Old-fashioned and backward banking

News that "old-fashioned and backward" banks have managed to completely escape the problems of today's credit crisis should not come as a surprise. There is something to be said for having a reasonable expectation that borrowers will repay borrowed money.

This story from USAToday really makes you wonder about all the "financial innovation" of recent years. That is, financial innovation at which Wall Street and Washington economists have marveled but which has kept world credit markets reeling for six months now with no end in sight.

U.S. financial giants can apparently learn a thing or two from little banks in places such as Danvers, Mass.; Hudson City, N.Y.; and San Juan, Puerto Rico.

Citigroup, Merrill Lynch and Morgan Stanley are choking on more than $70 billion of bets on shaky mortgage loans. Shareholders in these money center banks have suffered in what's been called the biggest banking crisis since the Great Depression.

Outside of Manhattan, a handful of smaller banks stuck to traditional banking, and their shareholders are being richly rewarded. Led by CEOs who in many cases answer their own phones, the smaller banks steered clear of the risky loans, even though it made them look old-fashioned and backward.
Of the 707 banks tracked by Standard & Poor's Capital IQ, 31 mostly smaller firms have stock prices that are 6% or less below their 52-week highs, a USA TODAY analysis of the data found. Meanwhile, the Select Sector SPDR Financial, which mirrors the performance of S&P's financial stock index, is off 30%. Most of the smaller banks also managed to increase earnings in 2007, a year when the S&P 500 financial sector's earnings fell 34%.

The outperformance shows staying cautious during an unprecedented housing bubble was the right thing to do. "The formula is so simple any kid could do it," says Ron Hermance, CEO of Paramus, N.J.-based Hudson City Bancorp, which reported 9% higher fourth-quarter profit, boosted its dividend 6% and has seen its stock rise 4% this year. "It's the old-fashioned way."

They go on to list a number of items that characterize the old-fashioned way of doing things. Topping the list is not lowering lending standards.

Doh!