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Today's Outrage: Don't the Banks Get It Yet?

Michael Gannon

You'd think that after being the beneficiary of a $700 billion government rescue plan, as well as an ever-expanding list of economic tools invented by the Federal Reserve and Treasury, that bankers would be more contrite about their role in creating the credit crisis.

If so, you'd be wrong, according to a new survey of 339 bank CEOs and other senior officials compiled by accounting firm Grant Thornton. Coming in at the top of the list of causes, with 54% of the vote, was "lax underwriting standards."

OK, mea culpa, the banks' execs seems to be saying. That, however, was closely followed by "political emphasis on increasing home ownership," with 46%, and "lack of oversight of the mortgage industry," with 44%.

Talk about biting the hand that's feeding you. After running their businesses so well that the U.S. financial system nearly collapsed and Uncle Sam needed to step in, bankers want to tell Congress how to do its job?

Without question, the political will to expand home ownership played a role in creating the environment that led to the lax loan underwriting standards that bankers in the survey appropriately rated as the top cause of the credit crisis. But did Washington put a gun to the heads of the banks to force them to lend? The current angst over the Troubled Assets Relief Program's inability to ignite lending proves that banks lend when they want to, not when the government wants them to.

Moreover, which was more responsible for the housing bubble? Politicians pushing to expand home ownership, or the historically low interest rates of the early 2000s -- which made credit cheap and spurred more people to buy homes? Only 18% of survey respondents named "interest rates were kept low too long" as a reason for our current predicament.

As far as lack of oversight, few would question now that tighter regulation of the financial industry is in order. But who is to blame for its breakdown? A culture of deregulation -- pushed by bank lobbyists and endorsed by Republican and Democratic administrations dating back to Ronald Reagan -- weakened the hands of regulators and encouraged the sort of financial chicanery that brought us subprime collateralized mortgage obligations and other credit derivatives dependent on a robust housing market.

These products became financial weapons of mass destruction in the credit crisis.

Bankers employed by big institutions like Citigroup (C Quote), JPMorgan Chase (JPM Quote), Bank of America (BAC Quote) and Wells Fargo (WFC Quote) are smart people. They wouldn't have sat idly by as the government pushed to expand home ownership, deregulate the industry or lowered interest rates without a compelling reason.

Banks loosened loan underwriting standards for one reason: It was profitable. I don't remember too much whining about cheap credit and deregulation when that was still the case.