Thomas Brown at Bankstocks.com argues that Eliot Spitzer is wrong on a number of points he made in the Slate article, The Regulatory Charade. Let’s look at both sides starting with Thomas Brown’s.
– Ilene
Less Government Meddling, Please
Eliot Spitzer says the government should have more say in managing the TARP recipients. Actually, it already has too much.
Courtesy of Thomas Brown at Bankstocks.com
Eliot Spitzer arrives at a conclusion that’s almost 100% backwards in the semi-conspiracy theory he put forth in Slate last week regarding the supposed shortcomings of the financial regulatory system and the alleged need to overhaul it.
But Spitzer’s right, first off, that bank regulators already have all the powers they needed to prevent the meltdown. For whatever reason, they decided not to use them. I assume regulators simply misjudged the risks the banks were taking, the same way the banks themselves did, along with other key market players such as the rating agencies. The creation of a new “systemic risk” regulator won’t prevent a recurrence of the regulatory lapse. Only better judgment will.
But Spitzer is just plain wrong when he complains that, following the government’s TARP investment in the banking industry, “we have virtually no say in the management or behavior of these banks.” 
Somebody needs to get Spitzer Vikram Pandit’s phone number. From the stories I’ve heard about the sorts of decisions Pandit has had to run by regulators, I’m surprised he wasn’t the one tending the coat closet at that bank CEO meeting at the White House last week.
Or Spitzer might talk to Rick Waddell of Northern Trust, of golf tournament fame, which never needed the TARP money in the first place and is now trying desperately to give it back. But the regulators have told him he can’t. No reason why. He just can’t. So Northern has to keep operating under onerous restrictions (strict compensation limits, for instance, not to mention the second-guessing of operating expenses) that go with TARP money.
Or Spitzer could have a talk with Peter Raskind, the former CEO of National City. This was a company that in September had a Tier 1 capital ratio of over 10% (recall that the minimum for a bank to be considered well-capitalized is 6%), but was told that, strong capital position or not, it would not be allowed to participate in the TARP plan. That amounted to a death sentence. Again, no reason given. Raskind had to sell the company in a matter of days to prevent a run on it.
So the government has indeed had plenty of say “in the management and behavior of these banks,” on issues ranging from the profound to the trivial. It’s hard to argue, though, that the government’s meddling has helped speed the banks’ recovery or the recovery of the financial system broadly.
(Spitzer is especially off base, by the way, when he calls the government’s TARP investments “free money” for the banks. I assume he’s just being incendiary here, for effect. In fact, the banks are currently paying 5% in after-tax dollars on their preferred stock investments. Over the next three weeks, as banks report their first quarter earnings, it will be very clear the capital is not “free.”)
But in the end, Spitzer goes off the deep end when he lumps all the TARP recipients together and apparently assumes their balance sheets are all as dangerous as Citigroup’s. That’s just wrong—and irresponsible. But Spitzer assumes otherwise, in part because he wants to justify the removal of the big banks’ CEOs. He apparently doesn’t remember that the vast majority of banks took TARP money because they were told they had to. Only a couple of large banks, along with GM, took TARP capital in order to survive.
The most ironic part Spitzer’s view is that, if he truly believes that a) the regulators had all the powers they needed and b) people should be held accountable for what’s happened, then the heads he should be calling for should be John Dugan’s and Sheila Bair’s—the regulators who clearly fell down on the job—rather than a bunch of CEOs’ scalps.
Spitzer’s take on what went wrong between banks and regulators as the housing bubble inflated is right on. So’s his skepticism about overhauling regulation of the system. But if the industry is going to heal itself and resume growing, it will do so with less, not more, of the day-to-day government meddling Spitzer seems to think is so needed.
What do you think? Let me know!
