American Banker | Friday, October 24, 2008
By Robert Gnaizda and Jorge Corralejo
Last week the secretary of the Treasury and the chairman of the Federal Reserve Board decided to save the American banking industry from its follies by partially nationalizing the banks through an infusion of $250 billion of taxpayer funds.
Other nations have attempted this, often with harmful consequences for the banking industry, the economy, and the taxpayers.
The best way to avoid a socialist “Swedish” solution would be for the leaders of the major banks that received this infusion of taxpayer funds to call a meeting immediately among themselves. The purpose would be to determine key principles of corporate responsibility that will convince Main Street that this partial nationalization is temporary and should not be draconian.
It is highly likely that whoever becomes president will feel bound, particularly given the very likely large Democratic majority in Congress, to demand far more than Treasury Secretary Henry Paulson has attempted to extract from the major banking companies, such as Citigroup, Bank of America, Wells Fargo, JPMorgan Chase, Goldman Sachs, and Morgan Stanley.
We would like to suggest to these CEOs five things to serve as a blueprint for winning back Main Street’s confidence. The taxpayers need to be convinced that the $250 billion bailout will benefit them as well as the banking industry.
• Convince the public that it will not be governance as usual. Nominate at least three independent, well-respected Americans to represent the public on their boards and oversee corporate social responsibility issues. This could include a representative of the public interest/CRA community and a representative for financial industry workers. These companies should also try to diversify their boards; most major banking companies (Citi and Wells are exceptions) have no Asian-Americans and few Latinos on their boards.
• Develop voluntary compensation caps that are effective and easy for the public to understand. This could include prohibiting aggregate compensation that exceeds 50 times the average American worker’s salary. Last year Goldman Sachs’ CEO earned 1,700 times more than the median worker’s salary ($68.9 million versus less than $40,000). Interestingly, during the Nixon era the average wage disparity between CEOs and the typical worker was only 28 to 1.
If all major financial institutions used this formula, none would be at a disadvantage in competing for even the most talented CEO.
• Consistent with the FDIC’s IndyMac solution and Sen. Barack Obama’s call for a temporary foreclosure moratorium, announce a policy of moratoriums beginning Nov. 5 and ending 40 days after the new administration takes office. This would apply to all mortgages with primary residence, unless the borrower engaged in fraud and the lender can show it has “clean hands.”
• Commit to maintaining their philanthropy at 2007 levels without regard for profits, and they should commit a minimum of 2% of future pretax profits for philanthropy directed at underserved communities. Some institutions have understood the importance of sharing profits with these communities; B of A has committed $2 billion to philanthropy over the next 10 years without regard to profits. Once banks return to profitability, this commitment would increase by about fourfold the financial industry’s tax-deductible philanthropy to underserved communities at essentially no competitive expense.
• Develop major 21st-century leadership-type CRA commitments that enhance future profitability. For example, CRA-compliant, 30-year home mortgages made at prime, fixed rates to low- and moderate-income borrowers have a foreclosure rate under 1%, particularly where the loans are not based on artificially inflated appraisals or undocumented income.
In fact, many of the banks receiving infusions of taxpayer capital have acknowledged that CRA-compliant loans have been at least as profitable as most of their portfolio — and far less risky.
These suggestions, along with more comprehensive regulatory scrutiny, could free the banks of congressional efforts at true nationalization (the Swedish approach). Hopefully, the CEOs will call for a voluntary meeting before the Nov. 4 election and avoid Congress’ wrath and lack of confidence in Mr. Paulson previous approach to the financial crisis.
We have confidence that leaders such as Ken Lewis, John Stumpf, James Dimon, and Lloyd Blankfein will rise to the occasion, much as John Pierpont Morgan rose to the occasion during the 1907 banking disaster.