Making choices is a lot easier when you know exactly what is good and what is bad, and we all have the desire to find "simple" answers.
Take nuclear power, offshore drilling or national health care — all are complicated issues where any choice has consequences and trade-offs. Managing a financial institution in 2011 will be no different. Despite what some members of Congress and the press would have you believe, almost all modern banking decisions reveal themselves in varying shades of gray, not black and white.
Homeownership is a great case in point. Is CRA lending a powerful engine that ignites the development of strong neighborhoods … or an inappropriate investment in social engineering? Are subprime mortgages a way to stabilize families through homeownership … or a predatory lending device? Are foreclosures a necessary cleansing mechanism that will let banks increase investment … or heartless legal tactics that throw families out on the street? Do the activities of mortgage brokers facilitate the efficient delivery of products and services to underserved communities … or create opportunities for the unscrupulous?
If you ask someone running for political office or looking for a "man bites dog" headline, quick and easy answers suggest themselves for all these questions. But in truth the only real answer is, "It depends."
Let's look at balance sheets.
Are higher capital requirements necessary to prevent a future financial meltdown … or a deleveraging of banks that does nothing to increase credit availability? Do securitizations spread risk, free up capital and supply needed liquidity … or invite irresponsible lending and toxic asset dumping? Are brokered certificates of deposit a good device to improve liquidity … or merely fickle and risky liquidity devices?
And consider consumers. Is credit card debt smart … or irresponsible? Should consumers be viewed as responsible buyers of financial products … or do they require government protection through ever-growing regulations?
And finally, bankers themselves. Is performance-based executive compensation good or bad? Do options create a longer-term commitment to an organization … or encourage inappropriate risk-taking? Should executive compensation be determined by the market … or by a pay czar? Do Tarp compensation limits drive the bad guys out of banking … or keep the best and brightest from coming in?
Living in a gray world is not easy. It demands that we stay fully informed and that we never stop with the first right answer. This will ensure that we both understand and, perhaps, better predict the intended and unintended consequences of our decisions.
Of course, politicians, media and regulators have their own choices to make. Black-and-white issues and good guys and bad guys appeal to basic human instincts of anger, revenge and jealousy. Whipping up populist fervor against "the banks" in a sound-bite world is much easier than explaining trade-offs, risk and the uncertainty of living in a global economy.
So what's a respectable banker to do? One thing is certain, we cannot duck the issues. Our industry has attached itself to images of safety, security, savings, prudence, homeownership and patriotism. The problem is that today's media images do not reflect these values. Instead, they show excess, greed and bankers, at best, asleep at the switch or, at worst, corrupt.
We understand risk when it comes to balance sheets, but we do not see or manage the risks being thrown at us by third parties. Some say that directly challenging Congress and regulators is too risky since they determine our fates. But the same regulators who protect us also harm us by not understanding the consequences of regulation and mandates.
Our voices have become muted, and we have to turn up the volume so that our message is understood. We have to better explain how markets work and convince onlookers that demonizing and limiting the industry will backfire. If not, we will face the biggest risk yet — not being financially viable or relevant in today's economy.