Why Is Everyone Blaming the CEOs? It's the Government's Fault

Barney Frank has done the impossible. He’s actually made Ken Lewis seem somewhat sympathetic.

I didn’t get a chance to watch Lewis and the seven other financial services CEOs who went before Frank’s Financial Services Committee Wednesday. But I read their prepared statements and the Q&A that followed.

My first reaction: outrage—but not at the CEOs, who, as I’ll show in a minute, didn’t have anything to do with the creation of the credit mess that they were suddenly being made to answer for.

But those congressmen! What a bunch of vain, overstuffed, under-IQed, preening blowhards. For a moment, I thought they would have been better off using their time Wednesday to actually study the “stimulus” bill so many seem intent on voting for. Then I thought, why bother? Half those bozos probably don’t know how to read.

The supposed purpose of the hearing Wednesday was to determine how the big banks have used the TARP money the government gave them. But that’s of course bogus. If that were all the committee wanted, the answers could have been provided with a written response - which Citi (C) in fact has already prepared.

Rather, the hearing was a photo opportunity for Frank and others on the committee who are so eager to blame bankers for every problem the economy faces today. Unfortunately, Frank and his pals called the wrong guys. Back up for a minute. Congress passed the TARP legislation in the blink of an eye back in September, you may recall; then in October, Hank Paulson summoned the CEOs of ten banking organizations—including the eight who testified yesterday--to Washington, and flatly informed them that they all would participate in a capital investment plan, in order to help prop up the financial system.

Which is to say, the money was jammed down the companies’ throats whether they wanted it or not, which, you may also recall, many didn’t.

And now these same CEOs are viewed as the bad guys. It’s insane.

Barney Frank and others on the committee seemed intent on extracting their pound of flesh. More generally, people seem to be becoming semi-psychotic. Patt Morrison, a columnist for the Los Angeles Times, who I assume is a reasonable, gracious individual when she’s not foaming at the mouth, had this to say last week:

I want groveling. I want show-trial sweating and stammering. I want their nine-figure bonus checks endorsed over to the rest of us. I want my 401(k) money back. I want blood. I’m a vegetarian, but I’d make an exception for a smoking plate of CEO en brochette.

Hold on there, Looney Tune! Of the eight CEOs whose heads you can’t wait to see put on a pike, six run companies that (by no coincidence) had little to do with the creation of the credit crunch, and that have come through the crisis largely unscathed. Of the other two, one (Citigroup’s Vikram Pandit) inherited his bank’s problems, while the other (BofA’s Lewis) foolishly acquired it.

These are not the people who burned down the house. The CEOs who testified Wednesday must surely curse the day they ever heard of the TARP and must deeply regret agreeing to take the government’s money. They made no secret of the fact Wednesday that they didn’t need or ask for the capital, but that it was forced upon them. But the committee was oblivious. One member, Democrat Paul Kanjorski from Pennsylvania, was sticking with the script no matter what. “For anyone who contends that you do not need the money and that you did not ask for it,” he told the CEOs, “please find a way to return that money to the Treasury before you leave town.”

So clever, Congressman! Kanjorski has to know (he has to, right?) that the banks can’t simply “return the money” they were forced to take (even though they must be dying to) because it came with a passel of repayment restrictions that will essentially keep it at the banks for years to come. Banks are also required to raise a comparable amount of Tier 1 capital if they want to pay the money back—which, in the current, panic-stricken environment, would be incredibly expensive.

So Kanjorski was just monkeying it up for the cameras—which, of course, was the whole purpose of the exercise in the first place.

Comments

[look closer:]

This investigation has not yet done its investigative homework. The show that has been put on in WASH. is for all the angry people who have lost their fortunes. It's a method to prevent riots and disorderly conduct.
The exact cause of this problem has been repeated in the countless articles coming across in the published word.
The CDS --- and all the related greed based behavior over the last 10 years in the financial sector pushed our system to its limit. Now we want a scapegoat -- someone to punish --- not how to effectively reduce the destructive impact -- but someone to put behind bars.
This has been the mentality of America for the last 90 years and it has not proved to be beneficial for any of us, sure we could continue to lay the blame --- but it is not geared toward a resolution of the problem.
Dissolve the Credit Default Swaps --- allow banks to fail -- dissolve the Federal Reserve System which is prolonging and enhancing the problem.
The Federal Govt. needs to authorize and distribute a new currency produced by the Bureau of Printing and Engraving. Dissolve the debt based system that has finally run its course and nearly collapsed this country. If this is not done soon we will see Rome repeat itself.

Feb 15 12:52 PM

[Drew Horn:]

Tom, right on!

It is the job of business to maximize profits. In the movie, Wall Street, Gordon Geko said something like "greed is good" and explained that greed is only satisfied when something of value is delivered and we all benefit from that value.

It is the job of government to regulate business in a way that ensures that greed does not hurt us. I see the current mess as a result of governments failure to look, see, and understand what was happening. Politicians (Barney and Chris) also interfered by requiring lenders to make loans to people to poor to repay them.

Tom, if and when businesses are expected to regulate themselves, I will find another place to live. Business self regulation is illogical, cant work and if its tried, I will vote with my feet and move to another country.

Feb 15 12:54 PM

[atlasman:]

The real issue is that Pelosi wing of the Dem party figured out that if they could not directy provide welfare without rasing taxes which at the time was politically impossible so they decided it would be easer do it by creating laws that forced businesses to provide a form of welfare for them. The businesses would just pass the extra costs along through slightly higher prices. So in the case of home ownership, they forced banks to provide unprofitable loans to people that could not pay them back and then created a couple of quasi-gov companies to buy these bad loans so banks would not scream to much. It was a great plan as long as home ownership prices continued to rise. The real genius in this is that these same officials are now blaming banks for the problem. You have to give them (Pelosi and Barney and friends) credit for a rather ingenious backdoor welfare scheme.

Feb 15 12:58 PM

[Deehena:]

" It's da gobernment made me do it" (or was it the devil?) Nonsense from twisted facts but written in an entertaining manner.

Feb 15 12:59 PM

[an atheist:]

The government's fault.


What an idiot.

This crisis is a failure of the free market to regulate itself, as the conservatives kept promising us. If the government is guilty of anything, it was a failure to regulate the greedy bastards.

Too many CEO's pretended not to know or didn't care, a la Enron and Ken Lay.

Will we ever learn not to trust these thieves???

Feb 15 01:06 PM

[gpqr:]

Talk about the Government meddling in free markets. What bureaucrat was going to take on Frank and Dod as a result of policing the Sub-Prime game on Wall Street? And the wizards on wall street knew it.

Feb 15 01:14 PM

[Midwest:]

My, my, my. One more Republican apologist finding the time to write this swill and expecting us to swallow it hook line and sinker.

Not only is the article rife with half truths and innuendo, it lacks substance and relies only on the old red meat tactics the public used to respond to.

Sorry folks, but you lost the the Congress and the Presidency because you failed to recognize that your "strategeries" were based on little more than empowering an entitled class of elites to "manage" the financial system while reminding the rest of us foolish, uneducated sods that we should be happy to accept the scraps off your tables.

Well, we all know where that got us.

So, for starters, let's address the claim that banks were forced to give out subprime loans to less than stellar recipients. This is a talking point memo subject and little more than that.

If you believe this assertion, then you'll have to disagree with President Bush's own Working Group on Financial Markets report delivered last October that makes it crystal clear that private sector loans were the root cause of the mortgage meltdown and not government mandated loans made by Fannie Mae or Freddie Mac to undeserving recipients.

Please note that the President's Working Group on Financial Markets was set in motion by executive order of President Reagan in 1988. It's clear that the group has roots in the modern conservative movement and cannot be impugned as some kind of creation made by liberals.

www.mcclatchydc.com/25...

"Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

* Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

* Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets reported Friday.

Conservative critics claim that the Clinton administration pushed Fannie Mae and Freddie Mac to make home ownership more available to riskier borrowers with little concern for their ability to pay the mortgages.

"I don't remember a clarion call that said Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster," said Neil Cavuto of Fox News.

Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans."

So, who should we believe? Fox News or President Bush's own report on the mess?

Lest you think I'm specifically bashing the former POTUS, read on.

Anyone that thought we could sustain the rise in housing prices was a speculative fool. The mortgages being offered to undeserving recipients were literally, a fool's game of unsustainable Ponzi like scheming by mortgage companies, banks and Wall Street liars willing to screw over anybody they could.

Of course, within weeks of the home loan being made, the loaner had moved on, the loan had been bundled and sold to someone who believed the infallibility of the CDO they just bought and none who created the mess were liable for the meltdown. What a perfect storm of deceit, unethical behavior and perfectly stupid consumers willing to take on so much debt.

This is not a making of the Congress but what happens when we lack smart regulations and management. Blame Congress? Sure, why not. They could have done something about it but chose not to. The dirty little secret is that Congress was run by Republicans for the vast majority of the bubble build up and they had a chance to do something about it but chose to turn a blind eye.

The notion that banks were "forced" to accept TARP money and that they can't pay it back unless some kind of draconian expectations are met is ludicrous. BofA made huge blunders but I imagine that was caused by Democrats and liberals, correct? The author of this tired and repeatedly disproved mess of ramblings has failed to dig beyond Newsmax or Fox's biased "news reporting" to find anything does not fit a predetermined point of view.

Please link us to where it says banks were forced to accept TARP money.

Our predicament was caused by greed. Banks and Wall Street saw easy money in providing mortgages with absurdly bad terms and consumers lapped them up like cats at a bowl of warm milk. Housing prices skyrocketed when home sellers realized they could jack up the price of their house and the buyer could still get a loan for the new, and totally underserved, asking price. This is the same recipe that drives any bubble. Cheap money, fools for customers and very, very smart sellers.

As for Congress and their hearings being so tough on the bankers...

Please, spare us the excuses you've made for the heads of the banks that got their hind ends called up before Congress. These people are paid MILLIONS of dollars to run the company effectively and sustainably. They failed spectacularly on both account but still made larcenous sums of of personal income.

Americans have become immune to the paychecks of these cheats. $50 million is now seen as nothing special when it comes to paychecks but it is not just ridiculous, it has the makings of a revolution. The kind where the monied class once said "Let them eat cake" before the blade falls. However, the arrogance of these cheats is so complete that before the blade falls, they will utter the words, "They should have been grateful to us".

I'll take a Frank or any other politician willing to call these liars and overpaid thieves out for their misdeeds and ridiculous paychecks. Without them, all we have are "free marketers" claiming that the market will set itself right all the while we've been watching that exact thing happen for the last 10 years.

By the way, I self managed my 401K to a less than one percent drop last year so I have a small idea of what I'm talking about. However, I still managed to get laid off with 249 others this January due to this stellar economy's downward slide. Maybe I'm not so smart after all.

What a joke we've become and for good reason.

To the author of this story- Really? Is that ALL you could dig up? More tired arguments against liberals and Democrats? Really?? Come on, we need answers not more finger pointing at the other side of the aisle.

Talk about how we can get through this mess, not move backwards into political kvetching about the "other guys".

Feb 15 02:51 PM

[Tony Daltorio:]

There is more than enough blame for everyone -- All the jackals on Wall Street, the scumbag politicians from BOTH parties and the selfish Baby Boom generation that is in charge of both the government and Wall Street.

Feb 15 03:12 PM

[Aaron Ashcraft:]

I completely agree with you!


On Feb 15 07:26 AM apppro wrote:

> It's always easiest to blame someone who you THINK caused a problem
> mainly because they inevitably end up as the only visible entity
> trying to correct things. CEO’s make for some of the easiest targets
> for sure! But….
>
>
> "We need them on that wall! We want them on that wall!"
>
> What really pisses me off is that everyone is still blaming people
> like Ken Lewis, CEO Bank of America, the Fed, the corner drug dealer,
> everyone but those who really did this to us.
> Fine, we all got piggy and needy! We all wanted far more then what
> we rightfully could afford. Some of us abused the financial system…
> most of us didn’t; BUT it was NOT the obligation or right of a few
> narcissistic short sellers to point that out to the rest of us! Who
> asked them to gang-short and naked short the financial industry and
> our Country into oblivion to prove their point? I didn't - did you?
> Place the blame for the end results in the lap of the true culprits
> & criminals, and not on the people that tried to give us all
> a life style we all longed for.
>
> Oh, and please don’t forget that moron Chairman Christopher Cox of
> the SEC who gave all those bastard shorts the tools to short the
> crap out of America in the 1st place. Good riddens to him for sure!

>

Feb 15 04:09 PM

[john s. gordon:]

don't forget to blame the rating agencies, giving AAA to garbage, they were after the big fat fees too.
> jack

Feb 15 04:30 PM

[Urbane Gori...:]

You are correct. Paulson in fact did go to Congress while with GS to ask for an increase in leveraging loans. The financial institutions were given this increase. Ironic isn't it that he was left to clean up the mess that he had a big hand in creating. Also ironic was the MS CEO's statement at the congressional hearing ; "In retrospect we feel that increasing the leverage of loans to 30 times was a bad idea." (By the way, the UK uses 50 times... Ouch!)

Is Congress blameless. No. Of course not. Did any of them read the bill? I doubt it. In fact, I challenge anyone to read 1000 pages of legalese and understand it in the 24 hours that was given. (As reported by CNBC). I know I couldn't. Could I read the synopsis in that time. Sure. I'm guessing that that is what most of them did do.

Congress has its failings, but INHO, the banks are truly the culprits here. They have lobbied for and received just about everything they wanted from the increased leverage as I noted above, to harsher bankruptcy laws, little regulation allowing them usurious credit levels on people that can barely make payments on loans that the banks have issued, and now they have to answer to the people (taxpayers) that are financing the messes they made. Big deal! I own these banks. I see nothing wrong with setting their wages, not do I see anything wrong with calling my employees on the carpet to explain inconsistencies and unnecessary waste of my company's cash flow. The argument that they were 'forced' to accept TARP funds only flies so far. **Forcing** them to take the money was a means of face-saving. They all to took funds so nobody could tell who was bleeding more than the other. They all needed the cash. Simple as that. I haven't seen any of them write a check and walk out of the hearings yet.

jegan


On Feb 15 07:13 AM mrtaxx wrote:

> The CEO's are responsible for CREATING all the exotic financial instruments
> that caused the financial debacle and should be fined, jailed and
> the bonuses they received should be taken from them. Guy's like
> Paulson og GS, the Morgan Stanley created these financial instruments
> so they could get large bonuses.
>
> Notice haw GS was one of the first to become a Bank Holding Co. probably
> because they came up with the idea with Paulson to get the TARP money.
> AS for your comments about our useless congressman I cannot agree
> more, lets remember they went on vacation several times with the
> financial mess going on.

Feb 15 04:49 PM

[Tired of Po...:]

Thank You !!!

Feb 15 04:55 PM

[Idahobob:]

Paulson got them all in a room, and told them they needed to hand over stock and take the money, before they could leave. If my memory (and the mainstream media) serves me right.


On Feb 15 06:11 AM pimpjui wrote:

> Good article, but your main assumption needs clarity. How exactly
> did the government make banks or other institutions take money? For
> example, AIG (insurance) comes to mind. Goldman Sachs as well.

Feb 15 05:11 PM

[atlasman:]

"Too many CEO's pretended not to know or didn't care, a la Enron and Ken Lay"

Don't bring down the best economic system in the world due to a few bad apples. There are 1000s of good corporations. Put Ken Lay and his crew in jail and move on. Don't ruin the entire system due to one or two bad actors. We are all paying for their sins via the cross that is Sarbanes-Oxley.

However, if you do want to continue to play this game, lets get rid of the entire Congress because of Duke Cunningham and William Jefferson (notice how I was even handed here) and pick a new system of Governement.

Feb 15 07:25 PM

[Jimmy Lathrop:]

Tom, I had been patiently waiting for you to make another post since most of the stocks in your financial fund have crashed and burned. I was hoping you would tout a stock which is always a clear sell signal or a great reason to short, but instead you come up with this disappointing sour grapes rant about the CRA and government regulation causing all the problems, as though Barney Frank looked at this risk models, weighed in on the arguments from the traders and personally gave the go ahead for a 20 to 1 leveraged position on the lowest tranche of mortgage backed securities. That is really the issue - that the banks can't carry these securities under normal capital requirements, that these assets make the bank insolvent, that they want money from the government to keep the capital requirements in the hope that the investment will turn it around and they want cheap money from the government with no explanation on why the situation won't happen again. A simple cursory read through any of your past posts demonstrate how you have been consistently wrong in your predictions as to valuation of these institutions or as to their solvency or their value as an ongoing enterprise, and this general policy tirade is unhelpful to the short-sellers who monitor your posts so please, humor us, stop the editorializing and just give us some picks to bet against.

Feb 15 08:47 PM

[confusioness:]

Well said Mr. Lathrop.

Author, I don't know about you or your financial fund, but I can tell you this: you have taken an interesting topic (that you may be very well suited to write about) and you have approached it so poorly I am embarrassed for you. Seriously man, before you post something like this, bounce it off of an editor or friend, first. Preferably someone who has the sense to tell you to dispense with the weak attempts at humor and stick with the salient points. Your feeble attention-grabbers and lame put-downs of the players in this debacle make you look like a buffoon.


On Feb 15 08:47 PM Jimmy Lathrop wrote:

> Tom, I had been patiently waiting for you to make another post since
> most of the stocks in your financial fund have crashed and burned.
> I was hoping you would tout a stock which is always a clear sell
> signal or a great reason to short, but instead you come up with this
> disappointing sour grapes rant about the CRA and government regulation
> causing all the problems, as though Barney Frank looked at this risk
> models, weighed in on the arguments from the traders and personally
> gave the go ahead for a 20 to 1 leveraged position on the lowest
> tranche of mortgage backed securities. That is really the issue -
> that the banks can't carry these securities under normal capital
> requirements, that these assets make the bank insolvent, that they
> want money from the government to keep the capital requirements in
> the hope that the investment will turn it around and they want cheap
> money from the government with no explanation on why the situation
> won't happen again. A simple cursory read through any of your past
> posts demonstrate how you have been consistently wrong in your predictions
> as to valuation of these institutions or as to their solvency or
> their value as an ongoing enterprise, and this general policy tirade
> is unhelpful to the short-sellers who monitor your posts so please,
> humor us, stop the editorializing and just give us some picks to
> bet against.
>

Feb 15 09:56 PM

[biomedlives:]

In this case, I presume you mean that the CEOs were supposed to be greedy on behalf of their shareholders. Through their stupidity or shortsightedness, they failed big time in that regard.

I suspect a lot of lenders were happy to make subprime loans, with or without pressure from Washington, when they recognized the fees they could earn even as they moved the loans off their books into mortgage-backed securities.


On Feb 15 12:54 PM Drew Horn wrote:

> Tom, right on!
>
> It is the job of business to maximize profits. In the movie, Wall
> Street, Gordon Geko said something like "greed is good" and explained
> that greed is only satisfied when something of value is delivered
> and we all benefit from that value.
>
> It is the job of government to regulate business in a way that ensures
> that greed does not hurt us. I see the current mess as a result of
> governments failure to look, see, and understand what was happening.
> Politicians (Barney and Chris) also interfered by requiring lenders
> to make loans to people to poor to repay them.
>
> Tom, if and when businesses are expected to regulate themselves,
> I will find another place to live. Business self regulation is illogical,
> cant work and if its tried, I will vote with my feet and move to
> another country.

Feb 15 10:25 PM

[rhinson7117:]

Poor CEO's and other Financial Institution Officers! How can anyone possibly blame this group of POOR SOULS for "scamming" their customers out of EVERTHING!
PENSION FUNDS , IRA'S , etc. have taken a TERRIBLE hit! What about the salaries of the "MONEY LORDS"!

Feb 16 09:46 AM

[gwinner:]

We need Mad Max's Thunderdome. If nothing else, the entertainment value would provide temporary relief from reading the dismal outlook at Seeking Alpha.

Put Ken Lewis in with Barney Frank first. Two men enter, one "man" leaves. I know who my money would be on.

Feb 16 12:04 PM

[PROXIMO:]

Thanks for the history Artful Dodger. So true too.


On Feb 15 10:30 AM ArtfulDodger wrote:

> Mr. Brown:
>
> Thank you very much for the article.
>
> Finally, someone is telling the truth instead of simply hammering
> away at "rich overpaid CEOs."
>
> Not only did the government force the nine banks to take the TARP
> money; you can go back to the `90s and find that, for the most part,
> it was the government that initially forced banks and lending institutions
> to invent the Subprime Loan to lend to people who could not afford
> even a down payment, much less the monthly payments.
>
> Moreover, most of the American public had no idea that the nation
> was in another financial down cycle (which always occur every few
> years), until Bush, Paulson, Frank, Pelosi, McCain, Obama, Dodd,
> Bernanke, and Reid came out and claimed if we didn't pass TARP 1
> the whole system was going to crash.
>
> If you recall the Congress voted the bill down on a Friday, and that
> weekend the whole host of scare mongers were on every talk show on
> every channel telling the people that the nation would never get
> over the devastation brought about if the TARP were not passed.

>
>
> Their negative screaming started runs on banks and frightened people
> into staying at home and not spending and caused companies immediately
> to cut cap spending, etc.; and turned what could have been a typical
> down cycle into a gigantic crash.
>
> The DOW, for example, was at 10,850 on 9-30,08 about the time the
> government began knocking the economy and the financial system; it
> had crashed to 8450 by 10-10,08.
>
> Over 2000 banks and lending institutions went broke from 1987 to
> 1994, because of the S&L blow up, the 1986 Tax Reform Bill, and
> two huge tax increases from Bush 1 and Clinton.
>
> How many Americans know about that? If they had of known it was going
> on we would have had similar results as we're having today: the public
> frightened to death and companies pulling in their spending and investments.

>
>
> No doubt, though, banks and many companies borrowed far too much
> money since 9-11 after which the Fed drastically lowered rates, because
> Greenspan believed that 9-11 could break the nation. And much of
> that debt is still hanging over companies today.
>
> But no matter. The government is the cause of I'd say at least 90%
> of the nation's current problems.
>
> You won't hear much about that from our media, though.
>
> Thanks again for pointing to the proper culprits, Mr. Brown.
>

Feb 17 06:39 PM