Subprime lending excesses have damaged US's standing as global leader in finance

Subprime lending excesses have damaged US's standing as global leader in finance
By Janet Tavakoli
Copyright The Financial Times Limited 2007
Published: March 19 2007 02:00 | Last updated: March 19 2007 02:00
From Ms Janet Tavakoli.

Sir, We financial professionals in the US stood by and silently watched while risky mortgage loans were made to people with bad credit. Most of the consequences will fall on struggling minorities who thought they were being given the opportunity to create financial security, but instead they rode a Trojan horse loan to financial ruin.

We are witnessing the fall of the predators as US mortgage brokers implode. These thinly-capitalised Wall Street-funded operations sent financial snipers to Main Street. They promoted "truthiness" in lending, "truthiness" in prospectus writing, and are now becoming victims of their own excesses and conflicts of interest.

I could appeal to our sense of humility and social responsibility, but that would be naive and ineffective. Instead I will appeal to our sense of self-preservation. We blame Sarbanes-Oxley and onerous regulation for financial services moving abroad, but that is only part of the story.

Financial technology has allowed a small number of people to create a great amount of damage. We financial professionals in the US have squandered our credibility, our legitimacy and even respect for our financial expertise.

Truthiness is a word coined by Comedy Central's Stephen Colbert, meaning, "What you want the facts to be, as opposed to what the facts are. What feels like the right answer as opposed to what reality will support." I have read several prospectuses of deals using subprime collateral, and there was a lot of "truthiness" involved in the disclosure of the implications of predatory lending practices combined with lax underwriting standards.

As our international customers realise this, we are dividing our supporters and uniting our critics, just the opposite of what is required to retain the US's position as the centre and global leader in finance.

Our behaviour in the subprime market reveals aggressive arrogance. We acted as if we, the financially and technologically superior, were leading the forces of good against the empire of evil, the financially and technologically inferior, thus justifying our financial sleight of hand. We adopted a very dangerous posture for leaders in finance.

To lead effectively, we need the support, the trust and the confidence of the global financial community. Wall Street's former standard, "Your word is your bond", did not mean "Your spin is your shield".

If we are unhappy that financial services are fleeing the US, part of the reason may lie in regulation, but part of the reason lies in the fact that, in areas where we are lightly regulated, our words are unworthy.

Janet Tavakoli,
President,
Tavakoli Structured Finance,
Chicago, IL 60601, US