All the Devils Are Here [61]
In early 2001, the banking regulators did issue “guidance” requiring institutions with heavy concentrations of subprime loans to hold more capital against those loans. But the definition of what constituted subprime lending was vague. And “guidance” was only guidance, which lenders could adopt or ignore as they saw fit, depending on how zealously the regulators enforced it. No antipredatory lending bill was ever passed; no strictures against most of the practices were ever enforced; no serious effort was ever made to make financial institutions pay more attention to the loans they were buying and securitizing.
Yet even the guidance, as weak as it was, met with a firestorm of criticism. John Reich, a new member of the FDIC board, told the American Banker that the regulators were in the wrong, and that “we should have done it right the first time.” He clarified that “doing it right” meant consulting with the banking industry. James Gilleran, who became the head of the Office of Thrift Supervision in late 2001, would later say of his agency, “Our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion.” A few years later, a picture was taken of Gilleran and Reich with the representatives of three bank lobbying groups. They were taking a chain saw to the red tape of excessive regulation. In 2005, Reich replaced Gilleran as the director of the OTS.
And yet, and yet. Even though the bank supervisors refused to take steps to curb subprime lending, the smarter ones—the Office of the Comptroller of the Currency, in particular—also didn’t want its institutions to make these loans. Via the examination process, which isn’t public, the OCC quietly started making life difficult for any national bank that had a big subprime business. Early on, in August 2001, Bank of America announced it was selling its ninety-six subprime lending branches and its $26 billion loan portfolio. Four years later, in a decision that every bank noticed, the OCC forced Laredo National Bank, in Texas, to make restitution to every borrower who had gotten a loan without the bank taking care to “adequately consider creditworthiness.” “OCC ran every national bank out of the business,” says a former Treasury official.
Admirable though this effort may have seemed, it was both problematic and a little perverse. Because the OCC’s effort was not matched by the Office of Thrift Supervision, thrifts began grabbing the subprime market share the big banks were abandoning. Subprime lending also began to migrate into state-regulated institutions, where, as Gramlich once put it, federal regulators have “no obvious way to monitor the lending behavior of independent mortgage companies.”
And one other thing. What the OCC forgot was that even if the big banks were no longer making the majority of subprime loans, those loans were still finding their way into the banking system. All the big banks were also in the securities business, and they were all making fortunes securitizing subprime loans originated by others. And big and small banks alike continued to hold mortgage-backed securities on their balance sheets. But no one, not the banking supervisors, nor the Securities and Exchange Commission, nor the Federal Reserve, was bothering to track this. That risk was supposed to be gone.
7
The Committee to Save the World
In February 1999, Time magazine put a photograph of Alan Greenspan, Robert Rubin, and Larry Summers on its cover. Greenspan by then was the most famous economic policy maker in the country, and probably the world, but Rubin, the Treasury secretary, and Summers, his deputy—who would become Treasury secretary himself five months later—weren’t far behind. On the cover, Greenspan stood