Will The Banker Bashing Never End?

In last Sunday’s New York Times (9/23/12), columnist Thomas L. Friedman, whom I admire and usually agree with, gave President Obama credit for daring to lead without fearing the politics. Among his examples of such leadership was “. . . saving the banks rather than throwing all the bankers in jail, which they deserved.”

Leaving aside the detail that the banks (most of them anyway since there were many bank failures during the crisis and its aftermath) were saved by Hank Paulson’s TARP and Ben Bernanke’s monetary policies, what got me was Friedman’s statement that all bankers deserved to be thrown in jail. What a reckless thing to say.

Prior to the crisis there were over 8,000 banks in the country, most of them community banks serving the small businesses and citizens of their local communities. Many of those that failed did so because they had purchased AAA-rated mortgage-backed securities thought to be both sound and liquid investments. Others that survived, some with TARP assistance, were also weakened by those investments. Most all of the 8,000 plus banks in the country were victims of the subprime crisis and had nothing to do with creating the crisis. It’s hard for me to understand why they deserve to be thrown in jail.

The toxic subprime loans were made primarily by nonbanks outside the bank regulatory framework. Virtually all the packaging of those loans into MBAs was done by Wall Street Investment Banks such as Bear Stearns, Goldman Sachs, Morgan Stanley, Lehman Brothers, and Merrill Lynch. A few Wall Street banks that had merged with or acquired investment bank arms such as Citi and J.P. Morgan Chase were culpable, but those can probably be counted on the fingers of one hand.

Thomas Friedman probably didn’t intend his sweeping statement to be taken literally, but he said it, and he is influential. Misinformation like that has consequences. All banks, virtually all of which are innocent of wrongdoing, get to share in the backlash. They get to enjoy the burdens of the massive and mostly-beside-the-point Dodd-Frank law and the beefed-up and also mostly-beside-the-point Basil III rules. New FDIC Director Tom Hoenig has rightly called for those latter rules to be scrapped and replaced with something simpler, especially for community banks. Fixing Dodd-Frank will have to await regime change.


Comments (10)

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  1. Robert says:

    While I think most (educated) people understand the difference, you’re right that such sweeping generalizations can be problematic.

  2. Alex says:

    People have to have a demon, regardless of whether it makes sense or is fair.

  3. Namazu says:

    Friedman has also said one shouldn’t take literally his praise for China’s authoritarian political system. It’s all good fun until someone loses an eye.

  4. seyyed says:

    even if you understand the difference or not, such rhetoric makes it easier to lump all bankers as the same and continue to bash on them

  5. Nichole says:

    This has just made the loan process longer.

  6. Kyle says:

    I absolutely agree. But, aren’t politicians the ones who legislated lenders into believing they were making safe investments, and borrowers into believing that banks couldn’t roll their mortgages into a market scheme?

  7. W.C. Varones says:

    Wow, I don’t admire Thomas Friedman at all. He’s a blowhard, a master of the obvious, and an admirer of authoritarianism in China.

  8. JJ says:

    Not as long as Obama is in office

  9. Joe Barnett says:

    I agree with Bob that banks and bankers in general didn’t act criminally, but in the home mortgage industry apparently something Enron-like was going on. Steve Kroft, of CBS 60 Minutes, spoke at a luncheon sponsored by the NCPA and the Hatton W. Sumners Foundation last week, and he stated that he was surprised that there was absolutely no interest on the part of the Justice Department in prosecuting anyone for mortgage fraud. And, I would add investigation of what, if any, false claims “might” have been made about derivatives (Mortgage Backed Securities) that might have been sold. And what, if anything, is being done about Freddie and Fannie?

  10. Edouard D'Orange says:

    Yes, of course Mr. McTeer is correct about the originators of the MBS being mostly “non[-]banks outside the bank regulatory framework”. And he corrects Mr. Friedman’s blanket generalization by stating the packagers were a handful of Wall St. banksters. But he doesn’t mention two problem sources: 1)the government laws which drove excessive loan lending (Community Re-investment act) abetted by the Fed’s loose money, and 2)the rating agencies which rated “The toxic subprime loans” as AAA investment vehicles. On the latter point, who at these various agencies (Standard & Poor’s (S&P), Moody’s, and Fitch Group) was responsible for the high ratings? Moody’s is owned by none other than Mr. Warren Buffet, who seems to have a walk on water persona. Just sayin.