On the menu today: There’s something absolutely fascinating going on in the coverage of the current banking crisis. One of the two (or three? Four?) banks at the center of the story has a really prominent former congressman on its board of directors — a co-architect of how the federal government regulates banks. He’s known for his acerbic comments, and he’s doing a bunch of interviews right now in a hasty effort at reputation management. But you really have to look around to find anyone who’s casting this congressman as a villain in this story; he’s being treated as a mildly ironic bystander to the whole mess.
Whose Signature Is on the Banking Crisis?
Picture, if you will, a 16-term congressman who plays a major role in overhauling the nation’s regulation of banks. He then retires and joins the board of directors of a New York-based national bank traded on NASDAQ, a bank with assets of about $50 billion. As a former congressman and member of the bank’s board, he lobbies Congress to loosen the rules for banks like his, making the not-insane argument that the rules for a bank with about $50 billion in assets shouldn’t be the same as the rules for a bank with $1 trillion or more in assets.
Imagine that while this congressman was still serving in the legislature, he denounced two of his former staffers who had gone to work as lobbyists for banks, saying of one of them, “It never occurred to me that he would jump so quickly from the committee staff to an industry that was being affected by the committee’s legislation. When he called me to tell me that he was in conversations with them, I told him that I was disappointed.” The congressman instructed his current staffers not to talk with former staffers who had gone to work for banks. But this congressman sees nothing wrong with himself going to work for a bank, and urging his colleagues to vote a particularly way on additional bank-regulation reforms.
Imagine that two years after the congressman joined the bank’s board, the New York state attorney general put the congressman’s bank atop her list of banks that loaned the most money to the landlords on the state’s Worst Landlords Watchlist.
Imagine that the bank’s former director — a former senator from New York — warned that the bank was getting too heavily involved in cryptocurrency and taking its “eyes off of that small entrepreneur.”
Imagine that the congressman’s bank came under the scrutiny of the U.S. Department of Justice and Securities and Exchange Commission, over concerns that the bank didn’t take sufficient steps to detect potential money laundering by clients, such as scrutinizing people opening accounts and monitoring transactions for signs of criminality.
Imagine that a former executive claimed that employees at the congressman’s bank kept their jobs despite being accused of a $1 million wire-fraud scheme.
Imagine that the New York State Department of Financial Services suddenly took possession of the congressman’s bank, making it the third-largest bank to fall into financial failure in U.S. history.
Then, imagine that in an interview with the Financial Times, the congressman explained why he joined the failed bank’s board of directors: “I need to make some money.” The congressman received nearly $2 million in cash for serving on the bank’s board over the past eight years, for what is characterized as “a (very) part time gig.”
But you don’t have to imagine anything in that scenario, because all of that really occurred with Barney Frank, the former Democratic congressman from Massachusetts and co-architect of the Dodd-Frank Act, who went on to serve on the board of the now-shuttered Signature Bank.
If Barney Frank were a Republican, he would be the face of the current banking crisis. He would already be on the covers of magazines and the front pages of major newspapers, on television all the time, and the subject of condemning profile pieces. If Frank were on the right, he would be the villain of this story already, and ipso facto evidence of the greed, incompetence, malevolence, and recklessness of the GOP.
But Barney Frank is a Democrat who was widely admired by his party when he was in Congress, so you’re not hearing a lot about him outside of the financial press, and when you are, the tone is more ironic than denunciatory. Juana Summers of NPR asked, “Those are rollbacks you supported. Are you having second thoughts about that now?” (Apparently Frank had asked Summers to not ask any questions that would require complicated or lengthy answers: “I asked you not to do this. I don’t know how much time is time left, but I don’t like to be asked complicated questions.”)
Frank’s contention is that New York state regulators shut down Signature Bank for no good reason other than to send a warning to the rest of the financial community to get as far away from cryptocurrency as possible. He told Politico that Signature Bank was shut down because of a domino effect, set off by the actions of Sam Bankman-Fried:
Frank, who served on Signature’s board since 2015, said his bank was in “good shape” but was hit with a run generated by “the nervousness and beyond nervousness from SVB and crypto.” The bank’s digital assets business made it the “unfortunate victim of the panic that really goes back to FTX,” the cryptocurrency exchange that failed last year.
“This is the regulators — particularly, say, in New York — sending the message to banks, crypto is toxic; stay away from it,” he told NPR. He told CNBC that, “I think part of what happened was that regulators wanted to send a very strong anti-crypto message. We became the poster boy because there was no insolvency based on the fundamentals.”
(If you need to take a moment to savor the irony of Barney Frank complaining about bank regulators, please do so.)
The New York State Department of Financial Services essentially calls Frank’s explanation horsepuckey. This week, in response to Frank’s claims, the department issued a statement declaring that the closure had “nothing to do with crypto,” but instead was a response to “a significant crisis of confidence in the bank’s leadership” and “was based on the current status of the bank and its ability to do business in a safe and sound manner on Monday.” The state feared that if Signature Bank opened for business as usual this past Monday, it would experience a bank run, spreading further financial panic and spurring more runs on other banks.
No doubt the cryptocurrency enthusiasts would agree they’re being unfairly demonized, but it’s a little tough to believe that the New York state government would shut down the 36th largest bank in the country just to send a signal to other banks to get out of crypto.
Contending that Silicon Valley Bank and Signature Bank were “too woke to fail,” as Missouri senator Josh Hawley does, doesn’t quite sufficiently sum up the current banking crisis. The problem with those banks was not that they had minorities and women on their board of directors, and it’s arrogant and tone-deaf to suggest that. The boards of directors for Signature Bank and Silicon Valley Bank had plenty of white guys.
No, the issue with those banks’ management was primarily an issue of competence and ability to see risks. Ideology may well have exacerbated those problems, but it by itself is unlikely to have been the sole cause of the problem. For example, Silicon Valley Bank having the position of “chief risk officer” empty for eight months — from April 2022 to January 2023 — probably didn’t help matters.
What we’re seeing from Frank right now is another demonstration of the coziness of this country’s “progressive aristocracy” — that once you reach a certain level of status in this country, and as long as you publicly profess to hold certain political ideas, you’re given the benefit of the doubt by almost everyone else in the same elite status. The assumption is that you must have had a good reason for the decisions you made, and you no doubt meant well. Whatever disasters occurred on your watch were unforeseeable manifestations of bad luck, and in no way a reflection upon your judgment, competence, ethics, or clarity of vision.
Barney Frank was a Democrat, and thus he had to be one of the good guys. It doesn’t matter that he went to work for a bank, after publicly demonizing former staffers who went to work for banks. It doesn’t matter that his bank was the biggest lender to New York’s most notorious landlords. It doesn’t matter that the Department of Justice and the SEC were considering investigating his bank. It doesn’t matter that former employees were claiming that the bank was committing wire fraud. As Frank bluntly put it, he needed to “make some money” — and his desire to make money is different from other people’s “greedy” desire to make money.
Barney Frank was a Democrat, so he had to be one of the good guys. That is the over-simplified moral equation at work in a lot of corners of American life, and it is a philosophy that enables and explains away all manner of sins and crimes.
ADDENDUM: In case you missed it yesterday, two-thirds of arrested criminals in Washington, D.C., don’t get prosecuted, and wondering how much it matters if Marianne Williamson raged at her staff behind closed doors.