Facing Oversight, Banks Go on Offense
Wednesday, February 11, 2009
Wall Street is trying to move out of its defensive crouch.
The chieftains of eight of the nation's largest banks could receive a tongue-lashing when they testify before a House committee today, but some on Wall Street have moved to preempt the withering criticism by proposing their own solutions to the economic meltdown.
Earlier this week, Goldman Sachs chief executive Lloyd Blankfein urged tougher regulation of the financial sector and tighter limits on lavish compensation for executives. His comments echoed previous proposals by Wall Street's main lobbying association to expand oversight and regulation of the industry.
The banks helmed by Blankfein and the other seven chief executives called to appear before the House Financial Services Committee this morning received $165 billion from the $700 billion government bailout. Lawmakers are furious at the executives over accounts of their lavish spending since receiving the taxpayer funds, and have attacked them for hoarding the money instead of using it to boost lending.
"This is going to be a torture session for them; they know they are going to be pilloried, particularly by the Democrats on the committee," said Anne Mathias, director of policy research for Stanford Group, a financial services firm. "They know that they have to reframe the debate on their own terms and show that they understand the public frustration."
Analysts said the Wall Street executives are hoping to go on the offensive and embrace some degree of regulation before it is forced on them.
"For policymakers and regulators, it should be clear that self-regulation has its limits," Blankfein wrote in the Financial Times on Monday. "All pools of capital that depend on the smooth functioning of the financial system and are large enough to be a burden on it in a crisis should be subject to some degree of regulation."
Blankfein, whose firm received $10 billion in the bailout, also called for limits on executive compensation that could be more stringent in some circumstances than President Obama has proposed. Blankfein said senior executives should be paid a large portion of their bonuses in equity that they must retain until they retire. He also said it was critical that companies put a priority on reducing the risk of losses, arguing that it is necessary to prevent another crisis.
Mark T. Williams, an expert on risk management and a former Federal Reserve Bank examiner, said Wall Street has recently begun to elevate the importance of risk management as a good business practice, a trend that is typical once banks sustain enormous losses. He cited the increasing number of chief risk officers in financial firms.
"I call it the return of the nerds," said Williams, a professor at Boston University's School of Management and a consultant for Deutsche Bank. "We used to be the nerdy group that was just pushed aside into the back offices to crunch our numbers. Now risk managers are really at the tops of these banks."
Bank executives hope their adoption of risk management will soften the anger from lawmakers, according to Williams. He said it is similar to a move by J.P. Morgan in the early 1990s to develop a risk-management approach for the industry before the government did. "They were very proactive in anticipating and heading off additional regulation," he said. "They realized if they didn't develop it then regulators would."
Analysts expect that today's hearing will be much like when hedge fund managers appeared before the House Oversight Committee in the fall and, under serious questioning, agreed to support further oversight.
"I think the bank executives are going to cry uncle and finally say: We will accept more regulation," Williams said.
Blankfein's emphasis on the importance of more market oversight follows a similar proposal from the Securities Industry and Financial Markets Association.
"Today no regulator has a 30,000-foot perspective of the system," group spokesman Travis Larson said. "A financial markets stability regulator with oversight of systemically important insurance companies, private-equity firms, hedge funds and other financial firms is absolutely key to building a stronger, more robust and resilient financial system."
Spokesmen for the eight executives appearing today declined to comment or did not respond to requests for comment.
But in previous statements, the executives have tried to strike a careful balance between acknowledging the need for more regulation and being reluctant to have rules stifling innovation. In a speech last year, Citigroup chief executive Vikram Pandit said there was a need for better regulatory oversight of systemic risk.
But he quickly added: "This doesn't mean deluging oversight agencies with data. That serves the opposite goal. We need transparency with a purpose."