Sunday, March 22, 2009

One area of lending is thriving

That would be the realm of insider lending, to executives and directors also known as decision makers within the bank.
Banks nationwide hold $41 billion in loans to directors, top executives and other insiders, a portfolio that experts say should be stripped of secrecy.

Insider lending to directors is particularly troublesome because it could cloud the judgment of people charged with protecting shareholders and overseeing bank management, the experts say...

..Insider loans, ranging from home mortgages to multimillion-dollar lines of credit for big companies, are legal but are largely shrouded from public scrutiny.

Banks don't have to explain increased insider lending. They don't have to disclose individual loan amounts or terms for any insiders, including executives. Directors and their businesses, often the largest insider borrowers, are completely shielded. Directors must approve insider loans greater than $500,000, so they sometimes vote on loans for each other or the executives they oversee.

Insider favoritism is against the law. Bankers and regulators say the loans are subject to greater scrutiny to ensure insiders aren't getting better terms and are creditworthy.

But top corporate governance experts contend that insider lending carries serious potential for conflict of interest among bank officials and must be stripped of secrecy. They argue that lending to directors, the watchdogs of management, must be revealed so shareholders can gauge their independence. And disclosure should be paramount for banks receiving government aid, said Ed Lawrence, a University of Missouri-St. Louis finance professor and co-author of a 1989 study that was a rare look at insider lending.
In a time of tightened credit you would expect insiders to turn to the source of credit that knows them best. The real question are they good loans and are they on terms that someone outside the bank would receive. Remember the great deals Neal Bush was involved in with Silverado? This is one aspect of bank lending that should be completely open to the public. If an insider doesn't like it, they can always go to another bank.

The Charlotte Observer has a companion piece to this one that more closely looks at the doubling of insider loans at Bank of America recently.

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