UMB chief: Fed's response to America's financial meltdown is misguided

Mariner Kemper isn't just a free-market advocate; he's a self-described "raging capitalist" who thinks America is in big trouble if the government continues to rely on leverage to solve the country's economic woes.

Kemper, 37, is chairman and CEO of Kansas City-based UMB Financial Corp. (Nasdaq: UMBF), a $10.2 billion multibank holding company that has received attention aplenty for sticking to its prudent lending practices in the age of excess. He's proud that UMB, which operates three bank branches in Springfield, is standing tall on the battered banking landscape, but he's perturbed by the federal government's response to the industry's near collapse.

"We should be lending less as an industry," he said during a sit-down interview with Springfield Business Journal following a July 14 luncheon at the Springfield Area Chamber of Commerce. "You can't solve leverage with leverage."

Kemper's visit was arranged through Ann Marie Baker, president of the southwest region for UMB, and Michael Garner, the bank's vice president of commercial lending. Garner also is chairman of The Network's 2009 Advisory Committee.

Speaking to an audience of more than 80 young professional members of The Network, Kemper said banks and auto manufacturers should have been allowed to fail. Without the taxpayer-funded bank bailout and subsequent stimulus package, the economic shakeout would have been more devastating, but likely much quicker, he said.

Prior to the current recession - now entering its 20th month - the country's longest recession lasted 16 months, noted Kemper, who predicted that the value of the U.S. dollar will continue to plummet followed by a steep inflationary interval.

In Kemper's opinion, the roots of this recession can be traced back 30 years to the Carter Administration, when he said the government launched programs to promote and advance homeownership. He said those initiatives gained even more momentum in the Clinton and George W. Bush years, which saw the unparalleled expansion of Fannie Mae and Freddie Mac.

But the leverage game really kicked into high gear for many lenders earlier this decade when staunch demand for home mortgage loans was amplified by historically low interest rates. Many banks just couldn't help themselves - it's that cut-and-dried, Kemper said.

"There's no debate that leverage brought this economy to its knees," he said. "We all take risks, but we take calculated risks, if we're smart."

UMB deliberately steered clear of low- and no-documentation loans as well as auction-rate securities and speculative real estate development, and when the inevitable financial meltdown occurred, Kemper said UMB had no interest in federal bailout money.

U.S. Treasury funds extended to banks through the Troubled Asset Relief Program passed by Congress in October - legislation Kemper refers to as "political candy" - were sure to have government strings attached, but UMB simply didn't need a capital infusion, he said. In the third quarter of 2008, when most banks were swooning from immense loan losses, UMB reported a 4 percent year-to-year increase in earnings per share and a 1.1 percent increase in profitability during the same period.

In the first quarter of this year, however, UMB's earnings per share were down 30 percent from first-quarter 2008 due to volatility in equity markets and a low interest-rate environment causing pressure on the bank's net interest margin. Kemper said UMB's old-school lending philosophy and its diverse range of services, which include mutual funds, corporate trusts and health care cards, will guide the bank through the economic recovery. According to a "stress test" conducted by SNL Financial earlier this year that ranked the best capitalized bank holding companies with assets between $1 billion and $100 billion, UMB was No. 5 out of 418.

More concerning to Kemper are the proposed regulatory reforms facing the beleaguered banking industry. He favors a single federal regulator that would replace the Securities and Exchange Commission and Office of the Comptroller of the Currency - two agencies he said consistently send conflicting messages to the banks they supervise.

But perhaps the "scariest thing" on the horizon, Kemper suggested, is the development of a competition-killing Consumer Financial Protection Agency that would have sweeping authority over the types of financial products offered by banks and financial services companies. The Obama Administration - and the consumers it seeks to protect - would be better served by an incentive-based approach, Kemper said.

"All this seems to be so retaliatory and bureaucratic when all you need to do is incent the right behavior," he said.

Kemper envisions a tiered banking system that requires highly leveraged institutions that routinely make riskier loans to pay higher premiums for federal deposit insurance. Using an auto insurance analogy, he said banks on the opposite end of the spectrum would receive rebates or similar incentives for staying out of trouble.

On a positive note, Kemper sees regional banks as the strongest level of the country's financial apparatus. Many community banks are struggling to maintain adequate capital levels, and gargantuan investment banks have felt the consequences of their dalliances with credit-default swaps and other toxic derivatives, he said.

Ryan Stack, general manager of Springfield-based SRC Heavy Duty, said he's not a banking expert, but some of Kemper's remarks about government intervention did resonate.

"I'm not a big fan of propping up anything when you don't see an exit strategy," Stack said. "From our standpoint, any time we get into a deal, we talk about what the end of it would look like. It is concerning that we haven't done that in a lot of the vehicles the government's used (to stabilize the economy)."

On July 22, UMB will announce its second-quarter earnings in a conference call. At press time, the bank's stock was trading at $40.95 per share, with a 52-week range of $33.65 to $69.60.