Bankers: “charlatans and ne’er-do-wells”

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.

Comments (6)

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  1. John Booke says:

    Bob didn’t mortgage bankers lower lending standards so that fraudulent mortgage applications and fraudulent appraisals became the rule rather than the exception? Don’t you think that investment/commercial banks that purchased mortgages have an obligation to protect the public from outright fraud?

  2. Jon says:

    To say “bankers were the victims of the mess, not the villains,” is a similar generality we were trying to argue against with the Dallas Morning News article.

    I think we cannot lump all bankers into one category. Yes, the banks who were not involved in the current mess are obviously not the ones to be blamed, but there are plenty of banks that need to be blamed and brought to justice, which the government still has not made any attempt to do.

    Watch this interview with Congresswoman Kaptur to understand the New York bank power over Washington:
    http://www.pbs.org/moyers/journal/10092009/watch.html

  3. I tend to mostly blame the heavy hand of government. The ongoing policy of pushing home ownership with no regard for a person’s financial ability to purchase a home really started this particular snowball rolling. Like the current entitlement programs haunting the U.S., politicians aren’t willing to abandon most any subsidy in fear of losing votes. Evidently, the jig isn’t up.

    Far be it from me to be the defender of bankers. I’m sure there were some failures there as well as from the regulatory regimes. But let’s face it, what’s happening now is an effort to blame a group, or groups, in order to deflect blame from the main culprit. I’ll have to say that the politicians are doing a good job of it. Of course, that’s a big part of their everyday jobs – avoiding culpability at all costs. Everyday we witness the smearing of health insurance companies simply because they’re a good target. How many people are really going to come to the defense of insurance firms? I think bankers are in a similar boat.

  4. Greg says:

    The most concise and insightful explanation of the mortgage mess I have read. Should be a letter to the editor to the major newspapers.

  5. Greg says:

    But then again, your blog probably gets more readers than the newspapers these days!

  6. Kevin says:

    If you talk to bankers who kept to their game plan and stayed in their local market or even regional market and made loans to people and businesses in the area that they serviced, these banks did not have nearly the amount of trouble as the large banks did.

    I’m not calling for any regulation or futher oversight .. indeed just the opposite. We should have found a way to let the big banks … and their shareholders suffer more of the impact of their poor decisions.

    Alas, where is deposit insurance reform?