BUFFALO, N.Y.
Buffalo’s venerable M&T Bank Corp., one of America’s 20 largest commercial lenders, tells the story of the troubled global banking industry in a nutshell.
Bob Wilmers, 77, and CEO of the bank for 27 years, ran M&T like its prudent Canadian counterparts until it mattered.
Like so many of the world’s largest financial institutions in the mid-2000s, M&T gave in to peer pressure and criticism from securities analysts that it was unduly risk-averse. It deviated from character, relaxing its lending standards in pursuit of higher short-term results. M&T accelerated its writing of “Alt-A” mortgages, just a notch above subprime or junk mortgages, to borrowers of doubtful creditworthiness.
M&T also bought $131.7 million worth of collateralized debt obligations (CDOs) from Deutsche Bank AG. DB was one of the top global lenders then passing among themselves these bundles of U.S. subprimes and other dubious loans — soon to be dubbed “toxic” — for a quick profit amid a record U.S. housing boom.
And M&T took a 20 per cent stake in Bayview Lending Group, a Miami-based commercial mortgage lender far afield from M&T’s base in the U.S. Northeast.
The Buffalo bank was soon heavily exposed in Florida, California and Arizona, epicentres of the U.S. housing boom and imminent bust. Just 15 per cent of M&T’s loan book was in those three states, but they account for half the bank’s writeoffs since 2007.
By 2010, M&T’s dalliance with go-go banking had resulted in a more than sixfold increase in delinquent loans, to $1.5 billion, from the 2006 level. Its writeoffs on bad loans peaked a year earlier, at $513 million, and remained unusually high last year, at $346 million.
Profits at the 155-year-old M&T were more than halved from 2006, to $379 million in 2009, and despite last year’s smart recovery they remained 12 per cent below their peak four years ago.
M&T is no basket case, though. It has recorded profits throughout the crisis, ranks among the most prolific small-business lenders in its markets and required no government rescue.
Elsewhere in global banking, the story is far worse, though the cause of the misery is the same. The U.S. alone has spent close to $2 trillion to stabilize its banking system, which continues to hoard cash to shore up weak balance sheets rather than lend it, impeding a recovery in the broader economy. Some 6 million U.S. households have gone into or face foreclosure.
In Europe, the deadbeat phenomenon extends beyond participants in the British, Irish and Spanish housing booms to over-leveraged nations like Greece and Portugal. The damage to the world economy has been incalculable, including funding cuts to education and other essential services in the U.S. and the very existence of the postwar European Union.
And this epic disaster started simply enough, Bob Wilmers explains, with peer pressure.
Says Wilmers: “For decades M&T had outperformed our peer group (of large regional banks).” That was due to his painstakingly honed formula of unexotic local lending restricted to retail and business clients in the territory where M&T has its more than 725 offices — seven Northeast states, Washington, D.C., and Toronto.
Wilmers had been unusually disciplined in the more than 20 mergers with which he grew M&T from $2 billion in assets when he became CEO to $68 billion today, taking a pass on the overpriced acquisition prospects that crossed his desk each day.
And in contrast with empire-building banks undermined by culture clashes, M&T mastered the art of integrating acquisitions. It uses a buddy system that pairs new employees with existing ones in order to imbue the M&T culture of prudent, plain-vanilla banking and extensive community involvement to keep M&T’s profile high.
But in the mid-2000s, “we were looking pretty mediocre,” Wilmers says, compared with spectacular gains posted by fellow regionals like Cleveland’s National City Corp. and Wachovia Corp. of Charlotte, N.C., along with megabanks Citigroup Inc. and Bank of America Corp. (The first two eventually had to be forcibly merged out of existence. The latter two, deemed “too big to fail,” were rescued with massive government bailouts.)
I ask Wilmers how could he sign off on the ill-fated CDO purchases, given his history of extricating the then-troubled M&T from exotic foreign loans.
“I just wasn’t focused,” he allows. “I had papers in front of me that said these were triple A- and double A-rated mortgages, which we fully expected to promptly resell. In hindsight, the shame of it is that our treasurer was proposing these CDOs as a means of squeezing an extra 0.25 per cent return over our customary investments. And we got left holding the bag.”
Like so many of his fellow bank CEOs, Wilmers says he didn’t know what either CDOs or the recent Wall Street “innovation” of Alt-A mortgages were. Eyes rolled later when the music stopped and, failing to find a buyer for M&T’s unsuitable loans, Wilmers asked colleagues if the CDOs could be opened to see if there was something salvageable.
“There was a long silence,” Wilmers recalls, “until someone said, ‘Bob, there are 486,000 mortgages in this thing. It would take years to sort them out.’”
I ask Wilmers about his desire to see the restoration of the Great Depression reform known as Glass-Steagall, which divorced commercial from investment banking, given that Canada’s Big Six absorbed the securities sector in the 1980s to no ill effect.
“Yes, but the Canadians didn’t turn that combination into a casino, did they?” Wilmers asked rhetorically. “We did.”
Wilmers calculates that just three errant deviations from its usual culture cost his bank a total of $845 million in losses — roughly equal to M&T’s entire 2006 profit. “We should have stuck to our knitting. But instead we joined the party.”
It shouldn’t take hindsight to grasp something was bound to go horribly wrong when Japanese university endowment funds were holding mortgages on four-bedroom “starter” homes in Phoenix, and lenders in Charlotte were financing the debt of Greece.
“You’re much less likely to do dumb things when you stick with the fundamentals of knowing your borrowers and their employees, suppliers and customers,” Wilmers says. “Banking is not that difficult, you know.”
It’s been immeasurably costly, and needlessly so, to relearn the maxim that has served Wilmers and M&T so well. “You should do what you know and do it at home.”
dolive@thestar.ca
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