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Buy the Book
Risk Responsibly
The risky behavior of bankers was not the proximate cause of our financial crisis.
Banker to the World: Leadership Lessons from the Front Lines of
Global Finance
By William R.
Rhodes
(McGraw-Hill, 252 pages,
$25)
AS ANY tort lawyer will tell you, society has a habit of demanding an unrestricted supply of baked goods without any consequences — cake-wise, that is. And so it is with bankers of whom we demand, “Take risks; just don’t lose any of our money.” The penalty for disappointing society can be severe. Perhaps only Transportation Security Agency junk-touchers at airports are held in lower regard in America today than bankers.
This is why this memoir by William R. Rhodes, the former head of international banking operations for Citibank, is more than a salutatory antidote to the prevailing lynch-mob attitude toward our financial industry. It should be required reading not only for other bankers, but also for Washington’s would-be reformers of Wall Street. and most of all for the ordinary lay citizen dismayed by the persisting panic that has gripped us since 2007 and which is going to be among us for at least another five years. I mean, they’re all Bernie Madoffs, right?
Well, no. Bill Rhodes has been for more than 50 years one of the true white-hats among American bankers. Next to Paul Volcker (who has written the book’s foreword), Rhodes has been the face of American capital probity to the rest of the world. Hence the accurate title, “Banker to the World.” A minor quibble might be that bookstall browsers will be misled by the subtitle, “Leadership Lessons from the Front Lines of Global Finance.” This is not your run-of-the-mill “my-ten-top-tips-to-get-rich” ghost job that ego-driven tycoons foist off on business school wannabes.
Nor is it an attempt to alibi the banking excesses of the past 30 years. Indeed, the most recent senior management of Citibank comes off as being pretty tone-deaf about the dangers that were clearly looming in the past decade, as witness the blithe quip tossed off in 2007 by Citibank’s CEO Charles Prince, “As long as the music is playing, you’ve got to get up and dance.” One comes away from such accounts wondering less why Rhodes never made it to the top chair, but rather how he was able to last as long as he did.
Through a series of case studies Rhodes reminds us of an overlooked truth: that bankers must take risks. We not only want them to, but we need them to if surplus capital is to do its work to best effect. Nevertheless, there are rules that apply in most risk assessments and, and this is underscored, there are consequences for ignoring or trying to evade those rules. And those rules apply whether one runs a bank, or tries to run bankers à la Barney Frank or Fidel Castro. It may be, as the old commercial says, “not nice to fool Mother Nature.” But it can be disastrous to try to fool Mr. Marketplace.
The backstory to the present global financial crisis and to most of Rhodes’s 53 years in banking is that the risky behavior of bankers was not the proximate cause of this most recent bubble and subsequent collapse. Rather, during that time more and more nations became more and more dependent on ever-more-expensive energy sources—oil for one—to fuel growth. Instead of running faster just to stay in place, entire economies and especially the U.S. economy began to steadily lose ground. American workers have lost purchasing power steadily since 1975, the same with household wealth even before the collapse of home prices. Instinctively, individuals have made decisions that provided the illusion of wealth and to demand that their financial trustees—bankers among them—support that illusion. Bernie Madoff and Goldman Sachs did not generate the bubble all by themselves. We helped.
The other hard truth Rhodes tells us is that banking is always in crisis. That’s what banks do when they take risks—crisis inevitably follows. Congressional ignoramuses are doomed to disappointment when they believe they can protect us with thousands of pages of one-size-fits-all regulations that will prevent any crisis from ever occurring again.
Looking to today’s slow-motion catastrophes that roil the once-smug eurozone, Rhodes offers a timely overview based on a lifetime (he started at what was then the National City Bank in 1957) in a career that made him the point man for U.S. banking for five decades of crises involving the finances of nations that once were considered the basket cases of the global marketplace—Argentina, Brazil, Jamaica, Mexico, Peru, Uruguay, Turkey—not to mention the emerging nations of Asia (especially China and South Korea) and of the newly liberated financial markets of the Eastern Bloc—Poland, the former Czechoslovakia, Hungary and, not least, of the former Soviet Union.
But with a nod to the crisis gripping the so-called PIIGS (Portugal, Ireland, Italy, Greece, and Spain) that threaten the financial structure of Europe and thus our own, Rhodes concedes that “financial crises will continue to occur. Still, the lessons of the last 50 years show that all crises are manageable.”
“Each country is unique, and a cookie-cutter approach does not work when dealing with a nation in crisis. Every country has distinct reasons for why it got into trouble, for how the problems could have been prevented, and for how the crisis could have been resolved,” Rhodes accurately observes. But there is, he adds, a common threat—that the instability of one nation will spread like contagion to its neighbors.
With a pointed message that should resonate in both Athens and Washington, he concludes with a list of remedies that includes privatization, trade liberalization, tax reforms, and regulatory adjustments. But repeatedly he argues that a prompt response is essential if the crisis is to be contained.
HAVING SPENT 40 years reporting from the sidelines of the banking scene, I found a lot explained in Rhodes’s inside stories of how and why institutions like the big banks, the Federal Reserve, the International Monetary Fund, and others responded to the sometimes painful evolution of the global marketplace. Sadly, some national leaders—one thinks of Nicaragua’s Sandinistas, Venezuela’s Chavez, Zimbabwe’s Robert Mugabe—try to evade the rules of sound finance and their people pay the price. Others—a series of Argentinean finance ministers, or recently the Castro brothers—belatedly wake up to reality and have to begin a painful period of reform.
More encouraging, however, is his recounting of how some new leaders quickly overcome the prejudices of their upbringing and get it right from the start. Success stories such as the East European governments that broke away from the Soviet Union or the reformers in Turkey and Brazil show what miracles can occur when responsible governments work with the financial markets to take the risks of investing prudently but also profitably.
Is it too much to hope that Mr. Rhodes has dropped off some copies of his memoir on Capitol Hill and at the White House? Is it too much to hope that anyone in either place will read it? They probably won’t. But you should.
About the Author
James Srodes, an author and broadcaster, is a former Washington bureau chief for Forbes and Financial Worldmagazines. His latest book, On Dupont Circle: Franklin and Eleanor Roosevelt and the Progressives Who Shaped Our World, is being published next week. His email address is srodesnews@msn.com.
Letter to the Editor View all comments (18) | Leave a comment
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vb| 9.23.11 @ 7:36AM
Thanks for alerting me to a book that I may not have noticed. I wonder how many of our presidential candidates concern themselves with such topics.
JayDick| 9.23.11 @ 9:40AM
"Is it too much to hope that Mr. Rhodes has dropped off some copies of his memoir on Capitol Hill and at the White House? Is it too much to hope that anyone in either place will read it? They probably won't."
Most of those bozos wouldn't have a clue even if they did read it. They seem mentally incapable of understanding market forces or even recognizing that such forces exist.
JA| 9.23.11 @ 10:00AM
While there is absolutely no doubt that our current housing crisis and massive mis-pricing of mortgage based derivatives, etc., originated in Washington DC (e.g., Barney Frank, etc - and they should be in jail !!), Wall Street decided to join the "party," as evidenced by Chuck Prince's remarks (he too, should be in jail ).
Wall Street sold as much of these fraudulent derivatives as possible and by doing so, aided and abetted the criminals in Congress.
If you see thugs breaking into a business, you are not obligated to join in the fray. If you do, you too are a criminal.
Wall Street and the bankers totally F'd up by joining the fraud that began in Congress.
No book will convince me otherwise.
Joe Gause| 9.23.11 @ 6:10PM
Even though Mr. Rhodes, personally, may be the exception to the other rapacious banksters, I agree wholeheartedly with you JA. The Barney Franks started it, and the banks jumped in and gleefully aided and abetted the commission of one of the worst crimes in the history of the U.S.
Dan| 9.24.11 @ 2:47PM
Yes, but always remember that the banks could have done no damage without the assurance from the government that the loans would be guaranteed by the full faith and credit of the United States. Foxes will always raid the hen house -- especially when the door is left open, and especially when the farmers force them to.
But I repeat -- regardless of FrankenDodd, if the government had not backed the loans none of this would have happened. None! Or if I am wrong, bring forth your strong reasons.
maximumrandb| 9.26.11 @ 12:26PM
Lehman, which was not even a commercial bank, leveraged up over 20 to 1 with MBS. The government did not make them do it.
That being said, everybody else was doing it (Charles Prince?), and the liquidity in the market was there, and the pols thought that as the way it should be. So Franks and Dodd were certainly culpable. Also, it was during Cuomo's watch at HUD in 1998 that the "20% down" rule for mortgages to be purchased by Fan and Fred was done away with. Exccessive leverage has almost always been present during financial crises.
Dan Hirsch| 9.23.11 @ 12:18PM
Sorry - I have a problem with the premise:
"The risky behavior of bankers was not the proximate cause of our financial crisis."
In point of fact, is not giving mortgages to those whose inability to repay those mortgages is readily inferrable risky behavior?
How many times did it go like this:
"Uh, let's see, the principle is $450,000, your payments will be $4,500 per month. You've worked at the Quickie Mart for fifteen months now and make $11 dollars an hour. Hmm.."
"I get a lot of overtime, so I make a lot of money!"
"Oh, I see, that's good. Okay, sign here..."
Not risky, not risky at all.
Or how about this one:
"Well, the current appraisal on your house shows that you have almost twelve per cent equity, and we are willing to lend you, as the (sic) homeowner up to 120% of your home's value..."
That's not risky?
C'mon, get real.
But I will give the mortgage bankers this bit of cover-
"Hi, my name is Muffy and I'm with ACORN. I'm here to make sure that your bank is not denying the right to home ownership to anybody who we think deserves it."
"Muffy, we do extensive testing of our lending policies by comparing loan failure rates by neighborhoods and we have consistently found there are no neighborhoods with lower than average loan failure rates.*"
"Well sir, if we think you are denying deserving people credit, we will call in the FDIC, the SEC, the state bank examiners, the State's Attorney, and the media to consider your bank's reprehensible behavior."
Don't believe in Muffy?
I do. I met her on a plane; she gave me her business card and explained that is exactly what she did for a living. Her name was not really Muffy, but was of a similar nature. Her business card definitely read "ACORN."
And when I offered her the banker's failure rate response, as proof that there was no significant redlining happening in my state, she just said she didn't believe it. People are being unfairly denied the right to home ownership.
So bankers, you did make a lot of overly-risky loans. But you were driven to it by fear, fear of big government proctological inspectors.
If you had stood up to it - you might have been able to stop it. But you didn't.
Remember this?
"First they came for the communists,
and I didn't speak out because I wasn't a communist.
Then they came for the trade unionists, and I didn't speak out because I wasn't a trade unionist.
Then they came for the Jews, and I didn't speak out because I wasn't a Jew.
Then they came for me and there was no one left to speak out for me."
Freedom ain't free!
DTOM, boys...
* Look at it this way: If a bank is denying credit to creditworthy people in a neighborhood, then the credit they do extend in that neighborhood will have a lower failure rate, because only those with better than average credit, who are less likely to default, get loans; therefore an excessively low failure rate is proof of denying credit to deserving creditors.
On the other hand, excessively high failure rates demonstrate insufficiently tight credit policies. Which anyone with a pulse and at least eyes, ears, or a sense of smell has noticed all over this land in the last several years....
DG in GA| 9.24.11 @ 10:30AM
Dan, it wasn't ACORN per se, it was the FDIC, the Comptroller of the Currency, the OTS, et al, that crawled up the nether regions of the banks and S & L's and forced them to make the crap loans. The government regulatory agencies didn't have to be summoned by ACORN, they were summoned by Bill Clinton who used the CRA as a club against the banks. I was a banker for 35 years and when this debacle started there were many of us who spoke out against it. But then the government used their powers to force us to comply. If that wasn't enough, there were very public lawsuits by the race pimps, Jesse Jackson and Al Sharpton. Then the government decided to "soften the blow" for the banks by having Freddie and Fannie agree to buy the crap loans that Barney Frank, Chris Dodd and Bill Clinton were forcing us to make. In order to be sure we were making ENOUGH crap loans, Freddie and Fannie agreed to buy paper that wasn't worth the paper it was printed on.
But it was all just the greedy bankers...
Dan Hirsch| 9.24.11 @ 11:07AM
DG,
Yes but, Muffy was a real, breathing human being flying from Chicago to San Francisco handing out an ACORN business cards. She believed in what she was doing and totally disbelieved what the U of C graduate school of business professor had explained about comparing loan default rates to our government and finance class in 1983.
If we clean up the agencies and central banking functions, we still have to clean out the the community organizers. The closet ones, the Clintons and the wealth redistributing Democrats, and the blatant, proud ones, the Obama's, the gunions (pronounce it as GOON'yun and you'll get it.), the unrepentant socialists. The real problem here is that these vermin community organizers really are the financial equivalent of terrorists destroying our system of private property from within.
If they were launching mortar attacks from outside our borders, we as a nation would respond. I guess it is up to guys like us to figure this out, talk it up, and get others to recognize the depth and coordination of these enemies within.
I can here it now, "Are you now or were you ever a member of the organization known as ACORN?" It's actually a DAMN good question.
We'd better start asking it or be prepared for their system of governance...
Eternal vigilance ain't cheap.
DTOM
cicero| 9.23.11 @ 12:20PM
You have got to be kidding! The bankers wanted to get in on all of the fun in the speculative money market, so they lobbied strenuosly for the repeal of Glass/Steagal in the late 90,s. Then, when they all bet the wrong way, and lost heir bets, they came running to the taxpayers to make them whole.
If the government had done NOTHING, the whole thing would have been over in about 3 weeks. The market place always works. The bankers who bet their shareholders money and lost would have had to put thier banks into bankruptcy, just like Lehman Bros., or sold all of their assets at rock bottom prices, like Bear Stearns. They would have been sued by their shareholders for malfeasance; had to cough up the estate in the south of France, and Steamboat Springs; sell off the jewelry horde of the trophy wife, and perhaps go to jail for a long while. They would also be barred from the industry for life.
Instead, they were given billions of taxpayer dollars so they would suffer nothing. This on the pretext that if the taxpayers did not pick up their losses, credit would dry up. Well, credit dried up anyway. In March, 2009, when the accounting rules were changed back to Standard Accounting Priciples from Mark to Market, all at once the performing mortgages, and the derivatives based on them were worth their face value. The banks rushed to the Fed, and borrowed against assets just as before; paid back the TARP loans; paid themselves bonuses with some of it, and bought Treasuries paying 3.75% with the rest. Since they were allowed to borrow from the Fed at 0 to 1/2%, it was a no brainer.
And the beat goes on. When are these thieves and their political sponsors going to go to jail?
cicero| 9.23.11 @ 12:26PM
Sorry Dan, but my remarks were not meant for you. Your post came after I was typing. I agree with your posit, but don't think that was the proximate cause of the problem. Only 4% of all loans were non-performing, or bad at the time of the debacle. The real cause was, as usual, the fact that our government was trying to meddle in the system to achieve the results requested by its friends. Yes, some of those friends were from ACORN, but more were from the banking industry who wanted to get into the hedge fund sandbox.
Dan Hirsch| 9.23.11 @ 12:32PM
Nullus suitor...
DTOM
PS To you moderns lacking Latin as a second language: "No sweat." DH
PPS Which also reminds me of another thing: since they were so busy making (or being made to) so many bad loans, did they not cause a seriously overproduction of homes in this country? I say yes...
PPPS And another thing, weren't a lot of those homes purchased by illegal immigrants who suddenly decided that not only the weather, but also the employment situation back home is way better than here, so screw that banker, we're outta here. We can't even afford to vacation in the US, anymore...
I'm just saying, credit where credit is due...
cicero| 9.23.11 @ 1:37PM
DH So, there are at least 2 of us left, although mine is a bit rusty from non-use.
Over building was probably not much of a problem. Over evaluating what was built was. In addition, speculators could buy housing in the cities for $5,000.00, rent it out for $500.00 per month, and remortgage it for $50,000.00 at the height of the frenzy. At that point, they could walk away from a derelict, buy 10 more, and do it all over again. As the banks were buying anything that looked like mortgage so they could turn it into a poker chip, they didn't care. And as Fannie and Freddie were basing their worth and executive bonuses (see Raines, Johnson, Goerelick) on the carrying value of the mortgages they were buying, the more the merrier.
And no one has gone to jail.....
Dan Hirsch| 9.23.11 @ 6:40PM
cic'
So you will remember from Frosh Latin the old saw, "Semper ubi sub ubi!"
Man, it's been a while since I got to use that one!!!
Nolite me conculcare!
Leroi| 9.23.11 @ 11:34PM
His having been in banking for the past 50+ years, and considering the appalling condition of the banks as a result of what they themselves have done,
"Nor is it an attempt to alibi the banking excesses of the past 30 years."
Oh yes, it sure sounds like it. It sounds like the memoir of a man who now realizes what he and others like him have done and the consequences of it that we are seeing now. The image is that of Alec Guiness at the end of The Bridge on the River Kwai.
Are banks solely responsible? No. Have they themselves, with few loan standards, credit default swaps and all the rest contributed mightily to the problem? You betcha. Are they themselves trying to thwart any sort of sensible resolution? Absolutely. Just try and get Glass Steagel reinstated.
This review may possibly be more delusional than the book.
aware| 9.25.11 @ 1:01PM
Leroi you are exactly right! Bankers knew better than most that what was going on was insane. And they knew the risk. But the assumption on their part, which later turned out to be true, was "government" will back them up.
Considering that the bankers own the politicians, and through them the government, that was a safe assumption, after all. "Lobbying" wouldn't happen if it weren't successful. Yet we are still to believe "government" is "us" and banks(multi-national corp., big business, Wall Street Big Boys, etc.) are "them".
No CEOs nor their assets, bonuses, or even freedom has been so much as threatened in this whole debacle. They even go on to write books that get favorable reviews on "conservative" sites.
Margie| 9.24.11 @ 7:15PM
FLASH!!!
Drudge Reporting Herman Cain wins FL. straw poll!
Go Herman!
http://www.washingtontimes.com.....traw-poll/
aware| 9.25.11 @ 1:05PM
Margie, no offense but why is it when Cain wins a straw poll it is a Big deal and a sign of the actual "will of the people", but when Paul wins one he "bused in supporters" and "stuffed the ballot box"?
Just askin'.