Friday, February 12, 2010

How Obama's War With Banks Will Hurt Our Recovery

A pretty common sense argument from the Chairman and CEO of Blackstone:

Blackstone is a major client of many of the largest banks around the world. And if there is one common theme that I have heard in conversations with senior bank executives over the past several months, it is that their fundamental business model is under siege. They are uncertain about the amount of equity capital needed to run their enterprises. They are uncertain about the amount of reserves required for various business lines. They are uncertain about the potential new requirements for special reserves they will have to retain in good times to use in bad times. They are uncertain about the ongoing level of taxes they will be paying. They are facing various proposals for what are described as new fees, which are the equivalent of new taxes. They are facing proposals to limit the number of businesses they will be allowed to be in and thus are contemplating having to shrink their banks and divest themselves of otherwise profitable assets. They are facing restrictions on what they can pay their people and are facing the possibility that many talented employees will leave for other financial institutions outside the public eye.

These uncertainties have severely hampered banking executives' ability to plan how to run their businesses or even know what their businesses may include. Predictably, bankers are reacting to this unprecedented uncertainty by becoming conservative and cautious. The result is that there is less lending and less credit available.

This country, of course, needs fundamental reform of our financial regulatory system, as I, and many other financial institution executives, have publicly advocated for a considerable period. But we are debating this hugely important issue in an inflammatory political atmosphere in which key participants seem determined to single out the banks for special retribution in reaction to the financial crisis.

It is important to remember that a variety of actors helped create the financial crisis. From our government, there was congressional pressure to expand homeownership by lending to borrowers who would not otherwise qualify for traditional mortgages. As a result, Fannie Mae and Freddie Mac dramatically expanded their activities to accommodate this objective. Federal Reserve monetary policy reduced the cost of lending and encouraged borrowing. Private market participants may have used excessive leverage in some transactions. Regulators permitted dramatic increases in leverage at investment banks, and billions of dollars of debt stayed off some banks' balance sheets. There was failure at virtually every level of regulatory oversight, including, critically, minimal controls over mortgage brokers, who encouraged many subprime borrowers to contract for houses or take out additional loans that they could never afford. Many banks lowered lending standards for various other commercial, residential and consumer loans while reducing their reserves for bad debts. Rating agencies bear a heavy burden of responsibility for assuring investors that securitized pools of subprime mortgages could get the highest AAA rating, when in reality they were highly speculative risks. Banks underwrote and sold these AAA securities around the world without a sober, objective examination of the underlying risks. Many of the purchasers of these securities failed to perform even the most rudimentary independent due diligence.

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