Return from Fantasy Island
Over the last 30 years, bankers successfully lobbied for a government-supported, loosely regulated Fantasy Island. It turns out Fantasy Island isn’t all that fun for them or for our economy.
Let’s visit a businessman’s Fantasy Island.
The government loans you money interest-free whenever you need it. You can loan some of this money back to the government at a profit, and use the rest for your own operations. The government insures your customers against any losses no matter how risky or imprudent your business practices.
If things happen to sour, the government changes the accounting rules so you still look profitable. If you still manage to become insolvent, they bail you out. If you get caught criminally misrepresenting the value of assets, illegally seizing customer property, or violating fiduciary responsibilities to customers, you don’t go to prison; you negotiate a favorable financial settlement.
Most would call this fantasy world business nirvana. There’s almost no way to mess up and lose money.
Amazingly, Fantasy Island has become the reality for big banks. And, against all odds, they did find a way to mess it up, not only for themselves but for our entire economy. So how have they reacted to their failure? By blaming the very people who’ve bent over backwards to ensure their success.
They conveniently overlook all the perks they receive and blame their woes on misguided government interference. They scream the word “OVERREGULATION” as loud and as long as they can – even as the latest JP Morgan debacle ($2 billion and growing) shows the fallacy of their argument.
Historically proven principles
I’m no fan of complicated rules and bureaucracy in either the public or the private sector. But if ever an industry demonstrated that it needs better regulation to protect the both the public and itself, banking is the one.
Anyone who has gotten the bank runaround on a mortgage problem might be tempted to view the imposition of punitive and confusing regulations as poetic justice. But that would be self-defeating. The truth is that regulation could be greatly simplified, our economy strengthened, consumers and investors protected, and the banking industry stabilized with the reintroduction of a few historically proven principles.
- Return to the practice of providing fair resolutions on troubled mortgages. In the old days, banks maintained ownership of the mortgages they originated and had strong incentive to help homeowners through periods of trouble. Foreclosure was a very expensive last resort. In today’s world, banks routinely sell their mortgages to third-party investors and take a contract to continue servicing the loans. Since banks earn higher servicing fees for a foreclosure than a mortgage renegotiation, foreclosure has become the first option for resolving troubled loans. This practice devastates families, hurts real estate values and imposes needless losses on investors who bought the mortgages. Regulation that requires good-faith mortgage renegotiation by loan servicers prior to foreclosure will protect both borrowers and investors.
- Restore the separation between commercial banking (lenders) and investment banking. Commercial banks should not be allowed to engage in high-risk investment strategies or share any affiliation with investment banks that would put insured deposits at risk. Risky investment banks should not qualify for deposit insurance coverage. Limiting Federal Deposit Insurance coverage to commercial lending banks will help push capital out of speculative financial instruments that do not support job creation and into productive job creating investments that bolster the economy. Forcing commercial lending operations to split from investment banking would also be a constructive first step in alleviating the “too big to fail” syndrome.
- Create the same transparency in derivatives markets as traditional stock, bond and commodities markets. That means providing instant data on trading volumes and price spreads. We can’t and don’t want to stop folks from making risky investments, but they should at least know what they are facing. The lack of information in these markets is simply a license for financial institutions to steal, and to cover up improprieties.
Creating a competitive advantage
Some in the banking industry claim these steps would push our financial institutions offshore where they can compete in lax regulatory environments. This argument rings hollow for two reasons. First, there is no evidence that operating investment and commercial lending banks under one company umbrella creates operating efficiencies. Efforts to do so have not panned out well so far. Second, lax regulation in Europe and Japan has resulted in banks that are even weaker than our own.
Strengthening U.S. financial institutions with commonsense regulation and improved transparency could create a competitive advantage that attracts more capital and financial service business to our shores.
Over the last 30 years, bankers successfully lobbied for a government-supported, loosely regulated Fantasy Island. It turns out Fantasy Island isn’t all that fun for them or for our economy. The last thing we should do is listen to pleas to stay.
Over the long haul, commonsense regulation that protects investors and borrowers will also strengthen our economy and the banks. Don’t let hucksters chasing next quarter’s profit numbers and this year’s outrageous bonuses convince you otherwise.
It’s time to return to the mainland.
State Senator Steve Fischmann, District 37, represents Doña Ana and Sierra counties.
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