Brad Rock of Smithtown, N.Y. was the chairman of the American Bankers Association for 2007-2008. He concluded his year in the association’s top spot with a speech he delivered last week at the organization’s convention in San Francisco. These are a few of the salient points he made.
First, he noted the effects of the nation’s home-ownership push of the last couple of decades:
The housing mission is an important, laudable purpose. Every American has the right to live in a good and decent home.
But the fact is, in a free-market, capitalist economy some of those homes are going to have to be rental housing, Because not every American will be able to afford to own his or her home.
Over the past 15 years, the housing mission has been distorted by government creating incentives for lenders to make home mortgage loans that people can’t afford to re-pay, and then …have government either buy or insure the bad loans to further encourage excessive risk-taking at the front end of the transaction.
This is one of our mistakes that we all have to come to grips with.
If we don’t recognize this part of the problem, 10 or 15 years from now, we will probably have to face this same whole mess again.
He acknowledged the need for additional regulation, but said the issue is making sure the new rules are aimed at the right players:
It is true that we have failed to regulate the practices that have caused most of our troubles.
But this is a very different proposition from saying …“Banks need to be regulated more”.
We don’t need to be regulated more. The vast majority of banks across the country, big and small, are very healthy.
They didn’t cause any of these problems, and …They are already very heavily regulated.
Most of our nation’s financial problems were created by people and activities outside the banking system that are either unregulated or very lightly regulated. Mortgage brokers, investment banks, hedge funds, derivatives contracts, credit default swaps and other fancy financial activities by some insurance companies.
They are the people and activities that are either unregulated, or hardly regulated at all …that caused most of these problems.
These are the people and activities that need to be the principal subject of our regulatory focus in the coming months.
We need to bring the level of regulation of those activities ….. which is down here …up to the level of bank regulation.
If lawmakers do not recognize these essential differences, and simply regulate banks more, without addressing these other unregulated activities, it may score political points with some constituents, but we will have failed to make the kind of meaningful changes to create the economic stability that we all want and need.
Rock found a silver lining in the current crisis:
And I believe that the recent “financial crisis” presents some significant opportunities for making accounting and regulatory improvements.
I will mention just 2 of those areas now:
“Mark-to-market” accounting, and Purchase accounting for bank acquisitions. We don’t have time here today for me to review those 2 sets of rules in depth …but I think that if you closely examine those rules, and …their underlying assumptions, and …the results that those rules produce in a variety of circumstances …It is plain that these rules do not work well. These rules need to be changed in a way that will result in more accurate financial reporting, and in a way that will serve our nation’s economic system better.
And if they can’t be changed …Then we need to re-evaluate who makes those rules, and …how the rules are made, and …what purposes the rules being designed to serve.
And, I thought this was a very interesting anecdote about how things work in Washington, D.C.:
On Monday, September 29th, the House of Representatives voted down the first version of the economic rescue bill. That evening at 5 p.m., the Secretary of the Treasury, Henry Paulson, did a press conference on national T.V. in which he said that he was very disappointed with the result, But that he and others would go back to the drawing board to try to address the problems.
An hour and 10 minutes later …Mr. Paulson called me on the telephone, and he said:
“Brad, I understand that you and your folks at ABA have done quite a job building an effective grassroots network.”
“If ever there was an issue upon which you should bring that grassroots capability to bear, this is the issue.”
And then we went on to talk about what I thought it would take to garner more broad-based support, and We talked mostly about increased FDIC insurance and some other matters, and I think that that conversation, and a whole lot of subsequent work by many other people, was part of the shift toward the law that was eventually enacted.
Again, look for thorough convention coverage in the Dec. 1 edition of NorthWestern Financial Review magazine.