It was my unfortunate fate to sit through more whining this morning from the head of the Congressional panel looking into the financial crisis, Elizabeth Warren, on CNBC.
Every time I hear this woman talk, my sense that there is nothing she says that is new is reinforced. As well as my sense of how much she doesn't understand about the financial sector.
She began her typical rant by excoriating large US banks for not lending out the TARP money they had been "given." Never mind much has been repaid.
Warren then added the usual pundit's rant about small businesses. Small businesses, she insisted, were being hurt at the expense of larger businesses by the failure of those big, bad banks to lend to the bedrock of the US economy....blah blah blah....small businesses.
Several other guests on the CNBC set countered Warren on two issues. Bob Barbera, chief economist at ITG, noted that small businesses had been disproportionately hurt by the drop in real estate values and, thus, were in no position to borrow any more money. Another guest, perhaps Rich Bernstein, a former Merrill Lynch senior strategist, noted that there wasn't really any real loan demand by small business, just based on economic conditions of late 2008 through late 2009. Further, they were absolutely not hiring anyone.
Nobody on the panel offered another key piece of evidence, i.e., at Fed-induced ultra-low interest rates, how could any bank possibly justify, in hindsight, throwing money given them by the Treasury into risky, low-rate loans to small businesses?
If those banks charged appropriate, higher rates, they would no doubt by garroted by Warren at a later date for daring to profit unfairly on the gift of Federal largess. If they lost money on low-interest loans, they'd be lectured for more foolish lending, just like their original real estate finance excesses.
Warren would have none of the panel's contrary views, insisting she was correct.
Then someone asked if the FCIC was investigating the potential for securitizing small business loans.
I have to say, at this point, I nearly spit out my coffee from shock. What the hell is anyone doing wanting securitization of small business loans when we still are cleaning up the mess from subprime and Alt-A home loans and their securitized offspring?
Warren charged ahead, though, informing everyone that, gosh, small businesses are very unique and require a different kind of lending than simply marking up prime and opening a credit facility for, say, Boeing or Cisco. Only she didn't say it that elegantly. So they are difficult to package up and sell in securities.
Liz Warren is 61 years old, born in 1949, according to her bio. So in 1974-75, when, as a freshmant at Saint Louis University, I was learning the basics of corporate finance in Dr. Fred Yeager's Introduction to Finance 100 course, Warren would have, I guess, been in law school, or already practicing.
Over thirty years ago, I learned in Dr. Yeager's course that conventional business lending was a very qualitative affair. Back then, the standard Brigham & Weston text referred to the "five Cs" of credit: character, capacity to pay, collateral, capital and conditions.
Now, an excited Liz Warren informs CNBC's viewers all about how individualistic is the nature of each small business loan.
Give me a break!
Hundreds of thousands of trained business school graduates working in the financial services sector already know this, Liz. You're only about, what, a few decades late to the party?
Why is it that the head of Congress' vaunted TARP Oversight panel is a liberal lawyer with obviously no practical understanding of finance? How useful are her 'insights' ever going to be? She doesn't even understand how the business works.
To be fair, for all of us, regardless of political persuasion, the challenge of staffing a Congressionally-appointed, outside panel is going to be finding informed but objective members.
The informed experts could well have an industry bias. Financial academics are a potential hybrid which could hold promise, but even some of the more revered theoreticians aren't all that steeped in the reality of fast-moving markets and real instruments, like CDOs.
The more objective candidates from outside the sector, like Warren, simply look clueless and naive. Further, their conclusions are likely to be wrong because they don't fully understand the issues with which they are charged to resolve.
It's hard for me to take seriously anything Warren says from her soapbox perch. When it's an informed comment, which is rare, it's not news. When it's not informed, Warren is just wrong.
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2 comments:
If the statistics and evidence weren't so severely stacked against "the sector," you might conceivably have a point. However, the industry has repeatedly shown itself to be insanely (almost comically) myopic and self-serving. I agree with you that striking the right balance to lead such an organization is exceptionally hard. More difficult though would be stomaching another industry-led effort to "clean up." Somehow their cleaning only leaves things messier for everyone else.
Fair enough.
Yes, the industry's players played way too fast and loose with risk, so it's difficult for most people to trust Morgan Stanley, Goldman Sachs, Citi, the remnants of Merrill and Wachovia, Bear Stearns and Lehman.
That said, the remaining, mainline commercial banks are correct in not lending to weak companies at too-low rates.
Congress was stupid believing Hank Paulson. Hank Paulson didn't think his idea through.
Hell, the stated use of the TARP, buying toxic securities, was never implemented.
But it's not so much the traditional commercial banking sector as much as the investment banking and mortgage banking sectors which were at fault.
-CN
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