The Decline of Responsible Banking

Earlier this week, a banking icon passed away. John G. Medlin, who was the CEO and Chairman of Wachovia Bank for many years retiring in the early 1990’s, died of a heart attack while playing tennis. I had the good fortune of knowing John Medlin and would agree with the obituaries about his many contributions to Wachovia, banking and the community. When I think of Mr. Medlin, the word that first comes to mind is “solid.” If I thought for a second more the word “honest” would also appear. Mr. Medlin provided stewardship over responsible growth in his bank. They did business in the right way, being judicious lenders and offering good customer service. Of course, the bank was not perfect, but for the most part it acted like a bank rather than something it was not.

At the time of his death, it was reported that his former bank which had been purchased by First Union (who adopted the Wachovia name) and then Wells Fargo is being sued for malfeasance around mortgage lending. A former mortgage lender, who now helps people with inappropriate mortgages, is part of suit that claims the bank preyed upon an economic class of potential customers selling them mortgages that they could ill-afford without explaining in full the details. The lender said she was incented to approve mortgages and it did not matter if the mortgagee would fail to comply with the terms in the future. She said the bankers even went to African-American church and civic leaders to drum up business without using terms like a variable mortgage. I am not saying whether this is true, but I do know former Wachovia (now Wells Fargo) people who have questioned the leaders of the mortgage group as to why they were pushing “pick a payment” variable mortgages, which were designed for a very astute audience.

This one paragraph is representative of a key reason why we had a housing crisis. Yes, the buyers should be aware of what they are signing, but there is trust factor that was violated many times by people on the selling side. Per the book “Class Matters” it has been shown that people in a lower economic class do not ask sufficient questions of their service providers and trust people in suits and ties more than they should. This is exacerbated by the fact mortgage paperwork is complicated. We have all signed documents over and over that we did not fully understand what we are signing. Yet, we knew enough to ask questions on occasion. This did not occur enough around these variable mortgages. The American dream of home ownership blinded people.

Another key reason which led to the housing crisis dates back to the repeal of the Glass-Steagall Act which was put in place during the Depression to prevent commercial banks from being investment banks. There was a reason this was put in place when it was, yet in the late 1990’s, the banks felt Glass-Steagall was preventing them from competing and making a reasonable profit for their shareholders (sounds like Dodd-Frank backlash doesn’t it?). In this case, the banking lobbyist group was able to convince Washington to repeal Glass-Steagall. Banks became multiple businesses around investments, insurance and commercial banking. Their goal was to sell more things to the same customers and increase profits (and risk)  by facilitating investment in merger deals.

The governance of a banking company became much more complex than ever before. Few people in the management ranks, much less the Board of Directors, understood fully the risks they were taking. Commercial banking was not uncomplicated, but far simpler than the businesses a banking company manages today. A good book on the subject is “Crash of the Titans” which describes the demise of Merrill Lynch and the travails of Bank of America, which shows the lack of understanding of the risk at the very top of the house.

If it were isolated to BofA and Merrill Lynch that would have been one thing, but it permeated other organizations bringing down Bear Stearns, Lehman Brothers, Washington Mutual and Wachovia among others. Bear, WaMu and Wachovia were gobbled up at yard sales, but Lehman went under. And, if it were isolated to that time, that would also be another thing. Yet, Jamie Dimon, the CEO of JP Morgan Chase, appeared this week before a Congressional Committee to discuss JPMC’s failure to stop a bad investment decision that cost its shareholders $3 billion at last count. It might be more when all is said and done. If you watch “Too Big Too Fail” you will get a glimpse of the ego of Mr. Dimon. He is a smart cookie and knows it, but his leadership team failed to grasp the complexity of this deal and the risk involved. A former banking CFO, Sallie Krawchek, said in a recent article that banking is now so complex, it is extremely hard for the CFO and CEO to fully understand and explain the risks.

Yet, I think the bigger issue that Mr. Dimon and others fail to grasp, is they have breached the trust that bankers earned and used to deserve. In the months following the financial collapse, banking CEOs testified in front of the Congressional Committee. I recall the CEO and CFO of Goldman-Sachs not fully understanding what the Committee was telling them. It was unprofessional and, even unethical, for Goldman-Sachs to sell an investment product to investors, while betting against it with other investors’ and their own money. The two leaders kept focusing on the legality of the issue. The fact that they breached the trust of clients was lost on them.

Getting back to John Medlin, I did not have the opportunity to ask him what he thought of all of this. I wish I had. He would have likely detested the irresponsible actions of these leaders. If Mr. Medlin had an Achilles Heel, it may haven been he was too cautious on occasion. Yet, from where I sit, a responsible, honest and solid banker is precisely what we need in this world. It should not be lost on anyone, that the more conservative Canadian banks did not suffer like the US banks. And, there are some very strong regional banks that did not get into areas that were beyond their comfort zone. They all suffered to degrees because of the echo effect on housing, development and businesses. Yet, they continued onward.

These other banks try to do business in the right way. We need all banks to recognize this and return to being solid banking organizations. Bankers have to earn back our trust. Unfortunately, settling lawsuits for past misdeeds where they do not admit or deny guilt, will continue and shine a spotlight on their breach of trust.  Also, the cross selling initiatives will hinder their efforts as well. Yet, they need to continue on that journey and climb out of the hole they dug. I recognize Dodd-Frank may be overly complex, but the banks earned this regulation. When Jamie Dimon complains about it, my first reaction is “tough shit.” Mr. Dimon is lucky to keep his job right now, so he should not be throwing stones at anyone trying to help his shareholders and customers. In other words, making sure he does his job. Mr. Dimon, if you want the money, you have to take the responsibility, as well.

John Medlin understood this.  I hope other banking leaders do as well. We need them to understand and start walking the talk again. We need responsible banking led by responsible leaders.