Alvaro G. de Molina had a front-row seat for the financial crisis as the chief executive of GMAC Inc. from March 2008 to last November. The longtime Bank of America Corp. executive — he rose to chief financial officer there — oversaw GMAC's launch of Ally Bank, which drew the ire of traditional banks and ran afoul of the Federal Deposit Insurance Corp. for aggressive deposit pricing.
In an interview, while he refused to discuss his sudden resignation from the auto and mortgage lender, de Molina offered his perspective on regulatory issues, the future of banking and how he thinks private-equity groups stack up to traditional banks.
Where is the industry now, and how do you assess the "new normal"?
ALVARO DE MOLINA: After all the capital raises, the industry is in a strong and stable structural position. Regarding operating results, you've got the obvious working through the credit cycle that has to finish off. That's 20% of the question. The other 80% involves how regulation changes the model. What does the model look like and how does each bank respond to that? Those are the bigger questions that deal with valuation and maximizing value. What does the environment look like? I think there will be a lot of changes with a lot of that dealing with what the customer sees. The bank that takes advantage of its strengths in the most customer-friendly way will succeed.
Which proposals from Washington make the most sense?
DE MOLINA: Clarity of mission creep by regulators is of paramount importance. But the most important proposal in terms of the overall stability of the distribution channel is getting as much of the derivative value and risk on an exchange so that there is transparency, adequate initial and maintenance margin and greatly reduced counterparty risk.
What about the so-called Volcker Rule?
DE MOLINA: I don't understand the [necessity of the] Volcker Rule and how it gets applied. I don't understand why proprietary trading was seen as a significant cause of [the financial crisis]. Stopping proprietary trading may reduce risk, but it would also lead to less access to credit. I don't know if the Volcker Rule has any significant positive impact, but I can certainly see the negative impact. Everything that was done [before the financial crisis] was taken to extremes, but at their root there was nothing wrong with the system or the innovation. We just took it too far.
What is your take on having a systemic-risk regulator?
DE MOLINA: I believe the Fed is in a great position to be the primary systemic-risk regulator. They have the most market knowledge and proximity because of the very nature of the roles that they play. They have the talent and the perspective to do it and they have the tools, too. I also think that the fewer regulators you have the better. I don't understand why you need a new agency for consumer products. You can be just as effective having that oversight within another regulatory body.
How do banks make money going forward?
DE MOLINA: Banks provide a necessary and valued service. They will make money the old-fashioned way, by delivering value and competing. Those that do will win. The world doesn't work without banks. They play a very valuable role. All the businesses that banks have — from wealth management, processing, consumer deposits and lending — all provide that valuable service. Some are better at it than others. All those things are important.
What about investment banking and the universal bank model?
DE MOLINA: If they're good at it, it is value added. If not, then it is value destroying. It is very difficult to manage an investment bank and a consumer bank under one umbrella — talking about the JPMorgan Chase, Citi and Bank of America models. It is a bigger challenge but if done well those businesses can provide value to each other. There is nothing wrong with the model. It comes down to the competency of the management
Where do you stand on "too big too fail"?
DE MOLINA: What really leads to crisis-mode intervention due to a failure is really tied to interconnectedness risk, and not normal-functioning-of-the-bank risk. If you lose one bank's lending, it is a big deal, but it takes awhile for it to be felt through the economy. The resolution they come up with will deal with that. The bigger problem was the interconnectedness risk. That needs to be dealt with via more exchanges. If you had an exchange, initial markets and capital to support the system, it would have a dampener on [interconnectedness risk].
What about the wave of former bankers jumping into PE deals to buy banks?
DE MOLINA: There is not a lot of novelty that will come out of different approaches. And when there is novelty, it is copied easily. If you have great management they can execute on any of those strategies. It really comes down to management execution. There is that much or more talent on the traditional banking side, which has all the advantages and the incumbent benefits of capital, scale, etc. If I was running a midsize or larger financial institution, I wouldn't be up at night thinking about XYZ private-equity firm.
What are your plans?
DE MOLINA: I am just taking it easy. I will know the right opportunity when I see it.