The head of the Federal Deposit Insurance Corp. said Monday that the U.S. needs better lending standards and greater transparency in the markets to avoid a recurrence of the 2008 financial crisis.
FDIC Chairwoman Sheila Bair, speaking to an audience at the University of Kansas' Robert J. Dole Institute of Politics, said the U.S. needs to return to the sort of monetary values she learned while working at a Lawrence savings and loan after graduating from the university.
She recalled that customers weren't taking on too much debt, took pride in repaying their loans and saved for a rainy day.
"Those were great days in banking. I hope that when we come out of this crisis we reacquaint ourselves with those values," Bair said in a question and answer format presentation.
Bair, a native of Independence, Kan., said the financial crisis had its origins in the shadow credit markets that went unregulated despite their risk, preying on vulnerable Americans who quickly became in over their heads.
Larger institutions abandoned their traditional lending and investment values, Bair said, hoping to recapture some of the market share they were loosing to the shadow lenders.
Bair said she saw the evidence of such questionable practices in 2001 when lenders in Baltimore made mortgages that led homeowners quickly toward foreclosure. The homes where then snatched up at a low rate, she said, and resold at profit.
Credit was extended to individuals based their home equity, she said, meaning the more the home was worth, the bigger the loan and the more profit for the finance and mortgage firms. The cycle eventually burst, leading to the collapse of the housing market and recession.
"It was the cause of the crisis," Bair said. "We should have never let lending standards deteriorate. It's not rocket science."
She said some blame goes to institutional investors who should have questioned how their money was being used and the fees and compensation paid without justification.
She said financial reforms under consideration in Congress are a start toward restoring the nation's banking system's values but that there is still resistance toward greater transparency in the markets.
That legislation intends to address weaknesses in the financial system that led to the crisis. It aims to increase consumer protections on loans and credit cards, add restrictions to previously unregulated financial products and find ways to dismantle failing firms without resorting to taxpayer bailouts. The House has already passed its version of the bill.
Republicans have said the legislation, backed by President Barack Obama, would perpetuate bailouts rather than end them.
Bair pointed to the system now in which the FDIC shutters smaller failing banks that are insured by the federal government and sells them off. "They take their losses, but taxpayers don't take the exposure," Bair said.
The legislation would set up a similar system for large institutions. It would establish a fund, paid for by the firms, meant to cover the costs of liquidation.
Republicans contend taxpayers could still be on the hook and that emergency loan authority by the Federal Reserve could also amount to a financial bailout.
Bair, who said she is a lifelong Kansas Republican, told the audience she would like banks to require more evidence that a borrower is ready for homeownership and can repay the debt. Loans should be made only if borrowers have a portion of their own money at risk, too.
"I do worry that we really don't have these protections in place. I worry the party will get started again if we don't have these changes in place," Bair said.
She told the business students in the audience that it's good to want to make money, but it's even better to produce something that has value. That, she added, provides the connection between the compensation and what people do for a living.
"If you make money, that's good. I'm a capitalist. But there's a right way and a wrong way to do it," Bair said.
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