Recapitalization And the Blame Game

Why do I “lose it” when I see other people doing something that harms or does no benefit to the people around them at their supposedly “professional” work? Frankly, I have been there all too many times myself, when mercy and forgiveness were needed from others for major blunders or minor misjudgments at my own work, but it doesn’t make it easier to forgive myself when I know I have done something unprofessional, much less when I have blown my stack at others who have done something that led to results or an obvious error that should have and could have been avoided. And then sometimes instead, a compounding of actions of many leads to trouble.

Just now, it’s hard for me to watch a business tragedy playing out in a nearby county, as a bank holding company (which owns multiple small local banks) is being more or less forced by bank regulators to sell itself to an out-of-state banking corporation, in what’s known as a recapitalization. In this situation, the previous shareholders usually end up with almost nothing, as their own capital in the bank has been eroded away. I believe in this case, it’s due to a decline of the banks’ asset values caused by the higher interest rates of the past 16 months.

As I wrote in an earlier column, the Federal Reserve (U.S. central bank) is responsible for controlling inflation, and when the “Fed” is on a mission to do so, it is almost fully focused on getting the national inflation rate down. And even if that effort harms some of the local banks that are its own customers (the Fed is a banker to commercial banks, but not to the public), the inflation-fighting mandate will take much higher precedence in almost every situation.

Thus I cannot fault the Federal Reserve for the failure of the nearby bank holding company. So who could I say might be to blame on here? Maybe the bank portfolio managers who held longterm government securities for a significant portion of the banks’ assets? The value of these bonds is extremely sensitive to interest rate changes, and when interest rates rise, their value collapses: For example, a 3% government bond maturing in 15 years could lose over 15% of its resale value if interest rates rose from 3% to 4.5%, which is about what occurred from when the Federal Reserve began raising interest rates in May 2022 until now when rates are about to begin coming down.

Or maybe the bank regulators are at fault, because they forced the sale of the holding company when the banks’ balance sheets showed negative equity (cumulative losses from the asset value decline)? After all, if interest rates are going back up now, the bank balance sheet might look just fine again in two years of interest rate increases. What the regulators must worry about, however, is that the bank’s depositors will start to pull their money out of the bank, fearing a “run” when everyone else would also want their money. That could lead to a bankruptcy, far worse than a recapitalization, because of some depositors might have more than the maximum of insured deposits in their accounts. Were depositors to lose THEIR money, the failed bank could also mean failed businesses in the town and surrounding area.

Maybe the shareholders also have some fault here, for holding too much of their wealth in one asset, and not diversifying their financial holdings among more separate types of assets? A few years back, my brothers and I had to sell some bank stock (a different institution) that my parents owned, as the proceeds could be needed to pay for their in-home care. Luckily, that stock had held its value after a big run-up in price, but it was hard to sell something that had become so valuable, when it had been passed down from my grandparents as a good, solid investment. Owning such a large chunk of stock in a single company however, is risky, if it’s an asset one cannot afford to lose.

Still, none of that “I/They should-have done this” game helps the people whose lives are being upended right now, and so we need to be kind to one another; to show we care; to pray for those affected by this financial nightmare of loss for shareholders. Remind people who feel responsible that God’s back is not turned on us, no matter how big our mistakes. And as someone who has suffered a major financial blow myself (in the September 4, 2011, fire that took away the Citzler Homestead), I can assure every one of you that life continues, not without tears and heartache and hard work to follow, but life and love and laughter are still here, and forgiveness, too.

Live in hope and grace, dear readers, and share a hug and a smile with someone who needs it today and every day: life is too short to live it without such care for others.