Matthew:
perhaps the better question to ask is:
"How did we get into this situation with Superior Bank, FSB in Hinsdale Illinois?"
The Office of Thrift Supervision is in charge of regulating the business model of each bank. According to the testimony of Ely Bert to the Senate Committee on Banking, Housing, and Urban Affairs; Superior Bank was little better than a "one trick pony" following a lucrative and risk fraught business plan of buying up subprime loans as made by Alliance Funds, with a few originated itself, of mortgages and auto loans. Alliance also acquired many B, C, and D loans from across the country.
Why the OTS missed the riskiness of the business in the quarterly reports (TFRs) provided by Superior is really one of the questions to be asked. Why the OTC prevented the FDIC from going into Superior is another interesting question to be answered also. And what about the auditors Ernest and Young? Whose deficient auditing of Superior left thousands of depositors unprotected? A couple of key points that Ely Bert brings out:
"it had almost seven times as much invested in the asset categories containing securitization-related assets, per dollar of total assets, as did the rest of the thrift industry. For 1997, Superior's gain-on-sale income, per dollar of pre-tax income, was twelve times the industry average that year. Most startling, at the end of 1997, Superior's recourse exposure related to assets sold, per dollar of capital, was 31 times the industry average." <link> Ely Bert
Pretty heavy stuff went by the way side and was missed by the OTS in the quarterly reports from Superior Bank, FSB. The same business plan seems to have been carried over after Superior was sold in October 2001 to Charter One and when Mr. Brewster got his loan from Alliance Funds in December 2001. Where the WSJ got its information from is interesting. If the loan came from Superior, it was really from Charter One and if from Alliance under FCIC, then it was not Superior. The WSJ is somewhat vague on this point.
Much of this activity by banks and mortgage institutions with making risky subprime loans was blessed by the Fed with its endorsement of the Glass Steagall repeal in 1999. With the repeal of the Glass Steagall Act and the passage of the Gramm-Leach-Bliley Act, the merger of Citibank and Travelers was made legal even though Greenspin blessed the merger before the repeal and passage of the old and new bills. Up to that point, the merger was illegal under Glass Steagall.
Between 1987-1999, there was a major effort by Wall Street, banks, and the business-minded politicians to first change it and then retract the Glass-Steagall Act. Glass-Steagall prevented financial institutions and banks from conflicts of interest in underwriting stocks and bonds in the stock market promoting their own interests first. Led by the maestro of the economy/fed in 1987 (wasn't that Reagan then?); Greenspin helped rewrite section 20 of the Glass-Steagall Act. In a 3-2 vote by the Fed over Voelker's protests, section 20 was rewritten:
"The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities. Thomas Theobald, then vice chairman of Citicorp, argues that three "outside checks" on corporate misbehavior had emerged since 1933: "a very effective" SEC; knowledgeable investors, and "very sophisticated" rating agencies." www.freedom4um.com/cgi-bin/readart.cgi?ArtNum=74200
As if Citicorp did not have any issues to protect and promote with WorldCom. And hey look, there is JP Morgan on the list of advocates also, a bank that Greenspin was on the board of directors previous to his appointment to the Fed and eventual promotion to Fed Chief in 1987. Voelker protested the rewrite of section 20 before his departure as the Fed Chief and expressed his fear that the Fed's actions would lead to a lowering of standards in order to capture more lucrative securities offerings and in turn market bad loans to the public . . . securities risk versus deposit protection the same as 1929.
With the appointment of Greenspin as Fed Chief, the degeneration of the Glass-Steagall Act continued. 1990, JP Morgan received permission from the Greenspin led Fed to dabble in securities up to 10% of Revenue (up from 5% in 1987). In 1996, the Greenspin led Fed renders the balance of section 20 ineffective by allowing banks the ability to acquire securities firms (think Travelers, Salomon Brothers and Smith-Barney) with a limit of 25% of revenue derived from these operations. From 1984 onward, the Senate actively tries to kill Glass-Steagall.
Led by Sandy Weil, lobbying efforts to repeal Glass-Steagall with Greenspin and Congress plus an expenditure of $300 million lead to its repeal in 1999 as signed by President Clinton in what is called the Financial Modernization Act. Weil merges Travelers with Citibank to become Citigroup Incorporated. The argument was that the industry could regulate itself and the ability of banks to engage in other avenues was needed to remain competitive globally. Surprisingly, Greenspin’s keeping Fed Rates low through much of the decade attracted foreign investments to Wall Street and into the mortgage market as they were deemed safe by underwriters, rating agencies, and banks.
That is the history of today’s demise as led by business and now here are my issues with the Treasury Secretary Paulson’s solution . . . a Treasury Secretary who is a former head of Goldman Sachs. The proposal does not fix the problem of banks speculating in lucrative and risky securities. The same as in 1929, we have banks speculating in risky securities rather than in the protection of bank deposits and investments. The Treasury Secretary proposes less regulation by giving over the reins of regulation to a financial industry that has “again” proven they are incapable of regulating themselves when it comes to protecting investments or deposits as opposed to risk adverse investments. (Hello, this is a rerun of 1929; just maybe not as bad because of other stop-gap measure such as printing more money and funding the market with it at the taxpayer’s expense.) Maybe it is time to limit banks from making to many risky investments.
The Fed and Greenspin are not off the hook either. Under Greenspin's tutelage, commercial and investment banks were allowed to merge or take on other risky and non banking business under the guise of global competition and profitability. Where was the Reserve Regulation that the Fed could have brought into play for many of these banks long before Superior and probably with the issues of Keystone Bank? WSJ taking the FDIC to task after 8 years of Wall Street “toga-partying” with investor’s money and bank deposits is incredibly disingenuous. Interesting take the US Treasurer and Wall Street has on today’s problems. Unfortunately for Greenspin, The WSJ and Paulson, some of us can read and also have memories.
