Such a thing as a good big bank?

Hopefully this doesn't get thumbed down. But I wanted to share a story about a decent "big bank".

A certain relative of mine is the CFO of one of the largest banks in the US. It's not a bank that makes headlines yet they are pretty big by their sector's standards.

Prior to the Recession they doing very well by making very careful investments, keeping all their loans and servicing each themselves. They had acquired a few local banks to expand their market. They didn't do zero down loans and in fact averaged somewhere around 40% downpayments from their customers. They were so efficient and non-wasteful in their spending that they could afford to give out above average interest rates in their savings accounts. Here's their downfall (or rather what brought them off the mountain top):

1. The government forces banks to give out a certain percentage of their loans to higher risk, lower economically capable applicants, in the name of not squashing them out of the American Dream. On the surface seems like a good idea, otherwise the banks could keep only the elite owning property and everyone else paying rent. But alas they were forced to give out a percentage of their mortages that could possibly be called subprime.

2. Once the economy collapsed, there were bailouts left and right. This bank did not participate in TARP. However because of their decades of success and growth, they were large enough to be forced to pay into that bailout fund. After paying $350M in state and federal taxes, they had to pay $60M in FDIC assessments to pay for failed banks, and then $45M to help pay for the bailouts, that they would not be receiving themselves since they hadn't been to risky. So they pay a fee for doing business (taxes), then pay a fee to be a member in case they fail, and then finally pay another fee to help fund the bailout of the ones that are too big to fail. Try doing that to all the local small businesses that are successful and see if you get re-elected!

3. When the economy kept getting worse and worse, eventually those risky mortgages had some failures. Nevermind that it was a small fraction of their total portfolio, less than the average. Nevermind that their prudent stance on larger downpayments was helping to offset the losses. It didn't matter people lumped them in with the rest of the big banks and said they were crooks. Now they were paying for the risk they were forced to take on yet didn't want to.

4. Remember those high interest rates they were paying to depositors? They've lost a ton of them. First because the savings rates were affected artificially to the point where they cannot keep up with the tiny fractions and their efficiency simply doesn't gather much attention anymore. Their spread over others is smaller now that rates are being forced so low.

5. And remember the quality mortgages they were issuing? All the good mortgages people signed and were paying off, those people refinanced elsewhere with the big banks that were forced to by the government. Imagine selling a mortgage at 5% interest rate that someone was happy and could pay, but then the government said to competitors - you have to offer 4% so that the people you screwed can refinance at a lower rate. Now this good bank's quality mortgages set to provide good values to it's stockholders for years to come were disappearing left and right because the company couldn't afford to artificially drop their rates like the government was forcing others too.

In the end - my relative lost over 50% of his savings since he did the good thing and didn't sell out and cash out his company stock when he saw this coming. Their stock has dropped roughly 65%, 70% at it's worst. In addition they've had to lower their dividends, further hurting the stockholders.

Here's the irony of all this: before I knew how this was all playing out, I refinanced my mortgage 4 times in 14 months with zero closing costs, each time when the rates kept dropping and always with a lender who sold it to a big bank. My relative's bank could not do business with me because they had to pull back plans to expand into my state once their revenue dropped due to the above reasons. So now this bank cannot do as much business as they were primed to do.

There are two obvious points: 1-not all big banks are the same. 2-the government screwed the good guys in order to bail out the bad guys!