By THOMAS HARTLEY
Business First

Peter Humphrey worries about becoming a victim of collateral damage.

He frets not for himself but for his company, Financial Institutions Inc., parent of Five Star Bank. There are two reasons for his concern.

First is the so-called "subprime mortgage crisis." Second is the March 16 action by the Federal Reserve to keep investment banker Bear Stearns Cos. from collapsing and plunging already-nervous financial markets into possible economic chaos.

It's not an unreasonable stretch of the imagination, Humphrey believes, to link prevention of an event that could have had global repercussions with his banking company in rural Wyoming County.

It is valid, he says, because lawmakers and regulators, in their zeal to prevent another subprime muddle and protect the Fed's assumption of risk in investment banking, might impose new rules that would increase the already-heavy regulatory burden on small banks like Humphrey's.

"My concern is that commercial and community banks like ours are heavily regulated today. Most did not participate in the irresponsible subprime mess," said Humphrey, president and CEO of Warsaw-based Financial Institutions.

"Regulatory response should focus more on those who were unregulated or under-regulated - the mortgage brokers, mortgage bankers and investment bankers," he said.

Tens of thousands of credit-risky homeowners with subprime mortgages in some states have lost their homes when unable to pay higher interest rates.

"But it is not the widespread problem that the mass media has portrayed," Humphrey said.

In certain areas such as Florida and California, where real estate prices went from boom to bust, the subprime issue has reached crisis proportions.

But not in Western New York or in most places Upstate, he said.

"In a list of the top 100 U.S. markets with the highest percentage of subprime mortgage loans, Buffalo was 98, Rochester 99 and Syracuse 100 - at the bottom of the list," he said.

Humphrey said lawmakers in Washington and Albany are considering remedies for a non-existent problem, for most of the country and most banks, that are tantamount to a cure worse than the disease.

"With the regulations being talked about, including interest-rate caps, the mortgage business will really dry up, and people who should be getting a mortgage won't be able to, and that will add to the already-
depressed housing market," he said.

If the various proposals become law, Humphrey said, "it could lead to a credit crunch worse than what we've already seen."

David Nasca, president and CEO of Evans National Bank, said that because investment banks and mortgage banks are not regulated to the extent that commercial and community banks are, he is concerned that a pendulum-like effect will create regulations for everything that has "bank" in its name.

"We didn't cause the problems, and they don't rest in our institutions. Yet we are collateral damage when we are painted with a broad brush," Nasca said. "The regulatory burden is already very difficult, and it only goes one way - up."

Kenneth Kim, associate professor in the University at Buffalo School of Management, said the Fed's takeover of Bear Stearns by JP Morgan Chase was the "lesser of two evils. But make no mistake, both are evils - the government's bailout of Bear Stearns versus allowing Bear Stearns to collapse."

East Amherst investment adviser David Elias, president of Strategic Advisor, said the domino effect from a collapse of the battered investment-banking house could have been on a scale "as severe as the Great Depression."

Gary Keith, economist for M&T Bank, said the biggest problems in the U.S. financial system are outside the banking system.

"What was unique about the Fed's action is, it stepped over the divide between the banking system and the investment banking world. The regulatory oversight function has been lacking, in my estimation, on a lot of the investment banks," he said.

Keith applauded the central bank's intervention "to avoid the death by a thousand cuts of letting one firm fail and then have ensuing market concern about who's next while liquidity continued to dry up."

Keith said that as a quid pro quo for being bailed out by the Fed, investment-banking companies in the future will have to submit to regulations similar to those imposed on banks.