Read the previous installments of our interview with Gloria Nelund, reprinted from Ethix:
Banks and the Economic Crisis
What role did banks play in the recent financial crisis?
There were many players that bear responsibility, including consumers, government, and financial institutions. Financial institutions were enablers because they lost sight of their historical role in an economy and focused exclusively on short-term profits. For example, in the subprime crisis financial institutions stopped asking the question: Can this individual or family genially afford to buy this house? At firms like Lehman Brothers, there was a mentality, an arrogance actually, which permeated from the top that they could not fail. I know the mentality was there. However, the blame does not lie exclusively there.
Government supervision was also clearly lax. How many people in this country got loans they were not qualified to receive? Throughout the subprime crisis government officials refused to accept that home prices had reached unprecedented and unsustainable levels. Traditional restrictions like down payment levels of at least 20 percent were discarded. Government has the responsibility to review and to audit. They got away from that. They weren’t holding these financial institutions accountable.
Finally, there were the consumers who never should have borrowed. People should have been responsible to know they couldn’t afford the adjustable rate mortgages they were signing. For most mortgages, the terms are right up front, but even if they weren’t, the terms had to be disclosed somewhere and there is a responsibility to read what you sign.
What about the “too big to fail”? Did the banks simply assume someone would bail them out if they overreached? Or was it pride?
Purely pride. I don’t think that any of the big banks, particularly Leman or Goldman, ever thought they would have to take money from the government. They just thought, “We’re smarter than others, smarter than the government, and we’ll never need help.” It must have been extremely humbling for them. As hard as it was, and still is, for our country, I think the government did the right thing to let Leman fail. I actually wish though that they would have also let some of the car companies fail and let AIG fail. Unfortunately, the banking system as a whole can’t be left to fail because if the flow of credit that greases the gears of an economy cease to function, so too will the economy as a whole. This is where I believe that government has a crucial role.
What role did Deutsche Bank play in the economic crisis?
I was gone before it all came apart, but I’ll answer without knowledge. What I believe is that Deutsche Bank played a similar role to many of the other big global investment banks: structuring and selling products like collateralized debt obligations (CDOs) backed by a pool of loans where the originator retained no risk on the loans they made. Where Deutsche Bank differed from most of them is that they don’t engage in consumer lending in the U.S. (including mortgages), so they actually didn’t directly participate in that part of the problem. However, while they didn’t play a role on the consumer lending side of the crisis they certainly played a role on the investment-banking side.
I really enjoyed working for Deutsche Bank and believe they’re a very good organization. There are a lot of really good people there. But they weren’t exempt from the “too big to fail” mentality, which comes from being a very successful investment banking firm for many years.
Banks and Recovery
What role do banks have in the recovery, given they had this role in the downturn?
Banks have a big role to play and they are not stepping up. You could argue that this is the case because they’re frayed, the government has put these new capital requirements on them, and it’s made it harder for them to lend. But I think the big banks have used that as an excuse. If you go back to a small town like I am from in Ohio, the banks lend more on character and good sense. They ask themselves: “Is this a good business? In this industry and this market, are people still buying these things?” Big banks turn these basic lending virtues into pure process. There is no judgment, so, character and common sense never get factored into the decision.
This is where community banks can be very successful. They can be in touch with the small businesses and consumers. Community banks can be in touch with small businesses and consumers in a way that the large banks are unable and unwilling to do so. That’s why small community banks do better than large banks when it comes to making loans. Unfortunately, all too often the pattern has been that large banks buy up community banks and turn them into pure process. Large banks would be better served to step back from that strategy and figure out how they can get back to making loans. They need to do their part to help stimulate the economy by lending to small businesses that deserve to have the opportunity. So many businesses have difficulty borrowing from banks today. If large banks can’t do it because their process is in the way, then they need to find another way to get it done.
Do you think it would be possible to infuse that process with the common-sense things you mentioned?
Perhaps, but it would be tough. The key is to allow more local decision-making, and the big banks have completely gotten away from that. Everything has become centralized to minimize costs. A system of accountability is necessary, but they’ve got to go back to local decision-making. Presently, all of these banks, with perhaps the exception of Bank of America, have significant earnings and cash sitting on their balance sheets. They could use some of that to restructure things to allow some local decision-making. You don’t have to undo everything, just revise processes to better support local small businesses.
Stay tuned for upcoming posts on what Nelund thinks about investing in technology and what she’s learned working as a woman in a male-dominated industry! Kind permission is granted by Seattle Pacific University and the Institute for Business, Technology, and Ethics for the use of this material from Ethix magazine, where it first appeared March 2012.
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