A final-hour encouraging rally on Wall Street lost steam in the closing moments Friday. The Dow Jones Industrial Average sat below 8,000 points for an extended time, but finished at 8,451, down 128 points.
Is 8,000 a floor?
“It’s getting close, no doubt about it,” Jerry Dempsey, chief executive officer of Dempsey Lord Smith LLC in Rome, said. “I’m seeing a lot of panic selling. When it gets exhausted, you’ll see (the stock market) kind of calm down a little bit.”
Bruce Hunter, co-branch manager with Wachovia Securities in Rome, said that drops in share price of companies not related to the struggling financial sector mean “selling should be coming to an end.”
He was buoyed by the late Friday rally.
“If we hold on and attract a little optimism, it won’t take long” for more investors to come back to Wall Street.
Credit crunch is a very real issue
Other financial leaders in the region are closely watching the market and national economy too. Some say the credit freeze among big banks is more of an issue than the stock market because businesses can’t finance capital projects, and local bankers emphasize once again that they have money to lend to qualified borrowers.
“The stock market is the ‘side show.’ If we can get a handle on the credit markets, then hopefully the market will stabilize,” said Gina McDaniel, business professor at Shorter College in Rome. “I think it is all about confidence. When confidence is restored, we will see improvement.”
“The credit market remains frozen, and people are hoarding cash,” said Rob McGehee, market president for Wachovia Bank in Rome.
“Until the credit market loosens, the stock market will be discounted.”
“As far as I’m concerned, (the credit crunch) is probably more of an issue,” said Steve Kemp, chief executive officer of United Community Bank in Rome.
Need positive momentum
“Everyone is looking for a sign of complete capitulation. Normally this means lots of down transactions — lately that’s been happening every day,” said Bruce Jones, economics professor at Georgia Highlands College. “We need something positive to change the psychology.
“It seems every time we get out of the woods, a new scare comes along. We were looking better, then Europe joined the party.
“It wouldn’t take much, just something positive,” Jones said. “A good Christmas of retail sales could do it. There is investable money on the sidelines. Good news would bring it in for investment.”
The government isn’t waiting. In a rare Friday night news conference, Treasury Secretary Henry Paulson announced the next step would be for the government to buy an ownership stake in a broad array of banks for the first time since the Great Depression.
Click to read related story: U.S. to buy stake in banks, first since Depression.
The world’s six other richest nations – Canada, Great Britain, France, Germany, Italy and Japan – announced they would take similar action.
Regional banks: We have money to lend
“We have money to lend, but it’s based on aggressively qualifying borrowers,” said Ryan Earnest, president of Heritage First Bank.
He also said he understands the Federal Reserve Bank lowered the prime lending rate to try to stimulate the economy, but that it’s the lack of lending by big banks, not the prime rate, that is the problem.
Meanwhile, lowering the interest rate combined with certain increases in the premiums banks will have to pay the Federal Deposit Insurance Corp. after the FDIC increased to $250,000 the cap on insured bank accounts, will put a squeeze on banks. Credit union accounts are insured by the National Credit Union Administration, which also raised the insured account cap to $250,000 from $100,000.
The FDIC increase was part of the $700 billion financial rescue plan signed into law last week.
Eddie Wilson, chief executive officer of River City Bank in Rome, said his bank is lending money and has zero non-performing loans. He said that’s because the bank’s lending standards are “exactly where we were when we started the bank” two years ago.
Borrowers with a credit rating of 700 and above are considered good risks.
Another possible effect of the big-bank turmoil is depositors moving their accounts to smaller community or other independent banks.
“I think we have seen a pretty good bit of money that has moved from the bigger banks into the smaller banks” in Rome, Wilson said. But he noted that people are always moving money from bigger banks to smaller banks and vice versa to stay under the FDIC cap.
Click to read related story: Smaller banks see a customer surge .
Kemp said it’s been business as usual at United Community Bank during the eventful two weeks on Wall Street. He said lending is up and, like other bankers in Rome, takes credit for not being in the subprime mortgage business.
“Banks are not feeling the same effects that many are in the mortgage industry, especially our local banks,” said Randy Street, spokesman for the Cohutta Banking Co. in LaFayette. “If you qualified for a home or business loan six months ago, you still are going to be able to get that loan.”
Asked about new loan requests, Street said, “It depends solely on that individual’s credit score as to whether or not they will receive a loan, as it has always been.”
Bank of LaFayette spokesman Dave Gilbert said, “It’s business as usual for us. We never got into the subprime market . . . The biggest thing we are dealing with is cutbacks in the local workforce that is making it difficult for customers to pay their payments. But we are working with these individuals to make their payments.”
Larry Collier, a director of the Community Bank of Rockmart,” added, “The credit crunch and other economic problems don’t affect a small hometown bank in the same way that the big national banks have been impacted.
We’re actually in great shape,” he said.
“We were very prudent and frugal ... and we were selective about the individuals we approved for loans.”
Still, he notes the nation’s slow economy “has certainly tightened up on everything.”
That means, for example, that applicants for a loan will come under increased scrutiny regarding their ability to repay a loan. Collier said banks are going to consider not only the person’s employment and salary, but also whether they are going to be able to hold onto their job if the economy worsens.
Tim Williams, president of newly opened Generations Bank in Cherokee County, Ala., is optimistic.
“I see it as a great opportunity,” he said. “Community banks are in better shape than many of the bigger banks in the financial industry.“We don’t have the problem with bad credit.”
Generations Bank is 100 percent capital as compared with many whose capital is 7 percent to 10 percent, he said.
Andy Lowe, a financial consultant with Wachovia Securities in Gadsden, said many of his calls in the past couple of weeks have been from clients who are angry about corporate greed.
Lowe, who lives in Cherokee County and has many clients from the county, said historically the stock market provides better returns than other investments if “you can ride it out.”
From Dec. 31, 1937, to Dec. 31, 2007, 53 years were up years and 18 years were down years, Lowe said. Usually after a big down year, the market posts strong gains the next year, he said.
Federal action not necessarily helping banks
As far as the recent prime rate cut (now 4.5 percent), Collier said most banks, like his, are adhering to a previously established “floor” of 6.5 percent for home mortgages. So the half-point rate cut won’t translate into lower mortgage rates.
On the other hand, the rate cut will affect the earning interest of money market funds, which earn a rate of interest based on the prime rate. So the rate cut could prove “more of a negative than a positive” for many people, he predicted.
Three bank officials in Catoosa County aren’t entirely supportive of the $700 billion financial rescue — or bailout — package.
“I didn’t think it was the right thing to do,” Wes Smith, Northwest Georgia Bank chairman and chief executive officer, said. He said the overall plan is not in the best interest of taxpayers who will bear its costs and that it was “hastily put together.”
Joe Haskins, chairman and chief executive officer of Northwest Georgia Bank, said, “As soon as they passed the bailout, the market didn’t rally. It went down.”
But Bob Peck, president and chief executive officer at Gateway Bank & Trust, said “If (Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson) feel like that needed to be done, I would agree with them.”
“I have come to wonder if structuring the bailout to go directly to homeowners and mortgages, which would indirectly help financial institutions because lenders would be repaying instead of defaulting, is a better method than an arcane and opaque auction,” said Frank Stephenson, associate professor of economics at Berry College.
But he added, “Comparisons to the Great Depression are overwrought. Unemployment now is around 6 percent rather than the 25 percent rate in the early 1930s. Currently, the Fed is actively increasing — perhaps too actively — the money supply instead of allowing the money supply to shrink.”
Staff writers Rachel Brown, Lowell Vickers, Larry Brooks and Kathy Roe and The Associated Press contributed to this article.
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