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KY Banks Should Weather Storm Says Expert

FRANKFORT, KY -- It appears unlikely the Wall Street bailout package that may get congressional approval today will have any direct impact on Kentucky banks, according to bankers and financial experts, reports the Frankfort State Journal in its Sunday edition.

The University of Kentucky's Donald Mullineaux said the biggest area of concern has been sub-prime mortgages and sub-prime mortgage backed securities.

In general, larger banks like Washington Mutual, Freddie May and Fannie Mac failed because they were overloaded with sub-prime debt, said Mullineaux, DuPont chair of Banking and Financial Services at UK's Gatton College of Business, reports the State Journal

It's unlikely that any community banks in Kentucky would be holding these assets, Mullineaux said.

His comments came as congressional Democrats and Republican senators pushed for an agreement Saturday and today on a multibillion-dollar bailout for the financial sector, the newspaper reports.

"In general," Mullineaux said "the Kentucky banking system has held up much better than average. "It's probably in the top 10 or 15 in terms of bank performance right now."

But, the success or failure of the proposed $700 billion Wall Street bailout could have an indirect impact on banks across the country, he said. If the bailout is successful, Mullineaux said it could help avoid a long, deep recession.

If the bailout package isn't approved or fails to work, Mullineaux said banks will likely be affected by the economic downturn.

"The situation will only deteriorate and banks don't do well in an economic downturn," he said. "If we don't do something, a recession is highly likely and it could be a very serious one."

John Taylor, president and CEO of American Founders Bank, said community banks will benefit if the bailout package restores stability to the markets.

"American Founders Bank is not waiting for Congress to pass a plan to help us along the way," he said. "Any help in returning confidence and liquidity to the markets will ultimately benefit us."

American Founders was created in 2001 and has about $509 million in assets and 160 employees. American Founders is headquartered in Frankfort and has eight branches in Shelbyville, Lawrenceburg, Louisville and Lexington.

The bank has been under a cease and desist order since 2007 when federal regulators found "unsafe or unsound banking practices." However, Taylor said the bank has met or exceeded all the requirements of the order.

"We've got a plan and we're operating under it," he said. "We're not waiting for government assistance."

Meanwhile, President Bush, seeking swift action, sent Treasury Secretary Henry Paulson back to the Capitol, where lawmakers were working through the weekend.
Presidential politics again played a role in the bargaining. Republican John McCain and Democrat Barack Obama called key negotiators and portrayed themselves as helping without getting directly involved in the talks.

"The goal is to come up with a final agreement by tomorrow," said Senate Majority Leader Harry Reid, D-Nev. "We may not be able to do that, but we're trying very hard."

He said he hoped for an announcement by 6 p.m. today just hours before the Asian markets reopen for the week. "Everybody is waiting for this thing to tip a little bit too far," he said, so "we may not have another day."

House Republican leaders, who have resisted some elements of the Bush administration's proposal, seemed doubtful.

"There are a lot of issues still on the table," House Minority Leader John Boehner, R-Ohio, told reporters at mid-afternoon, just as lawmakers entered the first negotiating session that involved senators and House members, not just staff members. "We should not be bailing out Wall Street on the backs of American taxpayers," he said.

Earlier, Bush expressed confidence that lawmakers soon would approve a rescue plan. He acknowledged that many Americans are frustrated and angry that up to $700 billion in tax dollars may be needed to cover Wall Street firms' mistakes.
The bailout is intended to rescue bankers from bad loans that threaten to derail the economy and plunge the country into a long depression. Some lawmakers likened the situation to a major car wreck that has backed up traffic " credit, in this case " for miles. The rescue is meant to remove the wreckage so credit can start moving to borrowers again, they said.

Many House Republicans object to several parts of the administration's approach. Negotiators sought to accommodate enough of their demands to entice a reasonable number of them to back the eventual plan, which is nearly certain to be unpopular with many voters.

Democrats and administration officials said they were willing to include House Republicans' idea of having the government insure distressed mortgage-backed securities " but only as an option, not a replacement for the broader idea of buying those toxic securities.

"There may be a way in which that could be accommodated as part of the toolbox" available to the Treasury Department, said Sen. John Thune, R-S.D. "As a practical matter, that can't be the engine that drives this bill," he said.
It was unclear whether House Republicans would accept those terms.

Negotiators also discussed phasing in the program's costs. For example, after the first $350 billion is made available, Congress could try to block later amounts, which could total an additional $350 billion, if it believed the program was not working. The president presumably could veto such a move, however, requiring extra large margins in the House and Senate to override.
Differences remained on how to limit compensation to executives of corporations that would be covered by the rescue plan.

Whatever emerges "is not the proposal that we got from Secretary Paulson," Reid said. But lawmakers said it would be much closer to Paulson's original plan than to the alternative offered by House Republicans several days ago.

McCain, who flew to Washington after Friday night's presidential debate in Mississippi, spent part of Saturday working the phones and "helping out as he can," aide Mark Salter said. But McCain did not enter the Capitol, where his colleagues were voting on a $634 billion spending bill that ended a ban on drilling off the Atlantic and Pacific coasts, and sent billions of dollars to the military.

McCain supports such measures. But the vote would have been difficult for him because the bill also included more than 2,000 pet spending projects worth more than $6 billion. That is the kind of pork barrel spending that McCain has pledged to end.

Obama campaigned in North Carolina and Virginia. Aides said he placed calls to Paulson, Reid and a key House member to keep tabs on the finance negotiations.
Both presidential candidates are trying to position themselves to take at least partial credit if an accord is reached. Obama spokesman Tommy Vietor offered new details from Thursday's contentious White House meeting that underscored the divisions among lawmakers trying to reach an agreement.

He said Obama encouraged Paulson to work with the House Republicans. Since then, Vietor said, Obama has urged negotiators to find a compromise with enough options so the treasury secretary has the flexibility "to act in an effective manner to stem this crisis."

The Frankfort State Journal
www.state-journal.com

The Associated Press Contributed to this report.


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