Banking: Where’s The Anger?

Wow, banking lives a charmed life. Not eighteen months have past the gambling the big banks undertook in the mid 2000’s sank the economy, but there they all are getting ready to pay our fat bonuses. Don’t we all wish we could live like that? So even as the ‘real’ economy still sheds jobs, over 85,000 in November, the intrepid souls who gamble on Wall Street have recovered and are going to be paid their due.

Somewhere in the last Obama must have woken from the sloth that has characterized him so far this year: he ventured out long enough to knock the fat cats and to promise a ‘levy’ on the banks sufficient to pay back all that TARP money. Hurrah. I won’t hold my breath however because this administration has, in its very short life, made a specialty of using palliative words and then delivering nothing to back them up.

Robert Reich has an excellent column in today’s Financial Times in which he lays into the financial ‘reform’ being proposed as a fix for the problems that led to the crisis. I agree with his overall conclusion: nothing that is being proposed comes even close to solving the central problems. Once again we are being misled. Once again we are being given weak and uninspired leadership when we need strength and character. We are being treated to a charade and being told it is serious drama.

Those of you who have read my comments throughout the past year will know that I have lost all faith in our bankers to be trusted to perform banking with any skill or social responsibility. What goes in on Wall Street is not banking in the manner most of us imagine. Gone are the days of sobriety and conservative evaluation of risk. Gone is the value seen in a long term relationship with a customer. Gone is the fiduciary trustworthiness that fosters loyalty. And gone is the value placed on the memory of bankers who have seen recessions or crises before. All gone.

In their place are a set of post-modern ideas driven purely by greed, faulty economics, and an abiding need on the part of bank managers to make a personal buck at all costs – even if it means robbing their shareholders blind. The entire industry has slipped from being a respectable, if boring, source of predictable profits, to a glitzy, casino like, and seedy source of bonus pool cash for managers. From Park Avenue to Atlantic City boardwalk.

This has been a transition into lunacy that began a long time ago.

I wish I could say I was not part of it, but I distinctly recall conversations with financial employees – people like the CFO – of the bank I worked at where the topic was how to ring more return on equity from an old fashioned bank. You can’t without wrecking the bank. The implication is a very simple one: more return requires more risk. In good years bank managers fall prey to the notion that it was their skill forcing the return on equity up. In bad years they blame the economy. In good years they see vindication in the risks they took, and decide they are skilled enough to take more. In bad years they blame the risk managers they ignored the year before.

One way around taking more risk on the balance sheet is to bulk up on charges to customers that have no balance sheet impact: hence ATM charges, and all those other charges that bloat bank earnings but offer little no service in return. I understand banks need to cover the costs of all that infrastructure they build to service us – bank branches cost a bundle – but covering costs and price gouging so as to fatten bonus pools are two distinctly different exercises.

Now, of course, those monster fees the banks are charging are being used to cover the gaping holes created by the gamblers. So not only did we send the banks bail out money to keep the gamblers afloat, but we are now paying extra fees as well. Those gamblers must return a pretty penny sometime if they are worth all these serial bail outs.

It’s easy to sit here and vent frustration at the total lack of response in Washington. It’s entirely another thing to watch as the banks set off down the same disastrous road that led to the crisis. Unfortunately all the signs are that they headed exactly down that same path. The combination of low interest rates, lessened competition, and an expanded safety net has increased the bank’s appetite for bad banking. Their risk profiles are already increasing even though the last crisis is still being investigated.

That there is little public anger over this is astounding. I know that most folks are sick of the bonuses being paid out, but the problems in banking go far deeper and wider than that. Those bonuses are a symptom, not the sole cause of the problems. Yes, pay incentives need to be brought both back to reality and connected to long term profit. But that is just the start: those bonuses exist because the banks make way too much profit. At the height of the last lunacy bank profits accounted for 40% of all the profits made in the American economy. That is simply ridiculous. No one, except the bankers, think that four in every ten dollars of value in our economy comes from banking. Add in all the hangers-on like the accountants and attorneys who validate and execute securitized transactions and the amount of our wealth being sucked into what should be an intermediary business is staggering.

The social value in banking is in moving capital around efficiently, and in allocating it to the most profitable, wealth creating activities. What seems to have happened is that the money was diverted into finance for finance’s own sake. The industry didn’t allocate capital, it simply accumulated it. Now this might well be an indictment of our non-banking managers who obviously cannot create enough value to justify receiving the capital themselves. It might also be an indictment of the economy at large because we have distortions that attract capital away from industry and throw it at asset bubbles like real estate – the American fixation with real estate is a proximate cause of the last crisis that also hasn’t gone away. But the larger social question we need to ask is: how did the banks run off with all that capital they were supposed to be channeling into productive and wealth producing stuff we all could benefit from?

It is that question we need to resolve. My guess is that we don’t want to hear the answer: they rigged the game and invented a slew of unnecessary ‘products’ like most of the derivatives and securitized assets of the past decade whose returns are inflated by the leverage banks added to their bets. Regular business would never take that amount of risk. Then again, regular business does not routinely and artificially inflate itself in order to look profitable.

In the end we all have to realize that the banks syphoned off our wealth for their own benefit. They pumped up their profit margins by taking stupid risks which enabled them to justify keeping the money for themselves. Those of us who were fixated on short term indicators like the stock market fell for the ruse and facilitated the cash flow in.

We were robbed.

Now we all know that: where’s the anger?

Obama we are waiting.