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How in the financial world did we get so screwed up?

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By Jim Rohrer

As we look at our financial mess, and the billions of our taxpayer dollars going to what we now call large banks, I can’t help trying to figure out how in the world we got here. These large institutions were on the verge of failure because they lent millions to people who didn’t have appropriate credit worthiness. So our Congress and our president gave them billions to “keep the banking system” operating. Many are continuing to pay huge salaries and bonuses with our money. What makes them think that anyone in their failed operations deserves one cent of our money? Are they stupid? No, I believe they are just caught up in their own world of make-believe.

Let’s go back a few years before Wall Street firms and community and regional banks merged into the organizations we have today. Everyone knows that bankers then were conservative in nature. They had models that disallowed us from taking on more debt than we could handle responsibly.

At the same time, Wall Street investment firms have always had the culture of “whatever it takes.” It’s about betting that you can “beat the market.” The 1987 film “Wall Street” memorialized the phrase “Greed is good; greed works.”

In 1977 the Community Reinvestment Act was passed. It required lower standards for approval of loans in order to extend the American Dream of home ownership to millions with modest means. Bankers may not have been thrilled with this development, but they managed the risk reasonably well, avoiding high levels of foreclosures.

In 1999 Republicans wanted to remove the barriers among the banking, brokerage and insurance businesses allowing the combined businesses to provide services in all three of these previously separate product offerings. The method was to remove the Glass-Steagall Act enacted in 1933 during the flurry of post depression legislation enacted to preclude another such financial disaster.

As the barriers came down between the three business models, the conservative culture of the banking industry collided with the more aggressive culture of the brokerage firms. Unfortunately, the brokerage culture prevailed. Along with the culture came the compensation plans that were utilized in the “whatever it takes” Wall Street culture. Tom Peters’ famous business principle “What Gets Measured Gets Done (And Paid)” was translated into aggressive commission and huge bonuses to be extended into banking operations.

Unfortunately, the new schemes produced mortgage agreements that were well beyond the mortgagee’s ability to pay. Simply put, if the incentive is large enough, corruption occurs. This cultural assimilation over the years explains why Wall Street lifers have no understanding how outraged everyday citizens are at the size of the bonuses paid and the ridiculous spectacle of a losing company paying bonuses to its employees. Wall Street sees it as just paying for production. How about paying for adding value for clients, rather than producing flawed transactions?

So now that we have determined how we got here, how can we undo this mess? I’m going to write my congressman and senators and ask them to work to reinstate the barriers between the three separate industries. Doing business with the brokerage industry is voluntary. If I want to subject myself to this industry and the cultural practices that come with it, it’s my choice. I don’t have a choice about interfacing with the banking business. Nearly every person who buys a car or house must seek a transaction with a banker. So I say, let’s restore the culture of prudence and common sense to this industry by returning its management and leadership to bankers instead of Wall Street lifers.

Jim Rohrer of Evergreen is a business veteran who has succeeded in big, small and medium-size businesses.