We published the below commentary, In Defense of Securitization, last week and we are republishing it today as, let’s face it, we’re all getting very French, and many of us took most of last week off. Enjoy, if that’s the right word.
Returning to the theme of my most recent commentary entitled God Hates Securitization, I want to elaborate on the point I made there (yes, if you stuck with me all the way through to the end, there was a point): We need to fight the narrative that banking, finance and securitization are evil. I am afraid that if we don’t do something here soon, we’ll wake up one morning (probably after the next cyclical downturn is underway) and find pitchfork-wielding villagers outside the gates thinking they have found Dr. Frankenstein’s monster. Populist anger, whipped up by our critics demonizing the financial sector, unfettered from the necessity to defend these positions in the marketplace of ideas and the court of public opinion, is powerful. That, coupled with our recent embrace of the weaponization of policy disputes enforced by both civil and criminal legal proceeding, should frighten all of us who make our living in the financial sector. And, to be clear, it should frighten everyone who understands the importance of an efficient and liquid capital market for the continued success of the US economy.
Our industry – the banks, the alternate lenders, all the participations in the process of capital formation, the users of securitization, etc. – needs to immediately, RIGHT NOW, mount a robust defense of the value, integrity and worth of this business and the quality and integrity of the people who make their living here.
At the CREFC conference, I had many conversations along the lines of “Hey, there is not much obviously wrong right now, there are very few major (or at least obvious) and immediate threats to the business from ill-thought-through regulatory initiatives or populist inspired legislation and the like. We appear to be in a period of relative quietude.”
We need to use that quietude to make our case that banking, that capital formation, that securitization are not the tools of incarnate evil.
Some poor high school kid made the NY Times a couple of weeks ago for either intentionally, or unintentionally, quoting the Nazi propaganda minister Joseph Goebbels when he included in his yearbook a version of “when one lies, one should lie big, and stick to it.” God knows what he thought he was saying (but I suspect he’d like to re-think it now), but the observation is spot on. A narrative, no matter its veracity or even plausibility, repeated often enough, and with enough fervor and emotional energy, uncontested by honest and robust debate, rapidly becomes a sort of truth. Fake news anyone? In our increasingly Manichaean polity where “sides” tend not to stray far from the echo chamber of their convictions, it is harder than ever to challenge existing certitudes. We are in mortal danger of hostile opinion about banking and securitization hardening into fact. And this fact will drive bad law and bad policy.
Opinion ossifies into fact when not contested by people of good faith who take the other side of the argument. We really don’t have to think very hard about examples, do we? The world’s flat, right? Galileo nearly lost his head over that. “Returning to the gold standard will save the British economy,” said Mr. Churchill – that return nearly tanked the British economy in 1925. Autism and vaccines – how much sadness and damage has that one caused? All fly balls are hit in the air (ok, that one might be true).
You think I’m being paranoid here? Unfortunately, since the Great Recession there has been an awful lot of intellectually unrigorous conflating of the complexities of banking and securitization with the financial collapse of 2007 leading to an increasingly shrill condemnation of the sort of financial engineering that is a critical underpinning of the successful function of our modern economy. Here’s a cross-section of commentary:
- “[T]he misuse of securitization created the whole ugly economic mess we find ourselves in today”
- “How Securitization Encouraged Bad Loans”
- “[T]he housing market in the United States was no longer booming. And it was the mortgage-backed security that killed it.”
And not many voices have contested this as of late. Kudos to Jamie Dimon of JPMorgan for standing up and making the case, but his was largely a lonely voice in the corridors of power. Certainly, too little, but one can hope it’s not too late.
Because, let’s be clear, Senator Warren is coming. And, OMG, Congresswoman Maxine Waters is likely to be the next chair of the House Financial Services Committee (to preserve my aura of non-partisanship, I’m not going to tell you why I said “OMG” here; it was just a said-in-the-moment thing). Those who have built their career vilifying the banking and finance sectors may be in power soon and any effort to rebalance the conversation thereafter will be very daunting indeed.
So, besides moaning about the unfairness of it all, what to do?
Well, there is plenty to do and it’s past time we got to it. We need to mount a real defense of banking, finance and securitization and their importance to the economy in general. Let’s use this respite from the governmental urge to regulate (a solution for every problem, plus solutions in search of problems) to make the case in the halls of government and the courtroom of public opinion that finance is an important part of our economy. Let’s confront those who say differently, directly and immediately. More importantly, let’s work with the staff of our friends on the Hill to educate them about how structured finance works, how the alternate lending marketplace is de-risking our prudential banking sector and how securitization is just another form of capital formation neither worse, and perhaps even better, than funds raised through the guaranteed deposits or explicit backstops from the Treasury. Let’s demonstrate that one of the major differences between the performance of the U.S. and the European Community marketplace is the broad and deep capital markets. Let’s make the case that these markets are a hedge against problems in our prudentially regulated banking market.
Let’s humanize this and show folks on the Hill and in the courts of public opinion that there are hundreds of thousands of people who work very hard every day to make the capital formation business work. Real people trying to do the best damn job they can and successfully bring liquidity to our market.
I could go on, but you get the point. Kudos to our colleague Jay Pittard of EasyCap who recently proposed to CREFC the formation of a committee of industry representatives to try to rebuild our image and manage the narrative to carry that story forward to our government, citizenry and punditry. This is a good idea and deserves our support. And this is not just a CREFC issue. It’s time for the trade organizations of the banking and finance sector to band together with commercial real estate interests, the Chamber of Commerce and the other voices of the business community to stand up and tell truths. If we don’t, the negative narratives about our business will continue to ossify, becoming harder to contest when broadly believed and understood and will become the basis of bad legislation and regulation which could fatally damage our industry and certainly impair the vibrancy of the U.S. economy.
We have a little bit of time, let’s use it wisely.