Background information about the bank
This case illustrates the difficulties faced by financial organizations during the economic crisis. In 2007, the Southeast Bank of Texas or SEBT was one of the most prominent financial institutions in the southern part of the United States (Pozen and Schneider 1). It passed through a period of considerable growth during the second half of the twentieth century. The members of the Greff family were the largest shareholder of this bank. They owned 30 percent of stocks. Unlike many other banks, the SEBT did not rely strongly on sub-prime mortgages. Therefore, this organization was not poised on the brink of insolvency. It was less susceptible to external risks.
However, this organization was adversely affected by the financial crisis that broke out in 2007. At that time, the stock market of the United States lost approximately 40 percent of its value (Pozen and Schneider 2). The collapse of the housing market led to the bankruptcy of many banks. The SEBT was also influenced by these trends. This organization had to reduce the value of its portfolio, especially the assets related to real estate and commercial loans. Furthermore, banks might not meet the capitalization requirements set for banks. In particular, they had to take urgent steps in order to reach BASEL II standards (Pozen and Schneider 2).
The SEBT could be affected by the policies of the government. The state launched several programs that could assist banks struggling with the lack of capital. For instance, one can speak about the policies of the Federal Deposit Insurance Corporation (FDIC) that promised to guarantee temporary liquidity of various financial institutions. According to this program, the government could ensure their short-term debts (Pozen and Schneider 2). This opportunity could be critical for various banks that could be affected by the global financial crisis, and the management of the SEBT had to evaluate the positive and negative aspects of this offer.
Additionally, there were several legislative acts that could assist banks requiring additional capital. The state adopted the Emergency Economic Stabilization Act or EESA (Pozen and Schneider 2). This law gave way to the implementation of the Capital Purchase Program. The thin initiative was aimed at strengthening people’s confidence in financial organizations (Massad 22).
Overall, these details are important for understanding the difficulties encountered by the SEBT. They are helpful for analyzing the decisions that senior managers had to take. They are also necessary for discussing the conflicting interests of different stakeholders.
The major issues affecting the bank
There were several issues that were critical for the senior executives of the bank. These issues were primarily related to the cooperation of this bank with regulating agencies and those institutions that are supposed to offer financial assistance to banks.
At that time, the management had to decide if they could borrow money from the FDIC. The SEBT was allowed to borrow $ 2.5 million from this governmental institution. These assets could be vital for repaying the short-term debts of this bank. However, the management did not know if they could easily return this money to the government.
This cooperation with the government could create new opportunities for the development of the SEBT. Provided that the organization relied on the guarantees of the FDIC, it would be able to serve a greater number of clients. In particular, the company could work with large businesses located in Texas. Nevertheless, the cooperation with this governmental agency could cost 10 basis points on the accounts that exceeded $ 250 000 (Pozen and Schneider 3). The senior managers of the SEBT were not sure if the bank could effectively serve the needs of large businesses. This financial institution might not meet the capitalization requirements set for financial organizations serving large businesses. It is one of the difficulties that had to be considered by the senior executives.
At that time, the management tried to find other alternatives that could enable the bank to borrow capital at a lower cost. This task was critical for the sustainability of the SEBT and its ability to acquire various investment opportunities.
Furthermore, the company could take part in the Capital Purchase Program. According to this program, the government could purchase a part of the SEBT shares. This partnership could be important for attracting additional cash flows, but this deal could impose various restrictions on this financial institution. This bank will not be able to buy cash acquisitions of various enterprises. These limitations could impair the functioning of this bank and its cooperation with business partners or clients.
The members of the Greff family could object to the dilution of the shares. The problem is that the U.S. Treasury could decide what types of shares could be purchased from the bank. This organization could acquire the preferred stock of the bank (Massad 22). So, some stockholders might object to this cooperation with the state. There were other challenges associated with this cooperation. The partnership with the U. S. Treasury implies that the company can be scrutinized by the government (Pozen and Schneider 5). In turn, many clients can object to this supervision. This publicity can negatively influence the attitudes of many deposit-holders. So, the managers had to determine if they could find more efficient ways of attracting capital that was necessary for the liquidity of the bank.
Furthermore, the interests of the senior executives should also be taken into account. These people could be deprived of the severance packages to which they could be entitled according to their employment contracts. In turn, the partnership with the government necessitated the reduction of the compensation paid to the executives. It was one of the requirements set by the Treasury. Thus, senior executives were reluctant to accept the terms of the Capital Purchase Program.
At that point, the bank had to design strategies that could help the organization overcome the effects of the financial crisis and achieve growth. The senior executives held conflicting opinions about the policies of the SEBT. Some of them believed that the bank could revive its operations by receiving loans from the state. In contrast, other managers argued that this cooperation with the government could adversely influence the performance of this organization. They emphasized various restrictions imposed by the government to justify their arguments.
These examples indicate that the SEBT was affected by several important trends. At first, one should speak about governmental initiatives that offered a short-term solution, but they could significantly limit the decisions of the management. Moreover, this bank was influenced by the conflicting interests of the management. These issues should be distinguished because they can prevent the bank from adopting the best policies.
Massad, Timothy. Troubled Asset Relief Program (TARP): Two Year Retrospective, New York: DIANE Publishing, 2010. Print.
Pozen, Robert, and Benjamin Schneider. The Southeast Bank of Texas in the Financial Crisis, Boston: Harvard Business Review, 2011. Print.