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As we traverse one of the worst modern American financial crises, we are again reminded of the follies of our present banking structure and the inequities showered on the many by a few.
The current crisis is being driven entirely by the major financial institutions, primarily the money-center banks and the national mortgage players.
The victims have been not only the consumers, investors, and taxpayers of America, but also the great majority of its 8,500 banks.
In their never-ending quest to manufacture profits from broken business models, the money-center institutions have engaged in reckless third-party lending, destroyed credit spreads in the search for volume, and sucked deposits from local economies with brokered deposits. They have downstreamed credit exposures for fee income, created and fostered unattainable financial instruments (CODs, SIVs, etc.), and dramatically expanded leverage (to ratios like 30 to 1). They have obliterated regulatory oversight and destroyed customer service.
The national mortgage players--Countrywide and Washington Mutual--eliminated risk controls, thrived for a while on unstable wholesale funding, and supported reckless third-party lending.
The results for America's community banks have been irrational funding competition, irrational lending competition, and an unequal regulatory environment.
Just as commercial banks have faced investment banks that operated in an essentially uncontrolled environment, community banks have faced the major national players that have an unfair regulatory advantage.
The "too big to fail" stances of regulators and Congress have helped created the current mess.
Regulators count paper clips at most banks, but at Citigroup they allowed the creation and promotion of incomprehensible instruments, which so far have cost the company $30 billion. Does anyone understand credit default swaps? Where is their capital support?
Regulators micromanage the succession plans at most banks, but Citi apparently had no management and no plan.
Liquidity planning and funding plans are scrutinized at most banks, but apparently neither Merrill Lynch nor Bear Stearns ever considered liquidity.
Deposit-funding strategy is central at most banks, but apparently the government thought Countrywide could rely on wholesale funding forever.
The money-center banks fought for Basel II to lower their capital, and now all banks are being saddled with incomprehensible, model-driven capital requirements.
The investment banks, with no financial oversight, can now borrow from the Fed discount window without shame. What happens to your local bank if it borrows from the Fed? Armageddon.
The money-center players put their considerable political clout to work, while community banks are hamstrung by prohibitions.
This has all been a detriment to America. When local banks cannot gather local deposits, support local credit needs, or serve local commercial customers because of irrational and biased legislation and regulation, America grows weaker.
What do you think? Let me know!
(This column originally appeared in American Banker)