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Pondering the unthinkable
A business bust in Bank Town
The University of North Carolina at Charlotte's finance professor Tony Plath is a go-to guy for reporters looking for a quote. That means his name winds up in the news a lot. When he's quoted talking about banks and their impact on the economy, those inside the banks often call him off the record to shoot the breeze, which in turn means he's developed some sources of his own and has a good idea what is going on inside.
For years, Charlotte has reaped the benefits of being a bank town, he says. In addition to our high-paid bank jobs, the industry attracts non-banking service businesses and jobs that have fueled sectors dependent on the banks. All of it has driven a construction boom and a market for businesses that provide goods and services to those who serve the banks.
Because it has minimal diversity, it is a thriving but fragile ecosystem. Charlotte has never really known times like these, Plath says.Home prices are still holding better here than most places in the nation -- for now. But sales of existing houses and condos in the Charlotte region are down 37 percent, The Charlotte Observer reported last week. That's more than twice the national decline of 16 percent.
"We've got an overhang of inventory in the housing market like we haven't seen in Charlotte ever," says Plath.
And that's under present economic conditions. Problem is, over at Wachovia, Charlotte's second largest employer, the wing-tip hasn't dropped yet. Wachovia is predicting over 10,000 position cuts due to its recent financial tumble. About 4,400 of those cuts are positions that have not been filled. The rest are actual jobs. Some of the job cuts will come from the Charlotte market, where the bank employs 21,000, he says. Some will come from elsewhere.
But this will likely just be the first round, Plath believes.
"One of the other things [Wachovia CEO] Bob Steele said yesterday was that the road to recovery was going to be bumpy and they weren't finished yet," Plath says. "So it's important to remember that what they are undergoing at this point is a line of business budget review and each of the business units is charged with eliminating 20 percent of their overhead expenses from their budget. Well, in banking the only really overhead expense that you've got is people."
Over the course of the next six to nine months in total we're going to see about 15,000 job losses based on the company's employment base right now of about 85,000 people, says Plath. Plath thinks many of those will occur in California because the bank is going to cut deepest in the mortgage business. But Plath believes Charlotte isn't going to be spared. He forecasts local job losses of 2,500 to 3,000 at the bank. Because bank jobs are so high paying, the ripple effect could be huge.
And that assumes Wachovia remains independent.
"If they are sold, it will go deeper," says Plath. "Typically in a bank acquisition, the target bank has a reduction in personnel of around 18 and 25 percent."
In that scenario, cuts here could total over 4,000 jobs he says. "At this point, I don't expect it to be that high, but until we work our way to the bottom of the residential real estate problem, we just don't know. Since bank jobs typically pay two to three times what the per capita income would be here, losing them is like shedding a lot more regular jobs in another industry. When the [banking] industry gets sick and the economy gets a cold, it's a little worse here because we are heavy in banks," he says.
Meanwhile, city and county property tax bills are going out based on new revaluations that will no doubt be overly sunny by the time taxes come due. The city and the county plan an orgy of spending, including a potential three-quarters of a billion worth of bonds between the two entities planned for the ballot this fall. That's on top of the $581.6 million school bond last year. In anticipation of this, county commissioners recently voted to raise its debt limit, even though Mecklenburg's per capita debt is already almost a third higher than Raleigh/Wake County's. When the tax bill for all that comes due on top of the new revaluation, as it surely will in a year or two, the drag will increasingly make it harder for Charlotte to compete with cities like Raleigh that have lower taxes and better schools and roads. Yet on a weekly basis, a glance at the city and county agendas shows politicians continue to spend with no thought for tomorrow.
That would be just fine if Charlotte were growing an economy as diverse as Raleigh's. But as I've written before, while Raleigh has focused on attracting and growing whole new business sectors, Charlotte has been content to count on the banks and blow bucks on tourism, which is nice to have, but doesn't pay like, say, biotechnology does.
We'll need those other industries in the coming years, particularly if the banks change hands, as they surely eventually will. But we'll have a hard time attracting it if Charlotte is too fat to compete.
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