A ‘Who’s Who’ in banking and finance tackle the issues Entering a recession is not the ideal place to conduct business. But it is the hand we have been dealt and the one that we must now play out. No industry will play a more vital role in guiding business through such a time than our bankers and financial services companies.
In this, our inaugural “Who’s Who in Banking and Financial Services,” we have queried a range of industry leaders and asked them to gauge the prospects for Rhode Island’s economic climate during such a difficult time.
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Name: David F. Brochu
Company/organization: Progressive Financial Strategies
Title: President
How does the current decline in consumer confidence and drop in gross domestic product impact your industry? As investment advisors we are in the business of managing people’s serious money. This is the money they do not want to lose and, in fact, while the current decline in consumer confidence and gross domestic products has a negative impact on the financial markets, it has an overall positive impact in our business as more people seek professional advice. It of course makes our job more challenging as we try to select investments that will not only provide long-term returns but will protect people during this time of economic weakness. In short, our job becomes one of helping people navigate a difficult time, and because people are looking for that assistance right now, it helps our business.
Is Rhode Island better prepared or less prepared to handle a recession than it was in 1991? In general, I think Rhode Island is better positioned (as is the whole country) to handle a recession than it was in 1991. That isn’t to say that there have been any fundamental changes in Rhode Island that make it more recession proof. The base of the Rhode Island economy is no more diversified. In fact, in some ways is less diversified than it was in 1991. The factors that will allow Rhode Island to weather this recession are the same as those across the country, and that is that unemployment is still at historically low levels. Federal tax rates are the most accommodating they have been in decades and inflation is under control. The challenges that face the state of Rhode Island continue to be the high cost of doing business and business hostile policies at the corporate level.
What critical bank and finance issues must the country address as it looks to bounce back from recession? In general, the banking and financial infrastructure of the country is very sound. The Federal Reserve has already moved aggressively to make the cost of borrowing lower, and our financial services industry is still the most efficient in the world. The current recession has more to do with correcting the excesses of the preceding 36 months and the temporary issues brought on by the tragedies of Sept. 11 than it does with any fundamental problem with our banking or financial systems. In fact, the overall health of our banks is good and improving as their interest income increases because of increasing margins as the Federal Reserve continues to lower interest rates. The key to bouncing back from this recession will be the return of consumer confidence and a reduction in excess inventories across a wide variety of industries. Recessions aren’t bad. They are a normal part of the business cycle, and we have been off the hook for some time here.
What guidelines should people be following as they invest money these days? Patience and clarity. The patience to stick with good quality investments through difficult times and the clarity to know which investments are good quality. Stocks do not simply come back because we want them to, and low prices do not indicate a good value. Companies that can continue to produce positive cash flow and generate profits will perform well. This is not a speculative environment and investments based on concepts are not where you want to be at this time. Look for industries and sectors in the economy where valuations are reasonable and the goods and services produced are necessities. And most importantly, understand that the last few years of the 1990s was an anomaly and will not return. That doesn’t mean that one cannot make money. It simply means that the rules of risk and reward are back in place and one clearly needs to understand the risk one is taking in exchange for the anticipated reward. There is still money to be made. It is just going to take a little more work.
Name: Richard Godfrey
Company/organization: Rhode Island Housing and Mortgage Finance Corporation
Title: Executive director
How does the current decline in consumer confidence and drop in gross domestic product impact your industry? As long as the interest-rate environment stays favorable, there will be very little effect. We serve first-time homebuyers with low-interest mortgages. Even in downturns people still dream of owning their home.
Is Rhode Island better prepared or less prepared to handle a recession than it was in 1991? Better. State government is much more focused on economic issues today than 10 years ago and our economy is more diverse. The growth in tourism and financial services in particular spreads the risk.
What critical bank and finance issues must the country address as it looks to bounce back from recession? Reaching out to traditionally under-served markets will cushion the blow by creating new business opportunities even as existing ones contract. We’ve got to increase access to capital across race, ethnicity, gender and other characteristics. Small business growth has always been the key to economic prosperity.
Name: Frederick J. Harkins
Company/organization: Edward Jones
Title: Investment representative
How does the current decline in consumer confidence and drop in gross domestic product impact your industry? In general, a decline in consumer confidence and GDP causes the short-term investor (trader) to sit on the sidelines. However, our investment philosophy is focused on the long-term. Investors who sit on the sidelines during times of disappointment usually miss the next market upturn.
Is Rhode Island better prepared or less prepared to handle a recession than it was in 1991? Rhode Island has come a long way over the past 10 years. Recessions are tough on everyone; however, I believe that Rhode Islanders are better prepared to handle the current and hopefully, short-term economic fluctuations currently taking place in our economy.
It is important to remember that newspaper headlines look back and depict what has already taken place. The stock market looks forward and anticipates what the overall economy will look like over the next six to nine months. Even though the economy in general and the Rhode Island economy in particular may be slowing, we believe the market will soon rise. In terms of recessions, historically, the market has started to recover before the economy does.
What critical bank and finance issues must the country address as it looks to bounce back from recession? We live in a very strong and resilient country. The people that we have entrusted to lead our country, as they always have, will continue to address the economic issues that affect us through fiscal and monetary policy. One of the obvious issues is the interest rates. However, no one really knows when and by how much they will fluctuate. That is one reason that we recommend that our clients have a well-diversified portfolio and that they stagger the maturities of their income-producing investments.
What guidelines should people be following as they invest money these days? At Edward Jones, the guidelines we recommend now are the same guidelines we have always recommended and we call them The Rules of the Road. We are not market timbers, we recommend that our clients maintain proper diversification, only buy investments that are appropriate for their risk tolerance and investment goals, to have a long-term perspective, and to be patient and disciplined in their investment decisions.
Name: Joseph MarcAurele
Company/organization: Citizens Bank of Rhode Island
Title: President & CEO
How does the current decline in consumer confidence and drop in gross domestic product impact your industry?
Loss of productivity and confidence are both major concerns in a country where 65 percent of the economy is based on consumer spending. Without renewed confidence, it will be hard for the economy to remain stable or grow. Unemployment has risen – and may worsen. However, historically low interest rates and the strong U.S. housing market have brought about unprecedented levels of refinancing. The amount of stimulus in our economic system, provided by the declining interest rates, should provide a significant foundation for growth sometime next year. Consumer behavior is crucial over the next few months in limiting the depth and breadth of the downturn. We could experience a robust recovery as consumers regain their footing and businesses start to invest again.
Is Rhode Island better prepared or less prepared to handle a recession than it was in 1991?
Rhode Island is not much different from the rest of the country in this downturn. In the early 1990s, we were saddled with the speculative real estate investments that caused severe problems for our state and the banking industry in particular. Today, the commercial and manufacturing base in Rhode Island is stronger and more diverse which will enable us to better withstand the rigors of a possible downtown.
What critical bank and finance issues must the country address as it looks to bounce back from the recession?
Banks are going to be a key to the turnaround by continuing to know, believe in, and invest in the businesses that have selected us as their financial partners. The communities where we live and work are relying on us for support and for investment in their initiatives.
What guidelines should people be following as they invest money these days?
The near-term economic future is uncertain. While it makes sense to be cautious and conservative in short-term investing, this is also a time to avoid panic and give long-term investments the time to move beyond cyclical downturns.
Name: Merrill W. Sherman
Company/organization: Bank Rhode Island
Title: President and CEO
How does the current decline in consumer confidence and drop in gross domestic product impact your industry? Not many companies were having banner years before Sept. 11, and the events of that day further curtailed demand for many goods and services. What that means to the banking industry is that companies are going to be a little more cautious about expanding into new markets, making capital investments or taking on additional debt. That obviously makes commercial lending opportunities harder to come by.
It also means that banks will be taking a harder look at their own portfolios as well as the commercial lending deals that are available. Don’t get me wrong, banks are still very interested in lending money and there are plenty of companies out there that need capital to exercise good solid business plans. I think people are just proceeding a little more cautiously than they were a year ago.
Is Rhode Island better prepared or less prepared to handle a recession than it was in 1991? Rhode Island is in better shape than it was 10 years ago. The state has a sounder and more diverse business base today than it did in the early 1990s, which allows us to weather a recession better. Rhode Island is not overly dependent on the Internet or technology industries, which are going through some of the largest contractions at this time. Finally, the real estate market is not nearly as overheated as it was in the late 1980s, and we will not face the “credit union crisis” again.
What critical bank and finance issues must the country address as it looks to bounce back from recession? There are no issues that are unique to the business or financial marketplaces. The dramatic events of Sept. 11 and of the weeks that followed, showed us that the banking and finance industries, and their infrastructure are fundamentally sound. On a more macro level, Sept. 11, the waging of a war against terrorism and the heightened concern with domestic security, all underscore the vulnerabilities of our national economy. Our prosperity is highly dependent on the free flow of people, goods materials and information. Anything that diminishes the flow of any of those ingredients can have adverse implications for our future prosperity and will need to be addressed.
What guidelines should people be following as they invest money these days? The investment guidelines people should be following in the coming days are no different from the ones they should have been following all along. Successful investing is a long-term proposition. Trying to make predictions on a daily basis, or looking for “scores” in the short-term, is the equivalent of going to Las Vegas. Anyone seeking to invest should focus on long-tem goals and develop a thoughtful strategy for achieving them.
Name: Robert F. Stoico
Company/organization: First Federal Savings Bank of America
Title: President and CEO
How does the current decline in consumer confidence and drop in gross domestic product impact your industry? The fallout from the attacks such as increasing layoffs, declining sales and consumer confidence, which has dropped, has pushed us into a recession. Manufacturing which was already weak seems to be getting weaker. The impact on the banking industry: We are likely to see more non-performing loans and a reduction in the demand for business-type loans. Those banks that consistently maintain high credit standards should fare well. The lower interest rates should keep the mortgage re-finance activity high for a while and consumer credit especially with home equity loans will increase as consumers prepare themselves for what might be a liquidity crunch for them if they were to lose their jobs.
Is Rhode Island better prepared or less prepared to handle a recession than it was in 1991? Rhode Island is likely to be hit harder by this recession and take longer to come out of it than the nation as a whole. This is similar to what happened in 1991 as well. The reason: our economy is less diversified than the national economy and growth prospects are not as robust. Why? Our state is not as friendly to businesses as it should be. Although Rhode Island has made some progress since 1991, the state still taxes at too high a rate and relatively high labor and energy costs are still an issue. Rhode Island, overall, is a little better prepared today than it was in 1991 to handle a recession but not much.
What critical bank and finance issues must the country address as it looks to bounce back from recession? To come out of this recession better and faster than we did in 1991, banks need to be more willing to work with businesses that are in trouble. It means we need to be more creative with our credit administration and not look to grab assets to minimize loan losses as our primary vehicle in problem loan management. The FED needs to continue to provide liquidity to the banking system which they appear willing to do. Some economists believe that the fed funds rate could be as low as one percent by the third or fourth quarter of 2002.
What guidelines should people be following as they invest money these days? If you have a longtime horizon, this is the time to be buying stocks, not selling them. Dollar cost averaging into the market each month over the next 12 to 24 months will likely lead to solid five to ten year returns for investors who have the fortitude to invest now when most people are heading for the exits. Remember, it is very difficult to make a lot of money in a short period of time. However, with discipline and a clear strategy, making a lot of money slowly over a number of years is well within reach of most investors. Things may get worse before they get better; however, it is at times like these when the greatest opportunities present themselves.
Name: Anne Szostak
Title: Chairman and CEO
Company/organization: Fleet-Rhode Island
How does the current decline in consumer confidence and drop in gross domestic product impact your industry? Last week, the results of the Fleet-URI Consumer Confidence Poll were released. The report showed that in October consumer confidence sank to its lowest level in five years. The results are consistent with other consumer confidence reports recently published and with what economists have been telling – we are in a recession.
Recessions are part of the natural business cycle and never a good time for businesses especially banks. We have begun to see an increase in problem business loans – certainly not as severe as the early ’90’s. If unemployment continues to increase we will see a rise in problem loans on the consumer side as well.
While the economy slows and the Fed is cutting rates aggressively – lowest in roughly 40 years – deposit rates are cut as well. There is a limit to how low rates can go before banks begin to lose deposits. We are watching that carefully
We have seen a strong, steady increase in “core deposits” across Fleet’s franchise. Overall, there has been an increase in liquid accounts and slight decreases in other fixed-rate products like CDs or IRAs.
Our positive results reflect both our own marketing initiatives and larger economic factors. Fleet’s aggressive acquisition and cross-sell efforts have played a role in building and retaining core deposits. Larger economic trends, particularly the outflow of stock market funds, have also contributed to this growth.
For banks with investment and trading activities, the slowdown in trading volume and any movement out of investments (i.e. stock or money market mutual funds) could result in lower revenues in those business lines.
In short, it requires that banks have diversified income streams from diversified markets, which is the case for Fleet.
Rates on fixed-rate products are driven in large part by the financial markets. As those rates come down, so will the rates that we offer to the customer.
It’s also important to offer a variety of options — CDs, money markets, annuities, equities, etc.
We expect the current economic downturn to be shallow and short-lived. This will cause an outflow again of funds from certain deposit accounts to equities and other investments as consumer confidence and the stock markets pick up again.
Is Rhode Island better prepared or less prepared to handle a recession than it was in 1991? Rhode Island is certainly better prepared to handle a recession today than it was 10 years ago. In the early ’90’s New England led the nation into a recession which lasted roughly 4 – 41/2 years because of defense spending, real estate and mini computer industries all turning south simultaneously. In addition, we experienced a credit crunch because of the real estate loan issues. And, we faced the credit union crisis.
The banking industry today is healthier, stronger than a decade ago and therefore better prepared to face this current recession.
What critical bank and finance issues must the country address as it looks to bounce back from the recession? Credit quality – both on the consumer banking side as well as in business banking. There must be an appropriate balance between risk and return. Banks must maintain their good credit quality by maintaining consistent underwriting standards – keeping a watchful eye.
However, there are good credit opportunities out there. While we must be cautious, we must look for emerging opportunities.
Consumers also need to get back to ‘business as usual’ to maintain our nation’s economic vitality.
What guidelines should people be following as they invest money these days? We have experienced the largest expansion in U.S. history. There are many “new” investors who have not seen or experienced a complete investment cycle – haven’t experienced a downturn. Investors need to keep in mind that there is a cycle – recessions do end. The following 10 points represent the “to-do” list of successful investing.
1.Start now and invest regularly.
Begin investing as early as possible with as much as possible. Keep in mind that even small amounts add up over the long term. Ten percent of your adjusted gross income is often recommended. More is better. Less is okay. But make it something.
2. Take financial inventory.
Before you invest, it’s a good idea to know where you stand financially. Where are your assets now? Where can you find money to invest? Are your debts under control? Do you have a financial cushion – a few months’ worth of living expenses tucked away in a safe holding place like a money market account? Getting your financial foundation in order makes sticking with an investment strategy easier.
3. Work from a long-term plan.
Like anything else, committing your specific financial goals to paper can help you focus and work toward them. We mean, “I need to save another $25,000 for my son’s college education by 2005.” We don’t mean: “Put money in Billy’s college fund.” It’s critical to define your objectives and plan to meet them. Often, it’s a good idea to consult with an investment professional when developing an initial plan.
4. Don’t try to fund short-term goals with long-term investments.
Be sure to distinguish between short- (three to five years) and long-term goals. Any assets earmarked to pay for short-term needs should be safely tucked away in conservative investments where there is little risk of loss.
5. Use the power of stocks.
Whether you choose to invest in individual stocks individually – or a stock mutual fund – invest in stocks. History has shown that over the long-term, the stock market has outperformed every other type of investment – and walloped inflation. For funding things like college and retirement – where you have many years to achieve your goal – there has been no better place for your assets to grow.
6. Get all the free money you can get.
Put as much as you possibly can into employer-sponsored retirement plans like 401(k)s and/or other tax-advantaged investments like IRAs. These plans are a gift from the government to encourage you to save for retirement. They offer tax advantages that can’t be beat for long-term wealth building.
7. Pay yourself first.
Whether investing in a retirement plan or another investment, take advantage of automatic investment plans where money is taken directly from your check and invested. This also lets you employ a strategy called dollar cost averaging – an autopilot way to take advantage of market ups and downs.
8. Be realistic.
Expect bumps – particularly when investing in the stock market. Remember the only reason stocks offer potential for superior long-term returns is because they carry higher short-term risk. Before you investbe sure you have a realistic idea of what to expect in terms of risk and reward.
9. Practice good defense.
Proper asset allocation for your life stage, diversifying your investments and dollar cost averaging are three ways to help safeguard your assets and your peace of mind.
10. Seek guidance when/if you need it.
Do-it-yourself investors can benefit from goal and portfolio performance check ups, too. Investing wisely involves accounting, estate planning, tax law – even psychology. So it’s no wonder many investors choose to use a professional financial consultant occasionally-or even more often.
Name: John C. Warren
Company/organization: Washington Trust
Title: Chairman and CEO
How does the current decline in consumer confidence and drop in gross domestic product impact your industry? The banking industry thrives when business and the consumer are confident and feeling good about their futures.
Is Rhode Island better prepared or less prepared to handle a recession than it was in 1991? In 1991 we were in the midst of the credit union crisis.
Today the banking industry is strong and vital. It is able to help bolster the economy. The state is also in better position and, although there are challenges, Rhode Island will do well.
What critical bank and finance issues must the country address as it looks to bounce back from recession? Any bank and finance issues revolve around a new and different economic world. It is a different economy, whether you look at military spending, the role of the government, travel or technology. These changes may be long-lasting.
We have interest rates at 40 to 50 year lows, the fiscal stimulus is soon to be in place, and consumer/business confidence will come back. The sooner we see the shape of the new economy, the sooner the recovery.
What guidelines should people be following as they invest money these days? Stay diversified! Do not stay all cash!
