Keen insight offered in Cloutier’s ‘Big Bad Banks’
I like Rusty Cloutier’s book, Big Bad Banks. Rusty was chairman of ICBA in 2003-2004.
I remember that 2003 ICBA convention in Orlando. Frank Raines, then-chairman/CEO of Fannie Mae was one of the speakers. By then, Raines was encouraging bankers to make every mortgage possible. President Bush had announced a goal of increasing minority home ownership and Raines was doing his part. Coutier sat on the Fannie Mae National Advisory Council in the early part of the decade so he knew Raines pretty well. In Big Bad Banks,he says Raines seemed to change while heading the massive housing GSE. Here is how Cloutier describes it:
Raines invited me to attend the speech that President Bush gave in Atlanta. You’ll recall from the last chapter that Bush set a target of increasing minority home ownership by 5.5 million by 2010. He specifically stated that Fannie Mae would establish partnerships with 100 faith-based organizations to work toward getting more minorities into their own homes. Given that the big banks had been unleashed and allowed to do things that ultimately endangered not only their own existence, but the health of the global financial system, I had thought all along that Raines would be wise to keep Fannie Mae on the path of righteousness, helping people afford homeownership. After all, it was a pretty lucrative franchise Fannie Mae had. But when President Bush invited Raines to fly back to Washington on Air Force One after the speech, I had never seen Raines more elated. He was grinning like the Cheshire Cat. I mistook that grin for happiness, but I’ve since come to believe it was the grin of greed. For my part, I couldn’t help but wonder if Bush’s speech was akin to one President Carter had made many years earlier when he promised the country we could be free of foreign oil within 10 years. The oil industry believed that promise and pushed hard to achieve the goal, only to find itself broke in eight years.
It was like Bush’s speech had freed Raines from any constraints. From that moment on his focus was to make more money, both for Fannie Mae and for Frank Raines. When the Fannie Mae National Advisory Council met in Washington in late 2002, the biggest question in Raine’s mind seemed to be how to get bankers to stop asking all those pesky questions of people who wanted to borrow money…
Cloutier offers many interesting insights like that in this 125-page book. Another fascinating story he tells gives you some insight into how things worked at the old Continental Illinois Bank, which regulators rescued in 1984. He described a local barge owner named Bucky who wanted to borrow money to expand. Rusty had know the guy for years and understood the risk. He declined to make the loan, as did several other local lenders who understood the risks associated with a barge operation in Louisiana. Later, Bucky called Rusty and invited him to accompany him to a local airstrip where he would show Rusty how “real” banking works.
They went to the airport and watched a twin-engine aircraft land. Two young men in business suits emerged and greeted Bucky. Within a few minutes, the barge operator had signed papers securing $125,000 in credit. This was a lot of money in the early 1980s. The men were lenders from Continental Illinois. Within 15 minutes of landing, they were back on their plane heading home. Two years later, the barge owner went bust, and presumably, so did the loan.
A very interesting part of Rusty’s book is the last chapter where he lists 20 reforms which he believes would improve the banking industry and the economy. One suggestion is the same one I made in an essay appearing in the Feb. 1 NorthWestern Financial Review: limit mortgages to 80 percent of the value of the property. Other specific suggestions Cloutier makes include: restore separation of commercial and investment banks, impose term limits on the chairman of the Federal Reserve and require bank board members to own a substantial stake in the banks they govern. Other, more general reforms suggested are: bring the “real world” to Washington and end government secrecy.
A certain frustration comes through in the book. Rusty wants the world to understand community banking. He wants the world to understand the risks of concentrating too much power into too few hands. He condemns too-big-to-fail, and keeps hoping that the powers that be in Washington will see the dangers of this defeatist policy. Cloutier would like the latest financial crisis to be an opportunity for positive change, but he is worried that things are not going in the right direction:
Alas, I was destined once again to be disappointed. What has happened is exactly the opposite of what I hoped to see. The big banks have not been broken up and made smaller. Instead they’ve been merged or bought and are today bigger than they were before the crisis began. Taken together, the big banks now represent an even bigger part of the financial industry than they did before. Just consider: Bank of America now owns Merrill Lynch and Countrywide, JP Morgan Chase has absorbed Bear Stearns and Washington Mutual, and Wells Fargo has acquired Wachovia. The Treasury and the Federal Reserve have actually blessed and even forced some of these mergers rather than opposing them as the unacceptable continuation of a dangerous trend that nearly destroyed us. And if that isn’t bad enough, the Federal Reserve is handing out bank charters willy-nilly to entities that don’t even look like a bank. Today, Goldman Sachs, General Motors Acceptance Corp., and General Electric Credit Corp., are all banks. Making big banks bigger and giving banking charters to companies that aren’t banks is not the solution to our problems!
