Bair, the former Chairperson of the FDIC, spoke fast and barely paused for a breath during her speech at yesterday’s SAP Financial Services Forum, as if the clock was running out on her mission.
Perhaps it is.
Is Banking Regulation’s 15 Minutes Up?
She and other regulators would like to lay hands on the financial services industry, but the industry doesn’t want healing—Congress, the industry lobbying groups, and lawyers are seeing to that, she told an audience of financial services techies in the heart of regulatory Gomorrah: New York City’s financial district.
Bair clearly sees the moment for action slipping away. For the first time ever, consumers hate banks more than their perennial brickbats, insurance companies, according to another speaker, Kathy Burger of Bank Systems and Technology but time heals all wounds. Banks are still flailing about in their Greece and Spain moments, but the sense that Europe will fall apart if these countries are allowed to slip into the abyss just doesn’t exist when applied to banks.
Punishing the Good Guys Along with the Bad Ones
The reason is that the vast majority of financial institutions in the world didn’t act like Countrywide, or Bear Sterns, or AIG, or just about any financial institution in Iceland, in the years running up to 2008. Yet new regulations—900 pages worth in Dodd-Frank, according to another speaker yesterday—would apply to those banks just like the bad boys.
Though reports lately say that the costs to banks of complying with Sarbanes-Oxley (a mere 90 pages) were not nearly as bad as the financial industry howled at the time, those in the audience yesterday said they were contemplating costly systems changes to meet the new regulations (if they ever make it out of the moldy basement of litigation).
Bair acknowledged this yesterday: Some banks felt they were “cleaning up after a party they didn’t attend, when all the drunks were sent home in limos,” she quipped.
Is Fairness Always the Right Path?
This is one of the big issues in regulation, just as it is with the EU crisis: fairness.
Ask average Germans whether they should watch their taxes go up to pay for bailing out Spain and Greece (you know Germany’s going to end up footing the bill—the rest of Europe is nearly as broke as the failing countries) and they will respond with a few questions of their own: Why did Greeks build swimming pools in their backyards instead of paying their taxes? Why did Spaniards build houses that they knew no one could afford? (James Surowiecki wrote a great piece on the issue of human perceptions of fairness versus the cold calculation of what makes economic sense that explains this in more detail.)
Still, Bair demands, when it comes to financial regulation, we have to hold our noses and do what makes most economic sense. To her, this means:
- Break up too-big-to-fail banks. Besides the inherent risks, these banks just don’t make sense from a value perspective—they’re just too complex to manage in an efficient and effective way, diminishing shareholder returns, she argued.
- Stop compensating financial services executives for risk taking. Bair said many banks still compensate their CEOs based on profits from risk-taking operations rather than on the fees they collect from depositors.
- End speculation on failure. When banks can package up securities and then take positions that depend on those securities tanking, you’re tempting a fundamental human flaw: greed. “You can’t buy fire protection on your neighbor’s house because that would give you incentive to burn it down,” she sighed.
- Put a hard cap on leverage. Bair says banks will be tempted to misbehave as long as the amount of depositors’ money they are allowed to risk is vague. She thinks 8% of total deposits is plenty.
- Keep regulators’ hands out of the pie. Don’t let regulators bounce back and forth between regulatory entities and the companies they’re supposed to be regulating.
- Hire the right regulators. Bair said regulators come in many stripes, many of them bad. There are the converted zealots who did who did too little before the crisis and now want to do too much, the genius regulators who write regulations that are unfathomable to anyone but them, the bottom liners who assume the banks are playing fair if they’re profitable, and the regulators who got into the business for the same reason that Ron Swanson joined the Parks and Rec Department: to destroy any and all traces of government. “If you hate regulation you shouldn’t be a regulator,” Bair stormed.
What do you think? Is Bair right? Will more regulation lessen the chances for another meltdown?