Obama, FDIC don’t get it

Out on the western slope of the Rocky Mountains is a small business that has managed to survive robust and rough economic times for nearly 30 years.

The owner, a longtime moderate Democrat, was an enthusiastic supporter of Presidential candidate Barack Obama. He’s stuck with the president this past year. He has enough of a worldview that he accepted bailing out the banking industry, reasoning a collapse there could bring down the entire economy.

He’s still sticking by his president, but he’s no longer happy about it. The big banks were saved and are paying out millions in bonuses to their employees — employees who, in his view, have turned their backs on small and medium-sized businesses desperate just to survive until the economy turns around.

He’s still clinging to the hope that the administration will bring help to businesses like his before it is too late — and it is getting late. After 30 years of hard work he’s had to lay off employees and stop funding health insurance, and now is truly fearful he won’t be able to survive much longer.

“So what does Obama offer us?” he muses aloud. “A tax break if I hire a new employee. You don’t hire someone to get a $5,000 tax credit. You hire someone because you have work for them to do filling orders for clients.” Hiring a $65,000-a-year employee to get a $5,000 tax break is voodoo economics, he says. “I could go broke fast doing that.”

Traveling closer to the coast, I spent some time with local investors in a pair of community banks in California’s San Joaquin Valley. There I got a real education in how distorted economic policy can get between the White House and the federal bureaucracy charged with making the president’s vision work.

This is the tale of two banks. One, an older, more established community bank, has a large customer base and deep roots in the community. It has a large loan portfolio, mostly of local businesses, some commercial real estate and loans to individuals who financed additions to their homes, appliances to fill them and cars to sit in the driveway. There is a lot more local business where that came from. But the bank has always been cautious about keeping adequate reserves, and the FDIC has raised those levels.

The other bank is brand-new — just organized, in fact. They don’t have a lot of customers but they do have a lot of capital put up by local investors who think there is a huge future in local banks doing business with neighbors in communities they know. They aren’t considering complex financial derivatives or other sophisticated investment instruments that brought so many on Wall Street to their knees. Their idea is folks doing business with folks they know and with businesses they can walk into on any given day to see how things are going.

The idea is to merge the two banks — giving the new one a huge customer base almost instantly and infusing the older one with fresh working capital. It makes a lot of sense and shows the kind of innovation and entrepreneurship the president says he wants to foster to get the economy going again.

The problem is, the FDIC is completely missing the message. It says the merger is fine so long as the new capital isn’t loaned out. The FDIC wants it added to reserves just in case one of these local bankers should decide to start playing around with complex and risky financial instruments. The bankers point out they never did that — saw how much damage the practice wreaked on America’s economy, and besides, it doesn’t fit their business plan. “Rules are rules,” responds the FDIC. So now the bankers are finishing up a 163-page letter appealing the FDIC opinion, rather than helping grow the businesses in their local community.

President Obama may be saying the right things on his “everyday American” tour, but the middle class isn’t seeing the results of his efforts. There are big numbers being thrown around in speeches, but real people see the only winners as Wall Street. “The big banks signed papers and had the money the next day,” the Rocky Mountain businessman told me. “We need something swift, dramatic and effective” to rebuild Main Street. “We aren’t getting it.”

That’s the message I brought back from my trip out west, and it is the change Obama must deliver if he wants to hold those middle-class voters who put him in the White House.

Goddard is a founding partner of political consultants Goddard Claussen.  E-mail: ben@gcsa.com