Ex-Bank Commissioner: ‘A Lot of Bad Apples’ Created Crisis

“We’ve seen the worst of it,” said Horn, a former New Jersey bank commissioner and state treasurer, who is also a banking partner in the Newark law firm McCarter & English LLP. “We’d be surprised if other issues arose, although it could happen,” but he thinks the government is prepared to deal with the crisis.

Horn’s talk, billed as “Random Observations About the Current Banking-Credit Crisis," focused on the issues that caused the collapse and the response from the federal government. “There were a lot of bad apples,” he said. “Out-of-touch CEOs, greedy mortage consolidators and greedy investment bankers” all contributed to the problem.

Horn was New Jersey bank commissioner from 1982 to 1984 and state treasurer from 1984 to 1986 under Gov. Thomas Kean. The Federal Home Loan Bank of New York is one of 12 regional institutions that lend to community banks and other member institutions for mortgages and other purposes. The Federal Home Loan Bank of New York serves New York, New Jersey, Puerto Rico and the U.S. Virgin Islands.

Horn said there was plenty of blame to go around, including, to some extent, the accounting profession, because of its fair-value accounting rules. “The profession was trying to add transparcency, but it may have [exacerbated] the downturn.”

In addition, he pointed to “unrealistic, unsustainable speculation” in the real estate market, including low-interest rates and cheap money, which “also fueled the bubble.” He also said that “government policy aimed at increasing home ownership did lead to some abuses.”

“Additionally, some mortgage brokers and some banks issued out-of-control loan terms, including low-documentation and no-documentation packages with high interest rates to compensate for the risk.” And “abusive teaser rate loans that adjusted to above-market interest rates” also exacerbated the problem.

It’s easy to say that borrowers should’ve been more sophosticated, he said, but in many cases, they were encouraged by people who had a stake in making the loans.

New Jersey has weathered the storm better than most, he said; the state is “in great shape. We’ve lost very, very, very few commecial banks.”