next to no chance of being renewed.Credit is due to Betsy Markey, Greeley’s congresswoman, and to Sens. Mark Udall and Michael Bennet, for dragging Secretary of Agriculture Tom Vilsack out here last month to face a room full of angry farmers. Markey, who has every political incentive in the world to do so, has been carrying an enormous amount of water on this issue. And it has paid off to the tune of a $250 million stop-gap loan from the Farm Services Agency (FSA).That $250 million is a lot better than nothing, but Seastrom’s prediction that New Frontier’s collapse will cause massive pain in northern Colorado is turning out to be all too true. In this and just about any other state, the image of farmers shutting the barn door because their loan just got yanked has tremendous political currency. We hate to see it.What doesn’t get nearly as much coverage is the more dilute pain felt by all taxpayers, who collectively have to foot the $670 million bill to clean up New Frontier’s mess. Leaving out the FSA loan and any other assistance the federal government provides, that’s the anticipated hit to the Federal Deposit Insurance Corporation (FDIC) from this collapse.The pain could easily have been avoided if the regulatory will had been there when the easy money was flowing. New Frontier’s future problems were written on the wall. This operation had nothing like the scale of AIG or Lehman Brothers. There were no smoke and mirrors. No credit default insurance contracts, no fancy derivatives, no off-balance-sheet transactions.New Frontier’s demise is easily explained: It took in way too much hot money in the form of high-rate CDs, it let its loan-to-deposit ratio get out of hand, and it made a lot of risky loans. Anyone with a passing understanding of the S&L crisis of the late 1980s could see the same forces at work here. Almost all of this was known to the FDIC before they swooped in this spring, and there’s a trail of red flags to prove it.So why didn’t the FDIC act earlier, when the problem was smaller? Because beneficiaries of New Frontier’s largesse would’ve cried foul if the party had been broken up in 2007, when high commodity prices were keeping creditors current on their payments and the bank’s balance sheet was artificially flush. Even now, some of the bank’s customers say the FDIC acted too soon.Back in 2007, when the bank was profitable, there would’ve been an outcry among Weld County political and business leaders if New Frontier had been shut down. Marilyn Musgrave, Markey’s predecessor, would’ve stormed into the offices of the FDIC. Truth be told, Markey would have done the same thing if she’d been in office.So excuse me if I arch a cynical eyebrow at the Obama administration’s plans to give banking regulators the power to break up banks before they become “too big to fail.” That is one of the centerpieces of the president’s banking reform agenda, announced Wednesday morning in Washington. The idea is that regulators can identify banks that pose systemic risks to the economy, and then break them up or wind them down before we’re forced to bail them out.Are you kidding me? You can arm banking regulators with all the power in the world, but no regulator will ever have the political backing to take down a large bank before it fails. New Frontier wasn’t the only depository institution that gorged itself on easy money during the past few years. If it were, the federal government wouldn’t have backstopped $2 trillion worth of bank-owned assets since the crisis started.When push comes to shove, creditors, lenders, shareholders and executives all say their piece. Moral hazard doesn’t vote.
Paul Nitze is a deputy district attorney in Adams County and has been a part-time Aspenite his entire life. Before attending law school, he worked as a legislative assistant to another part-time local, Sen. Dianne Feinstein (D-Calif.).
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