“I don’t want to lend money to someone who needs to come to me to borrow it.”
— Diary of an Unknown Banker, 2/11/08.
Isn’t it amazing how fast sentiment changes? Almost one year ago, banks were jumping over themselves hand and fist to meet the insatiable demand for funds from the private equity and hedge fund communities. Now, they only want to lend to those who don’t need it. While I don’t know who made this comment, it certainly provides a succinct commentary on the lending environment right now and reminds me of my year in PNC Financial’s credit department in 1991, when the loan committee turned down just about every deal out there, preferring instead the safety and yield of government treasuries. Like then, the current sentiment is another reason to expect that the Fed’s work is not yet complete.
Banks have rarely received earnings multiples of much higher than 10-12x and have almost always sold for less than the market multiple, and preferably on the basis of price to book multiples. Now we know why. While capitalism may do a better job in guiding our economy than the bygone era of Soviet Communism and the Ten Year Plan, the system isn’t perfect. It’s still very much human and thus not immune to the cycles of greed and fear. I’m pretty sure the next President knows this too, or at least I hope so.
It will be very interesting to see where the banking industry goes from here. Surely, there will be a time to buy, but perhaps not yet. We’ll see.
