WASHINGTON -- The last time that America heard from Robert Pozen, he was proposing a novel fix for Social Security that attracted bipartisan support in Congress, though it eventually fell short of enactment. Now, he has a plan for setting the financial system right.
Pozen is the chairman of MFS Investment Management, a Boston-based fund with more than $200 billion in assets under its watch. He's also taught at Harvard's law and business schools, served as Massachusetts' secretary of economic affairs and been a senior counsel to the U.S. Securities and Exchange Commission. His new book, out in early November, is called "Too Big to Save?"
The title is a play on the phrase "too big to fail," which was the justification for the massive taxpayer bailouts of several financial-industry titans last year.
"I'm trying to have a forward-looking book, sort of saying, 'This is what happened, but let's figure out what we can do to save the system going forward,' " Pozen said in an interview at McClatchy's Washington Bureau.
Here are some of his thoughts, edited into a question and answer format.
Q: Why the play on words about too big to fail?
A: We've had much too vague a definition of "too big to fail," and as a result we've bailed out 600 financial institutions with over $200 billion in loans. Is it possible that there were 600 financial institutions that were too big to fail? I think the question answers itself. I think we all agree that something like Freddie Mac or Fannie Mae, those were probably too big to fail, but how far down the line do we go and what is our rationale?
Q: You argue that only money-center banks needed for retail banking are too big and important to fail. What about investment banks such as Goldman Sachs and Morgan Stanley, which are now bank holding companies? They tried to avoid the taxpayer bailout on grounds that they didn't need it.
A: By definition, they weren't too big to fail because they weren't about to fail. We had many small banks that were recapitalized, so by definition they can't be too big to fail; it was just a political thing that once you did the big banks, you had to do the small banks.
Q: What happens when a bank really is too big to fail?
A: I say the secretary of the treasury needs to write down the rationale before bailing out a financial institution, and it should be signed off by the chairman of the Federal Reserve and the chairman of the FDIC (Federal Deposit Insurance Corp.) And after the fact, there should be some report by the GAO (Government Accountability Office) to see if it did have the cost benefits we thought we would see.
Q: What would you change if the government needs to rescue a bank that poses a systemwide risk?
A: If we're going to bail out large financial institutions, we are essentially taking most of the downside. If these things go bankrupt, we have to live with it. So if they do well, we as taxpayers ought to have most of the upside.
Q: That's the opposite of what happened. Billionaire investor Warren Buffett got a better deal for investing in Goldman Sachs (10 percent dividend and more stock warrants) than U.S. taxpayers (5 percent dividend) did.
A: Either we ought to get warrants for 100 percent or we ought to get common stock. Getting common stock does not mean you have to have nationalization. ... When the FDIC takes over a bank, rehabilitates it and sells it, do we say it is nationalization? One of my major themes is we have too much one-way capitalism. We need to have fairness, and fairness means if we are going to take the downside, we are going to get the upside.
Q: Why do you feel new requirements are needed for the boards of directors of large financial institutions that pose risks to the broader system of global finance? Didn't the Sarbanes-Oxley legislation empower boards of directors to do more oversight?
A: They didn't seem to have a good grasp of what is going on.
Q: You propose that these larger institutions have smaller boards that meet more often, say three times a month. Why?
A: Right now, most board members show up six days a year. What's the chance of somebody understanding a really complex organization like a Citigroup or a Morgan Stanley by showing up six days a year?
Q: What do you hope readers take away from your book?
A: There's been an undue focus on banks, and I want them to realize that the non-bank sector produces a whole lot more credit than the banking sector does. Therefore, if we want to get lending going again, we need to focus on the non-bank sector and loan securitization. (Securitization is the pooling of loans -- whether they're mortgages, car loans or credit card debt -- into securities that are sold to investors.)
Q: You note in your book that banks supplied only 22 percent of the credit in the United States in 2007. Is this what you're getting at?
A: In 2007, we had about $1.2 trillion in loan securitization. This year, we will be lucky to have $50 billion. So if you want to know why we are not having a lot of lending in the U.S., it has very little to do with banks and has everything to do with loan securitization.
Q: So the administration is attacking the wrong source of the lending freeze?
A: They are looking at the wrong place. In fact, we know that of all the banks that got federal assistance, basically their loan volume has fallen by 2 or 3 percent.
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