Don't Let Regulatory Reform be Derailed by Improved Economy
Sometimes that worked. More often than not ... well, there's a reason why I've been a AAA member for more than 20 years.
I see a disturbingly similar pattern now in the banking industry.
But then a funny thing happened on the way to reform. The economy improved. Unemployment went down, confidence went up, banks started to repay bailout funds ... and then the public's attention turned to healthcare.
A year ago, our "Check Engine" light was ablaze. Over the course of a single weekend, we saw Lehman Bros. declare bankruptcy, while Merrill Lynch was acquired by Bank of America. Before that, Fannie Mae and Freddie Mac were taken over by the government, and afterward Washington Mutual became the single largest bank failure in history.
And that was just in September of '08. Before that month, we saw subprime mortgage crisis hastening our descent into recession. Subsequently, we saw the market tumble and unemployment soar. Scores of banks and credit unions failed in the ailing economy, and both the Bush and Obama administrations were called upon to 1) Bail out the financial services industry and 2) Reform its regulatory infrastructure.
President Obama and Treasury Secretary Geithner came forward earlier this year with their initial plan for a regulatory makeover. That plan was turned over to Congress to hash out and refine.
But then a funny thing happened on the way to reform. The economy improved. Unemployment went down, confidence went up, banks started to repay bailout funds ... and then the public's and government's attention turned to healthcare. Suddenly, healthcare needed to be reformed. Suddenly, all the time and attention being given to banking ... it shifted. It was as though, as an industry, we'd perhaps driven out of whatever conditions were causing our "Check Engine" light to come on.
Well, I'm here to defy the "drive out of it" approach to maintenance. It doesn't work. Sometimes the "Check Engine" light just burns out, the underlying issue remains, and - unattended - it grows into a bigger, more expensive problem to fix.
This is my fear for financial services. That all the issues we knew needed to be addressed last year - risk management, capitalization, regulatory checks & balances - will slip off our radar now that the economy is improving. It won't be that any of those specific issues will have been resolved; just that their flaws won't be so glaring in an improved economy.
I heard the same concern last week from Bill Isaac, former FDIC Chairman under President Reagan. He likes some of the signs he sees in the current economy - especially in light of a year ago - but he, too, is concerned by all the focus on healthcare. "I worry that we won't get it done at all," Isaac says of regulatory reform.
You know the clichÃ© about "Those who fail to learn from history," so I'm not going to repeat it here. I will say, though, that if we don't attend to all the warning signs we saw a year ago - if we allow this economic crisis to pass without ever addressing some of the fundamental conditions that allowed the crisis to explode ... well, then the banking industry somewhere down the road is going to need its own form of AAA.
And guess who'll be paying the membership dues?