Wall Street Collapse Unlikely to Impact Vermont Lenders

Vermont has a reputation as one of the most politically liberal states in the country. Less known is its history of fiscal conservatism — a characteristic that has helped banks doing business here to largely avoid the turmoil in the nation’s financial markets.

“There’s no major problem with any bank in Vermont, whether it’s based here or elsewhere,” says Chris D’Elia, head of the Vermont Bankers Association [1]. “It comes down to plain smarts. We avoided the subprime mortgage markets and those exotic financial products that were based on the assumption that the real-estate market would never see a downturn. Vermont banks did right by our customers.”

The roots of the Wall Street crisis are tangled and dense, which is one reason for the disagreement over the Bush administration’s plan to use taxpayers’ money to buy up $700 billion in bad debt. What is clear is that many lenders competed to provide mortgages to Americans with poor credit histories — the so-called subprime market — while also packaging those mortgages into securities that eventually proved to be lousy investments.

Many financial institutions suffered huge losses, leading to a seize-up of the credit markets that threatens to bankrupt many individuals and businesses.

Economists, bankers and state officials generally agree that Vermont banks and lenders managed to sidestep this toxic mess by hewing to their traditional Yankee frugality. Jane Knodell, a University of Vermont economics professor and a Progressive city councilor in Burlington, noted, “Vermont traditionally has been a place where debt was used responsibly.”

Scott Pardee, a Middlebury College economist and a former official with the Federal Reserve in New York, recalled that, in 2000, when he applied for a home mortgage, both Chittenden Bank [2] and the National Bank of Middlebury [3] were “very rigorous in asking me the kind of questions I expect banks to ask.

“Banks here still follow standards that became very lax elsewhere,” he said.

Some locally headquartered institutions — Merchants Bank [4], for one — have taken the further precaution of not packaging mortgages as securities to be sold to investors. “We don’t approve mortgages with the thought of selling them to somebody else,” says Merchants President Mike Tuttle. “It’s not consistent with our way of doing business.”

The cautious lending practices followed by most Vermont banks are not without their downside. Vermont’s small market puts it on the periphery of the U.S. financial system, which sometimes makes it harder for qualified entrepreneurs to access credit and create jobs.

“Some people would say they’d like to see banks be more aggressive to help us build our businesses,” said Middlebury’s Pardee.

Vermont state government is also quite conservative, notes Treasurer Jeb Spaulding [5]. The state’s Triple-A bond rating has helped Vermont avoid borrowing money on markets that are either frozen or charging high interest rates. That’s helped state entities that rely on the credit markets to carry out their operations. For example, the Vermont Economic Development Authority [6], which provides loans for business startups and expansions, is able to borrow at rates only slightly higher than those it was being charged prior to the financial meltdown, says VEDA director Jo Bradley.

None of this means that the future is risk-free. A national recession could cost thousands of Vermonters their jobs, and the irresponsibility of Wall Street and the apparent malfeasance of federal regulators could have unforeseen consequences for Vermont’s financial sector.

“This is a very frustrating situation,” says D’Elia of the state bankers association. “We didn’t create this mess but we can already see on the horizon regulations that may make it harder for our community banks to do business.”