The Following Article is from the Summer 2010 Newsletter
The federal investigative behemoth sometimes resembles a supersized oil tanker: slow to be brought about but hard to stop when it gets up a head of steam. The banking industry is about to see this federal redirection of its firepower incorrectly pointing the blame of the financial crisis, with firepower arrayed for a broadside assault against the financial services industries. The irony of that change in course is that, until very recently, banks were on federal life support, making them off limits to prosecutors. But the tide has turned.
Banks, including investment banks, now displaying financial vitality, are painted as villains by a political establishment casting about for people and institutions to blame for the financial crisis. Never mind that a root cause of the mortgage meltdown was an orgy of government-inspired subprime loans designed to achieve a political and social objective starting with Bill Clinton and Henry Cisneros that was deemed better than a chicken in every pot: everybody a homeowner, even those for whom the financial math did not add up.
So why are federal investigators and prosecutors now looking back and seeking to lay blame on banks for the financial crisis? One does not need to believe in grand political conspiracies to nonetheless conclude that those with common political aims look for scape goats. This turnabout of investigative interest coincides with consideration of so-called financial reform legislation, now mired in legitimate debate about the role of integrated financial institutions in our economic system and which parts of what they do should be subject to greater regulation. A year and a half after the country came perilously close to economic collapse, average Americans are sitting up and taking notice of the debate in Washington over financial reform. No one wants another financial crisis, and consumers of all stripes are agreed that financial reform is needed.
There is also broad agreement about the primary issues on which reform must focus, including ending the notion that any one institution is “too big to fail” and closing regulatory gaps that let securities firms and other nonbanks create huge problems for the economy. The legislation pending in Congress takes some positive steps toward addressing these matters. But it falls short in several areas and goes overboard in others. Traditional banks, particularly the biggest mortgage players did bring about the financial crisis. The mission of the banks was to create financial products, and the mortgage lenders were lobbied to sell the products which the banks gobbled up for their subsequent securitizations. One only need look at Jamie Diamon, Chairman of Chase who is beating on the mortgage industry to lay the blame. However, his bank Chase, as one of the largest mortgage players, was busy creating the mortgage products, underwriting and approving the loans which they package and sell for very profitable gains from the unsuspecting municipalities spanning all over the globe billed as relatively risk free bond obligations. Yet he continues to point away from himself while looking in the mirror.
On the flip side, the bill before the Senate is an overreaction and unfortunately contains provisions that would hinder the ability of banks to serve their local communities effectively, thus crimping the credit that local economies so badly need to get back on track. Consider, for example, the plan to create a Consumer Financial Protection Bureau.
It sounds great in theory. But in practice, creating a bureaucracy will produce more problems than it will solve, by putting government in the business of deciding what products are right for bank customers. Then there is the issue of uneven enforcement of the rules. The new consumer rules would apply to both banks and nonbanks. Ending “too big to fail” is crucial, yet the Senate bill falls short in this regard. It also contains provisions that will restrict credit for consumers and small businesses, and it does not provide for adequate oversight of accounting rules that greatly worsened the crisis. Bankers support financial reform, but it needs to be done well — and it especially needs to be done with a careful eye toward the impact on communities. These issues are important, and vigorous debate should be encouraged. The consequences of getting reform wrong are too great to be treated lightly.
Joseph Levy is the Owner of Affiliated Capital Resources, a mortgage banking firm in Santa Monica, CA. Mr. Levy received his MBA Degree in Real Estate Investment Finance from the University of Connecticut.
