By Steven Pearlstein
Wednesday, May 27, 2009
Given the role that big banks played in bringing on the financial crisis and global recession, and the trillions of taxpayer dollars mobilized to prevent their collapse, there haven't been many people outside these beleaguered institutions willing to speak up for them.
Until now. For it seems the too-big-to-fail crowd has found an unapologetic advocate in John Dugan, the comptroller of the currency and the very regulator whose job it was to prevent the banks from getting into this much trouble in the first place.
Dugan took up the big banks' cudgel last week at a meeting of the board of the Federal Deposit Insurance Corp., where he serves as a director. The FDIC is the government agency that insures bank deposits, and because of the recent rash of bank failures, expected to deplete its reserve fund by the end of the year. To replenish the fund, the FDIC's chairman, Sheila Bair, persuaded a majority of the directors to approve special assessment to be levied on all the banks that would raise $6 billion now, with perhaps another $6 billion hit at year's end.
But Dugan would have none of it. What particularly irked the comptroller was that under a new formula proposed by Bair, more of the burden for supporting the FDIC fund will be shifted from community and regional banks to the biggest banks.
"The overwhelming share of increased actual and projected costs for the fund have been caused by actual and projected failures of smaller banks, not larger ones," Dugan wrote in a rare public dissent that seemed to blame excessive commercial real estate lending by community banks as the source of the FDIC's cash crunch.
Inconveniently for Dugan, his dissent was lodged on the very day that the FDIC took over Florida's giant BankUnited, at an expected cost of $5.3 billion, equal to the cost of all 30-odd small bank failures so far this year. And last year the FDIC's $11 billion rescue of IndyMac, the giant California thrift, accounted for well over half of the $17.9 billion losses in 2008.
But what's particularly absurd about Dugan's argument is that it ignores the reason there haven't been more failures of big banks -- namely that these banks were prevented from failing by a Treasury and Federal Reserve wielding sums of money so large that they dwarf anything the FDIC might spend cleaning up after community banks.
Given this history, it requires a particularly warped sense of justice to complain about how unfairly the big banks are now being treated. It also gives a pretty good indication of how thoroughly the thinking of the nation's top bank supervisor has been co-opted by the very institutions he is supposed to regulate.
In Dugan we have a comptroller who has talked a good game about bank safety and soundness during his nearly four-year tenure but seems to have been totally unsuccessful in translating his concerns into effective policy.
In an interview yesterday, Dugan pointed out that, shortly after taking office in 2005, he ordered national banks to stop making the riskiest kinds of subprime loans. But apparently that didn't stop the same banks from shifting that lending to unregulated affiliates or off-book vehicles, whose problems would eventually wash back onto the regulated banks.
By 2006, Dugan had also called attention to potential problems posed by excessive concentrations of commercial real estate lending. Unfortunately, it took him more than a year to overcome industry opposition and finally translate his concern into official guidance -- and even then failed to take the steam out of overheated markets.
"Our message is not to cut back on commercial real estate loans," Dugan assured the New York Bankers Association in April 2006. "Instead it is this: You can have concentrations in commercial real estate loans, but only if you have the risk management and capital you need to address the increased risk."
This is the exactly the kind of regulatory mumbo-jumbo that got us into this mess. Instead of setting strict limits and standards for bank behavior -- and enforcing them, if necessary, with public cease-and-desist orders -- regulators bought into the fantasy that there was no amount of risk that couldn't be dealt with simply by having more capital or better "risk management." Only later did they learn that no amount of capital, no hedging strategy and no risk manager could withstand the collapse that was brought on by the orgy of risky activity going on right under their noses.
Even today, Dugan remains in denial about his agency's role in the financial debacle. He was skeptical about the bank stress tests and disclosure of the results. He continues to celebrate the fact that national banks have had fewer failures than banks regulated by other agencies, as if Citigroup and Wachovia and Bank of America are somehow great success stories. And he seems to have forgotten that, even after the crisis hit, he continued to push for international rules that would allow big banks to hold less capital and take on more leverage.
Given this history, there's no mystery why John Dugan is still running interference for big banks he is supposed to regulate. The mystery is why he is still comptroller of the currency.