Friday, December 12, 2008

The Bunting Dequation of Banking

There is not a whole lot on the Internet about late First Pennsylvania Bank which was one of the large regional banks in the sixties and seventies. Being a native of Philadelphia I remember gossip and talk about this institution. There was a dynamic young Turk who was President of the that bank. His ultimate failure in my opinion was in going from local and going global ahead of his time. His name was John R Bunting.

Bunting was not Ivy League but got his degree from the state supported Temple University. I think that the chairman of 1st Pa. brought him to shake things up in the usual Ivy League, Union League thin blooded banking crowd.

To make a long story short let me describe Philly in the late sixties and seventies. Philly used to be a factory town. It called itself the “workshop of the world” because of all his manual nineteenth century steam powered might. After World War II, the factory base changed. The textiles industries went south to find cheaper labor. White flight to the suburbs and across the river to New Jersey left a drain on the general economy.

Some of the big stodgy banks on south Broad Street were investment banks for the trust funds left over from the glory days of Robber Barons in coal and railroads from the nineteenth century. These banks only invested their money in stocks and bonds – money making money.

A bank like First Pennsylvania made its big money from loaning to businesses. And let’s face it business was leaving the city and the profit margins were low on loans to existing businesses in need of modernization like factories.

Talking to a realtor in the middle seventies I was told that First Pennsylvania Bank would not make a conventional home mortgage loan for less than thirty thousand dollars. The average row house in Philly was selling for 10-20 thousand at the time. Thirty thousand was the bottom end of suburban home prices.

One of the things that brought down that bank was easy money. Large origination fees and positive publicity had First Pennsylvania loaning big amounts to the then thought to be future growth market in banking – emerging third world countries. No doubt dinner with the United Nations and State Department crowd and lets not forget those big origination fees made for a long term headache and eventually demise of the largest bank in Pennsylvania and not to mention one of the oldest banks in the U.S..

There was a quasi kind of gentlemen’s agreement with the government to make loans to countries that were in line with the foreign policy goals of the United States. The government was thought to be the unofficial guarantor of such third world loans

The basic Bunting Dequation is this:

Know and keep your local base secure.
– and –
Never assume that the government will guarantee your bad loans.

I think that there will come a time in the next six to eighteen months when the U.S. government will no longer in reality be able to bail out these presently merged toxic loan based mega banks.

The catch phase in 2008 has been something like “they are too big to let them fail”.

The catch phrase in 2009 and 2010 will I think be something like “make some room to let those dinosaurs roll over and die.”

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