Why Trump’s Commerce Nominee Says Regulation Wouldn’t Have Stopped the Housing Crisis

President-elect Donald Trump has tapped billionaire investor Wilbur Ross to serve as Commerce Secretary.

President-elect Donald Trump has tapped billionaire investor Wilbur Ross to serve as Commerce Secretary. (AP Photo / Peter Foley File)

December 1, 2016

President-elect Donald Trump has picked billionaire investor Wilbur Ross to lead the Commerce Department. If confirmed by Congress, Ross will be responsible for implementing Trump’s promises to toughen U.S. trade policies and promote economic growth.

Ross, who made his fortune by buying distressed businesses and turning them around for profit, is known as “the king of bankruptcy.” He is the chairman and CEO of the private equity firm WL Ross & Co., and has an estimated net worth of $2.5 billion, according to Forbes.

Ross got to know Trump in 1990 when he helped the real-estate mogul avoid financial collapse. As FRONTLINE reported in The Choice 2016, Trump borrowed heavily to help finance the Taj Mahal Casino — he’d spend more than $1 billion on the Taj. The 1,250 room hotel with $14 million worth of chandeliers was meant to be the crown jewel of his growing real estate empire. But the Taj Mahal failed to turn a profit. Trump and his companies owed $3 billion to its lenders.

Ross, who at the time worked at Rothschild & Co., represented bondholders who helped finance the Taj Mahal. He met with Trump and struck a deal to take over part of his failing business.

“We could have foreclosed [on the Trump Taj Mahal], and he would have been gone,” Ross said in an interview with The New York Post earlier this year.

Ross can now be counted among Trump’s inner-circle. On the campaign trail, he served as Trump’s chief economic advisor on trade. He denounced key trade deals like the North American Free Trade Agreement for “draining jobs and wealth from America,” writing in September that Trump would end “the undeclared trade war now being waged on American workers by cheaters like China.”

As is common in the high-stakes world of private equity, some of Ross’ acquisitions made him a fortune, while others brought controversy and second-guessing. He drew praise for buying struggling steel mills owned by companies in Ohio and Pennsylvania and selling them to Mittal Steel, the world’s largest steel and mining company, for a $2.5 billion profit in 2004. The year after the sale, Ross faced criticism when 12 miners died in an explosion just weeks after he invested in Sago Mine in West Virginia.

In 2008, as the global financial crisis loomed, Ross began putting together a list of small, struggling banks that he could invest in. Over the next few years, he poured more than $1.8 million in failing banks, according to Bloomberg Businessweek.

The spending spree would lead some to call Ross a “vulture investor,” but when he sat down with FRONTLINE producer Martin Smith in 2011 for the documentary Money, Power & Wall Street, he described his work differently.

“It should be called a phoenix, because a vulture just eats carrion flesh. Phoenix is the bird that arises again from its ashes,” Ross said. “To me, a vulture is the right word for a liquidator. We’re not a liquidator. We try to rebuild things. So it’s a popular slang term, but I don’t think it’s very accurate for what we do.”

In the wake of the financial crisis, President Barack Obama signed the Dodd-Frank financial overhaul law in an effort to rein in excessive risk-taking in the financial services sector. But with the nomination of Ross — along with the nomination of former Goldman Sachs executive Steven Mnuchin as Treasury Secretary — the incoming Trump administration is signaling that policies more friendly to Wall Street could be on the way.

In his 2011 interview with FRONTLINE, Ross said that the financial crisis could not be blamed on a lack of regulation. The problem, he said, was “an abject failure of supervision.”

“The problem isn’t lack of regulation. Banking, I would argue, is the most heavily regulated industry in the world. Regulations don’t solve things. Supervision solves things,” Ross said, adding that “What supervision requires [is] somebody sensible and thoughtful to come in and say, ‘Is what these people are doing something that’s sensible or is it not?’

“Supervision is a question of applying judgment. You don’t need more regulations to have proper supervision.”

Here is the interview from 2011, which has been edited in parts for clarity and length:

When you were looking at steel companies and putting together deals, there was a transformation going on in finance. How aware of it were you, and what was your take on what you were witnessing?

We were aware of it in the sense not that we were investors, but it was clear this subprime thing was getting a little bit nutsy towards around 2004, 2005.

I gave a talk at one of these securitization conferences in Florida. It’s the first time I’ve never had any questions after, because I advanced my theory that the subprime thing was going to blow up, and here were people who were pretty much buyers or packagers of the paper.

At the end of the speech I asked were there any questions. There was not a single question. They couldn’t wait to get me out of the room.

… All the way back in the ’80s and ’90s there is the advent of a lot of technological, financial engineering. People were able to do things they couldn’t do in the past. Was that on your radar? …

I don’t think financial engineering as such is the problem. I think it’s become a misused term. What it’s really become at the peak of the frenzy was a polite way of describing the packaging of securities that should never have been bought into something that was saleable. So I think it was an abuse of the engineering.

The idea of securitization itself is a perfectly sensible idea, taking a lot of little scraps of paper that don’t have much liquidity individually, making them into a larger instrument that could be traded — to me that makes sense. And there should be, logically, a rate arbitrage.

Where I think it went wrong was in overreliance on black boxes and on little mathematical models, because the problem with models are they inherently assume that tomorrow will look a lot like yesterday. The fact is that at turning points, particularly crisis turning points, what really happens is tomorrow turned out not to look at all like yesterday or like today.

So there’s an inherent flaw in models that they are inherently based on what had been. They don’t really protect you against the so-called black swan events.

How is it that we came to rely so heavily on models?

Again, I don’t think there’s anything necessarily wrong with it. I think that what is wrong with it is thinking the model is the only reality and not allowing for real stress testing and real contingencies.

Rating agencies, for example, never went and did original field research in subprime. If they had walked into a Countrywide loan production office, they would’ve understood that this had much more resemblance to a Wall Street boiler shop than it did to somebody who was trying to figure out whether or not they should make a mortgage loan. …

Why were there no incentives for the rating agencies to do that? How did we get things wrong to allow things to develop as they did?

I think that the models and the model salesmen were much more sophisticated than the people in the rating agencies. … The people putting these things together are much higher-powered people than the people trying to analyze them at the rating agency.

And who are these people that are putting these things together and who are much more sophisticated?

It’s Wall Street people, quants [quantitative analysts].

Some people have put a lot of blame on the compensation and incentives that were driving people to develop ever more sophisticated and complex financial instruments.

A lot of it goes back to the government. Between the Community Redevelopment Act, requiring banks to make what I would call very weak loans, and specific quotas that the Congress imposed on Fannie Mae and Freddie Mac, that created the market demand that really led to the subprime phenomenon.

But that doesn’t explain the spread of this window dressing of balance sheets and whatnot. It doesn’t address how it spread to Europe. Fannie and Freddie don’t apply there. There’s something larger it seems, just to me as an outsider, going on here.

I think the reason it became an export product is people rely, just as they relied too much on models, too much on rating agencies from a capital requirement point of view.

The way that they solved these allegedly AAA pieces of papers was to say this is AAA-certified by a couple of rating agencies, although they wouldn’t like the word certified, and it yields 10 basis points more, it yields 20 basis points more, but it’s the same risk.

So there became a very willing suspension of disbelief inspired by making a little extra spread.

The part I could never understand was this: How can the simple fact of slicing and dicing a package of securities make it worth 102 percent of its original face amount? Because that was what was really happening. …

Was there a time when you sat down with a banker and asked for an explanation of that?

My job is not to grade the bankers or anybody else. My job is to deal with what’s going on. …

Since we did fairly well [to] visualize it coming, we were looking at what should we get ready to be buying when the bad thing occurs? Because that what our job is. Our job is not to be the policemen of the rating agencies. …

… What was it that you were seeing in 2007 that gave you the idea that there was an opportunity here, that there was going to be a collapse?

It was a lot of the models had a series of assumptions, and the most critical assumption with which we disagreed was they were trying to figure out what would be the annual rate of household appreciation. HPA, they were calling it: household price appreciation.

We thought you can’t build a model on the theory that housing prices are always going to go up. That’s not a rational model. And it’s particularly not a rational model when you have now introduced much more leverage, because these are high loan-to-value ratio loans.

You had Fannie and Freddie, while they themselves felt they were only committing 70 percent or 80 percent loan-to-value, they were in fact writing 90 percent and 95 percent and even 100 percent in buying private sector mortgage insurance. But the primary risk was theirs.

They were in effect reinsuring with the PMI companies. We felt that that was clearly inflating the price of houses to have both subprime and normal loans be based on more or less 100 percent loan-to-value, whereas in the old days, people thought about 70 percent, 75 percent loan-to-value. Introducing the leverage had to mean more people were buying more expensive houses.

In March of 2008, before Bear [Stearns] goes down, or is sold to JPMorgan Chase, you said that we’re going to have a lot of bank failures. The bubble was about to burst.

Right. They were.

You said: “I think it’s the medium-sized banks, particularly some of those that got overextended with the subprime and other kinds of mortgage debt. Those are the ones where there’s going to be a problem.” You said that the big banks won’t fail in the sense that I think the Fed and other regulators will make things happen.

I think that’s pretty much what did happen.

How did you know? You saw that they were in a sense too big to fail? …

First of all, we felt they were too big to fail. But second of all, the failure of a medium-size bank that’s going to cost FDIC [Federal Deposit Insurance Corporation] $100 million or $200 million or $500 million is affordable.

The systemic risk of a Bank of America failing, a JPMorgan, someone of that ilk, probably the whole system couldn’t afford. And we just felt that the government would understand that and would do something.

Now at the time, we had no idea about TARP [Troubled Asset Relief Program] or any of these other things that would come, so I had no idea what the form would be. But it seems pretty clear that if we were right, that the subprime thing was going to blow up, the government would draw the line at the really big institutions.

… The taxpayer would be on the line for any speculative trading they did in these big banks. …

Exactly, and that’s what turned out to be the case. What you had was a socialization of private sector errors into eventually public sector debt.

If these are so impossible to manage, why did the banks want to grow to those sizes? …

I think it’s natural for any manager to want to grow his business. The question is at what rate, and in what direction, and in what format?

I don’t think there’s anything inherently wrong with a bank being big. In fact, there are some good arguments about universality of geography that in theory, if you have all your eggs in one little community, and some big employer goes out, that could be your downfall. If you’re spread all around the globe, in that sense you could be mitigating risk.

But you could be a very simple bank and be spread around the world. What you’re talking about is becoming a financial one-stop-shop supermarket.

I’m not a believer in the one-stop-shop supermarket. I think that every part of finance has become infinitely more sophisticated than it was before. I think narrower-focused activities really make more sense, because when you think about it, the Internet has now reduced the value of information practically to zero. So I believe it’s going to ultimately drive the value of expertise to infinity, because everybody has information overload. …

What accounts for banks banks becoming one-stop shops? Citigroup, Bank of America took on all sorts of different kinds of financial businesses.

We were always skeptical that that would work, and I think it has not turned out to work. Running an insurance company is not the same thing as running a retail bank. We don’t think there’s any logic in them being in the same entity.

The whole idea of it was cross-selling. The idea of if I’ve captured a person or a company as a customer in one of my activities, now I should be able to cross-sell them.

That doesn’t really work, and the reason it doesn’t work is the fellow who has the account relationship doesn’t want to run the risk that some other part of the institution will screw it up. So cross-selling has never worked on a very big scale. …

In fact, we find them betting against their clients.


I mean abuses really.

But some of that is hedging too. … Again, I don’t see anything wrong with people trading one direction or another. I think there are issues about fulsomeness of disclosure, but if a trading house wants to be short something and a client wants to buy it, I don’t see anything wrong with that.

I think where it is a little bit wrong is if the client who’s wanting to buy it isn’t aware that the guy on the other side of the trade is shorting it to him. I don’t think that’s a necessary part of having markets. Now the client may want to go ahead and do it anyway, and that’s fine. But I do think there are issues of disclosure.

In April 2008, you put together a shopping list of small, struggling banks. … What are you looking for out there, and what were you seeing? …

There was similar diseases and different diseases. The littler banks were mostly not originating big securitizations, so that wasn’t the nature of their activity. They were more of a buy-and-hold mentality, so they were buying subprime paper created by the big banks, and they were generating some for their own account.

So they were buying loans. They were taking on loans as their assets.

They were doing both. … Remember, banks have been subject to the Community Redevelopment Act, the CRA. They really have kind of quotas, what they’re supposed to do by way of what I would call very weak loans.

And many of them felt well, these were the subprime loan. I’ve got some kind of collateral. Maybe it’s a little safer than some of the other kinds of loans that I need to make for community redevelopment purposes.

In both the cases, the government mandates what they were supposed to do from a sociological point of view, a societal point of view. Frankly, we’re in total contradiction to fundamental soundness of the institutions. And as I said, they did the same thing with Fannie and Freddie. They gave them quotas.

But a bank didn’t have to take these.

They have to take some sort of loan of that type. … And what gave them some comfort was if they could simultaneously fulfill the governmental mandate and have something that at least somebody thought was a AAA security, well that’s pretty good. So they fell into the trap.

A trap set by the government?

Inadvertently. The government’s purpose, obviously, wasn’t to set a trap. But I think it’s something that we’re seeing more and more, and especially nowadays with the consumer protection agency. They just put out an 800-page handbook, alerting the banks that are $15 billion and more what to expect when they come in and audit the bank.

Many of the things that they’re going to be wanting the banks to do are quite adverse to the bank’s profitability, maybe even to the soundness of the bank. So here you have the OCC [Office of the Comptroller of the Currency], FDIC on one side of things, and now you have the consumer protection agency potentially on the other side. …

Some would argue that banks are so essential to our lives that they are akin to utilities and therefore should be more heavily regulated than they are.

The problem isn’t lack of regulation. Banking, I would argue, is the most heavily regulated industry in the world.

Regulations don’t solve things. Supervision solves things. If we could figure out that the subprime thing was a train wreck that was coming, where were the regulators? …

Everybody points the finger at the banks. That’s great. They made their mistakes. But the job of the regulator is supposed to be safety and soundness.

The bank we bought in Florida, BankUnited, made a specialty out of the most toxic product that you can imagine. This was a specialty of theirs pre- our buying it and pre- the failure. What was the product? Adjustable rate mortgages. Subprime mortgages, generally pretty close to 100 percent loan-to-value with teaser rates in the beginning and then sharp ramp.

And who were their borrowers? Non-resident Latin Americans. Now I have nothing against Latin Americans, but to give a non-resident 100 percent loan-to-value loan when you know he’s a bad credit and he’s not even someone in your country.

That’s a no-money-down loan.

Yeah, no-money-down loan to a foreigner. It doesn’t make a lot of sense to me, and yet they put billions and billions of dollars of that on their portfolio over a period of years. Nobody stopped them. That kind of thing is an abject failure of supervision. …

… What are some of the other stories that you found out there as you combed through the rubble of the financial crisis?

… The big banks were doing these enormous real estate transactions. The little banks … a lot of times they would participate in syndicated loans from the big banks, often just taking it more or less on faith from the big banks. And as far as we could tell, there tended to be an adverse selection of what was shown to the really little banks.

You’d see $900 million syndication, and some little bank in Georgia would be in for $7 million of it. If this loan had been any good to begin with, the big banks would’ve syndicated it all among themselves. The little tiny banks had no business being in trivial participation relative to the size of the big loan. …

… That’s the big banks treating the little banks like suckers.

What happens is the big bank marketing desk naturally tries to sell it to other big banks first, because that’s the quickest way to make a sale. If they can’t get it sold to them, then it looked to me like they would keep going smaller and smaller to try to get it sold.

Because the big banks don’t really want to keep paper on their books any more than they need to, they’ll take it in, underwrite it in effect, but their real plan is to redistribute it and make a fee for doing it. That’s what banking has really become.

But in this case, they’re victimizing the little bank.

You can call it victimizing.

They’re the greater fool in a sense.

I think they turned out to be the greater fool. Not all the loans were bad, but the little banks should’ve had the sense to understand if you can’t fill a big loan from big banks, why are you coming to me in some little town in Georgia, offer me a few million dollar piece? Should’ve been a sanity check that said there’s only one reason I can think of — that’s that the bigger banks didn’t want it.

But if some guy with a nice suit comes down from Wall Street to sell you something, you’re pretty impressed, I guess.

It depends on your point of view. I wouldn’t have been so impressed. I would be thinking why is he coming to me for two pennies? …

Let’s stay with tales from the main street a little bit more.

The other thing that the little banks were doing — they more or less had to do — was finance the local shopping center developer, finance the little local developer of a small apartment house, finance the local office park, that kind of thing.

That’s very much the lifeblood of the economy.

That’s what they should be doing. What happened, though, was they began emulating the bigger banks, because the big people were starting to syndicate those loans into collateralized mortgage obligations. So suddenly the loan-to-value ratios were going up on those.

But the little banks didn’t have much alternative, because in many territories, that’s the industry. Take much of Florida. What is industry? What is business? It’s largely real estate oriented. So when the syndicators of securitizations were paying higher loans-to-value, lower yields and stuff than the little banks, the little banks kept competing.

In that sense, the securitizations hurt them very directly because it affected the normal mainstream business that they would be doing in the normal course.

So those states that have real estate at the core of their economy, such as Southern California, Nevada, Arizona, Michigan even, and Florida, all were hit tremendously hard.

All were hit, but even ones where real estate isn’t the main core, all of them have seashore communities or vacation communities where that’s true. Even short of that, there’s always a local developer, local something. Real estate is an important mainstay of a lot of the little banking institutions. …

To put this into really simple language: The little banks got sold a bill of goods by the big boys at the big banks, and the regulators weren’t watching out for them.

Interestingly, they weren’t watching out for either side. They didn’t watch out for what the big banks were doing with their own balance sheet, and they surely didn’t watch out for what was happening to the balance sheets of the little banks. …

So you pick through this pile of failed banks, and what do you look for?

What we were mainly looking for were banks with a service territory that seemed appealing, where there was the potential, either because the bank was already pretty large — for example, BankUnited was the largest independent bank in Florida — or as in the case of the bank we’re invested in in Michigan, where there was a clear roll up opportunity of other, smaller troubled institutions.

The real key was sticky deposits. We think over the long term, the real key to value of a bank is does it have true deposits from true long-term customers? People who actually know the bank, live in the neighborhood, work there, maybe have a mortgage there, credit card. …

A stable core.

That to us is the key to a bank. And if you have that combined with the territory where there’s likely to be any kind of growth, or at least economic recovery, then we think you have interesting set of ingredients.

How many community and regional banks are there in the country?

… There are about 7,000-and-some-odd banks now, roughly half what there were before the first S&L crisis back in the ’90s. Of those, 10 percent have 90 percent of the deposits. So 90 percent of them only have 10 percent of the deposits.

So you’ve got over 6,000 little tiny banks. But I’m just saying, little tiny is under $1 billion deposits. Very few of those are going to be able to survive the regulatory burdens that are being put on them.

What will that mean for communities?

What it’s going to mean is that you’re going to have the demise of little banks. They’re going to get gobbled up either by regional banks, such as the ones we’ve been doing, less likely by the big banks.

They’re going to get gobbled up or they’ll just close their doors, because a little bank can’t afford the amount of staffing that’s going to be required just to deal with these new layers of compliance.

I think that’s a serious problem, because the real job creation in this country comes from small and medium-sized enterprises. Bank of America and JPMorgan, however much they try, are never going to be able to be organized to make a $500,000 loan to some little operation. It’s just not feasible.

To a mechanic who wants to run a shop.

It’s just not going to happen. And particularly as we become more and more of a service economy, services tend to be very locally provided. So I think at the very same time, there’s this [greater] need for funding for small and medium enterprises, we’re going to have fewer and fewer places where it’s logical to provide that. …

Somebody listening to this is going to say: Wait a minute. I thought it was the lack of regulation and the failure of regulators that got us into this mess, and now you’re saying that we’re going to be in a bigger mess because we have too much regulation.

There’s a big difference between regulation and supervision. None of the new regulations in my opinion, other than separating the proprietary trading and kinda trying to ring-fence that, … other than that, there’s not one of these new things that would have prevented any of the failures. So most of it is nothing to do with the cause of the failure.

But what about preventing a future failure?

I don’t think it will do that either, because there was nothing in the old rules that would’ve prevented the regulators from saying to BankUnited: You shouldn’t be making such a big concentration of those loans. Or the bank in Georgia making all these hotel loans. They didn’t need a new regulation to do that.

I think that’s an unfortunate thing that the public does not understand. Regulation and supervision are not the same things. What supervision requires [is] somebody sensible and thoughtful to come in and say, “Is what these people are doing something that’s sensible or is it not?”

That’s different from saying, “Okay, this is a category two loan, do you have the proper reserve against it?” Supervision is a question of applying judgment. You don’t need more regulations to have proper supervision.

What you’re describing sounds to me like an art form, supervision. And what we get is we try to make a science out of fixing the banks.

But it’s not a science. It’s common sense.

But do we have the artists? Do we have the people that can really do the supervision you’re talking about?

I think so. I just think it’s a question of what is our mind-set? There was too liberal a mind-set before. The idea was sort of anything goes. …

Now there’s too much of a punitive attitude, where anything the bank does is bad. Like, for example, Bank of America. When the Durbin Amendment took away a lot of their credit card fees, they started imposing some new charges, and the government went berserk. President Obama had a press conference attacking them for doing it.

What was really going on? It was a question of you had just now transferred, the government, part of my profitability away. Now I’m trying to replace it. What would you expect?

People are angry at the banks. People feel like the banks got us into this trouble, and you say it’s the regulators. …

It’s not just the regulators, and it’s not just the banks. There’s an underlying sociological phenomenon which is what really got us to think there would be a crisis, and that’s this: Middle-class America has been totally left behind for the last 15 or so years. Median income, adjusted for inflation, has gone nowhere.

But everybody wants to live a little bit better each year than they did before, and the solution that American families found to that dilemma was to borrow more. Along about ’04 and ’05, which is when the securitization of mortgages really took off, there would’ve otherwise been a big problem with other forms of credit.

What happened was, what would’ve been a medium-sized problem then got rolled into a gigantic problem because of the securitizations, the pop up in real estate values, and the change in loan-to-value.

People didn’t run up credit card debt, they just used their houses as ATMs.

Yeah, and there were literally dozens and dozens of instances in each of the banks we bought where what was the reason the guy took out a mortgage? He wanted to buy a new car. Or he wanted to do something else, buy a boat, buy a vacation home, take a trip. Those are strange reasons for putting a mortgage on your house, but the people didn’t feel they had an alternative.

And they were marketed that.

They were marketed that way, but they were receptive because it’s natural to want to live a little better each year than you did the year before.

What got us going on the subprime thing was we said, wait a minute. House prices can’t go up forever. They’ve already been spiking way above the long-term trend.

Second, the family indebtedness is getting out of proportion. Then with all these teaser rates, that was an accident waiting to happen. That’s again something where government could’ve stepped in.

How profitable has this been for you?

It’s a work in progress so far. The one that’s gone public has been BankUnited, and that’s done very well, as I think you’re aware.

Tell us how much money you’ve made on that?

The group put in $900 million. It went public at a little bit under three times that value. We all sold off about 35 percent of our holdings, but we still have 65 percent left. So even that one is not a completed process.

The other banks are still at various stages of evolution, but we’re happy with them because we have none that are below budget, and by and large they’re doing very well compared with the year before. So we think we’re on the right track.

Is it hard to find a good deal out there?

It’s always hard. …

You’re called a vulture investor.

It should be called a phoenix, because a vulture just eats carrion flesh. Phoenix is the bird that arises again from its ashes. To me, a vulture is the right word for a liquidator. We’re not a liquidator. We try to rebuild things. So it’s a popular slang term, but I don’t think it’s very accurate for what we do.

So you started looking at Europe; you started seeing opportunity there.

We looked at Europe because the logical corollary of the overextension here had been Europe. …

European banks were also much more highly leveraged in terms of assets to equity even before the crisis than the American banks and have a fundamental difference in their deposits.

Most American banks have more deposits than loans. Most European banks have more loans than deposits. That means they’re very dependent on what they euphemistically call the wholesale funding market. To me, that’s the hot money market.

A lot of the problems you’re seeing with Europe now were that American money market funds, who formerly were putting money into these banks short term, because they’d make 20 basis points more or 30 basis points more, now are withdrawing it. …

Everybody looks at Europe right now and sees disaster. You look at it and see opportunity.

I just don’t think it’s the end of the world, and if it’s truly the end of the world, I’ve got bigger things to worry about than just Europe. … To me, the idea of Europe truly blowing up is as flawed as the idea that Bank of America, JPMorgan, and Citicorp would be allowed to go down.

But who’s going to bail them?

I think what’s going to happen — and nobody else so far seems to agree — I think it’ll take a combination of the ECB, the European Central Bank, the EU [European Union] itself, the countries, the EFSF [European Financial Stability Facility], that’s the stabilization fund, and the IMF [International Monetary Fund].

But they have meeting after meeting after meeting, summit after summit.

But they’re moving in the right direction, because what is needed are two things. One is a big check. That’s part of why I think IMF would be needed. But the other thing that’s needed is a policeman. Right now, they don’t have a mechanism for enforcing fiscal austerity on anybody. IMF has a long history of serving as the policeman.

So what I think is ultimately going to happen is IMF will come into it in some way, shape, or form, and that probably will mean that China and some of the other emerging countries will end up with bigger shares in the IMF.

That’s something they’ve been wanting to do. They have the ability to write a big check, and so I think you’re going to start to see a real change in global financial structure as the result of this, not just of the European structure. …

You can’t take away monetary policy from the individual countries, which they have, and yet leave fiscal policy in the hands of the local governments. Think what a mess the U.S. would be if every state could run a deficit as big as it felt like. That’s the equivalent of what’s the European structure right now. It’s illogical. Not going to work.

How much of what happened in Europe with sovereign debt can be laid to bankers here in the U.S.?

They might’ve prolonged the period before which you had the crisis. That’s the most that it could’ve done. But take Greece. This is something like Greece’s fifth default in the last 100 years, so they don’t need Goldman Sachs to teach them how to operate in a profligate manner.

But it didn’t help that Goldman got in there in the last 10 years and helped them do a little bit more window dressing.

I’m not intimate enough with the facts to know who did what, but I don’t think it’s a fundamental problem.

The fundamental problem was Europe was setting itself up to be the leisure society, and many of the European leaders were trumpeting that theory.

They are the ones who created the pension fund mess. They are the ones who created the early retirement. They are the ones who created the terrible labor laws that make it almost impossible to fire people, which means you can’t really hire people. It’s based on the local government’s problems and on the original flaw in Europe, which was not taking control both of monetary policy and fiscal.

… Right now, we have people camping out all over the country proclaiming themselves the 99 percent. You’re part of the 1 percent, clearly. Who should we be helping here?

I think the 99 percent need help, and I’ll tell you what my biggest worry is now. … Our educational system is failing the middle class and lower middle class and below people. The only way for people to close gaps and to, more importantly, bring the lower people up, is education. …

We’re moving into a world that’s more and more complicated, more and more technologically oriented. Our kids are falling farther and farther behind. That’s the real tragedy in what’s going on in America. …

Are you sympathetic with Occupy Wall Street?

I’m very sympathetic with the causes of it. I think it’s extreme hyperbole to blame Wall Street for all the ills of the world, but I’m sympathetic with what caused it, which is they are in a warp that they can’t really get out of very effectively. But I lay that at the feet of the educational system. …

The Occupy Wall Street movement is a scream for fairness. What they see is a bonus system, high levels of compensation in the financial industry, and a financial collapse, and the epicenter of that was Wall Street.

I understand that they should be angry with parts of Wall Street, but I think the politicians have done a very clever job deflecting the share of the blame that should belong to them over to be just Wall Street. That’s the part that I object to.

Also, if you look at the signs the Occupy Wall Street people are carrying, a lot of them say, “I need a job.” That’s what they really want, and that’s what they deserve. But if you’re not qualified to get a job because your school system has failed you, that’s not a Wall Street creature. Wall Street didn’t wreck the school system. …

What was your intention when you bought BankUnited? What were you looking at?

What we felt was important was several things. One, people were afraid Florida would become the lost continent of Atlantis. We didn’t think so. We’d thought it was a question of how long it would take to turn it around, not whether or not it couldn’t.

Second, we felt that the new management would do a very good job with it, and they did. It ended up making more earnings sooner than we had thought, went public a lot sooner than we had thought. So everybody won from that point of view. …

There are a lot of other funds that have been pulled together to invest in failing banks. Some of these are looking to turn banks around pretty quickly.

We think that’s a very hard thing to do. A bank is by its nature a very broadly based, community based activity. It’s a lot of little decisions that have to be made within the institution to get it fixed, so we don’t believe we can do it very quickly, unless you’re very lucky.

How long do you intend to hold onto a bank when you buy?

We had originally thought it would be at least three- to five-year holding period.

This is BankUnited or in general?

Any of the banks.

How many banks do you currently have money in?

When I say “we have,” we have investments in. We don’t actually control any of the banks.

We’re in BankUnited. We’re in Sun Bancorp, the second biggest bank in New Jersey. We’re in Talmer, which is a very big Midwestern bank. We’re in Cascade in the Pacific Northwest, and we’re awaiting regulatory approval for Amalgamated, a union controlled bank.

That’s the Occupy Wall Street bank.

It turns out it happens to be the Occupy Wall Street bank.

So you’re a banker to Occupy Wall Street.

We are, and while that’s not a movement that I particularly identify with, given the nature of the bank — that it’s meant to be a progressive bank, it’s a sort of underdog bank if you will — I think it’s perfectly appropriate that the management not only is the bank for Occupy Wall Street, the CEO of the bank marched with Occupy Wall Street. …

Income inequality is one of the focus points of Occupy Wall Street. But it’s also fraud, malfeasance and morality on the part of people who were in positions of responsibility.

I think on the fraud part and the immorality part, they have 100 percent good case, and I think those people really should be prosecuted. Not just civil penalties, but really criminal.

Why aren’t we seeing anybody go to jail?

I don’t understand it to tell you the truth. …

… One of the criticisms of the bankers is that they’re tone deaf to the suffering of millions of Americans.

That may be true of some bankers. It’s not true of all bankers, and it’s certainly not true in our case. …

Banking seems enormously complex. You’ve been in the steel business, you’ve been in the coal business, you’ve done a lot of bankruptcy deals. Do you find banking more difficult as an industry?

It’s different in that it is incredibly detailed in its regulation, much more than any other industry we’ve ever been in.

What I was talking about with the supervision of it was, for example, there were these special-purpose entities that banks would set up to keep these things off their books. The regulators knew they were doing it. They were not done covertly. There was a loophole in the regulation. People did it.

And there was not one regulator who said, “Wait a minute. This is going around the regulation. Let’s pass a rule to stop it.” Later when the whole thing blew up, they started to scream and yell. That was one example of poor implementation. You didn’t need new regulations so much as you did implementation. …

But it was a great deal for the banks. They freed up more capital and could come back and do more business.

Well, it turned out not to be a great deal because that’s where a lot of the losses came from. …

To me, the two most dreadful words in the English language are “financial engineering.” Financial engineering is usually some guy creating a transaction that never should have been done but dressing it up so that it can get done.

Either to get around regulation or to fool some client.

Or some combination of the two.

I think banks should be what they were when I was a kid growing up. Simple things where people came, trusted them with their money. They made loans to people they knew, and that was more or less the end of their activity. Provided trust services. Straightforward, simple, uncomplicated things. …

… How much money do you have invested in banks?

At this point, it’s probably about $2 billion or so. …

… As you describe it yourself, you’re a guy who likes to run into burning buildings. Why do you do this? You’re past normal retirement age. You’ve got resources. You’ve got money.

There are several things. It’s one of the few activities where you can do well and do good at the same time. Take steel. We made a lot of money in the steel industry.

And you own some 20 percent of the U.S. steel industry.

More at one point. But if you ask Leo Gerard, the head of the steelworkers union, he’s not the slightest bit upset that we made money. Why? Because he knows we saved 100,000 jobs, because the steel industry was going to go down the drain, except that steel workers and we developed a whole new frame of reference for labor and management relations. I feel really good about that. …

This is where it’s tricky for people, because there is pain when you come in and turn a company around. Some people lose jobs. In the case of banks, some people are proposed off. … Some people lose their businesses.

First of all, our institutions percentage-wise have been far more active and more successful in doing loan modifications than other banks and other melded services comparable. Because we think that’s the right thing to do, both from the lender point of view and from the homeowner.

In other words, you go in and you write down the value of the loan and get the person paying and get them out from underneath.

… Sometimes it just needs interest rate reduction. Sometimes it just needs extending the mortgage duration. Sometimes it needs to roll in this payment.

But there are cases where these badly packaged mortgages, the guy never should have been in. The home is probably three times more expensive than the person could ever afford. There’s no point in modifying those loans. It never should have come, and especially if the guy is also out of work. …

Why not bail him out rather than the banks?

The government is trying its best to bail him out, but if you don’t have healthy banks, nobody will have loans. You have to have a banking system to have an economy function. So I don’t think the two are inconsistent.

Remember the shareholders of the old banks, the ones that FDIC took over, some of which we turned around? They all got wiped out, and in many cases, the subordinated debt holders got wiped out.

So it isn’t that there was no penalty to the owners of the bank. They suffered mightily. Mostly lost all of their investments. The individual bankers, many of them lost their jobs too. So it isn’t that nobody in the banking world suffered.

Why do you think it’s so different for people to see it that way?

One, there’s a natural tension between wealthy people and less wealthy people. Everybody would like to be more wealthy than they are, including wealthy people. …

But frankly, I blame the administration for stirring up that. I think they’re deliberately trying to run against things. Run against wealthy people. Run against Wall Street. Run against the economies. …

So Obama is looking for someone to blame, this is what you mean?

Yeah, it was the traditional thing when you have a difficult problem to manage is find an outside enemy and blame the outside enemy. I think that’s a lot of what they’re doing. …

… The rule of having to hold the bank that you take over from the FDIC for three years, is that a reasonable regulation in your view? Or is that a constraint on your ability to turn a bank around and sell it?

Since we generally figure it’ll be three to five years to turn them around, it doesn’t particularly bother me.

What about other players?

It may bother other players, but people who have a very short-term mentality probably shouldn’t own a bank anyway.

There are those out there that we come across that seem to be into getting these banks and flipping them.

Everybody has to use the investment style that they feel works for them. I don’t think you can turn around a bank of any size in less than a couple year time period.

And sleep at night.

Well, if you’re going to do it right.

But are there people out there that are continuing a kind of pattern of predatory capitalism and buying and selling banks quickly?

I don’t know. I haven’t really researched it, but I know from our point of view, that rule was not bothersome.

What is bothersome is requiring private equity banks to have higher capital ratios than banks backed by other individuals. That I don’t see any real justification for. …

A start-up bank is guaranteed to lose money in the early years. You just can’t throw deposits and loans quickly enough to see them be profitable from day one. So I really feel it’s part of the general mode in Washington against private equity, and I think that’s a mistake.

Because if we and others who came in early didn’t bail out those banks, the banking crisis would have gotten much worse. It was only later that the strategics, the commercial banks, developed the courage to commit.

So what you’re saying is banks need you.

I believe they needed us in the crisis. …


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