I got my copy of the Financial Crisis Inquiry Report yesterday in the mail. It is 633 pages of very small type, but I am actually looking forward to wading through it. You an download the entire report, or order it in book form as I did, by clicking here.
In the very first few pages of the report, it states: “We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Their’s was a big miss, not a stumble. While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred. To paraphrase Shakespeare, the fault lies not in the stars, but in us.”
This paragraph in the report’s opening pages also jumped out at me:
“The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not. The record of our examination is replete with evidence of other failures: financial institutions made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective; firms depended on tens of billions of dollars of borrowing that had to be renewed each and every night, secured by subprime mortgage securities; and major firms and investors blindly relied on credit rating agencies as their arbiters of risk. What else could one expect on a highway where there were neither speed limits nor neatly painted lines?”
It is rather ironic that the first agency the Commission blames — the Fed — ends up being the home of the biggest new weapon against financial fraud — the Consumer Financial Protection Bureau. I am sure the report is filled with other ironies and as I work my way through the report, I will be happy to share the more interesting bits with you through this blog, our Thursday e-newsletter, and NorthWestern Financial Review magazine.
I know much of the Commission’s findings already have been reported in other media outlets, but I do think the Commission was looking at a period that will be studied by historians for decades to come. Early 2008 to about now constitutes one of the most interesting times in financial history this country has ever known. It is well worth studying and I think the Commission’s report is probably a pretty good place to start.
Charlie Funk, chairman of the Iowa Bankers Association, has an interesting column in the March 25 edition of the association newsletter, Exchange. Funk is president and CEO of MidWestOne Bank in Iowa City.
He was in attendance at the ABA’s GR Summit in Washington, D.C., last month. He heard the boos from some bankers during FDIC Chair Sheila Bair’s speech and Q&A session. Here is what he wrote about that:
She read prepared remarks that included an admonishment to our industry and to its trade associations for not doing more in 2005-2007 to reduce loan exposure that would have prevented or lessened the financial crisis. She also cited several recent public opinion polls that portray “bankers” in an unfavorable light. And, finally, she stated that, other than the Dubrun Amendment, “Dodd-Frank is almost completely targeted at large financial institutions.” (Your humble correspondent begs to differ with Chairman Bair!)
I could debate the Chairman on a few points made in her talk and in the rather contentious follow-up exchange during questions from the audience. I’ll cionfine today’s comments to the one portion of her remarks that made my blood boil. Charman Bair said, “My reading of recent polling data on how the public views banks also speaks to the need for a different approach [to regulation] from your industry,” She then read abysmal polling results from “banks,” though some of her data specified “Wall Street” or ’big banks.”
Nevertheless, Ms. Bair missed a golden opportunity. Six thousand of the approximately 8,200 banks in America have less than $300 million in assets. Another 1,400 have assets between $300 million and $1 billion. In fact, most bankers in the room fell in the “under $1 billion” size group. Does Ms. Bair really believe Americans have stopped liking these institutions? I was not able to get to the microphone to offer a comment, but if I had, I would have observed that in Iowa, when there are new lights needed for the football field, a new wing added to the local library or a lead gift for the local economic development agency, the first visit is usually to a bank in that community. Iowans know the difference between Wall Street and Main Street. I regret that our policymakers apparently don’t.
Banker reaction to the March 16 speech was much different than banker reaction to Bair’s speech on March 22. I wrote about that difference here. Initially I said the speeches were similar, but I have changed my post after giving both speeches a second look. In fact, the speeches were quite a bit different. The ABA speech was much harsher, and as Funk points out, Bair’s use of polling data to show the unpopular position of the banking industry was questionable since she used results from polls concerning Wall Street banks and large banks. Truly, you cannot make a comment about the majority of banks, which are community banks, by focusing on the largest banks.
We will never know to what extent banker reaction to the March 16 speech affected Bair’s thinking about how to craft her speech for March 22. That was a much friendly speech, so, not surprisingly, the audience reception was much friendlier.
I used to think Ken Guenther was good at rallying bankers, but I have to say that Camden Fine brings it to a whole new level. He spoke forcefully for the ICBA mission during the association’s convention last week in San Diego. Fine’s approach was not missed by at least one local reporter, who covered Fine’s comments like this.
Here is culmination of his speech, where Fine talks about industry unity:
I fully understand that we are all part of a greater financial services industry, and when our interests align with other stakeholders in the industry, we are prepared to go shoulder to shoulder with them, for the common good… but where our interests diverge we will not hesitate to speak out forcefully and to fulfill our charge to explicitly represent the best interests of all community banks, even if that means we have to go it alone. And many times we do.
Others called us divisive and said we were deluding the industry’s message. Well, which industry were they talking about? Are they referring to the Wall Street transaction volume-driven industry, or the community bank relationship driven industry? Is ICBA any more divisive than Wall Street’s own dedicated national trade group? Why aren’t they called divisive by other state and national trade groups when they take positions harmful to community banks? Why is it that when ICBA takes public positions favorable to the community banking industry but not popular with Wall Street firms, other trade groups point fingers at ICBA and say we are deluding the industry’s message? But when mega Wall Street firms and their bank trade groups take positions that would harm community bank interests, other state and national trade groups are silent.
Ask yourselves this: If one voice for the industry has been so effective, how come 30 years ago the 100 largest banks in America held just under 42 percent of the nation’s assets, but today they hold more than 80 percent of the nation’s assets. And the 10 largest banks out of 7,700 banks control nearly 60 percent of the nation’s assets and deposits, when 30 years ago those 10 largest controlled just under 22 percent of the nation’s assets. Is that what one industry voice sounds like? Or is that the sound of community bankers being led to extinction by the Pied Piper’s hypnotic one-voice-is-good-for-the -industry tune? Well I can tell you something: Over the last 30 years, one industry voice has been really, really good for those 10 banks, but for the other 7,690 banks, ah, not so good. If you keep following that one-voice song in 10 years, that’s exactly what you are going to have, one voice, because you are only going to have one bank. That’s where we’ll be.
Elizabeth Warren, the special assistant to the president who is setting up the new Consumer Financial Protection Bureau, reassured bankers during her Tuesday address before the annual convention of the Independent Community Bankers of America in San Diego. She noted that she has reached out to talk to community bankers in all 50 states, and that she has visited with the industry’s trade groups, including ICBA. Click here to read her speech.
She made it clear that she understands that community banks are not part of the problem. She said that her agency will focus on non-bank financial firms. “We can’t enforce the laws only against the banks that are easiest to find,” she said. “Instead, we will build a strong enforcement arm that will — for the first time ever — put significant federal resources behind ensuring compliance by non-bank financial companies.”
She even said that her agency will help community bankers save money. “One of the amazing things about this new consumer agency is that it has the opportunity to cut back on regulatory costs,” she said. “With your help, we have set our first initiative squarely in mortgage documentation. We are aiming to consolidate the TILA and RESPA forms to create a shorter, cheaper form that consumers can understand — and that you can fill out more quickly and easily.”
Most bankers I have talked to who have visited with Warren or have heard her speak all say she is charming and says things that are comforting to community bankers. Time will only tell whether the agency actually develops as she describes.
Community bankers clearly are dependent upon Warren’s favorable interpretation of the provisions in Dodd-Frank which prescribe the start-up of the CFPB. Interpretations are much easier to change than the law. When a new agency head comes along, that person may have some other interpretation — one that does not recognize the unique role of community banks. It would by much more comforting if Warren was working from an interpretation that was codified into the law.
Federal Reserve Board Chairman Ben Bernanke addressed bankers in San Diego this morning during the final general session of the ICBA convention. Sal Marranca, the Upstate New York banker who is the ICBA’s chairman for 2011-12, asked Bernanke about the Dodd-Frank Act provision which requires the Federal Reserve to establish interchange pricing for debit card transactions. Bernanke responded:
We have been working really hard on this rule. This has been a difficult one. We have had about 50 staff working on this full time for about six months, collecting information and trying to understand this market…As you know, we put out a preliminary rule and we got back more than 11,000 comments. Each one of them has to be analyzed, so we have our work cut out for us.
As you think about debit interchange, you should understand there are really two parts to the law. The first part, which establishes a standard for debit interchange fees. This relates to the incremental cost of a transaction, has a carve-out, and that carve-out is for issuers that have liabilities or assets of less than $10 billion. To make that carve-out efficacious, we need cooperation from the networks so that they can be willing to pay different fees to different issuers. So far, many of the largest networks have announced that they will be managing a tiered fee system, and to the extent that that happens that will help differentiate the fees received by the smaller and larger issuers.
The second part of the law, though, relates to the networks that merchants use to put through their debit charges. And in particular it creates more competition so that merchants will have more choices about which way they want to route their transactions. This part of the law does not have an exemption for smaller institutions, and overall, more competition in this market will probably bring some pressure on interchange fees, and that will be probably across the board.
So there are a number of forces in play. I think there will be some differentiation but it will take a while for us to know exactly how it will work out.
Let me say one thing which is that at the Federal Reserve we are quite aware that the Congress in writing this law intended for smaller issuers to be exempt, carved-out, from the broader statute. And in our rule-writing, we will do everything we can with all the powers we have to try to make sure that carve-out is effective.
Jim MacPhee, a banker from Schoolcraft, Mich., completes his one-year term as ICBA Chairman today. I asked Jim to reflect on this past year. Here is what he told me:
This year has been an amalgamation of thoughts and processes, of highs and lows. I think that as I look back, we started out with what was some hopeful change to Dodd Frank, which we did receive. We got the FDIC insurance premium based on assets; we got the FDIC coverage increased to $250,000; we got trust preferred included in capital. We think we had some significant victories, if you will.
We started out with the premise that we knew there was going to be a bill. It was not going to be stopped. And we had to have a seat at the table when it came to being able to at least articulate our side of the argument, and help carve out whatever we could for community banking. As that progressed, of course, 25 financial trade associations in Washington D.C. — 11 of them with budgets over $25 million — we knew we weren’t going to be in lock step with every association. As it turned out, we weren’t. Some of those wanted to just stop this bill in its tracks. But when you stop and realize people lost their homes, their life savings, and their jobs, and Wall Street had run a muck, that had put together mortgages that were insane, when you think about that they had no doc, low doc liar loans, and were just funneling these things through en mass, we finally said to our selves, this is going to pass. Something has got to change. And when we sat down with Barney Frank and Chris Dodd, we knew that the change was coming, and all we could do was carve out what we could.
That somewhat splintered the industry in terms of the other large trade association thought we should just fight to stop it. We didn’t think that was a good path to follow, at least at the beginning; we still think we were right in doing what we did. We still fight today against the Durbin interchange amendment. We know, Congress knows, tomorrow Mr. Bernanke is going to tell the world that he knows, that the Durbin amendment was not fair and equal to all. Community banks are cut out of the deal. And it is going to be anti-consumer; it is going to be anti-small bank. In fact, it could drive community banks out of the debit card business. It is that significant.
When I think back on the entire year, where we started, with this massive 2,300-page bill coming at us and, obviously none of us in community banking want any more regulation. We are over-regulated now. But taking the approach that okay, even if you don’t want more regulation we know it is coming, let’s take the high road, let’s work with the regulators, let’s work with congress, and just do the best we can for community banking, and I feel very good about the wins. I feel bad about a couple of the losses, but in total, I think we had a pretty fair record for what we did this year.
Look for the complete interview and coverage from the ICBA convention in the April 15 edition of NorthWestern Financial Review magazine.
Michigan banker Jim MacPhee praised FDIC Chairman Sheila Bair as he introduced her this morning during the opening general session of the ICBA convention in San Diego. Bankers greeted her with a standing ovation. Earlier that morning, she had given this interview to CNBC, in which she commented on her appearance last week in a meeting of bankers hosted by the ABA in Washington. Click here for our post on that meeting.
Her speech to the ICBA convention carried a friendlier tone toward bankers than her speech at the ABA meeting, where she cited survey data that said many Americans no longer trust bankers. Here ICBA speech, in contrast, included a fun story about her childhood when she got her first peek inside a bank vault. Here is the speech she delivered in San Diego.
“I’ve always had a very strong affinity for this group,” she opened at the ICBA meeting. “You are fiercely independent in your core mission in defending the interests of the nation’s community bankers. As you know, I am also tenacious in defending the interests of the FDIC as it pursues its vital public mission of depositor protection and financial stability. Like me, you are frequently direct and pointed in your communications. You pride yourself on your professionalism, and you influence opinion through reasoned public debate. Like me, you stay focused on your objectives. And you are never confused about who you represent.”
Bair added emphasis on that last sentence, and it was followed by applause from the ICBA audience.
The contrast between this speech and the one she delivered last week, apparently, was noticeable. Here is how one reporter for Reuters wrote about it.
The convention wraps up tomorrow.
Terry Jorde, a former ICBA chairman and North Dakota banker, is joining the staff of the Independent Community Bankers of America on April 1 in the newly-created position of chief of staff. As part of her job, she will travel to some of the state affiliate meetings throughout the country. Jorde already has moved to the Washington D.C. area from Cando, N. D., where she had been president of CountryBank USA.