In the perennial Christmas classic, A Christmas Carol, Ebenezer Scrooge complains before his redemption that the solution to the complaints of the poor and downtrodden is that they had better die “and decrease the surplus population.” Mr. Scrooge, as we all know, was the only lender in town – the banker of his day. As a result, he extorted his clients by increasing interest rates, threatening repossession of inventory, and demanding fees and penalties. Today, we call those points.
As the economy has turned into the publicized financial crisis, modern day lenders should review their classic literature. Recently, we assisted a New Hampshire business owner who is feeling the impact of the recession. Despite the economy, he had an unblemished eleven year relationship with a local lender. In better times, he had been wined and dined by the bank as a valued customer. When his obligations matured, the bank would routinely rewrite them. Documentation of the agreement was almost an afterthought.
This time things were different. Despite more than adequate security and a history of on-time or early payments, our client was no longer of any value to the bank. He was surplus population. The bank set forth its terms of more collateral, paying points and attorney’s fees, higher interest, personal guaranties and a shorter term. There was no negotiation or rational thought. Although he was told he was a valued client, the offer was sign the deal as presented or face workout.
As taxpayers, we are seeing these same lenders line up for their share of $700 billion dollars. No one knows where it is going, how it has been used or whether it will help. We are told that this will solve the financial crisis and lead to better times. This will help the banks survive. Ebenezer Scrooge saw his future and changed his ways. He discovered that even in difficult times working with his clients served the common good. His clients would remain in business, employ others and contribute to the economy as a whole. At least this one local lender appears to be missing the bigger picture. Perhaps, some banks deserve to fail.