Consumer watchdog scolds bankers for taking bad risks
It must be hard for the banking industry, which revels in indecipherable communication with customers, to actually be spoken to in plain English.
It must be equally hard to be told that the industry’s greedy, self-interested business practices reward recklessness at the expense of sound money management.
So props to Raj Date, deputy director of the Consumer Financial Protection Bureau, who stepped before the American Bankers Assn. this week to explain why those in the audience were screwing up their own companies, the business world in general and the broader U.S. economy.
Oh, and they weren’t doing consumers any favors either.
“Let me say a word or two about risk taking,” Date said about halfway through his speech at the banking group’s annual conference on regulatory compliance, held this year, without the slightest hint of irony, at the land of make-believe that is Walt Disney World in Florida.
“There is nothing inherently wrong with risk,” he declared. “Risk — liquidity risk, credit risk, counter-party risk, market risk, interest-rate risk — is why financial markets exist. Risk is why bankers get paid.
“But nobody should get paid for taking risk that they can’t understand, they can’t rank, they can’t quantify or they can’t price.... If you are smart and take smart risks, then you should get paid. But if you are taking bad risks, then you shouldn’t get paid.”
Let’s reiterate that last point: If you are taking bad risks, then you shouldn’t get paid.
Imagine. Bankers being held accountable for their actions.
This runs contrary to the ethos of much of the banking industry, which recent events would define as making gobs of money from even the most boneheaded decisions. And if things go wrong, all you have to do is pass the hat among taxpayers while insisting that a problem like this couldn’t possibly happen again.
Exhibit A: The banking industry and its Wall Street cronies nearly drove the global economy off a cliff by gambling wrong on mortgage-backed securities. U.S. taxpayers will be saddled with $32 billion in bailout costs, according to the latest estimates from the Congressional Budget Office. No one went to jail.
Exhibit B: JPMorgan Chase subsequently lost as much as $5 billion by making ill-conceived trades on similarly risky securities. The company’s chief executive, Jamie Dimon, testified before Congress on Wednesday that this was an “isolated event” and shouldn’t get people all worked up.
“Sure, there are bad mistakes, and there are bad breaks, and, yes, there are some bad people,” Date told the bankers in Florida. “But fundamentally, when all is said and done, people are generally good, and they generally do what they are paid to do.
“So if we want businesses to do the right thing, they shouldn’t be paid to do the wrong thing,” he concluded. “Bankers shouldn’t win when customers lose.”
Now there’s a novel idea. So I contacted the American Bankers Assn. and asked how Date’s speech went down with the pin-stripe set.
Bob Davis, the group’s executive vice president, acknowledged that “there were a lot of mistakes made all around” during the mortgage mess, including by regulators like Date, “who didn’t step in quickly enough.”
This is sort of like a kid admitting that he ate a cookie before dinner but also blaming his mom for not catching him in the act, but never mind.
“Obviously, in a risky world, you’re going to make mistakes,” Davis said. “But you aren’t going to have a banking system without risk taking.”
Although he said bankers at the conference appreciated Date’s feedback, Davis said it was “peculiar” that a consumer watchdog would be lecturing banks on matters of operational soundness. “The Consumer Financial Protection Bureau has a broad and not-very-well-defined mandate,” he said.
Be that as it may, Date’s message was clear: These self-styled masters of the universe should be more responsible.
When borrowers sit down with lenders, Date said, “there is a certain element of trust that your lender isn’t setting you up to fail.” But one bitter lesson of the banks’ mortgage mess is that, all too often, lenders were content to hand money to virtually anyone who asked for it, regardless of ability to repay the loan.
Date said the consumer agency, which the banking industry opposed from its inception, is working to fix things by requiring more transparency in mortgage lending and by establishing new safeguards to prevent people from getting into unsuitable loans.
“The mortgage market will recover when we have restored transparency, when we have restored fairness and when we have restored financial incentives that actually reward people for making smart decisions,” he said. “And that’s what we would like to see across the markets — transparency, fairness and incentives for responsible behavior.”
I can just picture the puzzled look on bankers’ faces as Date said this. Transparency? Fairness? Responsible behavior?
And then perhaps they looked at their schedule of events and saw there’d be an exclusive party later on with dessert and fireworks at Disney’s Epcot Center.
Cake for bankers and no one else? Things that blow up at a distance, causing no harm to onlookers? Now there are a couple of things the banking industry understands.
David Lazarus’ column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to firstname.lastname@example.org.
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