At Wachovia and other major banks, "Everyone had a cash incentive to approve loans, and that started at the top," says Tomas Norton of The Norton Group, which provides banking-related consulting and litigation support services. "A mindset based on volume went from the absolute top to the very bottom of the food chain."
Troubled Mentality
The repeal of the Glass-Steagall Act in 1999, which allowed commercial and investment banks to merge, was the beginning of what Norton points to as a change in mentality in the lending business. "It put an investment banker mentality into a commercial banking operation," he says. Mortgages became commodities that were packaged into securities. The more mortgages were approved, the more executive compensation soared.
CEOs, in search of the short-term profits that could boost stock prices, demanded more and more loans. And they didn't ask too many questions about how those mortgages were being approved.
For banks like Washington Mutual and Wachovia, the result was a disconnect between public perception and real-world tactics. To the general public, banks remained traditional, even conservative institutions. Bank branches continued to spring up in suburban subdivisions and big-city downtowns, creating the illusion that these banks were a part of the community.
But behind the scenes, banks were indulging in speculative, risky financial behavior. "They created the impression of community banking by having a branch on every corner," says Norton. "But they had no relationship with the customer. They wanted to get your loan, keep it for five minutes, then sell it off for short-term profits."
Elizabeth Blackwell
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