Fed official explains agency's response

By NANCY KIMBALL/Daily Inter Lake

It was no news to the Kalispell Chamber of Commerce crowd on Wednesday that the global financial system is "undergoing a period of extraordinary stress - stress on a scale not seen since the 1930s."

The words from Jim Lyon, first vice president and chief operating officer of the Federal Reserve Bank of Minneapolis, rang true.

But what the 240-plus crowd wanted to know wasn't so easy to encapsulate. Top questions were: Will current aggressive Federal Reserve policies change under the Obama administration? Are credit default swaps reliable investing tools? And what controls are in place for spending the government's $700 billion financial rescue fund?

Lyon's speech to the Kalispell Chamber's monthly meeting came two weeks after the Fed cut its target rate to 1 percent, a level not seen since 1959.

That and other unprecedented moves from the Federal Reserve have been tooled to avert the nation's worst economic downturn since World War II ended.

"It's our clear view that whenever possible, problems should be addressed through private-sector solutions," Lyon said. But he then detailed a series of interventions the Fed has taken over the last 15 months.

It facilitated JP Morgan Chase's buyout of Bear Stearns in March, one of the nation's five big independent investment banks at the time, because of the economic domino effects from its failure.

"The systemic impact on other market participants of chaotic unwinding was too big a risk," Lyon said.

But on Sept. 14 the investment bank Lehman Brothers was allowed to fail because, he pointed out, it didn't have enough collateral to secure a Fed loan. The turmoil that followed prompted major restructuring of the three remaining investment banks - Merrill Lynch was acquired by Bank of America, and Goldman Sachs and Morgan Stanley converted to bank holding companies.

The potential failure of the world's largest insurance company, AIG, surfaced a day later. Again, Lyon said, "major systemic implications" prompted the Fed to decide it also was too big to fail and the Fed established a "credit facility" from which AIG could borrow and take the time necessary to sell its assets in an orderly manner.

"This transaction constituted the largest government rescue of a private company in U.S. history," Lyon said.

This series of failures and bailouts gave rise to a series of Federal Reserve-backed credit facilities with varying regulations designed to give troubled companies another chance. Results on a national and global scale are still playing out.

Closer to home, Glacier Bank President Bob Nystuen maintained in his introductory talk that local banks still are healthy.

"We have a huge base of net worth compared to the rest of the country," Nystuen said. When it comes to earnings, "we've never had a better year financially." And the quality of loan portfolios held by area banks still is very solid, he said.

Despite recent statistics showing Montana's highest home foreclosure levels are in Flathead County, Nystuen said Glacier Bank has none.

Real-estate loans this year were very good quality, he said, and a tightening of the secondary market, where some institutions resell their loans, was a change for the better. Last month alone, he said, Glacier Bank approved nine new residential construction loans.

But everything is not rosy.

"We will keep an eye on home equity," he said, because families are beginning to rely on credit cards and non-income streams. "People are starting to put second mortgages on (homes)."

Average balances in business and personal checking and savings accounts have dropped, he cautioned, and bank loan customers "are starting to lag on their payments; we have more past-dues."

NYSTUEN suggested ways businesses can float through the financial squeeze:

. Get creative in figuring out innovative ways to move the business forward, he said, and ask employees for their ideas.

. With higher unemployment rates - 6.5 percent nationally, 3.8 percent in Montana and 4.6 percent in Flathead County - now is the time to hire new people.

. Step up your level of service and "exude prosperity," he said, with a crisp, clean, attractive workplace.

. Get involved with charities.

. Improve your own professional skills through college classes and other training.

. Advertise as if your business' life depends on it, because it just might.

Reporter Nancy Kimball may be reached at 758-4483 or by e-mail at nkimball@dailyinterlake.com