Part one
Should a lunatic run the asylum, a poacher become the
gamekeeper or a regulator switch loyalties at will? The answer may appear
obvious, but the reality could be different. Let us find out.
I first set foot on African soil in early 1998 when I
took over charge of a commercial bank in
The chairman was an entrepreneur at heart. He had built
up his plastic business from scratch. He was similarly determined to build up
his banking venture. He was closely involved with both, and split his daily
routine to make sure that he was involved in the decisions taken at his factory
as well as at his banking set up. As part of his routine, he held two Board meetings
a week at the bank. Yes, these were regular Board meetings, including agenda
items, minutes of past meetings, action taken reports and everything else. Present
at these meetings were two of his local directors (partners in his plastic
company), and the bank’s top management, i.e. my general manager and myself. At
these meetings all papers and decisions taken by us were reviewed by him. He
also spent the first half of every working day at the bank – overseeing
operations and meeting the bank’s customers. The Central Bank of
My cabin was on the same floor. All the customers that
visited us waved at me and walked on to the last cabin to meet the chairman.
They knew where the real power lay, and who the dummy was. I often wondered
what I was supposed to be doing there.
To go back a little, some of the rich Asians with money
to burn set up finance companies for two-wheeler financing. The business model
was simple, straightforward and need no special expertise. But then, like all
finance companies, they became unmanageable and the Central Bank of the country
gradually got worried with the way things were being handled at these finance
companies. So, one day, these finance companies received letters from the CBK to
the effect that they would have to convert themselves to banks, and strictly follow
from day one all the norms of a commercial bank. The Central Bank of Kenya
(CBK) had decided that it was far easier to control and regulate a banking
entity than a non-banking finance company (for which there were practically no
way to regulate them).
Some of these finance companies converted themselves
into commercial banks, but continued to finance two-wheelers as they had done
all along. Others appointed professional bankers and tried to conduct banking
business. I was the second MD and CEO to adorn this bank’s chair, simply
because the CBK wanted it that way. In his heart, the chairman who had created
this institutions had no intention to loosen his grip over it. He did not trust
external “professionals” to run his bank.
At one of these regular meetings the issue taken up for
discussion was the penal rate of interest lately imposed by the bank on the
defaulting borrowers. The chairman said that several of his customers (read,
his friends and peers in the Asian community) had complained to him that the
(penal) interest rates were too high; they hurt, and that the bank should do
something about them. On behalf of the bank I explained that the penal rates
were meant to be punitive – much higher than the normal rates. They were
meant to act as deterrents or disincentives to potential defaulters, to keep
their numbers as low as possible and thus improve the overall quality of the
bank’s loan portfolio. The main objective of a penal interest was not to
increase the bank’s income, but to impose financial discipline on the
borrowers.
The chairman had another issue to discuss. He said that
some customers had to resort to frequent overdrawing of accounts, but were
inconvenienced since they had to approach the bank every time they needed to
draw beyond their sanctioned limits. He suggested that the bank should sanction
25 to 30 per cent over and beyond the quantum estimated after appraisal, to
avoid frequent reporting to the Central Bank of Kenya, and inconvenience to his
customers (not necessarily in that order!). While on the subject, he also made
it known that he did not appreciate the bank (read, us) requesting the
borrowers to visit the bank to execute loan documents. Why couldn’t we, by way
of customer service, visit their offices instead at their convenience to
execute security documents? Could we also be extremely polite while writing
letters to defaulters, non-performing borrowal account holders, or even while
calling up bad loans, so that the bank did not hurt their sensibilities?
The issue uppermost in his mind was the fact that his
peers were unhappy with him and his bank. They had complained to him at various
social gatherings (probably in the presence of his other friends) that his bank
was severely penalising them for occasionally stepping over the line, for
frequent irregular drawings, or for failing to repay on schedule. The chairman
strongly felt that such irregularities were normal to every business. A bank
(especially a bank owned by a fellow Asian) was supposed to be ‘understanding’,
rather than exploit these situations to inconvenience or penalise the borrowers
to increase profit. As the owner of the bank, he was in a position to lend a
helping hand, offer financial assistance, to the fellow members of his
community; which he always did. However, by treating his peers as it did, the
bank was effectively undermining his position. In being strict, he felt that
the bank was letting him down, badly.
It was not very difficult to understand where he came
from. His plastic manufacturing company enjoyed large financial facilities from
other banks in
If it is difficult for an industrialist to think like a
banker just because he happened to own a bank, it could be even more difficult
for the ‘regulated’ to wear the hat of a ‘regulator’, for the poacher to become
the game-keeper. For them, the so-called Chinese wall may never exist.
Part two
The lines, unfortunately, are blurred in the US too.
There, the business lobby has a huge influence on the government and its
members. Being a lobbyist is a well-recognised profession. Those who are major
contributors to the campaign or election funds of politicians (it is perfectly
legal) bring to bear significant influence on the legislations by the
It would serve no purpose listing the movers and shakers
in the
He was the chairman of the Senate Banking Committee from
1995 through 2000. His seat on the Senate banking committee quickly won him
support from the nation’s major financial institutions. Many of his deregulation
efforts were backed by the
But, where did his loyalties really lie? After going
through the rest of this article, if you begin to wonder whether lunatics
should run the asylum, you have my sympathies. The details of his zealous performance
are now in the public domain. Here is a snapshot, for you be the judge.
From 1999 to 2001, while the US Congress considered
steps to curb predatory loans, Phil Gramm did everything he could to block the
measures. In 2000, he refused to have his banking committee consider the
proposals, an intervention hailed by the National Association of Mortgage
Brokers as a “huge, huge step for us.” A year later, he objected again when
Democrats tried to stop lenders from being able to pursue claims in bankruptcy
court against borrowers who had defaulted on predatory loans.
He played a leading role in writing and pushing through
Congress the 1999 repeal of the Glass-Steagall Act. Called The
Gramm-Leach-Bliley Act, the measure was the most significant financial services
legislation since the Great Depression. It removed barriers between commercial
and investment banks that had been instituted to reduce the risk of economic
catastrophes. The Act split up regulatory supervision of conglomerates among
government agencies. The Securities and Exchange Commission, for example, would
oversee the brokerage arm of a company; bank regulators would supervise its
banking operation; state insurance commissioners would examine the insurance
business. But no single agency would have authority over the operations of the
corporate in it entirety. Neither was there any attention given to how these
regulators were to interact with one another. The single biggest failure of the
system was that nobody looked at the holes of the regulatory structure.
Gramm thereby created what Wall Street analysts now refer to as the “shadow
banking system,” an industry that operated outside any government oversight.
A year later, the U.S. Senate rushed to pass the
11,000-page government reauthorization bill. Gramm slipped into it a 262-page
amendment. In what one legal textbook would later call ‘a stunning departure
from normal legislative practice,’ the Senate, at the urging of Texas Senator
Phil Gramm, tacked on a complex, 262-page amendment called the Commodity
Futures Modernization Act of 2000 (CFMA). Into this Act, Phil Gramm inserted a
key provision that forbade federal agencies to regulate the financial
derivatives, and exempted over-the-counter derivatives such as credit-default
swaps from regulation by the Commodity Futures Trading Commission (CFTC). His
proclaimed objective was to "protect financial institutions from
overregulation" and "position our financial services industries to be
world leaders into the new century."
Holiday season was approaching. Everybody was in a hurry
to wind up proceedings. No one had the time or the patience to go through the last-minute
additions and amendments. The bill along with the Gramm amendments were passed
without much debate.
The legislation created what was later named as the
"Enron loophole". It contained a provision – lobbied for by Enron –
that exempted energy trading from regulatory oversight. It allowed Enron – a
generous contributor to Gramm election fund – to run rampant, wreck the California
electricity market, and ultimately cost consumers and shareholders billions
before it collapsed. But for Phil Gramm, Enron was a family affair. Eight years
earlier, his wife, Wendy Gramm, as CFTC chairwoman, had pushed through a rule
excluding Enron's energy futures contracts from government oversight. Wendy
later joined Enron’s board, and in the following years her Enron salary and
stock income brought between $915,000 and $1.8 million into the Gramm
household. Incidentally, Enron’s CEO Ken Lay chaired Gramm's 1992 re-election
campaign.
In 2002, Mr. Gramm left Congress, joining UBS (Union
Bank of
“They are saying there was fifteen years of massive
deregulation and that’s what caused the problem,” Mr. Gramm said of his
critics. “I just don’t see any evidence of it.” Said Mr. Phil Gramm in an
interview, “By and large, credit-default swaps have distributed the risks. They
didn’t create it. The only reason people have focused on them is that some
politicians don’t know a credit-default swap from a turnip”.
Phil Gramm’s comments after the Commodity Futures
Modernization Act were approved – along with other landmark legislation he had
authored – by the US Congress are worthy of note: “The work of this Congress
will be seen as a watershed where we turned away from an outmoded
Depression-era approach to financial regulation and adopted a framework that
will position our financial services industry to be world leaders into the new
century,” Gramm said.
The financial disasters that cropped up frequently
(including the dot-com bubble) only went to prove how hollow these big talks
were. The Dodd-Frank Act was enacted in July 10, 2010. According to the U.S.
Department of the Treasury, it was “the most comprehensive set of reforms to
our financial system since the Great Depression.” The act made sweeping changes
throughout the financial regulatory system including new regulations for
systemically important. But when the basic norms of banking are given a go-bye,
things happen.
Author’s notes: The 2008
global financial crisis may be a distant memory now. The global economy may
have recovered from the financial Tsunami that was precipitated post-2008. But,
as Sir Winston Churchill famously said, “Those that fail to learn from history
are doomed to repeat it.” Banks in the US have failed again and again, as this
website[2]
shows. As recently as since 10 March 2023, two US banks viz., Silicon Valley
Bank (SVB) and Signature Bank, collapsed. These were the biggest bank failures
since 2008. (Do remember that SVB was neither a commercial bank nor an
investment bank. It observed no risk management practice either.) Credit Suisse,
another bank in deep crisis, reportedly mismanaged, was bailed out by the Swiss
authorities who brokered the bank’s emergency sale to UBS for 3 billion Swiss
francs over a weekend. “The issues at Credit Suisse are to do with a long
history of revolving doors at the top of the firm in management terms, a
changing plan, and on top of a series of operational risk and control and
compliance problems.”[3]
Sounds familiar?
The
contagion effect affected Deutsche bank, the financial stress throwing up its
own fault lines. The crisis may have been contained for the time being, but
history has a nasty habit of repeating itself.
****
28-March-2023
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