One of my favorite lines from “The Blues Brothers” movie comes from Tucker McElroy, the lead singer of the Good Ol’ Boys country-and-western band.
Standing outside of Bob’s Country Bunker, McElroy (played by Charles Napier) tells Joliet Jake Blues (John Belushi), who is posing as an agent from the American Federation of Music, in no uncertain terms that his band isn’t carrying union cards. The last line good old Tucker says: “You're gonna look pretty funny tryin' to eat corn on the cob with no (expletive) teeth!”
I thought about that line the other day when I was considering the woes of the banking industry and how those issues are affecting hotels. To paraphrase McElroy: “Hotels are gonna look pretty funny trying to get refinanced with no (expletive) banks!”
Yeah, alright, I admit that I might be going a little overboard, but there has to be others out there who are uncomfortable about the state of banks in the United States. I’m not talking about the high-falutin’ Wall Street guys and the others who, all things considered, aren’t in bad shape. I’m talking about those local and regional banks that dot the map. They’re falling by the wayside way too fast.
Last week, regulators shut four banks from California to Florida, boosting to 20 the number of U.S. bank failures this year. That comes on the heels of the 140 banks that shut down during 2009—the most closings of banks since the height of the savings-and-loan crisis in 1992.
These aren’t always only the neighborhood branches where your old girlfriend Candy or your Aunt Vicki work. The banks shuttered last week included La Jolla (California) Bank (10 branches, US$3.6 billion in assets and US$2.8 billion in deposits) and George Washington Savings Bank in Orland Park, Illinois (four branches, US$412.8 million in assets and US$397 million in deposits).
The assets of these banks, and the other 158 banks that have shut down since the beginning of 2009, were assumed by other banks, so all is not lost—even if the closings cost the government-run Federal Deposit Insurance Corporation more than US$30 billion.
Reports indicate that the FDIC expects the cost of resolving failed banks to grow to about US$100 billion during the next four years. And that’s my point. How can there be any significant economic recovery if we have 100 or so banking companies failing every year? And more important to hotel developers, how can they expect many loans to be granted when local and regional banks are watching their backs, dreading the arrival of the federal regulators?
It’s no secret that smaller banks are more vulnerable than Wall Street banks because commercial real estate comprises a larger portion of their portfolios. That means if there is a spike in the number of hotel defaults as 2010 progresses—and some people believe there’s a large number of those defaults ready to happen—these smaller banks could be in a heap of trouble.
President Obama recently promoted a US$30-billion plan to provide money to local and regional banks to lend to small businesses. The program still must be approved by Congress and it could provide some relief, but regardless of that potential program, it’s going to be tough to get loans for at least the rest of this year.
The silver lining of course is that with less development comes less development, and that means the current supply of hotels will have room to absorb what we all are hoping is an increase in demand during the next few years.
But at the end of the day, much like the Blues Brothers were able to get the tax money for their childhood orphanage to the tax collector (played by Steve Spielberg by the way) just before deadline, many hotel owners are cutting it close with refinancing issues. Complete confidence in the banking system won’t occur until the number of failing banks drops to miniscule proportions. That’s when we can say a true economic recovery is taking place.