Banking is a very complex business, highly regulated, very interconnected – and absolutely vital to the well-being of our nation, and every one of us.  So when banking gets in trouble – look out!  And much of the commercial banking industry is in trouble these days.  So now the finger pointing starts, and the investigations begin (as we see with the Securities & Exchange Commission announcement of open investigations this week).


The dimensions of the problem are becoming more clear. So now we ask: Who is at fault?  Who should pay back their bonus (based on sales of exotic new financial instruments that were mortgage-backed)?  Who should go to jail?  Questions are simple and direct but aahhh, the answers are not that simple or straightforward, as we will see.


Let’s look at commercial banking first.  There was a time when most of the banks kept their loans in their portfolios. In the reverse-mirror of bank accounting, an “asset” is a loan out to a borrower.  The asset “performs” when the borrower maintains current payments and the loan is not in jeopardy.  The “liability” is the opposite of what you and I might think of; the bank owes you the money on deposit in your account, so that is a liability on the books.  When we hear that bank “X” has reached $1 billion in assets, a 15 percent gain in one year, that might mean that aggressive lending has put much more money to work (in loans and lines of credit) for the shareholders.


Once upon a time, the bank would take in deposit money and lend it out at a higher rate. Some economists projected the “10-X” rate:  One dollar made available to the bank might carry to a trajectory of $10 through many transactions made possible by the availability of that first dollar. The bank would borrow from other banks and from / through federal government entities and raise money in the capital markets…and the “assets” resulting (those performing loans) would stay in the portfolio.  A $100,000 mortgage over time could generate up to $300,000 for the bank.  Once upon a time the bank really worried about whether you could pay your mortgage back and if you paid your bills on time and if you had a safe / secure job and if you had good credit and what your credit score was and if you were a customer.  Enough?  Evidently too much – banking been changing dramatically over the past few years.


Most of us remember going into the bank branch and dropping to our knees twice – first to beg for the mortgage and then – when granted – in prayerful thanks for the money.  We got a payment book and the checks were written (or direct deposit arranged) with one bank over many years’ time.


Over the past five years the system changed dramatically.  The 70-year old “wall” between commercial banks and Wall Street houses (brokerages and investment bankers) came down in 1999 (when our banking system was last “reformed” by Congress).  Glass Steagall, the money men argued, was archaic – those bad days of the Great Depression, when so many banks failed, were long gone.  (Oh, we hope so!)  G-S was an anachronism – especially in the world of global banking.


So US bankers scooped up loan-after-loan and worked with their brethren to move those “assets” out of the portfolio at the bank office and into “Mortgage Backed Securities” (MBS) or “Collateralized Debt Obligations” (CDOs) and other fancy-named financial instruments.  As billions flowed out of bank vaults (metaphorically) and into Wall Street houses and thence to institutional investors (such as state pension funds), the bankers began to worry less about risk.


Risk is much different if you are keeping a loan for 30 years and expecting to earn $200,000 and more on your $100,000 loaned out to guys like you and me.  Risk is, well, less risky for bankers if the risk is widely shared.  So let’s take dozens, hundreds of consumer and commercial mortgages, put them in MBS’s etc. and have our friends on Wall Street peddle them to institutions looking to generate higher returns.  After all, the rate-of-return for the pension fund will be higher than anything the US Treasury might pay.  And money managers on contract to public employee pension funds (as example) are in a very competitive business – gotta get those better-than-market returns!


And anyway, as requested by the issuers of these exotica, the trusty credit risk rating agencies slapped Triple-A on many of the new instruments – hey, what can go wrong now!


And so the slippery slope begins, all in good faith we might argue.  Let’s create new kinds of mortgages – negative amortization and other fancy names – and bring them to eager borrowers.  Borrowers win!  In too many cases, however, the end result might be predictable:  Borrowers not qualified to take on debt or high mortgage payments entered the system.  NINA loans were talked of: No Income / No Assets.  Banks are there to serve the customers and there plenty of customers.  Remember all those home re financed over the past decade to “take the cash out of the house?”  As home valuations rose so did “cash out” borrowing.


As the economists are favored to say, “no tree grows to the sky,” and alas, the mortgage merry-go-round had to begin to slow, stall and almost stop.  The worse-case situations may be the Adjustable Rate Mortgages (ARMs) that re set at much higher rates.  We are told that two to three million of various kinds of mortgages may be  / will be in trouble over the coming months.


That also means that 95% of mortgages are performing – good news for bankers, investors, regulators, the rest of us.  We tend to overlook good news in a crisis situation.


So – we now work our way backwards to ask “what went wrong, whose fault is it, who can we punish?”  That happens after every boom and bust.  Hey, we are still arguing about what caused the 1929 stock market crash, and the reasons why we plunged into the Great Depression (1930-131 to 1940) and whose fault it was.


The Congress is now nibbling around the edges of the “mortgage crisis” and trying to decide how to help the situation without “rewarding those who were greedy” etc.  The White House says President Bush may or may not sign the legislation if it passes.  The leading presidential candidates are carefully offering up solutions.  And the SEC, we read today, has opened its investigations.  Oh, and two Bear Stearns honchos were arrested on suspicion of fraud.


Criminal fraud convictions require proof of deliberate actions intended to defraud innocent investors (our description here).  We think the bar will be quite high for these types of convictions for transactions related to the subprime mortgage crisis.


Many of us were willing participants in the greatest game in town – for a few years – as we turned the built-up equity in our houses into ATMs, or over-speculated in investment properties. (Look at Nevada and Florida – always to be counted on as canaries in the coal mines for over-speculation.)  Record bonuses were paid on Wall Street last year – how many of these were based on the newest game in town – subprime lending! Billions’ of dollars flushed into retail markets, for big ticket purchases.  All along the chain of transactions from mortgage broker at kitchen table to pension fund portfolio managers snapping up collateralized mortgages from all those thousands of kitchen tables, the players were willing partners.


Should the federal and state regulators have done more to protect borrowers …investors … the economic system of our nation?  Yes, of course.  Should better risk management systems have been in place?  Yes, of course.  Should borrowers have known better?  Yes, of course. Should mortgage brokers have been more qualified, and should oversight have been in place?  Should some borrowers have known better than to take on high-risk loans?  Should bankers have stayed the course with loans-in-portfolio approaches (note that a good number of bankers didn’t play the subprime / high risk game)?


The answers are complex and varied.  But this much can be safely stated:  We had better figure out ways to stabilize the mortgage market, stanch the flow of red ink on bank balance sheets, put better mortgage lending oversight in place (without stifling innovative approaches to banking), keep capital flowing to worthy borrowers, and most important, figure out ways to help borrowers in trouble and who, if they walk away, could plunge entire neighborhoods into despair.


Many of us were involved in some way in the creation of this mortgage credit mess – and most of us now need to be involved in solving the problem.  The fraud convictions, if any result, will titillate us on the news reports – love those perp walks — but will solve little if any of the challenges that face us as a People…in the broad scope of things, related to the banking industry mess.


Visit this link for the related article – http://www.accountability-central.com/single-view-default/single-view-lexis-nexis/article/sec-probes-of-sub-prime-crisis-expand-inquiries-target-fraud-market-manipulation-and-breaches-of-d/?tx_ttnews%5BbackPid%5D=1&cHash=2cc93c5ff3


This on-line journal is titled “Accountability Matters,” and we note (above) that “accountability really does matter” to all of us.  So, too “Politics Matters,” says CNN senior commentator and well-known author David Gergen.  We had the pleasure of sitting in on a briefing by the well-known pundit as he shared his thoughts at the Rutgers’ University Eagleton Institute of Politics (headed by our host, the able Ruth Mandel).



David Gergen began by stating that he – a former advisor to four presidents – can’t remember a time when there were more challenges awaiting a new President of the United States on the January 20th (after the November elections and swearing in ceremonies).  And, while the campaign rhetoric at times has featured candidates trumpeting about who was better prepared for “day one,” it will be the somber realities faced on Day Two [by the new president] that are so complex and challenging.  No president since Franklin Delano Roosevelt in spring 1933 has faced such enormous challenges coming into the highest office in the land.



This is a strategic inflection point for our nation, notes Mr. Gergen, and we as a People have reached a point on many issues that – if we continue on the present course – could mean we will continue to “go down” as a nation.  Nations do rise and fall, said Mr. Gergen.  Think of Rome and the Fall of the Empire.  More often than not it is an internal failure – the collapse of the empires of Rome, Greece, England and Spain come to mind.



The next president will have to clean up the mess left behind by recent presidents and the Congress — and then address serious issues.  Access to and cost of healthcare. A faltering economy. The complex challenges within “climate change,” The many challenges of a globalizing economy and free trade. The war in Iraq.  How we leave Iraq.  The future of democracy in Iraq. The overall instability of the Middle East region. The rise of other nations – India, China. Iran, a long burning fuse – especially if the Iranians get nuclear weapons. The condition of our military after a prolonged conflict, now longer than the US involvement in World War Two.



What do we do about…the Gulf states, Saudi Arabia, Jordan, Egypt, the Kurds and Turkey, Israel and Palestine, Pakistan, Pakistan and India, and more. The War on Terror. Keeping America safe. The Bush Tax Cuts — Tax Reform. The $400 billion federal deficit.  Not to mention trillions’ of dollars in deficits accrued over the years — $50 trillion perhaps?



Social security – Year Three, he cautioned, of the next presidency will see the first flood of Baby Boomers turning 65 (those born in 1946 – from 201l they will number 4 million per year hitting age 65, for 18 years!) Medicare – already in worse shape than Social Security (with its surpluses).



On climate change, Mr. Gergen believes that related events are moving faster now, and damage to our environment is certain.  We don’t know what the effects will be, he posited, but we are seeing polar caps melting and more violent storms occurring, and so the question for the next president is: What can we do? And, will we be able to act fast enough?   Will we listen / learn and then act?



And what of the two leading candidates now…are they up to these challenges?  Setting the above in place first, David Gergen moved on to Senator Barack Obama and Senator John McCain.



Barack Obama, he said, was rising up from the myth – he touches the soul at his rallies, something along the lines of President John F. Kennedy and Rev. Dr. Martin Luther King, Jr.  in his speechmaking.  He has real charisma, observes Mr. Gergen.  (He noted that first daughter Caroline Kennedy and other members of the family are enthusiastic supporters of candidate Obama.)  His candidacy could shape the events of political season 2008 to be as important in history as those of 1968, a year very much in focus this year.  The press loves a campaigner like Senator Obama – the coverage makes this obvious.



On Senator John McCain:  He is a true hero, said Mr. Gergen, an American we can all be proud of – he is “authentic,” there is lots to like here, and he can often be bipartisan to get things done. He reminded the audience that Senator McCain walked over to Senator Ted Kennedy to demonstrate his bipartisanship to the nation on key legislation. David Gergen said “I am a big fan of Senator McCain.”



And so – as one of these two candidates is presumed to be en route to the January 2009 “Day One” in the Oval Office – what can we expect?



It is not going to be so much as who wins in November, said David Gergen, as much as it is how we make this election work for America. Special interests must make real compromises. We must get important jobs done.  We need every citizen involved and engaged. The bills for postponed issues and solutions are coming due – and must be paid.  The outcome after Day Two would be bad for many of us if we cripple the new president coming in.  We need his judgment, his wisdom, his ability to reach out and build bridges – and coalitions.



Corporate America, Mr. Gergen observed, is exhibiting “good corporate social responsibility now,” especially on such issues as the challenges of climate change.



Let us hope, he concluded, that the new president can lead from within, that he can master himself to serve others. That he knows who he is, and what he is, and can control his dark side impulses.  That he will make us proud to be Americans, and America a proud nation that continues to lead the world.



We have come a long way as a people, he said, and we our actions should as a nation should be those that continue our progress.  And then he repeated – the 2008 elections are taking place in a charged political environmental very similar to those of the historic year of 1968.  If the Democrats win, they could well change “identify politics” for a generation.



We came away impressed that David Gergen was far more than a familiar face on CNN (where he is a senior commentator), and that he had the gravitas required to be a presidential advisor (as he has been since the early days of the Richard Nixon Administration).  I hope the next president pulls him into the White House for his sage advice – he really knows and understands the critical issues we face as a People and a nation.  Especially those issues and concerns that go far beyond the superficiality of so many pundits and blowhards holding forth on the airwaves these days…