Don't Play With Fire Boys and Girls
By Stephen M. Klein
November 18, 2009
The Proposed Restructure
Well, Senator Dodd, bless his heart, has come out with yet another proposal to restructure the financial regulatory system. If you haven’t seen it, at its heart is a new oversight body called the “Financial Institutions Regulatory Agency” or “FIRA.” I think a more appropriate name would be the “Financial Institutions Regulatory Entity” or “FIRE."
While it probably has zero chance of passing as proposed, the bill is telling. By stripping the FDIC and Federal Reserve of their bank regulatory oversight functions – making the FDIC just an insurance agency and the Federal Reserve a monetary policy agency and eliminating the OCC and OTS as we know them, I interpret Senator Dodd to be saying “You all messed up – so we are going to start over again.”
Actually, the concept of a new, single financial regulatory agency is intriguing. At least it would centralize power and create some consistency. The downside is that word power – and the fear of its abuse.
Where Are We Anyway?
Unfortunately we are still in the middle of this mess. With real estate values still dropping in many locales, we are far from done. The implications are far reaching. Because of archaic accounting pronouncements, banks, steered straight off a cliff by the accountants, appraisers and regulators, are forced to write down “distressed” assets to fire sale values. Why no OTTI standards have been adopted for real estate is beyond me. We just continue to privatize the upside on real estate and publicly swallow the downside in large gulps.
The Scary Regulatory Environment
Folks, I am here to tell you things have only gotten worse. With each succeeding Inspector General Report, the regulators get more dogmatic and risk averse. Enforcement actions are flying. Three CAMELS ratings are embraced. The whole process and its aftermath are overwhelming to boards and management and the regulators themselves, who simply don’t have the resources or necessary experience to properly address all the issues, many of which are self-created.
There is huge frustration on the part of management teams, including many good bankers just trying to survive this nightmare. Solutions that are an iota out of the box are shot down with no apparent thought or explanation. The mantra now is for common equity in capital raises, and failure is being considered over preferred stock injections.
Eliminating the Hostile Regulatory Environment
In hindsight, many banks took on too much risk and real estate concentrations. And, yes the regulators have a very tough job to do. However, the hostile environment we are operating under serves no one well.
The regulators , legislators, banks and their lobbyists must all take a step back and reconsider where we are at now, where we want to get and how best to get there without further scorching the earth.
The Irony of It All
The irony is that the banks are supposed to be at the heart of the economic recovery. However, with reduced lending limits, concentration ratios and tolerance for regulatory criticism, the banks just aren’t lending much nowadays. Why a broad-based government guaranteed lending program has yet to be adopted is beyond me.
From the outside looking in on that “island surrounded by reality” which is known as Washington, D.C., Congress, the administration and the bank regulatory agencies all are on different C-SPAN channels. The disconnect is frightening.
Let’s Put Out the Fire
So before adopting any new regulatory reform, let’s figure out just what went wrong, put a meaningful plan together to fix it and go about the business of returning our banking system and economy to some semblance of stability. Otherwise, we truly are playing with FIRE!
