Banks made bad loans and are in trouble today

By COLBERT I. KING

Before becoming a journalist in 1990, I spent nearly a decade in commercial banking.

The banking business was rather simple in those days. We took in deposits, made loans and collected repayments, hoping all the while that we would get at least two of those three things right.

Still, many bankers managed to botch the last two steps.

Reasons for the lending mistakes weren’t hard to uncover, however.

In most cases, the bad loans were made by loosely supervised bankers who, MBAs notwithstanding, were clueless about the true ability of borrowers to repay their loans.

Bad loans also ended up in bank portfolios because management, obsessed with generating ever-increasing quarterly and annual earnings, encouraged and rewarded those ambitious bankers who excelled at booking high-interest loans.

In such a climate, awareness of risk took a distant second place.

Either way, back in my day, the bank, as much as the borrower, was responsible for the defaulted loan.

In that respect, today’s no different.

Larger players

Yes, there are more and larger players in the game — investment banks, insurance companies, mutual funds, hedge funds and the like — and they are lightly regulated, if at all, unlike commercial banks. And yes, there are words in play today, such as “collateralized debt obligations,” “derivatives,” “credit default swaps” and “subprime mortgage,” that never graced my ears in the 1980s.

But the causes of last week’s financial meltdown are no mystery.

In the Sean Hannity-Sarah Palin infomercial that aired on Fox’s “Hannity & Colmes” last week, Hannity asked Alaska Gov. Palin who was responsible for the failure of financial institutions. The Republican vice presidential nominee said, “I think the corruption on Wall Street — that is to blame.”

If, by that, Palin is suggesting that Wall Street has been induced to do something illegal, I would like to see her evidence.

I have a different take.

Point a finger at those old standbys: greed, imprudent financial decisions and ignorance on the part of people who should have known better. Those factors are at the root of today’s crisis, just as they were sources of problems encountered during my banking days.

And the lies told today are the same ones I heard in the ’80s.

“The check is in the mail” is still the largest and most enduring lie in the business. We heard it back then, and it’s being spoken now.

Except that those doing the fibbing these days are hordes of borrowers stuck with unaffordable subprime mortgages. Their checks aren’t in the mail. Their mortgage payments will never be sent.

As a result, banks have been foreclosing on homes at a rate not seen since the Great Depression.

The shame is that banks carelessly extended subprime mortgage loans to the very people who should not have received them in the first place — those who were least able to repay.

But the lure of making a quick buck, coupled with the ability to send the loans off to Wall Street, which converted them into investment packages, prompted bankers and mortgage brokers to look the other way and book the loans.

Thus we now encounter the second-biggest lie usually heard in the industry: “There will be no changes after the merger.”

Bad lending decisions should have serious consequences, and not only for the people losing their homes.

Far-reaching changes

The institutions that caused this collapse have to pay. There will and must be far-reaching changes in the industry as the hastily arranged mergers and consolidations are taking place.

Removing toxic mortgage debt from the hands of so-called smart financiers who did dumb things should come with a high price. After all, the American taxpayer is footing the bill for the package that the Treasury, the Federal Reserve and Congress designed to rescue the very institutions that produced this calamity.

Show those high-flying financial types the door and make them jump without golden parachutes and fat pensions. Hard landings for them all.