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October 29, 2011
A Banker's Perspective on What the Occupy Wall Street Protesters Should be Demanding if They Only Understood Banking
(article submitted by R. Lardel)
I have worked for nearly a decade for a variety of offshore banks. At a recent business trip to Canada I discovered that the Occupy Wall Street movement had made its way to Toronto. At a dinner with colleagues we all expressed annoyance that the disruptions to downtown traffic had delayed the entrees at Barbarian's Steakhouse. After our filet mignons, T-Bones and creme brulees we pondered whether the movement would ever accomplish anything more than that. As we finished off with Cognacs it was universally decided that the movement would likely never accomplish anything other than to snarl traffic.
Take it from the bankers, the movement will likely never accomplish much. It lacks focus and whatever little focus it has is placed on the wrong things. The protestors are upset that the salaries on Wall Street are too big and that the rich are not paying their fair share of taxes. Salaries are not the problem, taxes are not the problem, bank failures and bad investments ARE the problem. Bank failures and bad investments were caused by banking and securities deregulation. The focus should be on the cause of the problem as unexciting as it may be.
The financial system is not in crisis because of banker salaries. No bank needed a bailout because its payroll got too bloated. The crux of the matter is that banks needed bailouts because they made bad investments and were in danger of not being able to honor their deposits. They did not understand the risks and got burned. The financial system is in trouble because bankers did a lousy job of banking.
Bankers did not do a lousy job because they got less smart or more greedy. Bankers have always been smart and greedy. It is because they and the securities industry got their way in convincing governments to deregulate.
Is it merely a co-incidence that there was no major banking crisis in the 50 year period between the Great Depression and the Savings and Loan crisis in the 1980's? From 1819 until the early 1930's there were approximately one or two mass banking panics every decade. This stopped until the mid-1980's with the Savings and Loans crisis. Why?
The reason is simple. After millions of people were made homeless and penniless in the 1930's, governments imposed a mountain of regulations. Savings and Loan Companies could not invest in risky real estate ventures. When they were allowed to make those investments they nearly bankrupted the federal deposit insurance system.
Bank holding companies could not own both a commercial bank that took deposits and an investment bank. Investment banks are risky. They earn fees and revenue by agreeing to buy newly issued shares in companies with the intent of reselling the shares rather than looking to hold them as an investment.
Also rules prevailing until the 1970's had the effect of ensuring that the people making investment decisions would suffer the loss if it did not work out. For example, until 1970 the New York Stock Exchange did not allow corporations to be members. Consequently investment banks were organized as partnerships. This meant that the banker making lousy investments and his or her partners would suffer the losses personally. With a corporation the shareholders can walk away from a catastrophic loss. With a partnership each partner loses his or her house(s), car(s) and personal wealth.
Deregulation changed all this. It allowed banks to take more risks with depositor money. Deposit taking banks and investment banks could be owned by the same institution. This meant that depositor money (and the government deposit insurance scheme) was exposed to more risk.
After exposing bank deposits to more risk, deregulation also facilitated the invention of riskier investment products than ever existed before. One of the culprits in the 2008 meltdown was the exposure of financial institutions to Credit Default Swaps. This is a contract whereby one party agrees to cover the losses of the other party if a borrower defaults on its loans, even if the other party is not the lender. The contract is a form of gambling. In fact congress in 2000 had to exempt some Credit Default Swap strategies from state gaming laws. This resulted in the Credit Default Swap industry exploding from $900 Billion in 2000 to $58 trillion in 2008.
Lastly mortgage deregulation allowed lenders to make loans without having to suffer any negative consequences if the borrower defaulted. Mortgage lenders could make loans and resell them to freshly deregulated financial institutions. Since the lenders got paid only for making loans and not collecting them, they did not have to worry about the borrower defaulting. Guess what happened? They did not ask tough questions, some helped the borrowers lie and pension funds and banks ended up owning mortgages issued to total deadbeats.
Speaking as a banker, rather than alienate and demonize all of us, Occupy Wall Street should reach out and find the bankers who care enough about their community to bring sanity back to the financial services industry. The movement needs us to help them to know what to ask for. They have the numbers and we have the knowledge. There are some of us bankers who would like to see banks making loans to companies that produce real things, provide real services and create real jobs. In the end we are all in this together.
(article submitted by R. Lardel)
Posted by Snaggy at October 29, 2011 08:07 PM
Comments
Why is it OWS's responsibility to "reach out" to the good bankers. If indeed they are good, isn't it their own responsibility to change their industry?
Posted by: Doug Weinfield at October 31, 2011 06:41 AM
I'd have to agree with DougW. This is like asking for the criminals to change the justice system.
Also, you write "The financial system is not in crisis because of banker salaries."
Perhaps not, but their salaries are symptoms of the disease, and another example of how out of touch they are with reality.
Posted by: Tony at October 31, 2011 08:43 AM
Most people who work in banking are hard-working and honest. And most earn humble salaries. Some are obviously dishonest, and some are undoubtedly greedy and obscenely overpaid. But we need to be careful not to judge the majority based on the actions and transgressions of the minority. And the author is right that a regulatory framework that makes unethical behavior so potentially rewarding needs to be changed.
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Posted by: Adrien at November 1, 2011 01:37 AM
As someone who's been participating in the Occupy movement, I can tell you that (at least locally) things have been moving in this direction.
The problem is that 'the people' feel largely helpless in affecting change. Be it regulatory change or simply identifying the perpetrators who managed to snuff out 20% of our nation's wealth, your average citizen does not feel capable of doing anything. And has not felt capable for a long time.
Most people who have not pledged allegiance to one extreme view or another are untrusting of ALL 'solutions', because the ones proposed so far have lead us progressively closer to system wide failure. Be it left, right, libertarian or socialist, all ideologies are suspect. So instead of starting with a solution, or with a plan of action, Occupy protesters are simply stating that there is a problem. It's like the pain of a broken leg - you may know it's broken, you may even see the bone sticking out, but unless it hurts some damned fools will try to keep walking on it. Occupy is that pain signal.
The Occupy movement has not only raised awareness of the disparity between poor and rich, and of the increasing inaccessibility of the benefits of our democratic and capitalist support structures for the average person... for the people involved it's brought a sense of purpose necessary to *learn* about our economic problems and try to find real, actionable solutions.
By actionable I do not mean policy change. That's what the protests and rallies are about; send the pain signal, so that those who set policy are more urgently aware of the need to get it right. But on a local scale people are learning how to get involved (again) in the political process, how to unify communities, how to overcome ideology in favor of practical solutions, and how to overcome inertia and apathy and ACT. Sometimes it's more important to do something even if it's wrong than to be so passive that the national pulse flatlines. This is a lesson that needs to be relearned every generation.
That said I agree that policy needs to change. But the mountain does not come to Mohammed. If you think that Occupy protesters would be better served by a clear policy strategy, come convince us. Pick up a picket sign with your ideas on it and join in. And when you go to work the next day, instead of just doing your job, take notes on what needs fixed and bring it to the community. Find some like minded citizens and build momentum. Occupy your profession.
Cheers.
Posted by: Don at November 1, 2011 11:32 PM
Completely missing from this analysis is the role of ever-expanding government subsidies and bailouts for the private sector played in the crises. Without the role of Fannie Mae and Freddie Mac in underwriting loan guarantees for risky mortgages with taxpayer money, the housing bubble would never have reached nearly the extent it did. Banks tend to be much more cautious playing with their own money, especially if there's no taxpayer bailout awaiting them (see TARP) if they screw up.
Posted by: Lawrence Person at November 2, 2011 07:39 AM
this is clearly nonsense. The cause of high profits and bad investments is malfunctioning computer equipment, how else can it be explained that bad investments mean everyone gets a raise?
Posted by: Mobile computer repairs Perth at November 13, 2011 03:09 AM