While Wall Street's banking giants cheer the government's plans to save them, the reaction from small banks is more reserved.
The majority of community banks, their trade groups say, didn't make subprime mortgage loans or trade in the subprime securities that are bringing storied investment banks to their knees. But there's a sense that they'll have to bear a burden for problems they didn't create.
“If you ask a community banker to react to this, they'll say, ‘We didn't cause this problem,' ” said Steve Verdier, at the Independent Community Bankers of America in Washington, D.C.
Monday, the phones at his group's headquarters were ringing constantly. The majority of members don't have toxic residential or commercial assets on their balance sheets, which would qualify for the government's $700 billion buyback plan.
But they're worried that they'll suffer indirectly by facing more competition. And those who do have troubled mortgage-related assets worried that the buyback would be extended only to their larger brethren.
The ABA Community Bank index, which tracks about 500 smaller banks registered with the American Bankers Association, closed down 8 percent on Monday.
Another development that could indirectly hurt community banks: the transformation of Morgan Stanley and Goldman Sachs from investment banks to bank holding companies. The Federal Reserve granted their requests for a status change on Sunday night, as the investment banks look for ways to become more stable. The change means they can continue to borrow from the Fed's discount window; it also means they will start building more core deposits.
“And overall, I think that's a bad thing for community banks,” said Benjie Guion, chief financial officer of NewDominion Bank in Charlotte. “You've got two more behemoths competing in a market for entities that are already stressed.”
The government's buyback plan so far doesn't mention that a bank must be a certain size to qualify. Diane Casey-Landry of the American Bankers Association worries that small banks will fall through the cracks as details become known.
“There's an awful lot of stories out there that this is only going to be available to the large banks,” said Casey-Landry, chief operating officer of the Washington-based trade group.
The N.C. Bankers Association says that most small banks in the state won't need the buyback plan, because they are well capitalized and not involved with troublesome subprime assets.
Guion points out that even loans that were issued responsibly can go into default, considering the dour housing market. For example, Guion said, a responsible developer can default on a reasonable loan if everyone stops buying his houses.
“There are a lot of banks that are going to have credit issues … because of that domino effect,” said Guion, who doesn't expect his bank to need the buyback program.
Kim Price, chief executive of Citizens South Banking Corp. of Gastonia, said all banks will benefit from the government's actions if it successfully stabilizes the housing industry and allows banks to place a value on their toxic assets. A known loss is better than an uncertain one, Price said.
As more details emerge about how the government's plans will work, the ABA's Casey-Landry worries about the helter-skelter way regulators and lawmakers are writing the proposed legislation. “This is language that would usually take months and months to craft, now being done in five days,” Casey-Landry said.
She and others said that small banks that invested in preferred shares of Fannie Mae and Freddie Mac, the federally chartered mortgage giants that were taken over by the government, are especially wary of new government plans. The takeover translated to big losses for some of those banks, which thought they were making a secure, conservative investment.
“Who knew that would come pounding down as the result of one (government) decision?” said Wes Sturges, chief executive of Charlotte's Bank of Commerce.