For our nation to grow and generate new jobs, we need investment of capital, and this, of course means the availability of savings. But how can we get the savings we need when we treat our lenders and lending institutions so poorly?
Rewarding the borrower with low rates and tax deductibility of debt interest, while penalizing the saver with interest rate ceilings like the famed Regulation Q have long been part of our financial scene.
Normalization of Bankruptcy
Reg Q is gone now, but in its place we have laws, regulations, and practices that make it ever more difficult for the lenders to get their money back once they have provided capital to borrowers.
Prime among these changes has been the almost legitimization of bankruptcy as a normal financial practice of both companies and individuals.
Is personal bankruptcy a stigma today? Not to most who use that route to adjust their debts. And the ease with which they can walk away from obligations - while at the same time sheltering a large portion of their assets - must absolutely burn the lenders left holding the bag.
Look, for example, at the "cram down," a procedure that allowed those who pleaded bankruptcy to reduce the secured portion of home loans to market value and make the rest unsecured despite the initial agreement.
Happily, the Supreme Court has just ruled that this practice is not legal. But until this ruling, banks in many states lost collateral in huge amounts because of legislators and courts feeling sorry for borrowers whose homes decreased in value after the purchases.
What about the lender? Do we have equity? Has anyone even thought of the "cram up," a procedure that would let the lender share in the windfall if the value of the borrowers' homes had gone up?
A sad example of this disparity between public attitude toward borrowers and lenders was related to me recently by E. Robert Levy, executive director of the Mortgage Bankers of New Jersey.
This, is a state notorious for difficulty in foreclosing on mortgages. In New Jersey, it takes two years for the lender to get his hands on the property in default, during which time the lender gets no return on his funds, must pay the tax claims, and must watch his property deteriorate, to boot. As a result, the mortgage bankers joined the bankers, thrifts, and lawyers in a conservative first step to modify foreclosure rules.
The proposal that resulted was for an optional foreclosure procedure, one which would be instituted only if the mortgage lender did not object and which the borrower could stop at any time.
It involved a deed in lieu of foreclosure, so the lender could get back title without sheriff's sale or elimination of subordinate loans.
In cases where the property had been abandoned - so that the borrower had no equity left or no prospect of generating any value in the asset - this appeared a good way to start streamlining mortgage foreclosure, and every indication was that the legislature would approve this.
That is until one reporter wrote a story stating that this was anticonsumer and that anything that breaks-down the foreclosure process and punishes the "voracious banks" was in the public interest.
Wary legislators, according to Levy, backed away in droves, and the idea died.
Lending at Stake
What, then, is public interest? If financial reporters cannot see that the lender has to have some rights, too, or that lender won't lend and serve the public with needed credit, how can we get the public at large to see this?
What do people think a bank is? Is it a large mattress filled with ill-gotten funds that are lent out at unconscionable rates?
Similarly, look at the bankruptcy courts that allow companies like Eastern Airlines to continue operating despite virtually no chance of returning to profitability until all of the lending investors' funds have been used up and there is nothing left for them to recover.
Somehow lenders must do a better job of getting the public to know whose money they are lending out and that the public interest is better served by keeping these institutions willing and able to lend than it is by letting borrowers walk away form their obligations.
We should remember that when banks were going under at a record pace several years ago, it was the potential new borrowers and those who lost their lines of credit who were the loudest screamers - not those whose deposits were too large to be@ fully insured or the shareholders who lost everything.
The fact that bank investments now exceed bank loans in volume for the first time in 27 years should be a warning. Public interest means having lenders available to serve the public.
But if their day-to-day efforts to get their funds back is deemed "not in the public interest," we are bound to get a strong lesson imposed on potential borrowers as to what their "public interest" really is.
Mr. Nadler is a contributing editor of American Banker and professor of finance at the Rutgers University Graduate School of Management.