My title is taken from the following quote from Monday’s (10-12-09) Dallas Morning News:
“The financial services sector has enjoyed a fine summer rally, but I just can’t get too excited about a bunch of financial stocks leading the market higher.
I mean, we are talking about banks, for heaven’s sake. These are the same charlatans and ne’er-do-wells who got us into this mess in the first place.” (Emphasis added)
Where to start?
First, let me simply say that, in my 36-year career with the Fed, I met many, many bankers. I don’t recall any that would fall into the category of charlatans and ne’er-do-wells. Not any.
What about “who got us into this mess in the first place”? Most of the subprime loans were made by nonbank and unregulated mortgage brokers who sold them to major New York investment banks for securitization and resale as mortgage-backed securities. The commercial banks implicated in that process were mainly those who had previously merged with investment banks or mortgage companies. Citi and Chase come to mind. You can probably count them on the fingers of one hand.
Virtually all of the 8,500 or so banks in the country were victims of the “mess” rather than the cause of it. Many had purchased MBSs as liquid, conservative investments that yielded a bit more than Treasury securities. By the way, they were rated AAA, and the bank supervisors approved. As trading in MBSs froze because of the toxic mortgages in the underlying mortgage pools, too-strict application of mark to market accounting rules forced drastic write-downs that destroyed billions of dollars of regulatory capital. Many failed unnecessarily. And, since FASB didn’t make its modifications of mark to market rules retroactive, many more may fail because of that. Bankers were the victims of the mess, not the villains.
To call these pillars of communities all over the country charlatans and ne’er-do-wells adds insult to injury.