We are at a critical point in working our way through the current financial crisis. The situation initially manifested as a crisis of confidence among depositors, financial institution counterparties and market participants that led to sudden and catastrophic collapses of leading financial institutions. Now the crisis appears to have evolved beyond that stage, with declining housing prices and low consumer confidence slowing the economy and the initial panic being replaced with lingering investor uncertainty about the business model of financial institutions, the direction governmental intervention might take and the risk that the changing rules of the game – on compensation, cramdown or otherwise – will continue to whipsaw investors. Much of this crisis is fed by a 24/7 media cycle that, without actual collapses or bank runs to report, repeats speculation about financial institution balance sheet and capital (further fueling concern about the direction of government policy and actions including the spectre of actual, if not de facto, “nationalization”) and inciting resentment over executive compensation, among other things.

Much of the future direction beyond this critical juncture will depend on the choices made by the new administration and in Congress. Will a clear focus be maintained on prompt, decisive steps necessary to restore confidence to the financial system, and will we let bank regulators and bank management go back to doing their jobs and join together in working our way out of the current situation? Or will the focus remain blurred by measures that (though sometimes well-intentioned) have served to discourage the capital buildup necessary to facilitate repayment of TARP funds, outright political intervention, and unwarranted punitive rhetoric that destroys the public confidence so critical to a recovery?

Getting the recovery on track is likely to involve respect for the following tenets:

• The banking system that has served our nation so well, while currently challenged, is not fundamentally broken and need not be destroyed.

• The long-term health of the economy depends on a robust, trusted banking system.

• Restoring private capital investment in financial institutions must have the highest and clearest priority, and doing so requires not only government action where necessary, but also appropriate restraint, including a renewed commitment to a stable legal framework and ceasing retroactive, game-changing interventions that cause private capital to flee.

• We already have a strong and robust system of financial regulation in place that, while it can be improved, should be allowed to function with a minimum of political interference to do the day-to-day blocking and tackling necessary to restore public confidence in the banking system. For instance, concerns regarding executive compensation could be simply and readily addressed by the existing federal regulatory framework for monitoring compensation at institutions deemed to be in troubled condition. Moreover, recognizing that all bank mergers are already subject by law to a rigorous regulatory review eliminates the need to add layers of additional rules that indiscriminately prohibit potentially useful transactions.

• Bank mergers, key employee compensation and other strategic business decisions are important tools that, when properly used, are essential for bank managers to build the strength of their institutions; these important tools should not be lightly interfered with and will continue to be used by banks, as they have been in the past, only under the watchful eyes of the banking regulators.

First: Job No. 1 is restoring private capital investment in financial institutions. Regulators already have a clear window into banking institutions and they should consider clearly communicating the financial condition of the nation’s banks in advance, and in lieu, of a vaguely defined future “stress test.” Relentless speculation about banks amid plunging common stock prices and indiscriminate talk that “the banking industry is effectively insolvent” has created a mistaken impression of hairtrigger fragility among the nation’s banks. Regulators should play a leading role in promptly fixing this misimpression.

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