Bankers Might Need 50 Years to Regain Credibility: Joe Mysak

Commentary by Joe Mysak

Oct. 7 (Bloomberg) -- Discredited and vilified.

Those are the words that can begin to describe the people most Americans would term ``bankers.'' Rarely has a broadly defined category of occupation sunk so far, so fast.

Not too long ago, careers in finance beckoned the ambitious and avaricious. In New York, in particular, the only lives worth living seemed to be led by those who worked on Wall Street and whose compensation was determined in widely reported, year-end, life-altering bonuses.

That ended, I suspect, shortly after noon on Friday, Oct. 3, when the U.S. House of Representatives passed the $700 billion financial-market rescue plan designed to re-open the nation's credit markets.

How long will it take to rehabilitate the profession? Is it three years? Five years? A decade? Fifty years?

The last few weeks have gone by in a blur. And yet it was just the sitzkrieg, the phony war. The real bloodshed will occur in the weeks and months ahead. Nobody knows what the real outcome of this disaster will be, although it's very likely that the financial industry will be crushed.

Now the scene shifts to Washington.

This isn't a temporary shift, either, as the U.S. Treasury attempts to pick up the pieces of the financial system. No, I have a feeling that no matter who wins the presidency, we are going to see newly empowered regulators go on the rampage. The taxpayers will demand nothing less.

Bully-Boys

The lords of finance are finished, at least for a while. No longer will these notoriously thin-skinned bully-boys visit their wrath upon those who dared to criticize their doings.

Out: Regulators who can be intimidated.

In: U.S. attorneys scrapping for a fight.

Wall Street banks and securities firms maintain lobbyists and associations in Washington to present their case to those who work on Capitol Hill. The almost $1 trillion rescue plan renders these folk nullities. Can they speak with any authority, even any credibility?

I'm not saying this is necessarily a good thing. Yet this seems to be the consequence of almost bankrupting the country. Finance surrendered.

Mutiny in Congress and the gyrations of the Dow Jones Industrial Average have overshadowed the municipal-bond market. That is, until Governor Arnold Schwarzenegger of California sent an e-mail to Treasury Secretary Henry Paulson on Oct. 2, saying the state might have to turn to the federal government for a little loan of $7 billion.

Deserved Scrutiny

The municipal-bond market had almost shut down by the time the governor sent his e-mail, dozens of issuers shelving their borrowing plans upon the advice of their underwriters.

For several years the government has been looking at the municipal market, in particular at how states and municipalities invested the proceeds they raised from bond issues. I hope the big bailout doesn't distract them because if a market richly deserved some scrutiny, it is this one.

I almost don't know where to begin, but how about with Moody's Investors Service lowering the credit rating on the Massachusetts Turnpike Authority Metropolitan Highway System?

On Oct. 2, the rating company put out a press release stating that the ``key reasons for the downgrade are narrowing debt service coverage ratios due to escalating debt service and increased interest costs associated with exercised swaptions,'' and you can stop right there.

Risky Nature

Swaptions! Interest-rate swaps and derivatives! From coast to coast, these things are eating issuers alive. I'm not sure I'm angrier at the bankers who so aggressively pitched the things, the politicians who bought into them because they could get campaign contributions from the brokers who set them up, or the bond-rating companies that rarely delved into the risky nature of these products in their regular analyses.

The full effect of the financial crisis is still murky. We do know that state and local tax revenue is declining, and that the business environment is turning sour. A bumper crop of municipal-bond defaults seems likely.

How fitting it is that they will be coming even as the rating companies cave in to issuers' insistence that they all deserve upgrades to AAA.

As for the bankers, they admitted the ignorance of their actions by going to Washington and asking for a bailout. They didn't understand some of these layers upon layers of securities they had created. They didn't surrender, so much as abdicate. It will be some time before anyone listens to their like again.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net