So, here we are: Thursday, October 29, 2009, nearing the end of a large recession. We appear to be in the midst of a jobless recovery- unemployment shows no signs of abatement, and is poised to cross 10% soon. Naturally, after something bad happens, it’s natural to try to blame something. A common scapegoat for the financial crisis is the venerable Big Bank CEO. Were these CEOs were so greedy that they leveraged the entire economy into the Great Recession? Allow me to speak in their defense, then you can go back to protesting against them.
The Myth of Perfect Knowledge
As Richard Korman of Miller-McCune Research points out, the main thrust of the argument against Big Bank CEOs is in error. The first assumption, which is a fair one, is that the opportunity for bonuses drove CEOs to attempt to capture said bonuses. The second assumption is where reality distances itself from sentiment. Banks did not know that mortgage backed securities were as dangerous as they turned out to be.
If you don’t believe me, look at a few points. First off, this mortgage backed paper was garnering high ratings from the ratings agencies. If this is an “aha!” moment for you, don’t automatically blame those agencies. Remember that there was political pressure to expand the types of loans available, and Government Sponsored Enterprises Fannie Mae and Freddie Mac were buying the loans once they were packaged by the banks. The political pressure isn’t off, however, as now the FHA is doing the exact same thing. Still even more puzzling, politicians are looking to continue recent ‘temporary’ measures to allow more loans to conform to GSE limits.
The point is: it’s hard to buck the trend when all signs point to safety. Perhaps Jamie Dimon was clairvoyant when he avoided heavy MBS purchases with JP Morgan, or perhaps he was lucky. Still, many banks lost money both on their balance sheets and in their market capitalization. Since a large amount of compensation at banks is tied to share prices, many bank CEOs actually lost money in the crisis. It isn’t as cut and dry as it first appeared.
Who to Blame?
Blaming one party is disingenuous. The complexity of the crisis makes it impossible to blame one entity: Government regulations and unintended consequences, investor ignorance in security purchases, Alan Greenspan, the GSEs, banks with shoddy mortgage requirements, scheming buyers, even bank CEOs. All of those parties likely contributed to one of the dominoes falling, so don’t let the others get off free by picking a scapegoat. Politically, it’s best to direct popular anger at on subset of the causes. Don’t let it happen. Talk to me with some comments!
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