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Sunday, February 13, 2011

Dubai Bankers and Responsibility: A Question of Presumed Complicity

Reacting to the debt troubles of Dubai World (which was carrying $59 billion in debt in 2009), the director general of the Dubai Department of Finance, Abdulrahman al-Saleh, said  “Creditors need to take part of the responsibility for their decision to lend to the companies. They think Dubai World is part of the government, which is not correct.”  This sentence strikes me as odd.  Al-Saleh was suggesting that in deciding to make a loan to a company, a banker takes a risk, which entails the possibility of working with the company if it comes up short in cash.  Is such flexibility in the vocabulary of the typical loan officer, much less in the culture of major banks?  I doubt it.

On the same week that Dubai World’s problems were being made public, the Obama administration announced plans to pressure mortgage companies to reduce payments for many more troubled homeowners, as evidence was mounting that a $75 billion government-financed effort to stem foreclosures was foundering.  "The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview. “Some of the firms ought to be embarrassed, and they will be.”  Even as lenders had accelerated the pace at which they were reducing mortgage payments for borrowers, a vast majority of loans modified through the program remained in a trial stage lasting up to five months, and only a tiny fraction had been made permanent. Mr. Barr said that the government would try to use shame as a corrective, publicly naming those institutions that move too slowly to permanently lower mortgage payments.  However, shaming is not the only weapon in the government’s arsenal. 

The Treasury Department waited until reductions were permanent before paying cash incentives that it had promised to mortgage companies that lowered loan payments. “They’re not getting a penny from the federal government until they move forward,” Mr. Barr said.  A week after Barr’s statement, the Treasury Department said it would withhold payments from mortgage companies that weren't doing enough to make the changes permanent. ”We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones,” Phyllis Caldwell, who was named to lead the Treasury Department’s homeownership preservation office, said in a statement.  So here we find that dreaded word—responsibility—as if it applied to the mortgage issuers as well as the homeowners.  Considering Senator Dick Durbin’s statement that the banking industry owns Congress (which he said after the industry’s lobby effectively scuttled a bill to allow judges to adjust mortgage terms for homeowners in trouble—even as the banks played a role in the bad mortgages), it is not surprising that even two years later, little benefit had come to mortgage borrowers from the U.S. Government, even as the banks had been rescued by TARP funds.

The banking industry has been more powerful, even though it was at least partially complicit in the crisis. Of course, Wall Street bankers have instinctively resisted claims that they were part of the problem that led to the financial crisis in September of 2008. Al-Saleh’s admonition to lenders that the bankers in his country step up to the plate was ignored in favor of the mantra, “it's the other guy’s fault so why should I pay?  I'm not budging.”  This is the mentality of a spoiled child.  The rest of us don’t see it as such when it applies to people in expensive suits because we are too impressed with the trappings of money and power.  As long as bankers get away with making their own rules in the halls of governments, the power ties will remain as though undisciplined children.

Sources: http://www.nytimes.com/2009/11/30/business/global/30dubai.html?ref=world ; http://www.nytimes.com/2009/11/29/business/economy/29modify.html?scp=1&sq=pressure%20mortgage%20companies&st=Search ; http://www.msnbc.msn.com/id/34204856/ns/business-real_estate/