Banks And Regulators = Dumb And Dumber

Confessions of a banker in this scuttlebutt of the blame game for the financial meltdown. It goes like this:

Banks were pressured by bank regulators to loan, loan, loan despite the credit worthiness of the borrower. After the 2008 market collapse, these same regulators employed by three governmental agencies, told banks no, no, no to even low-risk borrowers.

Today a spotlight is shed on these regulators employed by the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Office of the Comptroller of the Currency.

Not only were they derelict in their duties leading up to the crises, the government rewarded them with $19 million in rewards and bonuses for "superior work."

The business networks are abuzz with the analysis revealed by an investigative report by the Associated Press. For the purposes of this column, I will link to the Canadian Television network in which reporter Matt Apuzzo writes:

The payments ... are the latest evidence of the government's false sense of security during the go-go days of the financial boom. Just as bank executives got bonuses despite taking on dangerous amounts of risk, regulators got taxpayer-funded bonuses despite missing or ignoring signs that the system was on the verge of a meltdown.

The bonuses were part of a little-known incentive rewards program and ranged from a few hundred dollars to as high as 25% of a regulators' salary. About $8.4 million were rewards for financial examiners and the remainder dispersed to analysts, auditors, economists and criminal investigators.

The Treasury Inspector General's scathing report after the meltdown used terms scolding the regulators as

• "Did not react in a timely and forceful manner to certain repeated indications of problems"
•  "Did not issue a formal enforcement action in a timely manner and was not aggressive enough in the supervision"
• “In retrospect, a stronger supervisory response at earlier examinations may have been prudent”
• "Examiners did not identify or sufficiently address the core weaknesses that ultimately caused the thrift to fail until it was too late... “They believed their supervision was adequate. We disagree.”

Regulators complain the criticism is based on hindsight and unfair to suggest the bonuses were improper.

“These (rewards) are meant to motivate employees, have them work hard,” thrift office spokesman William Ruberry said. “The economy has taken a downturn in recent years. I'm not sure that negates the hard work or good ideas of our employees.”

And, where have we heard this before?

“In making compensation decisions, the OCC (Office of the Comptroller of the Currency) is mindful of the need to recruit and retain the very best people, and our merit system is aimed at accomplishing that,”said spokesman Kevin Mukri.

From this:

“Bonuses (for financial employees) were determined based upon the performance and the retention of the people,” said John Thain, the former CEO of Merrill Lynch, the troubled brokerage firm that paid out $3.6-billion in bonuses just before selling itself to Bank of America. “And there is nothing that happened in the world or the economy that would make you say that those were not the right thing to do for the retention and the reward of the people who were performing.”



The news agency reporting the AP findings:
One person in the OCC's financial examining division got a $41,000 recruitment bonus on top of a $179,000 salary in 2005. In 2006, the last boom year for banks buying risky mortgages, the FDIC gave out more than 2,000 bonuses to financial examiners. In 2008, the year the market collapsed, OTS gave 96 financial examiners bonuses of up to $3,000 for exceptional work.

Concludes the Canadian reporter Apuzzo:

To be sure, Washington policy makers eased regulations and encouraged banks to write risky loans. Families bought homes they couldn't afford. Brokers found them mortgages. Bankers quickly snatched them up, never asking whether they could be repaid. And rating agencies certified it all as safe. But regulators were part of the problem, and the bonuses were a symptom, said Ellen Seidman, a research fellow at the New America Foundation think tank and the former head of OTS from 1997 to 2001.
“Is it probably the case that the standards for evaluating how well people in the regulatory system were doing were not as high as they should have been? Probably,” Seidman said.
But the bigger question, she said, is why government regulators thought they were doing so well: “Why did the system fool itself?”

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EPILOGUE

It gives me little solace that the sweeping new financial regulations pending in Congress will do any good in terms of protecting the consumer and investor.