Magazine article American Banker

The Risky Business of Lending Your Bank's Good Name

Magazine article American Banker

The Risky Business of Lending Your Bank's Good Name

Article excerpt

During the Panic of 1907 -- no, I wasn't there -- a financier is said to have come up to the legendary J. Pierpont Morgan and said, "Mr. Morgan, will you lend me $1 million?"

"No, I won't," Morgan supposedly replied, "but for a small fee I will walk down Wall Street with my arm around you."

This classic story illustrates what bankers most like to do: lend their reputations for a fee, without having to put up any money.

When it works, it is good business -- but there is no such thing as a free lunch. Reputation is a bank's most important asset, and a name can be sullied by lending it to a company that goes under.

What I have never been able to understand is the next step, the standby line of credit. Basically it goes like this:

"Mr. Banker, I want a credit line to back the unsecured commercial paper I am selling in the money market. For this I will pay you 2% of the amount I am borrowing. This arrangement will give my name the backing that will encourage people to buy my paper.

"I promise to ask you to honor that line only if my company gets into trouble and cannot get money elsewhere to redeem the outstanding paper."

Presumably the many banks that make such deals consider the likelihood of having to provide the funds so remote that the 2% is found money. But it does not always work out that way.

Once I was on the boards of both a real estate investment trust and a commercial bank. I thought I could serve both by arranging for the bank to provide a line of credit to back some of the REIT's outstanding paper. …

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