An Industry on Steroids?

The Financial Crisis Inquiry Commission ("FCIC") held its first series of hearings this week on Capitol Hill in Washington.  The stated mission of the 10 member panel composed of bi-partisan members of Congress as well as private citizens is, "To examine the causes, domestic and global, of the current financial and economic crisis in the United States."  Similar to the Pencora Commission that investigated the causes of the Great Depression in the 1930s, the FCIC has the authority to conduct hearings and issue subpoenas for documents and witnesses.  The deadline for their final report is December 15, 2010.  Of the people called to testify this week, one of the more interesting and compelling was banking securities analyst, Michael Mayo.  He compared the financial services industry to major league baseball in its rampant use of performance enhancing steroids. Much like Mark McGwire, who admitted to long-time steroid use this week, bankers enhanced their performance artificially with significant long-term side effects.  Mr. Mayo noted the following:

"....the banking industry has been on the equivalent of steroids.  Performance was enhanced by excessive loan growth, loan risk, securities yields, bank leverage, and consumer leverage and conducted by bankers, accountants, regulators, government and consumers.  Side effects were ignored and there was little short-term financial incentive to slow down the process despite longer-term risks."

The only way to rid steroids from major league baseball was to implement a drug testing program with significant penalties for use.  Likewise, the banking industry must also implement programs to deter excessive risk-taking and allow firms to fail when they have ignored the potential catastrophic downside of their actions.