Good morning. We were pleased yesterday to announce a positive first quarter earnings report. Both first quarter earnings per share, at $1.15, and net income, of $151 million, more than doubled the comparable figures for the first quarter of 2009.
It is standard, on occasions such as this, for a chief executive to focus on financial results and what they mean for the company—especially when those results are as positive as those which I have cited. Indeed, there are many good reasons why I could do just that this morning. We have just completed the most recent of 135 consecutive quarters without a loss, a string of profitability extending over a 33 year period. During that period, not only have others not performed as well nor as consistently, but there have been 2,653 outright bank failures—including 140 last year alone, when the banking industry as a whole, outside of the five bank holding companies with the largest trading revenue, lost $7.4 billion. In contrast, since the onset of the financial crisis in the fall of 2008, we have been one of just two of the top 20 banks not to have reduced or omitted our dividend.
All this surely speaks well for us. But, if you’ll permit me, I’d like to take on a series of broader themes this morning—including a more general discussion of M&T, the communities in which we do business, and the aspects of financial regulation, government debt and deficits which affect both M&T and our communities.
You will not be surprised by my saying that the earnings we have announced and, more generally, M&T’s consistently positive record during the current deep economic downturn, inspire me to be proud of the bank and all its employees. But after 27 years in this position and more than 40 years as a banker, the reasons for that pride go far beyond any one quarter’s results. They reflect, rather, an understanding of exactly what it is that makes us successful—an understanding of how we do business, as lenders, employees and members of our communities. It’s what we have recently begun to refer to as the M&T Story. I’m not sure if everyone would find it to be a page-turner—but I know I find it compelling.
It’s a story built on our way of doing business—a culture which has led to consistently positive financial performance. Its key elements include steady and prudent expansion—both by attracting new customers and new deposits, as well as 21 acquisitions in 23 years, transactions completed at a reasonable price and smoothly integrated by our experienced workforce. They reflected, too, our dedication to controlling costs that has made us among the most efficient of our banking peers.
Most of all, our performance has hinged on what we call our conservative credit culture. That means that we realize that the only good loan is one that will be paid back. And, yes, that means that during the recent years of irrational exuberance in the financial industry we did a pretty good job of staying away from the punchbowl; our shareholders, employees and the communities we serve are better off for it. So when you hear people bashing banks as the cause of our economic problems, you can tell them loud and clear to leave M&T out.
Getting the basic building blocks of banking right makes for possible additional chapters of the M&T Story—and they should make for good reading, too. Our employees have good reason to see working at M&T not just as a job—but as the basis of a career. The average tenure of an M&T employee is slightly more than 10 years—which is over twice as long as the average for firms like ours—and 75 percent of our 13,828 employees own shares of our stock. It’s been a reasonable investment choice. Including reinvested dividends, its value has increased at a compounded annual rate of 20.6% since January 1, 1980. That's the 15th best return of 743 publicly-traded equity securities which have been continuously-traded during that period. That 20.6 percent increase is only slightly lower than the 21.7 percent rise seen in the value of shares of Berkshire Hathaway, widely-considered the investor gold standard.
Their dedication and the prudence of our approach combine to make it possible for M&T to continue to be doing new business, even in today’s hard times. At a time when we hear how difficult it is to obtain credit, M&T has been active. In 2009, we made 147,026 new consumer loans, amounting to $9.3 billion, as well as initiating 11,266 commercial credits, with a total value of just under $7 billion. A great many of the latter went to the small businesses which are the backbone of healthy communities. Indeed, of all banks in the country—including the biggest—we made the ninth-largest number of Small Business Administration or SBA loans. The quality of our portfolio has allowed us to keep our lending window open, to offer our usual quality of service—made possible by our 778 branches and 1,767 ATMS, located in convenience stores, supermarkets, highway rest stops and airport corridors in the areas we serve.
We do much more than provide banking services to our communities, however. We are committed to their economic health and prosperity.
Which brings me to the part of the M&T Story that I like the most: the ways in which we have been able to help our communities that are not about business alone. Here I think of the $133 million our charitable foundation has made in donations over the past 10 years; in the past year alone, we gave $15.1 million in grants to 2,941 non-profit organizations. A particular example is the work dozens of employees have done at the Westminster Community Charter School here in Buffalo—helping one of the city’s worst schools become one of its best. I couldn’t even begin to list all the ways and places where M&T employees have volunteered a staggering 342,000 hours of their time—at schools, youth sports leagues, food banks and homeless shelters.
As positive as the M&T Story may be, however, there is simply no getting around the fact that we live in a time of unusual crises. Many of the crises we face are so well-known that we can refer to them in words or phrases: wars in Afghanistan and Iraq; unemployment and underemployment reaching 17 percent; upheaval on Wall Street. But what about the future of our communities?
In the long run, our communities cannot remain healthy unless our national economy recovers, so I am deeply concerned that there is virtually no national dialogue about the financial condition of state and local government. Unless there is a radical change, vast sections of M&T’s geography will continue to deteriorate. If past is prelude, the future appears bleak and potential increases in an already-high tax burden will make job creation even more difficult.
Why do I say this? Consider the following. At the end of the last fiscal year, the deficit of the Federal Government amounted to $1.4 trillion, three times larger than five years ago. Ongoing deficits lead to increasing long-term debt—and it is generally accepted that once the economy improves the government will have to reduce debt either through cutting expenses or increasing taxes. In either case, funds to invest in job creation will be limited. The United States has never had an economic plan to assist in developing particular industries or geographies, leaving such work to the entrepreneurial spirit of our citizens—with a fair degree of success. But higher taxes will make job creation even more difficult.
The federal budget picture is just the beginning. We cannot overlook the dismal condition of state and local finances. Total state government debt at the end of 2008 amounted to $416.8 billion and these numbers do not include the $1 trillion in unfunded liabilities of state employee pension, benefit and health care plans. Since 1998, state budgets have grown by 7.6% annually or at more than three times the rate of inflation.
State debt in Maryland, one of the states in which we do much of our business, has increased 8.3% annually since 2002. In the past two years alone, New York State debt has increased 7.4% per annum, on average. This fiscal year, the powers that be in New York State are already 20 days late in putting a budget together while facing a hole of $12 billion for the current fiscal year. It has been projected that all the states together are facing a budget shortfall of somewhere between $180 and $350 billion in 2011 with a fall off of stimulus funds.
Local government is no better off. The controller of Harrisburg, PA is looking to file for bankruptcy, while the Mayor of Los Angeles wants to close city departments two days a week in order to save money. In the meantime, libraries, schools and museums are being closed and university systems are being crippled through layoffs. Our bridges and roads sometimes look like they were imported from a third world country.
Meanwhile, there is a dissolution of the social fabric of the communities that we serve, caused by poverty, insufficient job formation, poor education and a bloated but still ineffective government infrastructure that is responsible for the job creation that does exist and the attendant costs which are the root cause for businesses and people fleeing our communities for better opportunities elsewhere.
Here in our headquarters city, we have lost population 18 years in a row. More than 30 percent of the population, and 40 percent of the children, are living in poverty. The numbers are only slightly lower in two of our other regional market hubs, Baltimore and Harrisburg. Schools are the best hope to help the disadvantaged and to lay the groundwork for economic renewal, but ours are failing far too many of their students.
In both the cities of Buffalo and Baltimore, fewer than 63 percent of those who enter the ninth grade ultimately graduate from high school—let alone go on to college and obtain a degree. In Buffalo, almost 20% of the children in its public schools are in charter schools, primarily because their parents are dissatisfied with the school system.
And too many of those who do successfully complete college move away from the places we do business. They leave behind a region whose public finances and overall economy, like those of so many areas of the country, both urban and rural, are in shambles.
We see an ever-growing government which depends on a consistently-shrinking private economy. Since January 2000, average public sector employment in the United States as a whole has grown by 10.5 percent, while the private sector job total has decreased by 1 percent. The share of U.S. personal income derived from public employment, social benefits and pensions was 29.4 percent in 2009, compared to 19.0 percent in 1962. Looked at another way, the number of persons depending on government grew by 2 and a half times the rate of increase of the total U.S. population over this period. This means that government is relying on a smaller and smaller private economy—even as it competes with that economy for talent. One can describe this as a slowly-tightening noose on private industry.
In Upstate New York, we face an especially toxic combination: high taxes and inefficient public services of poor quality. Property taxes per capita remain at one of the highest levels in the nation in these regions. As young people continue to leave for lower-cost, higher-growth regions, they leave behind a smaller and smaller private workforce to pay the cost of a bloated, burdensome public sector and the pensions of its retirees. Consider the fact that in Upstate New York, since January 2000, average public employment increased 50,000 or 8.3 percent, while private employment decreased 82,800 or 3.3 percent. In 2009, annual public sector wages in Upstate New York were 14 percent higher than private sector wages. As a result, New York local government, outside New York City, has seen its debt level grow at almost 3 times the rate of inflation.
You simply cannot sustain an increasingly expensive government with a smaller and smaller private economy. Or, as the late economist Herbert Stein famously put it, “If something cannot go on forever, it won’t.
So it is that concerted public action to improve our economy is constrained, not only by federal debt and deficit but by the dismal condition of state and local finances. We already spend at too high a level with too little to show for our spending; we have already incurred huge amounts of debt, constraining our capacity to undertake new initiatives. What’s more, the state fiscal situations continue to worsen thanks to sharply rising deficits. This combination of excessive debt and ongoing high spending robs us of the resources needed to provide the infrastructure of economic growth, including well-supported colleges and universities, as well as the roads, rails and bridges that pave the way for commerce. Simply put, there’s no money left for the things we need most to build long-term prosperity for our communities.
I said some years ago that we in Upstate New York were in danger of becoming more and more like the moribund old socialist economies of Eastern Europe. In the time since, those countries have found the entrepreneurial spirit that once characterized western New York and all America, while we look increasingly arteriosclerotic. We are at grave risk of entering a downward spiral.
Unless we begin to make tough choices about the size, cost and purposes of government, the effects on our way of life are frightening to contemplate. And yet we seem unable to coalesce, in a bipartisan fashion, to make progress in addressing the key issues of our time.
This is particularly true, from M&T’s perspective, when it comes to the need to reform the regulatory structure of the financial services industry of the United States, whose deficiencies were exposed by the recent market upheavals. The slow rate of progress in addressing what went wrong in the recent bubble years has posed a problem in a multitude of ways. Investors and entrepreneurs have remained skittish, wondering whether other shoes will drop. Banks face an uncertain regulatory environment, which has itself created impediments to a robust economic recovery.
It would appear that the glacial pace of reform has begun to thaw. It’s my hope that the Senate and House will find consensus in dealing with these problems. If we are beginning to make progress in crafting a new regulatory approach to the financial services industry, we have yet to begin a serious reform of two major institutions whose collapse played such a central role in the 2008 credit crisis. I refer to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, the secondary mortgage market giants commonly known as Fannie Mae and Freddie Mac, respectively.
At the end of 2009, their total debt outstanding either held directly on their balance sheets or guaranteed on mortgage securities sold to investors was $8.1 trillion, which compares to $7.8 trillion in total marketable debt outstanding for the whole U.S. Government. At year end, their debt represented 15.4% of all U.S. Credit market debt outstanding. This debt has the implicit guarantee of the U.S. Government, but it is not reflected on its balance sheet.
We cannot, in my view, make serious progress in reforming these enterprises unless we fully confront the extent to which their outrageous behavior and business practices have had on the entire United States commercial banking sector. While public discussion has focused more on the federal taxpayer bailouts of banks, automakers and insurance companies, the scale of the rescue which was required when Fannie and Freddie were forced into conservatorship—their version of bankruptcy for these government-sponsored enterprises, or GSEs—was simply staggering.
To date, the federal government has been forced to pump no less than $126 billion into Fannie and Freddie, yet one seldom hears them mentioned in the same breath as others who taxpayers have rescued. They are, however, in the same bad company as AIG, which has absorbed $70 billion, and General Motors and Chrysler, whose bailouts totaled $77 billion and banks, which saw an infusion of $205 billion, of which $136 billion has been repaid.
The loss of value of Fannie and Freddie’s preferred shares has hurt private investors as well, leading to losses estimated at $34 billion—including as much as $15 billion experienced by approximately 2,300 banks, including M&T. Approximately 1,900 of these affected institutions were community banks with less than $1 billion in assets, thus weakening the capital structure of the whole banking system. Put another way, Main Street banks were forced to absorb a loss from Fannie and Freddie of $1.8 billion, while Wall Street banks, through the TARP program, were getting $169 billion in help. While the largest institutions have since repaid most of their TARP funds, this assistance allowed them to emerge from the crisis in stronger competitive position, in contrast to their smaller counterparts.
Worse still, Fannie and Freddie continue to operate deeply in the red, with no end in sight. The Congressional Budget Office has estimated that were the operating costs associated with the GSEs to be included—as it properly should—in our accounting of the overall federal deficit, that figure would be greater by $291 billion. There was a time, as recently as September 1970, when a figure of that magnitude was equal to the entire debt of the federal government.
Worst of all has been the cost to the public associated with tracts of foreclosed homes, left behind by households lured into inappropriate mortgages by the lax credit standards made possible by Fannie Mae and Freddie Mac promising to purchase and securitize millions of subprime mortgages. One worries, as well, about the quality of the many homes that were hastily put up.
It all happened in the name of what is said to be the American Dream of homeownership. There’s no evidence, though, that Fannie and Freddie helped much, if at all, in this regard. Despite all their initiatives since the early 1970s, shortly after they were incorporated as private corporations protected by government charters, the percentage of American households owning homes has increased by just four percentage points to 67%. In contrast, between 1991 and 2008, the homeownership rate in Italy and the Netherlands increased by 12 percentage points and increased by 9 points in Portugal and Greece. In fact, higher homeownership rates can be found in at least 14 other developed countries, including Spain, Iceland, Ireland, and Hungary, none of them known as paragons of economic prosperity nor as advertisements for home-owning. In Poland, the homeownership rate is 75 percent. Of particular interest is Canada, which has neither the equivalent of Fannie and Freddie nor even the mortgage-interest tax deduction—but where the household homeownership rate of 68 percent also exceeds that of the U.S. Nor is it a coincidence that Canadian banks have weathered the financial crisis particularly well--and required no government bailouts.
This mediocre U.S. homeownership record developed despite the fact that Fannie and Freddie were allowed to operate as a largely tax-advantaged duopoly, supposedly to allow them to lower the cost of mortgage finance. But a great deal of their taxpayer subsidy did not actually help make housing less expensive for homebuyers. A 2004 Congressional Budget Office study, for instance, found that, although the GSEs received $23 billion in federal subsidies, they passed on only $13 billion to homebuyers. What happened to the rest? Much of it helped to enrich Fannie Mae and Freddie Mac’s own executives. For example, from 1998 through 2003, a former Fannie Mae CEO received $91 million in compensation. He was far from alone. In 2006, the top five Fannie Mae executives shared $34 million in compensation, while their counterparts at Freddie Mac shared $35 million.
This is not private enterprise—its crony capitalism, in which public subsidies are turned into private riches. It happened because those executives were accountable not to shareholders but to their masters in Congress who created and protected these enterprises. It is no accident that Fannie and Freddie, from 2001 through 2006, spent $123 million to lobby Congress, the second-highest lobbying total in the country. But remember—this was really one part of the government lobbying another part in order to benefit itself. And that lobbying was complemented by sizable direct political contributions to members of Congress. This, at a time when cries for change were growing louder. I wish I could tell you that there has been an end put to this sort of thing. But in 2009, the top five executives at Fannie Mae received $19 million in compensation. The chief executive officer earned $6 million.
Changing this terrible situation will not be easy. The mortgage market has come to be structured around Fannie and Freddie. And powerful interests are allied with the status quo. Indeed, I recall a personal conversation with a member of Congress who, despite saying he understood my concerns about the two GSEs, would never push for significant change, because, as he put it, “they’ve done so much for me, my colleagues and my staff.” For me, this is a deep problem.
No more serious, of course, than the problems of debt and deficits I discussed earlier. The challenge of making progress on all of these problems was well-described by no less an authority on politics than Niccolo Machiavelli when he wrote, in The Prince, “There is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order.”
Nonetheless, my message today is that the powers that be must get to work on the reform of Fannie Mae and Freddie Mac. A healthy housing market, a healthy financial system and even the bond rating of the federal government depend on it. So, too, must business and labor, indeed interests of all types, subordinate their private interests to a larger public interest—that of putting our financial house in order so as to right our economy. Indeed, if we cannot put aside our private interests and consider the general interest—all of us will ultimately suffer.
I began this morning by talking about what we call the M&T Story. I wish, very much, that this story did not have to include chapters on our ongoing concern about the sorry state of our public finances and federal financial regulation. There was a time when these matters were reliably and predictably managed. That is an approach much to be preferred, one which allows bankers simply to be bankers—for the M&T Story to be focused on that which we do best: sound underwriting and great customer service, provided by dedicated employees. Lest I seem to be sounding too negative a note, let me stress how I am proud to stand here this morning, as your chairman and CEO, and to be able to say that, even as change has and continues to swirl around us, those parts of the M&T Story continue, with, I hope, many more chapters yet to come.
Robert G. Wilmers
Chairman of the Board
and Chief Executive Officer