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At least the FDIC knew just where to find the grizzled veterans: right here in the heart of Texas, where a banking cataclysm two decades ago wiped out more than 650 Texas banks and savings and loans. The FDIC has brought 44 of its own veterans out of retirement in Dallas alone — far more retirees than it has reinstated from any other city — to deal with an outbreak of bank failures across the country.
"We've been there and done that, and have the scars and bullet holes to prove it," says Steve Scurlock, a state bank regulator in the '80s and now executive vice president of the Independent Bankers Association of Texas. "I still wake up in cold sweats" thinking about the bad old days.
But there's a twist: These days, the FDIC needs expertise from Texas, but not necessarily in Texas. Despite — perhaps because of — the financial wreckage in its past, Texas has escaped the worst of the current economic and financial maelstrom that has devastated states such as California, Nevada and Florida. "The recession's here, but it's nothing like it is in the rest of the country," says Texas Banking Commissioner Charles Cooper.
Consider:
•Across the country, nearly 29% of subprime mortgages were at least 90 days late or in some stage of the foreclosure process in the third quarter. In Texas, the figure was less than 17%, according to the Mortgage Bankers Association.
•Texas banks have stronger defenses against loan losses than banks nationwide. Their problem assets — non-current loans plus real estate seized from delinquent borrowers — are equal to just 17.2% of their defenses — equity capital plus reserves against loan losses. Nationwide, the figure is 24%. In neighboring Arizona, where a real estate bubble burst, the figure is 51.2%. Anything over 100% indicates a bank is in danger of failing.
• Texas banks were five times as profitable as U.S. banks overall and were charging off bad loans at less than half the rate of banks nationwide during the third quarter, the FDIC says.
• Just five banks have failed in Texas this year, fewer than 4% of the 140 bank failures nationwide. From 1988 to 1991, Texas accounted for more than 37% of bank mortality.
• The jobless rate in Texas was 8% in November — painfully high but 2 percentage points below the national rate. "Our fundamentals are very strong," says Mine Yucel, senior economist at the Federal Reserve Bank of Dallas. Forbes magazine recently rated Texas' economic climate No. 1 in the country.
Texas certainly isn't immune to nationwide problems. The weak economy is pinching Texas employers, too. And Commissioner Cooper worries that bad commercial real estate loans could be "the next shoe that's dropping."
Even so, the Lone Star State seems to have dodged the subprime bullet — and maintained a semblance of economic well-being — in the midst of the worst downturn since the Great Depression. And that is a bit puzzling even to Texans themselves: "We're not smarter than everybody else," says Barton Smith, director of the Institute for Regional Forecasting at the University of Houston.
So what's the explanation? Analysts offer three.
Sanity in mortgage market
Texas housing prices never touched the sun and never came crashing down. From January 2000 until they peaked in 2006 or 2007, the price of single-family homes rose 174% in Los Angeles, 181% in Miami, 135% in Las Vegas and 107% in 20 metropolitan areas tracked by the Standard & Poor's/Case-Shiller Home Price Indices. In the Dallas-Fort Worth market, by contrast, home prices rose less than 27% before peaking in June 2007.
In Texas, supply and demand for housing remained more or less in balance while much of the rest of the country went topsy-turvy. Texas offers residential developers lots of wide-open spaces and imposes few restrictions on home building. So there's usually a plentiful supply of new housing to keep a lid on pricing — and a plentiful supply of migrants, from other countries and other states, to absorb it.
"Texas really didn't have the run-up in the housing market," says Thomas Dujenski, director of bank supervision at the FDIC's Dallas regional office. "There wasn't the speculation" that occurred in other markets. And because prices never scaled ridiculous heights, lenders didn't need to come up with "exotic products" — teaser rates, interest-only payment plans — to fit home buyers into houses they couldn't afford.
Besides, a lot of the stuff that got other places into trouble is illegal or severely restricted in Texas. Texas frowns, for instance, on home-equity loans. They weren't even legal there until 1997. Now, total mortgage debt — including home-equity loans — cannot exceed 80% of a home's value when the loans are made, and Texas homeowners cannot take out more than one home-equity loan at a time. In other states, "People were using their homes as piggy banks," says John Heasley, general counsel for the Texas Bankers Association. No such self-indulgence in Texas.
In the subprime mortgage market, Texas law also restricts balloon payments to no more than twice what borrowers had been paying earlier; bans most negative amortization loans (in which the loan balance grows as borrowers write checks because payments don't cover interest); and prohibits the prepayment penalties that elsewhere locked hapless home buyers into high-cost mortgages. And when Congress passed legislation regulating mortgage brokers in 2008, Texas and North Carolina were the only states already meeting the new law's national standards, according to Commissioner Doug Foster of the Texas Department of Savings and Mortgage Lending.
High energy prices
Peaking last year at $147 a barrel, high oil prices threw Texas a lifeline when the rest of the country was sinking into recession. The Texas economy isn't as dependent as it used to be on energy. Oil and gas production now accounts for about 6% of Texas' economic output, vs. almost 20% in 1981, according to the Dallas Fed. But Texas-based drilling companies get work around the world when energy prices are high. So an uptick in oil and gas prices can still help the state, sometimes working to delay or fend off recessions that hit the rest of the country.
Texas, for instance, escaped the 1990-1991 recession, partly because Texans benefited from the high energy prices that hurt everyone else. Same thing happened this time. Dallas Fed economist Yucel believes high energy prices bought Texas about a half-year reprieve: The recession that began in late 2007 elsewhere didn't reach Texas until mid-2008.
Battle scars
"We've got a lot of veterans who went through the wars," says veteran Texan banker George Jones Jr. "I'm not saying we're smarter, but we're more experienced." What happened to Texas banks from 1985 to 1993 was nothing short of a financial massacre: 658 banks failed — more than the 635 banks that still survive.
They were done in by extraordinary events — and by their own hubris. "Before the '80s, Texans thought they were invincible," says Joseph "Jody" Grant, a veteran Texas banker who lived through the crisis and later wrote a book about it.
Oil prices were surging — hitting a peak of $30 a barrel in December 1985 — and Texas' business elite went a little crazy.
The thinking: "Oil was selling at $30 a barrel, and it was going to $70, and it would never go below $30 again," Banking Commissioner Cooper recalls.
Banks stumbled over one another to finance speculative oil-exploration and real estate schemes. Dumping fuel on the fire: savings and loan associations. Traditionally humble mortgage lenders, S&Ls were deregulated by Congress in 1982 and started throwing money around, financing commercial real estate projects. "There was mass hysteria," Grant says. "You couldn't fight it."
An ordinary bank might finance a promising shopping center by a reputable developer on a busy street corner only to learn later that S&Ls were financing identical projects on each of the three adjacent corners. "There was a saying that was popular in the Southwest and mainly Texas: God only made so much real estate," says former Texas banking commissioner Jim Sexton. Which might be true — "but I seriously doubt He wanted it all developed in 1983."
Then, Saudi Arabia started pumping up the volume in oil production, and prices fell to $9.75 a barrel in April 1986. Result: catastrophe for Texas. When the smoke cleared, nine of Texas' 10 biggest banks were gone — closed by banking regulators or sold to out-of-state institutions.
Among the casualties: Texas American Bancshares, the Fort Worth banking company where Jody Grant was CEO. Grant left banking, spending time as CFO at Electronic Data Systems.
But in 1998 Grant returned to the industry, bringing along fellow veterans of what he calls "The Great Texas Banking Crash," including George Jones. They founded Texas Capital Bank in Dallas. "We took the lessons from the past and put them to work," Grant says.
Getting a second chance
Texas Capital was determined to do things right the second time around. It built a strong capital cushion against loan losses. Although it focuses on midsize ($10 million to $200 million in annual revenue) companies and wealthy individuals, it avoids concentrating loans in any one industry. It shied away from acquisitions, which burned Texas American back in the '80s. "You sell a little of your soul when you acquire," says C. Keith Cargill, president of Texas Capital Bank.
Most of all, it resolved to defend its credit standards from pressures inside the bank and out. "You never compromise credit quality," Cargill says. At the banks that stumbled in the '80s, "You'd have one or two guys who had such strong personalities that they dominated credit" — they could get the bank to cut corners to get deals done. Many other lenders paid loan officers for churning out loans and never penalized them if the loans went bad later.
Texas Capital's Cargill built a compensation system that holds loan officers accountable for the loans they make. One year, the bank's top loan producer didn't get a bonus because some of his loans had soured. (The Federal Reserve has since proposed that banks rewrite compensation policies to ensure that they don't give employees incentives to take excessive risks.)
Other bankers learned similar lessons. "I don't think there's any replacement for experience," says Jimmy Campbell, CEO of Community Bank in Granbury, Texas.
"I learned to do much less speculative lending." Before the '80s crash, some banks would lend money to developers based on estimates of what a property would be worth a couple of years later or make loans on oil rigs based on optimistic forecasts of rising oil prices.
And remembering the destructive role of S&Ls in the '80s, Texas bankers learned to say no the past few years to loans that were being approved by reckless mortgage lenders. "In my 40 years in this business, you've always got a juvenile delinquent down the street," says Dick Evans, CEO of Cullen/Frost Bankers, the only big Texas bank that survived the meltdown of the 1980s and early '90s.
Before the rest of the financial industry, Texas bankers learned that good times don't last forever. "When everybody thinks that we have somehow figured out how to repeal the business cycle, don't believe it," says former FDIC chairman William Isaac. "The time to be cautious is when everyone starts to believe the sun is always shining."
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