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TheStreet Open House

A Prominent Economist and Quiet Businessman, Alan Blinder Seeks Lending Revival

Stocks in this article: BK

NEW YORK (TheStreet) -- In the conflict-heavy world of bankers, academics and former regulators, Alan Blinder has managed to keep his image relatively clean.

That is not to say the former Federal Reserve vice chairman and Princeton academic hasn't had a few prominent critics take shots at him. But far more criticism has been aimed at his longtime business partner Gene Ludwig, head of Promontory Financial Group and contemporaries of his in the world of economics like Columbia's Glenn Hubbard and Fred Mishkin, both of whom were savaged in the movie Inside Job for insufficient disclosure of links between their business and academic pursuits.

Something important is getting lost in the finger pointing, however -- or maybe it's lost because Blinder has been relatively quiet about his business interests. The Clinton-era Washington heavyweight is turning around some critics with business ideas that, for good or ill, have a chance to bring about radical change in the banking industry.
WATCH: Alan Blinder Eyes Bank Lending Rebound with Bank Assetpoint Venture

A firm Blinder co-founded, Promontory Interfinancial Network, is working hard at getting banks to increase their lending through an eBay (EBAY)-like platform for financial institutions to buy and sell assets such as commercial real estate and consumer loans. The business, Bank Assetpoint, had been toyed around with by Blinder and Promontory for years; however, they began developing it in earnest two years ago, and launched a beta version last April.

Bank Assetpoint was initially conceived as a means to help banks, particularly small institutions, shed the distressed real estate weighing on their books, possibly freeing them eventually to make new loans. Both of those goals became critical in the wake of a steep downturn in the U.S. real estate market and a corresponding financial crisis.

After a few months in operation, Bank Assetpoint has shown early signs of promise.

The business now counts over 4,000 members, including 1,200 banks nationwide. Its customers have entered into over $500 million worth of new loan originations and commitments, with the majority of activity centered on bank-owned real assets. Blinder believes small banks are just beginning to shed distressed assets they have carried on their balance sheets since the downturn.

Bank Assetpoint also gives banks the ability to gain exposure far beyond their home market in either buying or selling their loans, pools of assets or direct real estate. The business could prosper in a nationwide banking recovery.

Small banks have traditionally focused on their backyards. In theory, this should have allowed them to be smarter about the risks they took on. It didn't work out that way during the real estate boom that ended in 2008. In the subsequent bust, community banks in states hit hard by the real estate downturn such as Georgia, Nevada, Arizona and Florida found themselves in trouble.

Now, a small lender in Georgia can buy or sell real estate or loan portfolios nationwide on Bank Assetpoint. A bank making construction loans could also sell assets it didn't want to own, while buying loans of a different type, for instance consumer loans. This type of diversification is more readily available to big Wall Street institutions via securitization markets. 

Another advantage to the fledgling business has been its ability to connect local or specialized lenders to national markets.

Keith Stayer, vice president at Triad Financial Services, said Bank Assetpoint has helped his company build new banking relationships and it may allow the manufactured home lender to diversify its product offering.

Lending Club chief operating officer Scott Sanborn said Bank Assetpoint has introduced the peer-to-peer lender to a handful banks, helping the fast-growing startup find new markets for its consumer loans. Lending Club's peer-to-peer offering may be extended to a small business product in the first quarter of 2014. 

"Assetpoint has really been a significant driver at making introductions for us in the banking space," Sanborn said.

Bank Assetpoint doesn't charge a fee on the sale of distressed assets such as bank-owned real estate; however, it does charge fees for new loan originations on its network.

Richard Walter, head of Bank Assetpoint, joined the company two years ago after a career in mortgage banking and commercial real estate.

He argues Bank Assetpoint has a competitive advantage since its parent, Promontory Interfinancial Network already has relationships with over 3,000 lenders. The firm's growing network of participants will create increased efficiency for buyers and sellers.

There is risk involved.

Banks have never really fared that well when trying to push outside of their expertise or home market. Meanwhile, diversification may have its downside. Sherrill Shaffer, a former economist at the Federal Reserve Bank of New York, notes that while diversification of assets can decrease an individual bank's risk of failure, it can increase the correlation among lenders and thus system-wide risks.

Blinder has already had the experience of seeing an innovative idea meet resistance. Indeed, Promontory Interfinancial Network and its products have been dogged by controversy for much of their decade-long run in the banking industry. Especially so given the firm's well-connected founders, which also include Ludwig, former head of the Office of the Comptroller of the Currency, Mark Jacobsen, a former chief of staff of the Federal Deposit Insurance Corp., and Alfred H. Moses, U.S. ambassador to Romania in the Clinton administration.

Shaffer, currently a University of Wyoming professor, has been among the firm's critics.

"When I first saw Promontory, I was amazed that the regulators would let it fly," Shaffer said of Promontory' initial product in a Sept. 2008 Bloomberg News interview. "These guys know how to work the system... They saw a good buck in it for themselves."

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