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The Latest From Banker Guy

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“Banker Guy” is the CEO of a mid-sized bank. He occasionally sends me his thoughts on the financial industry in these years of crisis and, hopefully, recovery:

I would like to add a banker’s perspective to President Obama’s and Paul Volker’s efforts at financial system reform. Former Chairman Volker outlines his prescription for reform in Sunday’s New York Times.

In his op-ed, Chairman Volker did not mention President Obama’s proposal for a “financial crisis responsibility fee.” This tax is just another populist attack on bankers. Given the mood of most people and politicians, no one will be against the unprecedented punitive tax on the 50 largest financial institutions. Other than raising revenue for the government, the tax does nothing for reform. At 15 basis points (0.15%) the tax will not change behavior by any institution, nor will it reduce balance sheet leverage. It does not cover participants such as GE Capital and retailers with large credit card portfolios. Most likely the tax will be passed on to customers of these institutions. In his announcement the President uses the term “massive profits” in talking about the institutions covered by this tax when in fact most are producing subpar earnings. So this fee is all about revenue and politics not reform.

The so-called Volker Rule announced by the President on January 21, 2010 also does not produce real reform. The rule would restrict any banking institution from owning a hedge fund, private equity fund, or engage in proprietary trading. In his op-ed, Volker argues that such funds can operate independently of commercial banks (true) and that those funds would not be “too big” or “too interconnected” to fail. (Not true – remember Long Term Capital Management that was bailed out.) He admits that the rule would only apply to four or five banks. No banks failed due to these funds or proprietary trading. So other than diverting attention from the Massachusetts results or Obama Care, the rule has little meaning. By the way, this time the President in his remarks referred to “massive bonuses.”

It seems to me that the administration is trying to use the broad anger at bankers to salvage its effort at financial reform and the creation of the Consumer Financial Protection Agency (“CFPA”). It has pitted to community banks against the large banks, which is not good for the economy. The crisis was caused by a number of issues; government interference by pushing for more mortgage lending to low- and moderate-income borrowers; way too lax mortgage underwriting due to high demand for mortgages to be securitized; too much leverage by investment banks (Bear Stearns and Lehman); unregulated competion by the “shadow banking” industry (GE, GMAC, mortgage brokers, collateralized mortgage obligations, money market funds, etc.); aggressive ratings by the rating agencies; lack of understanding the risk of complexity and interconnectedness; and over dependence by some community banks on brokered deposits and construction and development loans. I should also mention poor management and weak regulatory supervision. For example, how can Corus Bank have over 80% of its loans in condos? So while Volker mentions “improved capital requirements and leverage restrictions”, they are not part of the administration’s plan.

The law of requisite variety states that the solution must be a complex as the problem. There needs to be comprehensive reform that addresses “too big to fail”, capital requirements and leverage, and brings the shadow banking system under regulation. The CFPA does none of that. Instead it creates a czar that will add costs and make it more difficult for consumers to get financial products. Today at my bank we are attempting to be compliant with over 20 new laws and rules. All of this has only made getting a mortgage more difficult, more time consuming, and more costly.

As we begin 2010, I am worried. Regulators are being overly difficult which is restricting lending and the administration wants to add even more rules and regulations adding costs and reducing services. At the same time we are not making the reforms to protect the financial system in the future. I’ve asked our outside counsel if we can benefit from the recent Supreme Court ruling that would allow us to advertize to elect a new Congress that would deal with these issues in a way that would truly benefit our economy.

I can be contacted at


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