Thomas Stanton, a Fellow at the Center for the Study of American Government at Johns Hopkins University, has written a new book titled “Why Some Firms Thrive While Others Fail” and he spoke this week at a book forum at The Cato Institute.
In writing the book, Stanton used material available to him through his role as a staff member of the Financial Crisis Inquiry Commission (FCIC) to explain why some firms (the firms are banks) survived the 2008 episode of the financial crisis while others failed.
Stanton is an expert in housing finance, and his analysis of Fannie Mae and Freddie Mac placed him in the forefront of the critics of the housing government-sponsored enterprises (GSEs). He provided early warning, which was unwelcome in some quarters, about the vulnerability of the business model of the GSEs and the likelihood they would one day fail and cost taxpayers hundreds of billions of dollars.
Asked to comment on the future of GSEs, Stanton responded that it depended on the view of policymakers as to the importance of maintaining the availability of the 30-year mortgage as a financial product. He also noted that 2008 legislation provides that only Congress can abrogate the charters of Fannie Mae and Freddie Mac. (Translation: Fannie and Freddie are virtually certain to be reconstituted and to once again become a vessel to be exploited by politicians in the name of promoting housing.)
In response to Stanton’s presentation at the forum, Alex Pollock, former CEO of the Federal Home Loan Bank of Chicago, spoke of the need for CEOs to have people around them who are willing to challenge the prevailing view. This is especially true in the field of risk management, where risk officers often lack access to the decision makers or are bypassed at critical times.
Unfortunately, perhaps, when it came to evaluating the leading banks, Stanton identified the four model survivors as JPMorgan Chase, Goldman Sachs, Wells Fargo and Toronto Dominion. Stanton deserves credit for identifying Toronto Dominion, a bank that might not readily come to mind, and for giving it credit for cutting its exposure to securities backed by subprime mortgages before they could endanger the bank.
As for the others, he credited them with superior governance, operational competence and intelligent discipline.
Beginning with Goldman Sachs, I predicted trouble was in store on the very day its then-CEO Henry Paulson was named Treasury Secretary on June 30, 2007.
Ultimately, Goldman Sachs was treated to a shotgun wedding with the Federal Reserve so that it could be rescued by the government. The FCIC hearings heard proud testimony from Goldman Sachs CEO Lloyd Blankfein that he bought protection from AIG for Goldman Sachs’ derivatives exposure.
Stanton was right to credit Goldman Sachs with maintaining a culture of marking its portfolios to market, but he called this practice “a tool” that banks should be free to employ or to eschew.
JPMorgan has, of course, been in the news over the notorious “London whale” trades that CEO Jamie Dimon has himself admitted were poorly designed and supervised. During the 2008 episode, Dimon was able to take charge of the deal making and choose which firms would be saved according to whether he wanted to buy them with generous government aid. You can determine whether the survival of this bank is a triumph of free enterprise, bearing in mind the challenge of Groucho Marx, “Do you believe me or your own eyes?”
Wells Fargo was one of the first nine banks to received aid from the Troubled Asset Relief Program, and its CEO made a big show of resisting the deal. Recently the bank has been celebrated for expanding its mortgage business to a 30 percent market share. Wells Fargo might be positioning itself to divide the mortgage business with a revived Fannie and Freddie. Will this be a story of a sustained economic recovery or a new and potentially destructive housing bubble?
Investors and citizens have a huge stake in the outcome, because all of these institutions remain too big to fail.
Robert Feinberg served on the staff of the House Banking Committee for the 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms and trade associations.
Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.
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