New perspective on banks

I was surprised just now to read a column by Arianna Huffington on HuffingtonPost that puts the banking crisis in perspective. Quoting Edward Yingling, CEO of the American Bankers Association, Wall Street banking and Main Street Banking are very different and should not be confused.

All the troubles with toxic assets, and all the rest of the doom and gloom we've been hearing, have to do with the gluttons, risk-takers, and irresponsible high-flyers of Wall Street investment banking.

According to Yingling, "of the over 8,000 banks in this country, very few ever made a single subprime loan, and they did not engage in the highly leveraged activities that brought down Wall Street firms." And, for the most part, they're doing just fine, continuing to lend money to small businesses and to collect payments on the mortgages they hold.

This is even more true for credit unions. Huffington writes:

Another bright spot on the banking front is credit unions. They're lending, their balance sheets are solid, and their capital levels are at near record highs.

Unlike the big banks, credit unions are not owned by shareholders, who are looking for maximum quarterly profits, but by members, who are looking for stability and service. Since their goal is not to maximize short-term profit, credit unions by and large steered clear of risky subprime loans. As a result, their balance sheets could pass the Geithner stress test just fine.

Eighty-five million Americans belong to credit unions. And, according to the Credit Union National Association, as of mid-2008, delinquencies on its members' mortgage loans were only 0.7 percent. Around 70 percent of credit union loans are held by the credit unions themselves, as opposed to being sold off on secondary markets.

This all just makes me even madder. The older system really does work, where banks or credit unions make prudent loans and continue to hold the mortgages themselves in a one-to-one relationship between lender and borrower. No kicking the risk up higher and more abstractly into credit default swaps and then making money off insurance that they will fail.

All this didn't have to happen.

Obama's major address on the economy yesterday struck me as first rate. His explanation for how it all happened is easy to understand, his reasoning behind the current measures to handle the crisis seems sensible, and his vision for what needs to be done in the future is sweeping and necessary.

Read it carefully and you will see that his plan calls, not just for restoring regulation, but for a reinvention of the financial system. If only he can sell it to Congress.

Ralp;h