A CEO's perspective

Northwestern Financial Review, Aug 1-Aug 14, 2003 by Bengtson, Tom

Outspoken like his father, R. Crosby Kemper III reflects on the industry as UMB Financial commemorates 90 years.

UMB Financial Corp., Kansas City, Mo., is commemorating its 90th anniversary in 2003. The $7.6 billion holding company has six bank subsidiaries, led by the $6.3 billion UMB Bank, N.A. in Kansas City. Fifty-two-year-old R. Crosby Kemper III assumed the company's chairman and CEO positions three years ago from his father, R. Crosby Kemper Jr., who remains on the holding company's board as senior chairman.

The Kemper family has long run the company, with several Kempers active in day-to-day management. Mariner Kemper is chairman and CEO of UMB Bank Colorado; Sheila Kemper Dietrich is executive vice president and manager of UMB Bank's trust and wealth management division; and Heather Kemper is senior vice president and marketing director of UMB Bank Colorado.

North Western Financial Review caught up with R. Crosby Kemper III by telephone recently and had the following conversation.

I just read a letter on your Web site where you lament the state of corporate America. What do you think the corporate scandals do to our country and investor confidence? Can we get over this?

Absolutely. Human nature doesn't change and I think the vast majority of people in this country believe in the old fashioned virtues: honesty, integrity and a work ethic. We will get over it. There is already a wave back on things like CEO compensation. Standards have been strengthened, and are being further strengthened internally as well as from FASB and the government.

We still have a problem, though. We read about the severance agreement for the head people at Freddie Mac. Obviously, they don't get it. So we still have a long way to go. But these are the exceptions, rather than the rule today.

Do you think there is an issue with the transparency of balance sheets, particularly with banks?

I think there is a huge issue there. I feel very strongly about this. There is huge growth in the use of derivatives. There is a huge growth in the use of asset classes that are not transparent, things like mortgage-backed and other asset-backed securities. And then one of the great hidden balance sheet issues is the growth in bank-owned life insurance. My view is this serves no business purpose. It is entirely a tax game, but most importantly there is a fundamental problem from a balance sheet point of view because bank-owned life insurance is based on a mismatch of assets and liabilities. Now, the problem resides on the insurance company's balance sheets, to be sure. But the exposure for the banking industry is stunningly large. Regulators have made zero effort at controlling this. It is a big mistake.

What about derivatives?

The derivative issue is similar. Derivatives come in a lot of different forms. There are plain vanilla versions of this. But you have lots of folks who aren't using derivatives as hedges, they are using them as speculation. They are using them as bottom-line enhancements, not bottom-line protections. And even if they think they are using them as hedges, because of the counter-party issue, again, I wonder what the regulators are thinking? We have $3 trillion in the derivatives system, and about 40 percent of that is in one institution, which, when you are talking about counter-parties, you are talking about one institution, Morgan Chase. If they even stub their toe, the financial system may be at risk. Again, I wonder, where are the regulators on all of this?

Your father always had very strong opinions about the regulators. It sounds as if you have picked that up.

We've had this conversation at the Fed and at the OCC and I must say I don't think any of this penetrates to them. There's a kind of arrogance on the part of regulators today that they understand it and we don't. That's the argument between Alan Greenspan and Warren Buffett about derivatives. Alan Greenspan has backed off his position a little bit but Buffett's right and Greenspan is wrong. Our exposure to derivatives is enormous. As long as interest rates are steady and as long as there are no huge movements in the market there won't be a problem, but on the day when there is movement - and historically we know there will be, it is as certain as death and taxes - at that moment we could have a gigantic problem.

Talk a little about your correspondent banking business.

We have in excess of 1,000 customers in our correspondent bank area and bond department, which means somewhere between 15 percent and 20 percent of all the banks in the United States. We are very proud of the area. We used to be regional; we're now really national. We have customers on both coasts and everywhere in between. It's a growth area in parts of the business. Our compliance and consulting businesses, our data processing, our bond department, and our asset/liability management capabilities are really growth businesses. Bank stock lending is still a good business for us. The rest of our business is stable, so correspondent banking is very important for us. It is a core business.