Economic stimulus policy and implementation

¶ … Economic Stimulus, Banking Firms, and Their Performances:

The Current U.S. Financial Environment and What Comes Next

The banking industry in the U.S. has been strongly and negatively impacted by the current financial situation of the country, particularly with regard to the subprime mortgage crisis. This crisis became very obvious in 2007 and, since then, there have been a lot of related problems. Banks have been bailed out, and so have homeowners, all as part of the Obama Administration's economic stimulus package. This package was designed to create jobs, help people keep their homes, and let the country move forward, but there have been many people who have complained about the stimulus, as well. These people do not feel that the stimulus package has done (and is doing) enough to move the country forward. Housing and banking are two of the biggest sticking points, followed closely by job creation and the speed at which the stimulus money is being distributed.

After the housing bubble finally burst, there were high default rates on both subprime and adjustable rate mortgages. These were some of the largest triggers of the U.S. financial crisis, but they were not the only difficulties that the economy was facing. The serious problems with the housing market were due largely to the amount of lost equity value in consumers' homes. This offered little incentive to pay back high-interest and expensive loans that had been awarded through a lot of predatory lending, credit conditions that were far too lenient, and federal deregulation of the lending industry prior to the crisis (Steverman, 2008). The subprime mortgage loan foreclosure epidemic (See Fig 1) caused lower cash flow for most banks, eroded financial health of institutions that had mortgage-backed securities, and also restricted lending practices. This created a vicious cycle that clearly needed to be broken, but what do to about it was something that was hotly debated -- and often still is (see Fig 2).

Companies like Regions Bank and Bank of America have seen a serious downturn in their market performance because of the economic crisis, partly due to the increase in consumer dissatisfaction with what banks can offer and whether they can do anything about the problems that their customers were facing with their loans. In a 2008 Retail Banking Satisfaction Study of almost 20 thousand U.S. households, the results showed consumers held banks "directly responsible for the current housing and mortgage crisis," and that is according to Rockwell Clancy, who is an executive director at J.D. Power and Associates (January 2008). Clancy (2008) went on to say that: "Many retail banks are experiencing a decline in their brand image, especially in the current economic climate. With customers experiencing more problems, longer wait times and more fees, that negative view is intensified."

In the above study, which also included rankings for sixteen banks, Bank of America was ranked 12th, and Regions appeared in last place in the survey. Because of this severe loss of overall consumer confidence and market performance, both of those banks have tried to ramp up efforts to serve their customers. That means, among other things, working with customers to keep them coming back and working with them to modify their home loans if they are having trouble paying for their homes and meeting their obligations. Regions has also launched an entirely new marketing strategy which has been reflected on their website. It is a mantra, or credo, of sorts and says, in part: "You can expect more from us, because we expect more from ourselves" (www.regionsbank.com).

The company also highlights various industry awards that it has received in an effort to show customers how much they can be trusted, and how they are still able to do what they have promised despite the economic difficulties. One of the awards they list is the 2009 "Most Improved in Customer Service" award, and it promises consumers that they "come first." Similarly, in order to improve the market performance of its company, Bank of America has also geared itself up to improve its brand image as a socially responsible institution.

B of A is doing this in the hope of attracting and retaining consumers who believe that the company is going to put them first. So many banks had been collapsing that people were getting very nervous about whether their money and mortgages were safe at the bank that they were using. Bank of America is planning to use stimulus money for eco-friendly buildings, planned spending for "green" projects, employee eco-conscious incentives, and energy efficient loan incentives (Bank, 2008; Credit, 2007). These all add up to banking that a customer can feel good about, and can feel is going to remain around for some time. Donations to health clinics and homeless shelters (Kowalczyk, 2007), community development plan lending, and pledges totaling more than $350 billion toward job creation in neighborhoods that are disadvantaged (Freer, 2007) are also additional incentives that Bank of America has explored. This has been done to increase market performance through brand enhancement and a promotion of a sense of well-being for the customers.

The ongoing financial crisis of 2007 started an extreme rise in mortgage delinquencies and foreclosures around the United States. This had devastating effects on the financial performance of banks and lending institutions all across the globe (Anderson 2009). Furthermore, the weaknesses that was seen in the foundations of both private and federal finance systems were exposed, and consequences have been devastating and informative for the companies that are still remaining in the industry. The banking system itself remains very unstable despite the economic stimulus money that the Obama Administration has put out there to help businesses big and small remain open, and the process of recreating a business model for sound banking is already underway at a lot of regional and national banking chains (Green, Oct 2008).

Many banks reacted very strongly to the first signs of a mortgage crisis and changed the way that they did business. That was started by shying away from mortgage-based lending portfolios, because they caused too much risk for the banks if the mortgage market took a downturn. As consumers continued to experience a decline in their home prices, rising unemployment, and restricted credit lines, banks like Wachovia Corporation reacted exactly as could be expected: it reached out for a lifeline. On October 12, 2008, the Federal Reserve approved Wells Fargo's takeover of Wachovia, and allowed the creation of the largest bank network within the United States. Without stimulus money, a lot of banks and other companies would not have been able to move forward with takeover plans and other things that allowed them to keep operating properly in this economy.

On December 31, 2008, Wells Fargo paid $15.1 billion -- around $7 per share -- to buy Wachovia. As an independent company, it is now seen as the fourth-largest bank holding company within the United States, if one bases that on total assets. Before the acquisition by Wells Fargo, Wachovia purchased a few other financial services companies, It did this in an attempt to become a more national bank and a comprehensive financial services company. It was trying to expand, but when the economy took a downturn Wachovia found that it was greatly overextended. With the Wells Fargo buyout, Wachovia's growth goals are now finally being realized, and it has shown continued steady growth and a deliberate pace of conversion. That appears to have protected the brand image against any kind of customer fallout. For several years now, Wachovia has been ranked number one in customer satisfaction among all of the major banks on the University of Michigan's annual American Customer Satisfaction Index (2007). Compared to Wachovia's score of 76 out of 100, its competitor Bank of America only scored 73, coming in a close second (ACSI.org).

In comparison to the pre-merger financial growth of Wachovia, BBVA Compass is a financial holding company that has $47 billion in assets and is also one of the nation's largest banks. Based in Birmingham, Alabama, the bank became BBVA Compass in February of 2007 when it was bought out by Banco Bilbao Vizcaya Argentaria, which is the second largest bank in Spain. This acquisition is an example that has not that often been considered: foreign institutions bailing out failing U.S. banking giants and other companies, rather than the U.S. doing it through stimulus money. BBVA Compass gave the parent corporation a very substantial stakehold in the U.S. banking sector, since it created the biggest financial institution in the lower regions of the U.S. (Florida, Alabama, Colorado, Arizona, New Mexico, and Texas).

As banks continue to compete to meet shareholders' expectations and they continue to struggle to stay afloat even with the economic stimulus package, it has become very crucial that they review and adapt the corporate goals that they have to better survive the economic condition that consumers find themselves in today. Customer buying power is at an all time low even though there have been some discussions about the economy starting to improve once again, and banks have to fight to maintain the market share that they have by communicating their strengths to potential investors, by highlighting the reward programs that they offer for consumers, and by exploring new financial avenues that have not previously been reviewed. These can include the stimulus package, though, because the Obama Administration is still offering stimulus dollars to banks and other companies that need help and cannot take care of their customers in the way that they used to and preferred to.

Figure 1: How Severe is the Subprime Mess?

Obviously, the subprime mess is a serious concern for everyone. The stimulus package was designed to help the banks and the people who borrowed from them with the fact that they could not pay for the debts that they had created for themselves. That was true for the people who had mortgages, and also true for the banks that loaned money to these people. The stimulus package was designed to help them both out so that they could take care of their debts and move forward again. However, the economic stimulus package has not fixed everything that was hoped. There are still problems with the economy, and the package is not moving things forward as fast as people would like, especially where working with banks to keep homes is concerned.

Figure 2: Subprime Mortgage Crisis

As for opinions about the stimulus package and what it does or does not do for banks and other lenders as well as the people who borrow from them, there are a lot of different thoughts on the matter. Clearly, the economic stimulus package was a good idea from the standpoint of trying to help people pay their bills and keep their homes. It was designed to get the country moving again, but recent news reports have shed light on the fact that the stimulus money may not be moving into the areas where it is really needed as much as it is supposed to -- and that some of the money may be going to places that technically do not even exist. A lot of Congressional Districts that allegedly were handed a lot of stimulus money are nonexistent, and that leaves the American people wondering where that money actually went. That is especially worrisome for people who are losing their homes and wondering if that 'missing' money could have helped them.

By bailing out banks and lending institutions, the government also sent a message that it would step in and be a 'parent' when people or companies got into trouble in a big way. It is very hard to say whether that is a good message or not, because it implies that there is always a safety net -- at least if the business is big enough to affect the national economy. For small-time people and businesses, though, there is no safety net. There are still many people who are in foreclosure, and who are losing their homes. There are still banks who are refusing to work with good people who have lost their jobs and ended up with some credit problems that they now must try to tackle and get through. These banks have the power to help these people get through their tough times, and part of the stimulus money went for this purpose, but was it enough? The people who are still out of their homes because their bank would not or could not help them probably do not feel it was enough.