Bank Bashing
Sitting, as I was this morning, reading the Financial Times an ill-informed reader could have been excused for feeling sorry for bankers. After all the sudden burst of populism at the White House seems to have caught the industry off guard. Time will tell whether the administration is serious about following its words with action – it doesn’t have a very good history in that regard – but even so the stories in the FT gave the distinct impression that bankers feel downtrodden.
Poor bankers. How on earth did that happen?
A major article ends with a longish quote from someone at UBS:
“The public mood now is that banks shouldn’t be at the cutting edge of complex financial innovation, and should be scaled back to more utility-type functions with no risk of social costs in the event of failure.”
That just about sums it up.
How do we tell the banks?
They absolutely need to get away from all those innovative things they were playing with. Why? Because if there’s one thing we now know about banks it is that they are horrifically ill suited to playing those games. Those innovations blew up. They sank Bear Stearns and Lehmann. They sank AIG which wasn’t a bank. They cost the public trillions in bail out money, lost jobs, GDP collapse, and other forms of economic mayhem.
Those innovations we want the banks to step back smartly from were about as pernicious, toxic and downright nasty as it is possible to get.
So, yes, let’s move the banks back. Stand well away! You clearly are not grown up enough to play those games.
Besides just how innovative is it to spill toxic stuff all over the place? Derivatives of derivatives stuffed to the gills with assets that everyone knows are high risk is hardly a innovation that an industry entrusted with fiduciary responsibilities should be proud of.
Nor is running a book of business at 40 to 1 leverage particularly innovative. I suppose we are not supposed to notice that one.
Nor is shorting or hedging against assets that you don’t even own very clever. Innovative yes. Border line ethical? Not even close. Way unethical in my book.
Oh, and betting that the assets you just foisted off onto a pension company will go down in value immediately hardly constitutes cutting edge innovation. Complex. I’ll concede that. So complex that stories are continually emerging that no one knew what was going on.
The problem with these ‘bankers’ is that they were confused. They thought that ever increasing and obscure legal language and accounting trickery was actual financial innovation. It wasn’t. It was trickery. Duh. But the dopes still cling to the absurd idea that securitization documents three feet thick with neat legal loopholes and phraseology straight from a the pen of ‘Kafka meets Dickens’ is something to do with finance. The entire point of that kind of ‘innovation’ is to hide the fact that the bank was being taken for a ride by the people who charged it huge fees and took massive bonuses while making sure their hands were clean when the proverbial hit the fan.
It wasn’t innovation. It was parasitism.
Be that as it may. Now the poor bankers feel misunderstood.
Having laid waste to the economy they feel as though they are being unfairly treated by the very public who just bailed them out. How odd.
Just a year later the banks are making good profits and are back to their old tricks. They are paying themselves nice bonuses and trying to make sure we all forget what occurred.
Here’s a hint why that might happen: there are millions – a record number to be accurate – of regular non-banker folks who are now unemployed for more than a year. In the same time it has taken the banks to get themselves back to payola time, millions of the peons whose taxes supported the banks on their moment of need are struggling to pay their bills. Why?
Why is it that this catastrophe haunts so many regular people?
Complex innovation. A cutting edge so sharp it sliced clean through the economic life lines of millions of folks who surely have a right to be a little upset at the banks.
Never has cause and effect been so sharply defined.
The banks deserve everything and more. Their complaints are not simply pathetic. They are laden with a contempt for the real economy.
The sad part is that the bankers whose anonymous comments litter the media nowadays don’t even understand banking.
They claim that populist revulsion is being whipped up for political reasons or that re-regulation is creeping socialism. They complain that we are seeing banking as a mere utility.
That’s because it is.
Banks are vital to our economy. We need them. They run the payment system we all benefit from. They mediate short term money into long term assets.
The first of these two functions is absolutely a utility. Go to any large bank data center and what you see is a vast utility company managing huge flows of paperwork and electronic cash. The credit card companies are great examples of this: their entire business is to facilitate economic transactions. That is a good definition of a utility.
The problem for bankers is that running a utility is not much fun. In fact it is very dull. So they try to sex it up with marketing tricks. After a while they convince themselves that the fluff of marketing is the core of the business. The utility gets hidden behind a veil of marketing jargon and the social value of what they are doing falls victim to various fads and fashions that sweep through marketing minds periodically.
The second function of banking, mediation of short to long money, is also a utility. A more complicate one, but still a utility. It involves financial risk, and therefore judgement. The problem is that mediation also gives banks access to low cost funds – through things like commercial paper as well as through standard demand and savings deposits. Those low cost funds entice the banks to play. They look for fun and profitable things to do with all that cash. If lending to companies looks too risky and complicated, as it always does, there will be a sharp employee sitting on a trading desk eager to convince bank managers that he or she can make more money at less risk. Before you know it the bank is running a proprietary trading book and being exposed to the ebbs and flows of Wall Street.
The rest, as we say, is history.
And as for the claim about creeping socialism.
Because the two major functions of a bank are utilities, society has always taken a great interest in their provision. This interest extends to the massive and continued safety net that undergirds the entire banking industry. Without that safety net bankers would have to exercise much greater caution than they do nowadays. They would have to be paragons of honesty and integrity, committed to the careful evaluation of risk. Which is exactly what most of want bankers to be.
Which leads us to the great paradox of banking: the more we protect ourselves from the inadequacies of bankers the less they behave like bankers.
In fact they become spoiled children.
Afterthought:
Much the same hubris and misunderstanding cause the downfall of the American auto industry. GM’s rise to dominance over Ford was on the back of neat marketing prowess and a steady disdain for Ford’s boring emphasis on simple engineering. GM wanted to build cars to suit people’s tastes rather than cars that were reliable and actually worked. After Ford fell for the same error the entire industry imploded as it management became more and more inbred and hyped over the message rather then the engineering. The decline of the American industry can thus be traced all the way back to Alfred Sloan – the irony being that Sloan is held up as an icon of American management genius.
Sometimes innovation can have unintended long term consequences far greater than the short term benefit. I call this the delusion of management and it affects us all. The Reagan delusion still prevents many people from seeing the enormous damage that his sound bite attacks on government, and his supply side economics still have on our economy. Marketing is useful, but when it becomes the only thing, companies and countries are doomed. Somewhere there has to be substance.
