Bankers have been under siege lately. I should know, I am one. Just this week we saw a post on this site tying the suicide of a Greek man in the main Athens square to bankers, urging bankers of all stripes to resign en masse as a means of striking back. Yesterday we read a guest post by a writer here wondering half seriously if we should execute corrupt bankers. Commenters were evenly split on whether bankers should be simply executed, or if there was perhaps a better way to inflict even more pain.
I would find these deliberations somewhat amusing, if they weren’t so far afield of reality and so pervasive in our society. The root of the vitriol seems to come from the perception that bankers are solely responsible for the financial crisis that started in 2007. This view is compounded by the generalized lumping of all bankers into the same pot, just as if postal workers should also be held responsible for the ills of our government.
It takes just a quick, cursory look at the financial crisis to see what a massive joint effort it truly was, but first let’s clarify just who these guilty bankers are—who were the ones who had a direct hand in the financial crisis, and who did not. We can presumably blame upper management. We could point a finger at the guys who packaged and sold those securitized CLOs, CDOs, etc. We should probably add the people who arranged the mortgages that went into those products.
Those are all bankers, for sure. But we can’t very well blame bank tellers, can we? We also can’t really blame stock or bond traders, or traditional loan officers, or credit officers (apart from the ones associated with the bad asset packaging), or the commercial real estate teams, or the bank administrative arms, or the notary people, or the IT departments, or collections, or the bank asset managers who didn’t buy the toxic products. It would be a stretch to finger the people issuing bankers’ acceptances or letters of credit, or all the folks who service credit cards.
So I’ll go out on a limb here and pencil in a figure of 5% as the number of bankers that were directly involved some way in the financial crisis. I realize it probably seems high to you too, but let’s be conservative and go with that. Let’s call these people the “Bad Bankers.” (For disclosure, I am not a Bad Banker.)
Now let’s take a spin around the financial block and see who else was involved in the crisis. Let’s start with the investors who bought the products from the Bad Bankers. Investors who bought these CDOs and CLOs are certainly fully complicit, because banks would hardly waste their time creating investments that no one would buy. So we really have to include pension funds, endowments, mutual funds, 401k plans, hedge funds, etc.
But these guilty investors are among the most conservative institutions, and they certainly would not have made their purchases if the investments had not been highly rated. That trail leads to the ratings agencies, most notably Moodys, Standard and Poors, and Fitch. In fact many institutions can or will only buy AAA-rated investments, that is, only bonds deemed to be of the highest possible credit, virtually certain to return principal and interest. So the ratings agencies are certainly to blame as well. How in the world could something with a AAA rating be worth pennies on the dollar just a few months later?
At the same time, regardless of the rating, the products themselves were bad. Had the mortgages been performing, we would not be in this mess in the first place. The problem is that the investments that the rating agencies endorsed consisted of mortgages with no down payment, borrowers with poor credit ratings, faulty documentation, etc. We can’t blame the ratings agencies for the fact that the products were so bad, and we really can’t blame the Bad Bankers, because they would not have agreed to lend money to the borrowers under those conditions. The Bad Bankers were just representing a huge lender.
The stars of the show, the lenders that made it all possible, are none other than FNMA and FHLMC: Fannie and Freddie. These are the government agencies that set the standards and leant the money to the subprime and “Alt A” borrowers, that stretched farther and farther to find potential borrowers so that more and more Americans could own their own homes, no matter how inappropriate that might have been. No Fannie and Freddie, no financial crisis. It’s that simple. Our list of the guilty is growing exponentially.
But Fannie and Freddie are really only there to serve their master, the federal government. As we all know, our government has been pushing home ownership during multiple administrations, pushing the ratio from an already unsustainable 64% to a mind-boggling 68% over the last few years that preceded the crisis. Barney Frank, the chairman of the House Financial Services Committee, encouraged Fannie and Freddie to leverage their activities even more, during the height of the fiasco. For the record, he is still the chairman of the House Financial Services Committee.
But the government, as ill-advised and well-intentioned as it was, could not have forced us to buy the homes that Fannie and Freddie would fund, that the ratings agencies would endorse, that the Bad Bankers would package, that the institutions would buy. For that, they needed millions of US citizens. Yes, it may be hard to turn down a house we can’t afford when someone is willing to lend money at low rates (we have Alan Greenspan to thank for the low rates, by the way), but why should we choose to live beyond our means? Whose fault would that be? Now our very long list of the guilty just became much, much, much longer.
The simple fact is that our entire country went through a bubble, just like the Japanese before us, and the Europeans now. Among other things, bubbles require a pervasive herd mentality, and lots and lots of credit. Our bubble was not perpetuated by the Bad Bankers, who were also living the bubble dream. The Bad Bankers bought plenty of their own products, entranced by the same AAA ratings that ensnared the rest of us.
Sure, we can blame bankers, good and bad alike. We can also blame our pen for staining our shirt pocket, and cut off our nose to spite our face. In that same way, the government has been all too happy to blame the banks for the crisis, to avoid taking responsibility for its own prominent role in the debacle. But when we blame bankers, we fail to address the issues we still face in a responsible, effective manner. The Bad Bankers are gone, or neutered. The rest of the chain that comprised the crisis remains very badly flawed, and we continue to single out the banks at our own peril.