BY ANTONY CURRIE
Ten years after it effectively failed, Bear Stearns is a useful lesson in healthy conflict. The Wall Street firm’s demise, like that of Lehman Brothers six months later, was a group effort by executives and watchdogs. So it is a cause for concern that post-crisis rules are being softened and regulators talk of forging a “partnership” with the banks they police.
The U.S. financial system has far more safeguards than it did as, under bridge-playing boss Jimmy Cayne, Bear crept toward its own undoing. Banks have to hold more liquidity and capital and have all but exited subprime lending, prop trading and constructing large swaths of overly complex securities. Pay can be clawed back, and big institutions face a comprehensive, and in their eyes overly opaque and pessimistic, annual stress test administered by the Federal Reserve.
That has fostered a degree of mutual suspicion between the two sides. So it should. Regulators are supposed to hunt for the bad news banks may be trying to hide. A decade ago, the relationship was getting too cozy. Christopher Cox, then chair of the Securities and Exchange Commission, told Congress a couple of weeks after Bear’s collapse that it had been well capitalized and “apparently fully liquid.” Yet later investigations by his agency and others revealed Bear’s executives had been worried about funding for months.
Where there was friction, it was sometimes in the wrong places. Officials from the SEC and the Fed covering Lehman seemed to spend more time battling each other than digging into the firm’s troubles, according to a bankruptcy court investigation. Worse, the Office of Thrift Supervision, which regulated Washington Mutual and IndyMac – both of which went bust – called its charges “customers.”
Some of that mentality is starting to return. Comptroller of the Currency Joseph Otting said last month that “there is more of a partnership with banks, as opposed to a dictatorship.” He came to the OCC after running OneWest, the successor to IndyMac. Meanwhile, Congress looks set to pass a bill rolling back some of the admittedly onerous restrictions on smaller banks in the 2010 Dodd-Frank Act.
The crisis is still fresh enough that the most obvious mistakes in letting banks run amok are unlikely to be repeated. But hubris is a real danger, and when banks and their regulators see eye to eye, it’s time to worry.
First published March 14, 2018
(Image: REUTERS/Kristina Cooke)