For a while now I’ve wanted to start a Compliance Week book club. We get a small but steady stream of books here at CW Central Command examining corporate governance from various angles—some of them quite good, others clearly hitching a brief ride on the governance bandwagon until the fad that propels their pages slips away. Either way, books trying to tackle compliance and governance are a legitimate niche in the best practices and guidance out there, and deserve attention.
So today we’re going to start paying some of that attention. First up is Too Big to Save? by Robert Pozen. (Wiley, November 2009, 480 pps. $29.95)
Pozen attempts nothing less than to diagnose the problems that caused the financial crisis—like, all of them—and propose solutions. Normally I would be skeptical that anyone could do that well, but Pozen has the credentials to try. He’s currently chairman of MFS Investment Management, a $150 billion asset-management firm. He served as economic development secretary for Massachusetts under former Gov. Mitt Romney, and as chairman of the Securities and Exchange Commission’s advisory committee to improve financial reporting in 2007. I also had the opportunity to interview Pozen when he was a keynote speaker at Compliance Week’s annual conference in 2008, and can vouch that whether you agree with him or not, he has a fiercely insightful intellect and practical wisdom worth considering.
That said, this book is not for the timid or unalert reader. The causes of the financial crisis are complex stuff, and Pozen doesn’t shy away from responding with complex prose. He never overwhelms with jargon or bores with irrelevant detail, but the chapters do often feel like passages from the reading comprehension exam on the SAT. They are mentally demanding, but also lucid, straightforward and in plain language. (The chapters also have key points or sentences bold-faced, and a summary at the end recapping main themes. Really, if Pozen had just used high-gloss paper and tripled the price, he could have called it a textbook.) Keep your wits about you and be prepared to re-read complicated points as necessary, and you’ll do just fine.
The first half of the book dissects how the financial crisis occurred, reviewing each contributing weakness in our financial system in turn and then offering ideas on how to fix it. Pozen names all the usual suspects—corrupt mortgage originators, lax regulators, myopic legislators in Congress, shameless credit-rating agencies—but also gives a rich history of how those suspect elements came to be. For example, by everyone knows that the federal government pushed the idea of home ownership to reckless extremes, but how many know that Department of Agriculture tax credits were part of that push? And everyone knows that excessive bank lending introduced terrible risks to our financial system, but how many people know where banks’ capital reserve requirements come from, or why those reserve rules weren’t stronger?
Those questions are the sort Pozen tries to answer (plus many more). He goes beyond simply identifying the culprits that caused our financial crisis, to paint a picture of the policy climate that let those culprits exist and thrive. And remember, that policy climate is what we need to change if we don’t want the world to go through all this again.
Another large portion of the book gives that same analysis to the 2008 bailout of our financial system, and Pozen pulls no punches. He catalogs the long list of programs the Treasury Department and Federal Reserve have concocted to keep the financial system alive, and ultimately dismisses most as flawed efforts that expose the U.S. taxpayer to risks he doesn’t know about and doesn’t deserve. That is not to say Pozen toes the pro-consumer party line; at best, he is a non-partisan critic whose ideas would incense both ends of the political spectrum, which probably means he’s doing something right.
He opposes restoration of the Glass-Steagall Act or anything like it, as well as higher limits on insurance for bank deposits. But he does support more regulation of, say, money market funds (indeed, I read his chapter calling for greater regulation on the exact day the SEC adopted the changes he had advocated), and wants banks to carry contingent reserves to cover surprise loan losses—an idea that would bring scowls from accounting purists since it would allow banks to manage earnings. And while loan securitization has gained a bad name in the last two years, he accepts the bald fact that securitization is vital to our economic prosperity, so we can't simply dispose of it. Pozen repeatedly demonstrates that his only concern is what works and makes sense, not what is pure or popular.
Only at the end did I find the book start to wear thin, when Pozen shifted gears to talk more about corporate governance challenges in the future and less about financial regulation in the present. Here he sounded all the usual tones, advocating shareholder advisory votes on executive pay and stronger boards of directors, and so forth. He also strove to carve out a middle ground on difficult issues like fair-value accounting or international cooperation to improve the regulatory system—which might be wise, but will not be easy.
Pozen is at his best in the first three-quarters of the book, where he chains together one punishing fact after another about how the financial crisis occurred, giving the reader a precise, vivid understanding of the problem. Then he deftly slips in a few straightforward suggestions about how the system should work, and the reader can’t help but think that this guy is spot-on.
Next
I will try to post a new book review on the third Monday of every month. Next up is Money for Nothing, an indictment of corporate boards by John Gillespie and David Zweig. (Free Press, January 2010, 320 pps. $27.)
Meanwhile, leave your own comments about Too Big to Save here, and feel free to suggest other titles for our Compliance Week book club to me at mkelly@complianceweek.com.