Hammering Hank Paulson: Congressional Testimony

Yesterday, I defended Gentle Ben Bernanke. I said I believed him when he said he didn’t say something and said it would have been appropriate if he had. Or, something like that. A committee of Congress had his partner in non-crime on the hot seat today accusing him of saying something he had already acknowledge saying. Got that?

In the process, Mr. Paulson clarified that he had reminded Ken Lewis, the CEO of Bank of America, that the Fed, as the primary regulator of his holding company, had the authority to remove management and the board if he did something they regarded as stupid as well as harmful to the bank, the financial system, and the economy. Of course, Mr. Lewis knew that already, as do all bankers.

But, apparently the members of the Congressional committee apparently didn’t know that, and didn’t want to. They wanted to accuse somebody of something, or everybody of everything. I couldn’t figure out which, or what wrong they were trying to right.

Just for the record, banks and thrifts are closely regulated and supervised. Their primary regulator (supervisor) assigns to them following examinations what used to be called a CAMEL rating, which, like everything else originating in Washington, has expanded. It is now a CAMELS rating, an acronym formed from Capital, Asset quality, Management, Earnings, Liquidity, and, now, Sensitivity, presumably to interest-rate changes (sort of an ongoing stress test). Anyway, the letter in question here is M for management.

Management is not entirely independent of the others. For example, a bank with low asset quality, inadequate liquidity, etc. would not likely be rated a 1 (the highest rating) or a 2 (the second highest) in M for management. (5 is the lowest rating.) On the other hand, the examiners do make some judgments regarding whether other weaknesses may have been caused by unforeseen conditions or “extenuating circumstances,” as we might say in Texas without the final g, or whether they attribute most of the other problems to weak management.

Sometimes, the banks’ boards of directors take the hint and make management changes; sometimes, they react to more than a hint from the examiners and their bosses back at the office (ultimately Washington).  My point, which once again belabors the obvious, is that management changes made in response to supervisors are common. Let me repeat that: COMMON.

I imagine there were some former bank executives watching the hearings today pulling for the Congressman trying to turn that common practice into a scandal.

I will say this regarding Mr. Paulson and Mr. Bernanke. Mr. Bernanke displayed remarkable skill and innovation in dealing with the financial crisis. But, he was also lucky to have a hulking former offensive lineman up front blocking for him- even if the lineman in question did hone his blocking skill at Dartmouth. I’d take him- if Lynn Hauss were not available.

Way to go, Hammering Hank!

Comments (1)

Trackback URL | Comments RSS Feed

  1. Valeska says:

    Another factor was crdeit card debt people refinanced their homes to pay off their crdeit cards, then found themselves stuck with house payments AND crdeit card bills they couldn’t pay.But don’t forget the war. The Romans had to tax their citizens to raise funds to go to war.If Bush had had to raise taxes to pay for the war, the public would have been against the war, so he just borrowed from the international bankers to make people think it was a free war.The collapse is the cost.