CFANorthCarolina.org Q&A with Dr. Tony Plath, Associate Professor of Finance, UNC-Charlotte. 

Tony Plath teaches courses in commercial banking and corporate finance at the graduate and undergraduate levels.  Before joining the UNC Charlotte faculty in 1987, Dr. Plath held various positions in bank management at the AmeriTrust Corporation and Huntington Bank in northeastern Ohio. He has served as a branch manager, retail loan officer, commercial loan officer and relationship manager. Dr. Plath has been active in a number of community organizations including the Rotary Club, Big Brothers and Big Sisters, Inc. and the American Institute of Banking.

 

Dr. Plath has been frequently quoted on the financial crisis.  He’s been interviewed by local media such as the Raleigh News & Observer, Winston-Salem Journal, Charlotte Business Journal and WSOC-TV.  He was recently interviewed by NBC Nightly News in a feature titled “Company Town”.

 

This interview took place on November 11, 2008.

 

Q:  What signs are you looking for to tell you the storm has passed for the banking industry?  Are we there yet, or do you foresee more problems?

 

A:  We're not even close to reaching the bottom here.  In fact, things are getting worse rather than better as the unemployment rate rises, loan delinquencies and ensuing foreclosures increase, and bank asset quality falls even farther.

 

Q:  How will we know when we've turned the corner? 

 

A:  First, we have to see the number of layoffs stop rising.  For that to happen, the credit market must become more hospitable to private-sector borrowing requests.  Once the unemployment rate begins to stabilize in the presence of adequate short-term credit, the next milepost to watch is the foreclosure rate.  As unemployment peaks and begins to subside, the foreclosure rate will top out and begin to fall.  Stable real estate values will give banks more confidence in the strength of the economy, and they will start lending in greater volume to borrowers deeper down in the credit risk pool.  At this point, we'll be on the way to full economic recovery.

Q:  How long will all this take? 

 

A:  That's the really hard part to predict here.  Based on the Japanese experience it could take as long as 10 years or so. However, given the massive involvement of the American federal government, it's likely that our economy will recover in a far shorter period of time.  Still, we're looking at a prolonged recession that lasts a year or more.  By 2012 or so, we should see a return to more normal rates of growth in employment, income, and output.

 
Q:  Much of the media has compared the current financial market conditions with those of the Great Depression.  In your view, are these comparisons valid? 

A:  The comparison is valid, because in all likelihood this will turn out to be the most significant period of economic decline since the Great Depression.  Prior to 2008, the deepest recession we've encountered since the 1930s was the 1981-82.  The current economic downturn will likely be more severe than events from the early 1980s, with the unemployment reaching around 9 percent, economic output falling for a period of 12 to 24 months, and foreclosures peaking at 8.5 million over the 2008-2010 period.  Judged in relation to other recessionary periods that have occurred over the last 20 years or so (one in 1991 and another in 2001-02), the current downturn is likely to be significantly more severe than these recent recessions.

 

Q:  What are some similarities or differences? 

A:  The principal difference between the 1929-1933 period and 2007-2009 will likely be the extent of government intervention within the economy, including both the magnitude of government assistance intended to ameliorate the shock of economic downturn and the duration of this assistance effort.  At present, it's estimated that total government assistance provided to the general economy is nearing $2 trillion, and we'll likely see that total increase by another $1 trillion before we've arrested the decline in economic activity. 

 

Moreover, government intervention in the private economy occurred much more rapidly in 2008, and will be much more consistently sustained until the economy begins recovering, than the sort of government intervention we saw in the 1930s.  In that era, the Federal Reserve first reduced interest rates between 1929 and 1932, but then reversed course and started increasing interest rates in a slowly growing economy in 1932 leading to a prolonged period of negative growth in the 1930s.

 
Q:  What is your assessment of the Government's response to the crisis to date? 

 

A:  We've learned two important lessons in the last six months or so.

 

First, simply throwing liquidity at a modern economic crisis is insufficient to arrest the crisis.  That may have solved the problem in the 1930s, but the modern capital market is far to complex and global for a simple injection of prudential liquidity to solve the problem we're facing today.  Rather, the contemporary downturn requires much more comprehensive government action.

 

The second lesson we've learned is that a financial regulatory system designed in the 1930s is completely ineffective in dealing with a financially sophisticated and globally interdependent capital market.  In short, the global financial market is in need of complete and comprehensive regulatory reform designed to promote market transparency, establish reasonable capital requirements that cover the full spectrum of institutional risk-taking activities in the market, and extend internationally throughout the global marketplace, because financial trading is no longer bounded or limited by national boundaries in modern finance.

Q:  Are there any long-term implications of these actions?

 

A:  Of course.  The consequences of the current economic crisis, resulting in a global economic downturn, are far-reaching and significant in economic history.  Much like the vast body of literature that followed in the wake of the Great Depression, we'll be studying the present economic era, and evaluating our response to the downturn, for several decades into the future.

 
Q:  Turning to North Carolina, how will the state be affected by the Wells Fargo acquisition of Wachovia? 

A:  In the short run these changes will certainly shrink Wachovia's employment base in North Carolina, particularly in the greater-Charlotte market.  Since the job cuts involved with the consolidation of legacy Wachovia into Wells Fargo represent some of the highest paying and most visible jobs in the company, the impact on Charlotte will likely be substantial.

In the longer run, it’s likely that the impact of the WFC/WB combination will be accretive to jobs creation in the North Carolina market, provided Wells Fargo really does establish a substantive regional headquarters operation in North Carolina.  If, on the other hand, the regional headquarters distinction turns out to be nominal, and the combined company is managed principally from Wells' San Francisco headquarters, then the long-term impact on North Carolina bank jobs will likely be far more inconsequential.  In that case, the loss of the Wachovia headquarters facility in North Carolina will outweigh the incremental jobs-creation impact associated with the presence of Wells Fargo's regional headquarters in the Charlotte market.  Time will tell which outcome occurs here.

Q:  How sound is our state's economy relative to others?

A:  For the moment, we're quite sound in relation to other states in the Union.  We had sufficient forward momentum at the outset of the national mortgage, credit, and banking crises in 2007 to weather the first year of the storm with very little economic shock to the State.  That forward momentum is slowing markedly in the current economic environment, and 2009 is likely to be a difficult year in North Carolina.  We face a growing problem with slowing business activity, rising unemployment, falling real estate values, slowing commercial construction activity, and a significant reduction in the State's collection of tax revenue.  The full impact of the national economic downturn took awhile to reach North Carolina, but it's here now, and it's going to get worse in 2009.

Q:  Beyond banking, what are some other key NC economic trends worth watching?

A:  Some of the other concerning business trends at the national level, particularly the near-collapse of the domestic automobile industry and the significant stress in the retail industry, will have major economic implications here in the Carolinas.  Bankruptcies by the Big Three auto manufacturers would likely cause significant disruption to the motor sports industry in North Carolina, while the bankruptcy of several national retail chains would likely be a source of major job losses in the Carolinas as well.

At the same time, the State has a concentration of many of the nation's best performing industries such as healthcare, pharmaceuticals, and high-technology research facilities.  Unfortunately, these industries are largely concentrated in the population centers.  The benefits derived from these growth industries will be disproportionately shared across the state.  The Triad region will likely weather the current economic story with minimal difficulty, and the Charlotte region will fare well once we absorb the job-loss shock associated with the Wachovia failure.  Other areas of the state are likely to be more hard-hit by the current economic downturn, and the State will feel the impact of the recession for at least 2 or 3 years into the future.

Q:  How are University students reacting to the banking crisis and are they adjusting their course work or job searches as a result?

A:  Like all of us, they're still adjusting to the shock.  Students closest to the banking crisis, our finance students, are obviously concerned about the future and the status of the job market, but we haven't yet seen a downturn in the number of finance majors in the College.  Graduate school applications are up throughout the nation, however, as many students just graduating from baccalaureate programs are choosing to postpone entry in the job market for a few years until market conditions improve. 

 

It's a good time to postpone entry into an overcrowded job market for a few years and earn an MBA in the process, so this is a rational course of action for students to pursue.

 
Q:  Finally, any advice for anxious bank employees?

A:  I suspect we're going to see the banking industry contract on a massive scale over the course of the next 3 years or so, as smaller and weaker institutions consolidate into larger and stronger banks that have superior access to the capital market. 

In the process of shrinking and changing, I suspect we'll see a number of permanent job losses in the commercial banking industry, particularly for people at the mid-career level.  Many banks are likely to jettison entire divisions and lines of business, close a number of poorly performing branch offices, and cut senior managers who earn disproportionately higher salaries than the industry average.  Many of these displaced managers will likely never find work in the banking industry again, or at best it will be a prolonged period of time before we create sufficient new jobs in banking to reemploy the people lost during the 2008-09 period.

The only bright spot for mid-career managers is the opportunity to transition to other jobs in finance outside the banking industry, where the skill set of management-level commercial bankers still creates value in a business enterprise.  I suspect we'll see many former bankers opening new businesses, transitioning into senior-level management jobs in other industries, and becoming CFO's, controllers, and other financial executives at established companies outside the banking industry.