Bribed
by federal bailouts and threatened by lawsuits, top bankers have grudgingly
gone along with the narrative that greed and deregulation caused the recession.
But one prominent CEO is breaking ranks as he leaves the embattled industry.
While
running regional giant BB&T for two decades, John Allison had an insider's
view of the factors behind the crisis. A burst of greed wasn't one of them, he
says. Nor was deregulation. "The financial industry was not deregulated,
it was mis-regulated," he asserted. In his new book, "The Financial
Crisis and the Free Market Cure,"
Allison
says at every step of the way, Washington politicians and regulators brought on
the crisis and then made things worse during the panic. Now, he warns, they're
sowing the seeds of another financial crisis, thanks to new rules sold to the
public as insurance against another crisis but that in fact double down on old
mistakes.
Allison
says problems started in the 1990s when regulators pressured banks to abandon
traditional mortgage underwriting standards."Under Clinton, making
high-risk home loans to low-income borrowers was given priority over safety and
soundness from a regulatory perspective," he said. The ex-president used
the Community Reinvestment Act as an
enforcement tool. When home prices fell years later, Allison points out, loss
ratios on high-risk CRA loan portfolios soared.
Then
in 2000, Clinton's HUD required
Fannie Mae and Freddie Mac, which had dominated the prime lending market, to
restructure their portfolios so at least half their loans were CRA and other
subprime mortgages."The legitimate affordable-housing market was not big
enough to equal 50% of (their) giant loan portfolios," Allison said.
"To meet this political goal, Freddie and Fannie would have to consistently
lower their lending standards." And that's exactly what they did in the
2000s, dragging down standards across the entire industry.
They
also polluted the mortgage-backed securities market with junk posing as
Treasury assets. At the same time, the Justice Department began investigating
banks, including BB&T, for lending discrimination. Many stopped rejecting
risky loans.
"From
my experience discussing this issue with CEOs involved, they knew their
companies were not guilty," said Allison, who now heads the Cato
Institute. "But they also knew there would be a high price to pay for
fighting the regulators."BB&T fought back, and "they stopped all
our mergers." But after the GOP took Congress, investigators dropped the
case."They went home the next day," Allison recalled, showing the
probe was "highly political."
The
SEC also had a hand in the crisis by forcing investment banks to use so-called
Basel accounting rules to figure their capital requirements. The rules were
based on math models using rosy Fed economic assumptions. Banks lowered
reserves and "became more and more leveraged," Allison said.
At
one point, he says, the SEC ordered SunTrust to lower its loan-loss reserves.
The bank's chief credit officer was fired for building reserves."This
affected the behavior of every credit officer and materially brought down
loan-loss reserves in the industry," he said.
Allison
says the TARP bailout fund and other post-crisis action by Washington merely
propped up unhealthy bank giants (as well as Detroit unions), creating a
"government-sponsored oligopoly" in the financial industry.
He
said the Dodd-Frank Act does not effectively deal with the "too big to
fail" issue. And it doesn't deal with Fannie and Freddie at all. But it
does intensify the policing of banks for affordable lending. Dodd-Frank creates
a new consumer credit watchdog that's already feeding complaints to Attorney
General Eric Holder, who's cracking down on banks anew for lending bias.
Allison
calls the army of regulators and prosecutors now investigating lenders a
"gestapo.""The administration's regulators have done everything
possible to keep low-income homeowners who cannot afford the homes they have
bought in those homes for as long as possible, often two years or more after
they quit paying," he said.
Source:
Investors Business Daily, By Paul Sperry,
2/15/13,
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