Magazine article American Banker

Viewpoint: Counterpoint - How Big Banks, Congress Helped Create the Mess

Magazine article American Banker

Viewpoint: Counterpoint - How Big Banks, Congress Helped Create the Mess

Article excerpt

As we traverse one of the worst modern American financial crises, we are again reminded of the follies of our present banking structure and the inequities showered on the many by a few.

The current crisis is being driven entirely by the major financial institutions, primarily the money-center banks and the national mortgage players.

The victims have been not only the consumers, investors, and taxpayers of America, but also the great majority of its 7,405 banks.

In their never-ending quest to manufacture profits from broken business models, the money-center institutions have engaged in reckless third-party lending, destroyed credit spreads in the search of volume, and sucked deposits from local economies with brokered deposits. They have downstreamed credit exposures for fee income, created and fostered unattainable financial instruments and dramatically expanded leverage (to ratios like 30 to 1). They have obliterated regulatory oversight and destroyed customer service.

The national mortgage players - Countrywide and Washington Mutual - eliminated risk controls, thrived for a while on unstable wholesale funding, and supported reckless third-party lending.

The results for America's community banks have been irrational funding competition, irrational lending competition, and an unequal regulatory environment.

Just as commercial banks have faced investment banks that operated in an essentially uncontrolled environment, community banks have faced the major national players that have an unfair regulatory advantage.

The "too big to fail" stances of regulators and Congress have helped created the current mess.

* Regulators count paper clips at most banks, but at Citigroup they allowed the creation and promotion of incomprehensible instruments, which so far have cost the company $30 billion. Does anyone understand credit default swaps? …

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