|Big banks want to return to the behavior that caused the crisis|
The Financial Crisis Inquiry Commission report found that the 'avoidable' collapse could be repeated.
On Friday at the World Economic Forum in Davos, Goldman Sachs President Gary Cohn warned that the drive to impose more regulation on banks could cause the next financial crisis by moving riskier banking activities to less regulated entities like hedge funds.
Let me give a layman's view of Goldman's concern: Goldman and other large banks want to continue to be able to take big risks with investors' money and not give that edge to hedge funds.
This is an extraordinary statement coming from one of the global financial firms that helped bring about the most serious economic crisis in the United States since the Great Depression – little more than two years ago. These big banks have no shame.
It took extraordinary monetary and fiscal policy from the leadership of Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke to avert a complete collapse of the world economy.
As I said in a column on the crisis on Jan. 6, 2009: "We really did it this time. We put our American genius to work to devise a perfect financial system – no accountability, limitless risk and no consequences, or so we thought."
I have little patience with banking officials like Goldman's Cohn and Citigroup's CEO Vikram Pandit who have been forcefully lobbying for less regulation.
These are the institutions that were at the heart of the conflagration – precisely because they showed appallingly bad judgment about the risks they were taking and regulators were asleep at the switch.
The negligence of the big banks and their regulators was driven home this week with the report of the Financial Crisis Inquiry Commission, empowered to get to the heart of the causes of the crisis.
The commission's 545-page report allocates plenty of blame for what the commission views as an "avoidable crisis," but most goes to dangerous and escalating risk-taking on the part of 12 of the 13 most important financial institutions in the country and "widespread failures in financial regulation."
To give a sense of the magnitude of negligence at the top of many of the financial institutions, the report focuses on the many missteps at Citigroup in failing to understand the risk that the firm had taken on in the leveraging of questionable mortgage-backed securities. Citigroup was not alone. It was simply representative.
There is no question that the United States needs better regulation of our major financial institutions.
The surprise to me is the credibility given to the recent comments of the leaders of the very financial institutions that so recently were saved by billions of dollars of taxpayer bailout money.
Where I am more sympathetic is the impact that new financial regulations may have on smaller banks in this country. Smaller banks, which had little role in the crisis, are in danger of being suffocated by one-size-fits-all regulations now being developed in Washington.
I had a small taste of this last week when my wife, Sally, and I refinanced our current mortgage to take advantage of lower interest rates. We have done a few mortgage financings in our time but this one had a whole new level of onerous requirements, particularly as I am self-employed as a business consultant.
As one example, it did not matter that my business has been a viable concern for 18 years. I still had to provide an affidavit from my accounting firm to attest to the health of the business.
As the representative of the local bank who did the refinancing said, today only a small proportion of those desiring to refinance can qualify under the much higher bar required by the banks.
While we are redrawing the rules for large banks so that we limit their ability to take unreasonable risks, our regulators must also recognize that smaller banks should have more flexibility. These banks do not have the resources to be competitive if they are held to all of the same requirements as the behemoths of the industry.
Yes, banking institutions in this country need more regulation. They also should be afforded well-designed regulation that does not discriminate against smaller regional banks. These banks are often important drivers of local economic development.
Last week's Financial Crisis Inquiry Report is a timely reminder that we are not far removed from a major crisis and that things do need to change to protect us from another such economic disaster. At the same time, let's be smart about how we frame new regulations.
The culprits here are large financial institutions, not small regional banks.