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Bill George

Harvard Business School Professor, former Medtronic CEO

Let’s Stop Vilifying the Bankers

My post today originally appeared in the NY Times Deal Book yesterday, and I’ve already received a great deal of feedback.  I’ve been pleased in that regard, as I had hoped this nuanced perspective would get people thinking about the issues.  I’m currently reviewing those comments, and will be putting a post together tomorrow with some thoughts to continue the conversation.

Let’s Stop Vilifying the Bankers

Throughout the country, the anger at bankers is palpable. This isn’t a narrow populist phenomenon; rather, it reflects widespread mistrust in the nation’s financial institutions. A “Bank Anger” tour has percolated across the blogosphere. “I Hate Banks” yields 70,000 Google Index results.

The vitriol is not restricted to the blogosphere. Mainstream commentators have roundly condemned financial institutions. Keith Olbermann of MSNBC rants: “Break up the banks. Regulate the financial industries to within an inch of their existences.”

Members of Congress are also piling on. Representative Barney Frank, Democrat of Massachusetts, says big banks are “discredited” on Capitol Hill. Senator Christopher J. Dodd, Democrat of Connecticut, has moved to impose limits on bonuses without limiting salaries. In response, the boards of the American International Group and Wells Fargo just increased their chief executives’ salaries to record levels.

The frustration of Americans is understandable. It is natural for citizens struggling to find jobs, avoid excess interest charges on unpaid credit card bills, and live off their shrinking 401(k)s to ventilate anger against bankers and their compensation excesses.

There can be little doubt that the excessive risk-taking by bankers who aggressively hawked subprime mortgages and credit cards to earn high fees imposed enormous hardships on the American public. The worst offenders — Citigroup, Washington Mutual and Wachovia — irresponsibly over-leveraged their balance sheets and forced the United States government to step in to avoid complete collapse of the system. These banks and investment bank counterparts like Merrill Lynch, Lehman Brothers and Bear Stearns paid their price.

Unfortunately, the sins of the wrongdoers created a public relations problem for the remaining banks — at precisely the wrong time.

Leading bankers like Jamie Dimon of JPMorgan Chase and Lloyd C. Blankfein of Goldman Sachs (where I serve on the board) are calling for an industry self-assessment. Mr. Blankfein’s well-received speech to the Council of Institutional Investors in March was a humble and honest appraisal of the industry’s shortcomings:

“We held ourselves up as the experts, and the loss of public confidence from failing to live up to the expectations that we created will take years to rebuild. Worse, compensation decisions at banks that destroyed shareholder value look self-serving and greedy.”

Many pundits are advocating an increased role for government in regulating banking behavior and managing compensation. Past attempts along these lines have proven counterproductive and have produced unintended consequences. Yet in response to the public anger, such proposals are inevitable.

The danger is that we will punish healthy banks for the sins of failed banks. Most bankers have behaved responsibly throughout the crisis. This is the wrong time to tie their hands. Instead, we need these banks to get back to their chartered roles: to provide financial resources to consumers and businesses — large and small, new and old.

Commercial and investment banks are the backbone of American commerce. They provide the capital for business expansion and new company formation. In the past 20 years, 70 percent of all jobs have been created by start-up companies and small businesses. But the lack of available financing in the past year has severely crimped the ability of small businesses to grow their business and to add jobs. New company start-ups are finding it extremely difficult to get any financing.

Continuing to vilify all bankers will create a vicious cycle: It will fan the flames leading to excessive regulations. This will cause banks to pull back and lend less, thereby crimping expansion by small business and shutting down start-ups. This will intensify the jobs crisis and throw the United States into a double-dip recession.

But the banks can’t just retreat or lobby to stave off all regulation. Instead, they need to go on the offensive by advocating responsible regulations that reward sound practices and constrain and punish the egregious ones. They need to recognize the desperate needs of small businesses and start-ups and provide the funds they require. And they need to show marked restraint in cash compensation, rewarding only long-term performance with long-term rewards.

Let’s stop vilifying the bankers. The current public sentiment towards banks misses the forest for the trees. Anger is rarely cathartic. In this recession, it has become counterproductive.

The economic crisis was set off by an unbalanced approach to risk management, but the “antibank” rhetoric is an unbalanced reaction to the vital role banks must play in rebuilding trust and fueling economic growth. A blanket indictment of the entire system defeats the essential role that well-functioning banks must play in rebuilding the vitality of the American economy.