Banking’s Naked Emperors
This is truly annoying.
We have been treated in recent weeks to a barrage from the banking industry’s multitude of apologists and hanger-on about how enfeebling the proposed capital rules are. Those rules will, we are assured, ruin the recovery by forcing our dear banks to set aside a stash of money just in case their assets are not worth what they think they are.
Of course such an event can never happen. Our bankers are way too savvy, smart, and genius-like to book assets that are not worth a hundred cents on the dollar. So prescient and brilliant is the corps of US banking that any attempt to hedge them in with silly rules is an affront to their, well let me say it again, genius.
No it could never happen.
It never has.
And if it did, it was the government’s fault for interfering in the natural workings of the supremely efficient all-encompassing, uber-calculating, and ever correct machinations of the free market place.
Which, in case you missed my point, is bursting with genius.
In order to unleash said stellar talent what we need, in the aftermath of that little blip you may call a crisis but we cognoscenti of the financial markets call a correction, is to unfetter even more our heroes of the trading desks and allow them to roam across the economy adjusting inefficiencies and allocating capital with their accustomed aplomb.
It is important to remember, although it appears one or two of you seem to have forgotten, that our heroes never make mistakes. Their adroit tactics and savvy strategies are what underpins the supremacy of the US economy. Domination of world trade, unsurpassed job creation, rising wages, and all the other great benefits of our capitalist system would not be safe without the attendant ability to shift trillions of dollars at a mere click of a computer key to distant lands in search of that last one thousandth of a percent.
Besides there are quarterly profit and monthly bonus targets to be met.
Yes the boys and girls are back. En masse. And as completely dumb as ever.
Sigh.
We learned nothing from the crisis other than how powerful the banking lobby is, and how completely upfront it is with its willingness to distort and bully. We reformed nothing of substance. We meddled mightily with the fine print of banking. We managed to publish a piece of legal obfuscation that promises huge fees for consultants and has been a boon to the legal industry in general but little else. The Dodd Frank so-called reform act weighs in at nearly 900 pages of scarcely intelligible mumbo jumbo. It acts as a fine door stop. It does nothing credible to prevent us being pillaged again by the dinosaurs of Wall Street.
Our problem is that we live in an intensely bureaucratic era. We mistake reform for endless meddling with words and the microscopic parsing of paragraph long sentences. We feel gratified if we end up with pages of fine print that cover every contingency we could think of as we debated around mahogany conference tables and were plied bottomless supplies of rotten coffee.
Somewhere we forgot that reform is just that: change. Not just in the sequence of words on a very long page, but in behavior. Out there in the real world and not sequestered in the comfortable world of consulting presentations. For reform to be reform something done yesterday is no longer done today. Or something that existed yesterday is gone today. That’s reform.
That they banks have managed to beat back any reform of true value is testimony to two things: one is their political muscle; the other is the fear that politicians have of mucking around in finance: if they screw up banking they screw up the economy. Given this fear it is better, from a politician’s perspective to allow the bankers to screw things up. At least we all know how to fix that: we write big checks so that the banking monster goes away for a while until it needs feeding again.
Meanwhile the spoiled brats that run our banks are obsessed over all the wrong things.
They argue that raising capital requirements will diminish their return on equity. Yes it might. Good. High ROE’s denote high risks. We want our banks to be nice and safe so that our payment system works smoothly and that credit flows reasonably into places where it can generate wealth. Ah, the bankers argue, it’s very hard to attract capital when ROE’s are low. No it’s not. This is a matter of perception. If banking is viewed as a high return gambling operation, then low ROE’s are anathema. If it is viewed as a lower risk mediating business best overshadowed by the production of actual things rather than zeroes on computers then low ROE’s are useful: they signal the reality. There are plenty of people who would like to find a safe reliable police to invest. Banks used to be safe. Now they are not. They need to be again.
But raising capital will syphon cash away from lending and leave it idle on the bank’s balance sheets. Good. In fact double good. It was the explosion of loose credit that caused our crisis. We just lived through what is called a balance sheet recession where the private sector had to disgorge vast amounts of debt. It had to re-establish a proper balance between debt and equity. And between debt and incomes. Rotten banking, high leverage, and the endless pursuit of excessive ROE’s fed a river of toxic debt into the economy and benefitted no one other then the dopes who traded in it. As an exercise in bonus production it was a brilliant scheme. As an exercise in capital allocation it was an unmitigated failure of historic proportions.
How can I say this more clearly: our banks failed us miserably. They cost us dearly. They demonstrated unequivocally that all they rather pompously preached before the crisis, was so much horse dung. They sold snake oil. They are revealed as such. They know nothing. They should be put firmly into a very small box and told in no uncertain terms never, ever, to do whatever they just did again. Or otherwise we ought to throw them in jail. They committed a great fraud on the public, only it wasn’t a fraud because they had bent the rules so that nefarious became clever or smart.
And now they bitch about higher capital.
Oh. Wait. And they also bitch about all the rules inhibiting the increase of dividend payouts.
Get this: the banks who scream that capital is idle credit and thus harmful to the recovery are simultaneously arguing that they should be allowed to pay out precious cash in the form of dividends. So cash paid out and thus not being lent cash is OK, but cash sitting as a buffer against losses is and thus not being lent cash harmful. Nice. It gets worse: the Bank for International Settlements, an industry group, argues that the prospect of higher capital levels was “destabilizing” because it “brought fears of a drop off in lending”. But paying out dividends and thus not deploying that cash as loans is presumably not destabilizing. No fear there. Just the cash register ringing.
This is just silly.
Cash paid out as dividends depletes capital. It reduces the buffer against losses. It also signals that the bank in question cannot find a better or more profitable investment opportunity. A bank paying out cash to its shareholders is tacitly admitting that it cannot invest the cash at a higher rate than its shareholders can. Let’s follow that logic through more thoroughly: does this not suggest that the bank is too large? Is the bank not saying, in a very public way, that it has overgrown its natural business and can no longer use the cash it is generating from its profits? I read that banks are now expected to pay out almost 50% of their profits as dividends. If this is true we are looking at a defeated business. Those massively rewarded executives are admitting their inability to absorb the cash profitably on behalf of their shareholders.
Were I a shareholder of one of these banks I would begin to question the skill of the bankers who I employ to manage my investment. If they are returning my cash, why do I need them? I gave them my money so that they could make a profit for me that I cannot make for myself. If they give it back, presumably they have failed.
Time to fire them?
Time to shrink the bank back to a profitable size?
Time to re-think the banking industry?
Naked emperors surround us. We need to laugh and scorn them. They have not reformed. They continue to threaten the economy with their blundering ineptitude. They remain dangerous.
Oh. And one more thing: I see that a couple of banks in the UK have raised mortgage lending rates due to “the increase in funding costs”. I also see that those self-same banks borrowed heavily from the European Central Bank’s long term facility at the heady rate of 1%. Double talk? Disingenuous nonsense?
No. Surely not. Not from a bank. Banks are the hallmark of probity and fiduciary responsibility. They don’t gamble or fib. Do they?
