When the House Committee on Un-American Activities began its investigations after WWII looking for communists in the US government, it might have had a semi-legitimate goal. That objective did not last long.  The committee’s only purpose, shortly after the proceedings began, was to put Hollywood actors and writers out of work.

It would be a catastrophe if the House Financial Services Committee goes down a similar path, but no one should be surprised if it turns out that way.
Wall St.’s role in the destruction of the credit markets has merited every bit of investigation Congress could muster. This was also true for the perversion of the roles of Fannie Mae (FNM) and Freddie Mac (FRE). The committee, in addition, has had a substantial role in creating and promoting the mighty stimulus package, which will begin to pour money into the economy next month.

One of the problems with the significant interest that Congress and the Administration have taken in banks is that, like almost everything else in government, this preoccupation can go too far. Telling CEOs that they cannot make $50 million a year is one thing. Telling banks that they cannot pay their most important profit producers large bonuses is another. Demanding that financial firms to give up private aircraft moves into the area where the government is wasting its own time and resources which are already stretched too thin.

One of the reasons that the Treasury does not operate efficiently now is a lack of senior staff. Asking it to take over the minutiae of watching over day-to-day activities of American banks destroys its opportunity to deal with larger  problems which could still bring the banking system down.  Until the government decides differently, Citigroup and Bank of America (BAC) and other large financial firms are private companies owned by shareholders who are represented, perhaps badly, by boards of directors. Those boards follow rules from the SEC.  Having Congress or the executive branch usurp those responsibilities creates government control of banks without the advantages that it would give taxpayers. That ownership would, at least, allow Americans a chance of to get back the money that they are putting into the banking system through what will be higher taxes.

Congress will continue its witch hunt.  It will not find much more than it has. Senior management at financial companies acted in their self-interest.  Their due diligence that determined what they put onto their balance sheets barely existed. The effect of the investigations is Newton’s first law brought into the business community. Bankers will insist on being greedy and irresponsible until they are forced to change the course of that behavior by the government.
The banking system in the US has essentially been removed from the free enterprise system. It is going being told that it must lend more and that, in some cases,  the government will underwrite that lending.  The exposure of the considerable hubris that had become a centerpiece of the financial industry is now nearly complete.

Congress now has to decide whether it wants to spend its time bringing every last well-paid Wall St. trader before the House Financial Services Committee or if  some of the details of managing banks can be left to chastened bankers

Douglas A. McIntyre

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