Rusty Cloutier is not hiding in his office until the lending thrill ride comes to a satisfying stop. The president and CEO of Lafayette-based MidSouth Bank held town-hall meetings this year across Texas and Louisiana to defend community banks and to critique the too-big-to-fail philosophy of Wall Street and Washington.
Recently, he put his perspective on paper in the book, Big Bad Banks: How greed and ego among the big shots in banking and government created the crisis that wrecked our economy. The head of the $1 billion community bank expounds on that mouthful of a message.
1. If “greed and ego” were responsible for the financial meltdown of 2008, whose greed and ego?
I name names in the book. John Reed of Citicorp just apologized to the American people. [Former Texas senator] Phil Gramm just apologized; he’s now at UBS Bank. Alan Greenspan just apologized. It’s very easy when you have an ego like theirs. Greenspan was the emperor of America, he served from 1987 to 2006 as chairman of the Federal Reserve Bank. And we have an eight-year term on presidents of the United States. He orchestrated “big is important to the country.” He was a very big believer in that.
2. You’ve said big Wall Street banks disregarded basic principles of lending, which led to the crisis. Would you remind us what those principles are?
You have to be able to make solid loans with the understanding that you’ve got to work with people who are able to repay you. This predatory lending kick they got onto just took down the American system. Between 2002 and 2005, they just went nuts, you know. Mortgage lending, commercial real estate lending, credit cards, any type of lending you want. They just packaged up the loans and sold them. They didn’t worry if they could ever collect on them.
3. So securitization of loans is a good thing, provided that the loans are structured properly and don’t involve Enron-style smoke and mirrors?
Absolutely. You can’t have all this off-balance-sheet stuff that they did and get away with it. Phil Gramm in 2000 passed the Commodity Trading Act, which basically said they were not going to regulate any hedge funds and off-balance-sheet items. There’s nobody going to be watching what you’re doing, which was an absolute nightmare. Enron, all of those things just took off.
4. So repealing the Glass-Steagall Act is what caused the lending failure and the chain-reaction meltdown?
We told them at the time they did it, and nobody listened. You cannot merge these models of investment, insurance and banking into one. Banking has to be a very low-risk business. You can’t allow anybody that wants to, to call themselves a bank. It’s the difference between a running play and a passing play. With a running play, you’re very secure, and you’re going to get three yards and a cloud of dust. With a passing play, you’re hoping to hit the home run. They took a very conservative business model, banking, and joined it with a very risky business model, and it just didn’t work.
5. Do you support Congressman Barney Frank’s plan to form a Consumer Financial Protection Agency that would oversee hedge funds and private equity firms, as well as banks?
There needs to be more regulation on the hedge-fund industry and the other agencies that are not regulated. But I have a whole lot of problems with the whole CFA deal. They’re throwing the whole community-banking system in with them; “they get the gain, we get the pain.” I support restrictions on the commodity-trading industry.
6. What’s wrong with the CFA proposal?
They lump in the community bankers. We’re the only ones that really wound up with any CRA [Community Reinvestment Act] policing. If you’re too big to fail, the government is not going to hold your feet to the fire. The regulatory burden on small banks is enormous, where the regulatory burden on large banks is not.
7. What’s the most tempting investment opportunity you’ve said no to, that failed?
Home-equity lending, subprime lending, all the betting on real-estate projects. I’m not telling you we didn’t bet on a few that didn’t turn out right. But 90% of the time, we turned out to be right. We were very cautious. Massive credit-card lending, subprime lending, we’ve seen what’s happened.
8. What’s the most tempting investment opportunity you let slip but wish you’d pulled the trigger on?
I can’t say many, because we’ve expanded a great deal. There will be a lot more coming our way, with the coming banking crisis. There’s been some we lost that we got outbid on and outmaneuvered on. We lost deals that we just didn’t get. But we’re pretty happy with what we’ve got.
9. The coming banking crisis?
We’re not out of the woods yet. Over the next 18 months, between 1,000 to 1,200 banks will fail. A lot of those are in Georgia, Florida, California and Nevada, which is really bad. The Obama administration has really not taken any steps to correct this. He’s got the same management team. He kept the same Bush doctrine: [Henry] Paulson, [Ben] Bernanke and [Timothy] Geithner. He just replaced Paulson with Geithner; we got the same inner workings. We got a lot of change as far as jobs and economic growth goes, but not in that area. We’re bouncing along the bottom.
10. You’re a community-banking advocate, but we’re used to hearing about how big business is good, how consolidation creates savings for customers. Are big banks all bad?
I wouldn’t say they’re all bad. Certainly we should not continue to play what I call government blackjack. The government puts up a bet for them, and if they win, they put it in their pocket, and if they lose, you have to put up another bet. If Chrysler failed in the ’80s, we wouldn’t be in that situation. They would have absolutely made some adjustment. GMAC just went back to their government-assisted deal. If you’re gonna have a free-enterprise system, you’ve got to have people be allowed to fail.
