“Financial (not real) engineering wreaked havoc with our financial system during the past three decades. Rather than acting as a catalyst to enable productive endeavors, finance metastasized into a machine that simply transferred enormous wealth while adding little value to society.”
The aforementioned is an excerpt from my piece two months ago entitled “A FIRST Lesson in Why Gold Can Hit $4,000.”
The prescient quotation cited below was delivered recently to the American Bankers Association Government Relations Summit in Washington, D.C., by Federal Deposit Insurance Corporation (FDIC) Chairwoman Sheila C. Bair.
“First, I would like to propose to you a radical-sounding notion. And it is that increasing the size and profitability of the financial services industry is not – and should not be – the main goal of our national economic policy. But, in policy terms, the success of the financial sector is not an end in itself, but a means to an end – which is to support the vitality of the real economy and the livelihood of the American people. What really matters to the life of our nation is enabling entrepreneurs to build new businesses that create more well-paying jobs, and enabling families to put a roof over their heads and educate their children.”
Bair goes on to say: “In our national economic life, your contribution as bankers, and ours as regulators, can only be measured against this yardstick. And let’s be completely honest – in the period that led up to the financial crisis we did not get the job done. [emphasis mine] FDIC-insured institutions booked record earnings in each of the first six years of the last decade."
But in the recession that followed, the U.S. economy lost over 8-and-a-half million jobs, of which only about 1.2 million have been regained in the recovery. There are almost two million fewer private-sector jobs in this country today than there were in December 1999, 11 years ago.
More than 9 million residential mortgages have entered foreclosure in the past four years, and the backlog of seriously past due mortgages stands at more than 2.5 million.
The lesson for policymakers is that having a profitable banking industry, even for years at a time, is not sufficient on its own to support the long-term credit needs of the U.S. economy. Instead, the industry also needs to be stable, and its earnings must be sustainable over the long term. This, quite simply, is why regulatory changes must be made.”
Mortgage loan originators lacked “appropriate oversight or controls,” and industry associations expressed strong reservations concerning FDIC guidance years before the financial crisis erupted, said Bair.
In 2006, the FDIC warned of an excess proportion of commercial real estate within the real estate portfolios of banks. Responses from trade organizations at the time included the following: “new guidance was not needed and would only increase regulatory burden," "industry practices had vastly improved since the last real estate downturn," and "high levels of commercial real estate lending were necessary in order for small and midsized institutions to effectively compete against larger institutions.”
In 2007, the FDIC issued guidance on the handling of non-traditional mortgages. Industry officials believed these measures ‘“overstate[d] the risk of these mortgage products,” and that it would stifle innovation and restrict access to credit.”
Subsequently, the FDIC extended the guidance to hybrid adjustable-rate mortgages, which represented 85 percent of all subprime mortgages at that time.
In response, the FDIC “received a letter co-signed by nine industry trade associations expressing '“strong concerns”' and saying that '“imposing new underwriting requirements risks denying many borrowers the opportunity for homeownership or needed credit options.”’
“We need to stand together on the principle that prudential standards are essential to protect the competitive position of responsible players from the excesses of the high-fliers,” said Bair.
Unfortunately, industry leaders continue to articulate positions anathema to these prudential standards and principles.
The following comment was submitted when the Deposit Insurance Fund was negative $8 billion: ‘“it is best to err on the side of collecting less, not more, from the industry.”’
Additional public statements contend '“stronger capital requirements or risk retention in securitization will stifle lending and douse the recovery.”
The financial industry seems predisposed toward creating the same underlying scenarios that caused the financial cataclysm.
This is unacceptable.
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