Fifth Third -- Then and Now -- Reveals the Banking Landscape That Time Forgot

(MoneyWatch)  Let's step into our way-back machine and travel to a distant, more innocent time in the history of American finance:

Banking's been around since the Italians created it 600 or 700 years ago, and basically it is not very complicated.... You give us your money and trust it to us, or we give you our money and trust it to you.

We're eavesdropping on George Schaefer, the longtime and highly regarded CEO of Fifth Third Bancorp, talking to US Banker magazine about what makes the Ohio bank so successful (registration required). The time -- 2002. Fifth Third shares are flying high at nearly $70, powered by 28 consecutive years of rising earnings. The company's return on equity is enviously high at nearly 20 percent, while loan losses are enviously low. Although it has grown fast, more than tripling its asset base to some $70 billion in the space of a decade, most of its operations remain clustered around Fifth Third's Cincinnati headquarters. Fifth Third prides itself on its prudence, profitability and customer service.

Why, it's enough to make a fella long for the days of sasparilla and defined benefits plans (remember those?). OK, I exaggerate. By 2002 Congressmen Gramm, Leach and Bliley had already taken an axe to the Glass-Steagall Act. Financial supermarkets, which offer banking, insurance and securities trading products in conveniently adjoining aisles, were bustling. Investment bankers were already gorging on derivatives. Still, many banks, Fifth Third foremost among them, were making money the old-fashioned way.

Now let's spring forward in time to Thursday, when Fifth Third released second-quarter results. Loans are souring, as the company licks its mortgage-inflicted wounds in Ohio, Michigan, Florida and other real estate wastelands. Margins are shrinking. Assets continue to moulder, with nonperformers up a whopping 65 percent from the year-ago period, to $3.2 billion. Ratings agencies are cutting its credit. The company's reported "profit" for the quarter in fact would've been a loss if it hadn't resorted to divesting choice assets.

The point here isn't that Fifth Third is a crummy bank. Quite the opposite. Schaefer was top-notch, and current CEO Kevin Kabat, who replaced him in 2007, has done well to contain the damage since he took the helm. Historically, the company has had fewer problem loans that its peers. It's also better positioned to withstand continued turbulence, having recently raised capital. And obviously Fifth Third isn't alone in struggling, particularly among regional banks.

And that's the point: For many years Fifth Third was as good as it gets in banking. Yet it, too, got swept up in the mania for growth at any cost that afflicted banking and other industries. Trying to drive growth, Fifth Third greatly increased its lending over the last five years, particularly in business lines such as construction and home equity that are now unraveling. The company gambled on real estate in regions of the country outside its traditional Midwestern stomping grounds. Now it's being punished.

Of course, that feverish pursuit of growth -- its temptations and its consequences -- is by now an old story not only in Corporate America, but in America at large. We are a shareholder, not a stakeholder, nation. Or as Schaefer said in the same interview, "We're here to make money for the shareholders. And when we stop doing that, we're not going to be here. And when I stop doing that, they should throw me out of here."

And so they did. But even shareholders, that voracious species, must with the benefit of hindsight realize that the time is right for banks to get back to basics. That means attracting deposits, making good loans and keeping them on the books at values approaching reality. George is right -- it's not very complicated.