Back to Basics in Banking

By Colbert I. King
Saturday, September 20, 2008

Before becoming a journalist in 1990, I spent nearly a decade in commercial banking.

The banking business was rather simple in those days. We took in deposits, made loans and collected repayments, hoping all the while that we would get at least two of those three things right.

Still, many bankers managed to botch the last two steps.

Reasons for the lending mistakes weren't hard to uncover, however.

In most cases, the bad loans were made by loosely supervised bankers who, MBAs notwithstanding, were clueless about the true ability of borrowers to repay their loans.

Bad loans also ended up in bank portfolios because management, obsessed with generating ever-increasing quarterly and annual earnings, encouraged and rewarded those ambitious bankers who excelled at booking high-interest loans.

In such a climate, awareness of risk took a distant second place.

Either way, back in my day, the bank, as much as the borrower, was responsible for the defaulted loan.

In that respect, today's no different.

Yes, there are more and larger players in the game -- investment banks, insurance companies, mutual funds, hedge funds and the like -- and they are lightly regulated, if at all, unlike commercial banks. And yes, there are words in play today, such as "collateralized debt obligations," "derivatives," "credit default swaps" and "subprime mortgage," that never graced my ears in the 1980s.

But the causes of this week's financial meltdown are no mystery.

In the Sean Hannity-Sarah Palin infomercial that aired on Fox's "Hannity & Colmes" this week, Hannity asked Alaska Gov. Palin who was responsible for the failure of financial institutions. The Republican vice presidential nominee said, "I think the corruption on Wall Street -- that is to blame."


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