Inside Financial Services

John Dugan Continues To Kid Himself

There's nothing his OCC could have done to prevent the financial crackup? Please.

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You’ll get no argument from me that the primary culprits behind the banking industry’s recent credit problems were the banks themselves. Lax underwriting practices and excessive loan concentrations (primarily in commercial real estate) at a minority of the country’s banks nearly brought the whole system down.

That said, I find it amazing that so many people believe that the best way to ensure the credit crackup doesn’t happen again would be to give regulators-who, remember, oversaw the reckless underwriting and buildup of loan concentrations in the first place-even more power than they already have, and for Congress to pass a massive bill (Dodd-Frank) that will lead to a huge new set of rules and regulations that will govern the banks.

News flash: prior to the crackup, bank regulators had all the power they needed to prevent the catastrophe from happening. They simply didn’t see it coming. A lot of people didn’t. I get annoyed, though, when, after the fact, regulators try to re-write history by arguing that they were powerless at the time, and that things would have been different if only more rules had been in place. That’s nonsense.

(I also get annoyed, while I’m on the topic, when regulators overcompensate for the prior laxness by clamping down on the banks once the crisis is over, and so take a bad situation and make it worse. That’s what happened after the big real estate collapse in the early 1990s and by all accounts it’s what’s happening again.)

Which gets me to an interview the former Comptroller of the Currency, John Dugan, recently gave to Bank Director magazine. Here’s what he said

[T]o me, poor underwriting standards is not a consumer protection issue-it is a safety and soundness issue. . . . The heart of the problem was that we should have had better underwriting standards at the point of sale with the consumer. . .

I definitely think that the regulators should have done more in the area of minimum underwriting standards. I think we just lost our way as a country. But in defense of the bank regulators, I would say that underwriting standards were always much better for the loans that the banks held on their own books. Where the standard was not as high was on loans they sold to third parties. It was harder to enforce minimum mortgage underwriting standards on institutions that were selling loans to third parties. And if we had enforced a minimum underwriting standard the banks would have complained that they would lose the business to third parties who were underwriting substandard loans. . . . [Emph. added.]

If self-deception were a performing art, Dugan would be up for an Oscar. Here’s a man who was the country’s preeminent bank regulator, on whose watch the entire financial system nearly collapsed, and he still can’t bring himself to admit there was anything his agency might have done to avert disaster. If only better underwriting standards had been in place! I read the Dugan interview straight through. His comments aren’t an ex post facto rationalization designed to put the best face on what was, we all now know, a huge underwriting and regulatory lapse. He really seems to think his hands were tied. I especially like the last part I bolded up there: “If we had enforced a minimum underwriting standard the banks would have complained that they would lose the business to third parties.” How quaint! I suspect that, these days, not many bankers dare complain to their examiners. And the ones that do are seeing their complaints fall on deaf ears. How times change.

John Dugan ought to be ashamed of himself. In the fullness of time, we now know that if his OCC had forced some underwriting discipline on the nation’s banks at the peak of the cycle-if the agency had, say, forced banks to be more judicious in writing certain no-doc loans, or option ARMs, or sub-prime mortgages-the magnitude of the credit crunch would have been much, much less than it turned out to be. Yes, banks would have lost some business to non-bank lenders. Good! In all, fewer bad loans would’ve been written, and many fewer would have been written by the (federally insured) banking system. That’s the sort of things regulators are there for to make sure happens. Dugan’s OCC didn’t. They were a bunch of incompetent oafs, and they blew it.

Remember, Dugan was in charge of safeguarding the banking system’s safety and soundness. He shouldn’t have cared about a bank’s loan volume or market share. And given what’s happened, by now you’d think that he’d have realized he shouldn’t have cared. That he persists in arguing that he couldn’t crack down on banks more because, in essence, he couldn’t mess up the bank’s business plan, is a disgrace.

In any event, mark me down as skeptical that the raft of new agencies and regulations lately being created to prevent the next meltdown will do much good. There were already plenty of rules in place that could have prevented what happened. The problem isn’t the rules. It’s the people.

What do you think? Let me know!

14 Responses to “John Dugan Continues To Kid Himself”

  1. Alan Achterberg

    The problem is the people, but also the inability of the system to react to a dynamic market. In a healthy dynamic market, risks evolve quickly, like the over-leveraging of commercial real estate and land development.

    Nobody did the simple math on market absorpbtion, affordability and lot inventory. Too much of our economy was driven by real estate instead of something valued by others.

    But the regulatory environment is slow to react and generally does not reward proactive individuals.

  2. JoeV

    This time I wholely and heartily agree with your assessment. Dugan is a complete idiot. He will be long remembered as the clown who refused TARP funds for National City and then made those same funds available to its acquirer PNC.

  3. Bill the ex-banker

    So, basically, the banks have no remorse in ruining the country’s economy? I hope to holy heaven some regulatory scheme comes into place that limits the d-bag behavior of the Morons of Wall Street. This may be an imperfect start, but it’s better than nothing. Wall Street di*kbags have gambled for over a century that they are willing to mortgage the future of our country to line their douchy pocketbooks. Spay and neuter them all. Start with Sanford Weill, move to David No-Man-sky and deliver the coup-de-grace to the board of Goldman Sucks.

  4. southern banker

    If the weak OCC field staff in Charlotte was a national indicator, it is no wonder the OCC did not see the fiasco coming.

  5. 30 year banker

    Tom OK so we have these two opposing forces: The regulators are incompetent or at the least out foxed at every turn by their regulatees and the bankers can’t and won’t regulate themselves ( please see John Mack’s comment ” we can’t control ourselves” basically pleading for more regulation – at the November 2009 Vanity Fair panel on financial crisis). So who provides the adult supervision?

  6. jsc173

    You’re spot on. All regulators got pushed back for years by bankers whose line was “we haven’t suffered a loss in years.” Regulators were beyond incompetent in trying to understand the risk that banks were taking, especially in the mortgage banking area, where losses come years after loans are made. Only after the losses started to come in did they begin to take action, 3-4 years too late.

  7. George Stevens

    Actually, this guy should share the Oscar for inpersonating an effective regulator with Mary Shapiro of the SEC who came from Finra where her inept enforcers let Bernie Madoff go unnoticed for nearly 40 years as a classic Ponzi scheme. Let’s also not forget that Queen Mary let toothless Bear and Lehman jack up their leverage to 50 times their equity so even a small loss would bring down the entire empire. Where was Queen Mary when Stanley “Kingfish” O’Neal ran Mother Merrill into the ground? The best regul;ator story I’ve ever heard was when an examiner found that a brokerage firm was selling bonds of bankrupt companies to their clients. The broker explained that these were all accreditted investors and highly sophisticated and one of them was considered to be the next Warren Buffett. Without missing a beat, the examiner asked, Who is Warren Buffett?

  8. CK

    Right on brother. 2 Questions – Who was Dugan reporting to? Synovus?

  9. sarwor

    Tom, you are soooo correct. Unfortunately, the only sensible/responsive/empowered corner that could routinely prevent catastrophic actions on behalf of over-paid AND over-incented management are shareholders and their CEO-owned Directors. Until each group figures out for whom they SHOULD be working for, history will simply repeat itself.

  10. ACEMAN

    Y’all are so forgiving of the Bastards who gave us the economics of greed, who regulated the greed and who did not push back on the greed because they were part of the gangster mentality that contributed to the go for broke banking economics. It was good for business and especially the small regional banks and major banks in Northern California to create a book of real estate. For example not a day passed when we weren’t offerred “zero-down deals” or “take down deals” with little or no financing. As a small hedge fund it was always tempting to create a book of real estate as an asset class and thus resell the assets. From the banks to us it was really a gigantic Ponzi scheme and if we could see it then clearly so could the regulators. In fact they did as I spoke to several regulators to verify the lending “requirements” who all said it was as easy as taking candy from a baby. They are still regulating and bank examening to this day, but laying low, so to speak. It was corruption, but mostly greed, that motivated the bankers and the regulators some of whom created their own outside businesses to pass on the dirty real estate assets. So you tell me how can you clean this up when you have the very same people still in their jobs who made many millions each of personal profit by turning their heads and rubber stamping mortgage applications. And it was the same thing with the bank regulators who in their spare time were re-packaging REO loans with zero down mortgages. How can you trust them today, they’re the same folks who gave us the economics of greed and yet we now call it the economics of recovery!

  11. consultant

    I am tired of people blaming Wall Street for being greedy and for bankers going after short term profits or even fooling consumers into bad loans. That’s their job. I hate to say it, but I expect Wall Street to be greedy and I expect bankers to go after short term profits. Unless we can devise a compensation plan with multi year claw backs (good luck with that! How will you claw back bonuses already spent?), the notion that the system will self regulate is naive.

    We do need regulation…maybe even more than we had. But to Tom’s point, if we dont have QUALITY regulators (in terms of the human capital) then no matter how much regulatory weaponry you put in their hands they wont be able to prevent the next crisis. As a matter of fact all they will do is abuse this power and be overzealous.

    For me the real question is how do we get “stars” to seek careers in regulatory agencies. Should we maybe pay them more? Train them differently? Recruit them differently? I am not suggesting there is an easy answer, but there must be an answer. For me it’s the only answer. (and while we’re at it, the same issue exists with rating agencies)

  12. consultant

    I am tired of people blaming Wall Street for being greedy and for bankers going after short term profits or even fooling consumers into bad loans. That’s their job. I hate to say it, but I expect Wall Street to be greedy and I expect bankers to go after short term profits. Unless we can devise a compensation plan with multi year claw backs (good luck with that! How will you claw back bonuses already spent?), the notion that the system will self regulate is naive.

    We do need regulation…maybe even more than we had. But to Tom’s point, if we dont have QUALITY regulators (in terms of the human capital) then no matter how much regulatory weaponry you put in their hands they wont be able to prevent the next crisis. As a matter of fact all they will do is abuse this power and be overzealous.

    For me the real question is how do we get “stars” to seek careers in regulatory agencies. Should we maybe pay them more? Train them differently? Recruit them differently? I am not suggesting there is an easy answer, but there must be an answer. For me it’s the only answer. (and while we’re at it, the same issue exists with rating agencies)

  13. Rollfast5

    Totally agree with all of your comments. Just add one thing more. Who is presently training the new regulators being employed by the FDIC? I would guress that the vast number are the bozos who failed to understand the credit issues that were apparent in both the loan portfolios and the mortgage backed securities.

  14. Anonymous

    Bankers sold deregulation to the government. Bankers got deregulated and promptly crashed the whole edifice. Bankers whined for bailouts and mostly got them. Now they’re back to peddling deregulation.
    Now we’re rediscovering just why all that government regulation got enacted back in the Roosevelt times. I guess we have to do this when the last survivors of the Depression cash in their chips.

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