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Nationalizing the Mighty and the Fallen

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This entry is cross-posted on DMI blog.

Let me make it plain: I have no love for regulators or the idea of government controlling financial institutions.

In the late nineties, after the credit union I co-founded struggled with loan losses and high operating costs, the National Credit Union Administration (NCUA), which insures and regulates credit unions, essentially nationalized the Central Brooklyn Federal Credit Union and proceeded to almost run it into the ground. The lesson I learned, up close and personal, is that overly powerful bureaucrats and politicians make for clumsy, arrogant, and therefore, dangerous, bank managers.

Which makes my support for considering bank nationalization counter-intuitive.

Did we make mistakes in Central Brooklyn? Of course. We had grown too quickly, were operating in a building we couldn't afford, and were too lenient in our lending. But by the time the regulators stepped in we were turning things around. We shrunk the size of the institution, found a buyer for our building, and overhauled our lending practices. By contrast, today's financial and banking system resembles a situation in which the children have gained Lord of the Flies-like control of the playground. The adults need to step in and impose order before the brats set the whole town ablaze.

Take Citigroup, which is breaking into pieces in order to survive and has become the poster child for commercial bank failure. Ten years ago Citicorp's size and influence were unmatched. It used this power to shred the Glass-Steagall Act and became a mega-banking institution when it merged with the insurance giant Travelers. Citi led a lobbying campaign that essentially silenced those of us who pushed back against this audacious consolidation of power and the breaking down of firewalls that traditionally separated commercial banking, investment banking, insurance underwriting, and brokerage. In an unrelated move, Citi went on to acquire the Associates, a notorious predatory lender, and proved that mainstream banks, which had once valued their reputations as good corporate citizens, had gone into the fringe banking business.

During this period, the federal government not only facilitated Citi's growth, but did its bidding. Gramm-Leach-Bliley, the landmark legislation championed by then Senator Phil Gramm, essentially blessed the Citi-Travelers marriage and changed the very rules of the game so that a new era of deregulation and laissez-faire business practices in the financial services industry could commence. The rest is tragic history.

Bank nationalization - a concept that strikes fears of socialism in the hearts of many - is excessive action, one of last resort. Unfortunately, it is a proportional response to decades of corporate excesses and government acquiescence. My DMI colleague Amy Traub has astutely argued the pros and considerable cons of nationalization. She recognizes that in the end, it may make sense for the government to take control of institutions like Citigroup, clean up it's bad assets, and then resell it because the government has already sunk tens of billions of dollars into it, without any return on its investment, much less control or accountability. Formal nationalization, rather than the de facto nationalization that is already in place, may in the end be the most effective way to get what we deserve, if not need, from banks: Credit.

In the case of Central Brooklyn's credit union, we, ironically, represented an infinitesimal amount of risk to the federal government's credit union insurance fund, especially when you consider the trillions in losses now predicted for the banking industry. And although it was hard to imagine a more profoundly important and beloved financial institution in the predominately black, working class area of Central Brooklyn, there was no bailout waiting for us, just humorless men from Albany in suits, telling us how to run a bank in Bedford-Stuyvesant.

The first phase of the $700 billion Troubled Assets Relief Program (TARP), on the other hand, essentially shoveled money into the money burning stove of Citi and other banks. TARP functioned on a shoot (money at the banks) first, ask questions later, basis. It proved that even as the government stepped in to supposedly loosen up credit for consumers, the real intended beneficiaries were the banks themselves and their shareholders.

It's hard to imagine the government doing much better than Citigroup in turning a profit and restoring a viable lending institution. But it's even harder to imagine anyone, even the government, doing much worse.

President Obama has called for a new era of responsibility. That word conjures up images of poor, working, and middle class people, and other perceived slackers, stepping up and earning all the privileges and opportunities they've been afforded through our democracy and capitalist system. Fine. But what is missing more than anything else, is for our government to own up to its responsibility to, just once, put the public's interests over the banking industry's.