Wall Street Upheaval Shakes Main Street

By John Voket

From the community bank president to the town finance director, from the school district business manager to members of the Board of Finance, several local authorities who work in and around the world of finance took a few minutes this week to reflect on the rapidly escalating national financial crisis.

Thursday morning, September 25, the Associated Press reported President Bush was calling presidential candidates Barack Obama and John McCain into negotiations on a $700 billion rescue of Wall Street as Democrats and Republicans neared agreement on a bailout plan with protections for taxpayers and new help for distressed homeowners.

A bipartisan meeting was set for Thursday to begin drafting a compromise, which top Democrats said they hoped could pass within days.

John Trentacosta, president of Newtown Savings Bank, said what is going on in the financial markets is deeply disturbing to all community bankers.

“This is especially true as we have not been part of the problem,” Mr Trentacosta said in a prepared statement. He believes government bailouts will cost his bank more in FDIC insurance, and will provide a new level of competition as the remaining mega-brokerage houses are granted banking powers through their holding companies.

“Fortunately the community banks in the area are well capitalized and will weather this storm,” the local bank president added. “We have every intention to continue making loans in our market area.”

He conceded, however, that suggesting the bank will be completely unaffected would be lying.

“Americans will clearly have exposure to a slowing economy, reduced number of jobs and declining real estate values,” Mr Trentacosta said. “These factors are never good for banks, or their communities. Newtown Savings Bank has been around for 153 years and we plan on being around many more. Our strong capital and great market presence will insure that we do.”

Finance board member Michael Portnoy pointed out that based on his read of the bailout proposal, he believed that community institutions like Newtown Savings Bank might be eligible for assistance under the plan. Mr Portnoy, who has worked in the trust and financial services industry his entire career handling investment and administrative responsibilities, was extremely critical of the federal bailout proposal as it stood Wednesday evening, September 24, calling the move, “financial socialism.”

Mr Portnoy said it is possible that Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have underestimated how much money would be required in the long term to correct the rapidly unraveling economic meltdown.

“I’m not sure this will be enough,” he said. “A lot more mortgages are due to reset in the coming months that won’t be paid and will be foreclosed on.”

He said Secretary Paulson’s suggestion that a taxpayer-funded bailout, as proposed, is a far better solution than the alternative might not be well thought out.

“I’m not sure how much [Secretary Paulson and Mr Bernanke] talked about the alternatives,” Mr Portnoy said. “His idea is, wipe all the bad debt off the books so things don’t slide into a depression.”

John Kortze, who has worked in the securities business for 16 years is very concerned for Newtowners who have already lost a lot of their retirement plan funds, believes municipal finances will be affected as well going forward.

“The cost of credit has gone up for everybody, so we don’t know how that will ultimately affect taxes once the town goes out to borrow,” Mr Kortze said. “Nobody is talking about the availability or the cost of borrowing for any town project — credit is not tight, it has seized.”

Beyond Depression-era Scope

Mr Kortze said the current situation is unprecedented.

“The Great Depression affected a lot of banks, and we’re not seeing lines for soup kitchens yet, but the risks and impact of the current situation has reached far beyond the banking system,” he said. “It affects car loans, home loans, the ability for one to sell a house — it is a worldwide issue which has caused a complete global slowdown.”

Selectman Herb Rosenthal, who maintains certifications necessary for him to work in the securities market, said he is deeply worried about current conditions, pointing out that at today’s rates, municipal borrowing, if it can be achieved, would likely drive the cost of debt service for projects like the high school expansion and municipal road projects up as much as 50 percent or more.

On a more individual scale, he shared concerns for local consumers and business owners.

“If banks are afraid, or don’t have money to lend, it affects small businesses, people trying to buy a home, or to make improvements on their property,” Mr Rosenthal said, adding that he was not convinced that “giving a blank check to Wall Street and total power to the treasury secretary,” would be the best solution.

School district Business Manager Ron Bienkowski, however, believes the bailout is necessary and needs to be done rapidly.

“As time goes on, a lot is getting added on [to the bailout proposal]. It clouds the issue,” Mr Bienkowski said. “This is like an emergency room patient — we need to stop the bleeding and deal with the rehabilitation later.”

Mr Bienkowski pointed out projects like the Newtown Middle School steam pipe replacement are a classic example of how district vendors are compromised by the current global crisis.

“Our contract provides a requirement that the vendor obtains the materials long before they submit a payment requisition,” Mr Bienkowski said. “If we don’t see a fix here, we could see more serious failures that could affect the common folk.”

Can Newtown Bond?

Town Finance Director Robert Tait is hoping by the time Newtown goes out for its next bonding early next year, the markets and interest rates will have settled. He was informed by Newtown’s bond representative that earlier this week, the towns of Plainfield and New Haven both postponed going out to bond because of rate increases.

“They’re both looking at waiting a few weeks to make sure they get positive interest rates,” Mr Tait said, adding that current Capital Improvement Plan projects are estimated in town financial projections based on a four percent rate of debt service.

“If they go lower, good for us,” the finance director said. “But if they go higher, future CIP projects, especially beyond the 2009 fiscal year…well, we may not be able to afford them.”

US Congressman Chris Murphy, who represents Newtown, told The Bee that lawmakers have to come together to put our troubled economy back on track.

“But there is no way Congress should be giving a $700 billion blank check to the President,” Rep Murphy said. “Any economic recovery plan must include taxpayer protections, a return on future profits of rescued companies for the taxpayer, and limits on executive compensation for leaders of companies who benefit from this plan.”