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Stupid banker tricks

August 3, 2012 - Harry Eagar
Considering how many advantages they are given, it ought to be nearly impossible for a banker to lose money. But they do. I think it is because bankers are stupid.

This week's exhibit is Sandy Weill, who took a bank that repeatedly lost money bigtime making loans that no sane person would have made (to Latin American kleptocrats, for example) and merged it with a successful insurance company (Travelers) to create a really huge money-losing machine. Weill himself, however, kept a lot of money.

Therefore, people listen to what he has to say, no matter how ridiculous it is.

Earlier this week, Weill, long retired, told business reporter Andrew Sorkin that Too Big Too Fail banks ought to be broken up, along the lines of Glass-Steagall, into what RtO has distinguished as safe banks and risk banks.

People in the business news business who don't think much of Sorkin (and who, I suspect, envy the money he's made in his side deals) jumped all over Sorkin for not pressing Weill about his about-face. That's a valid point, but it is not the important point.

Weill, who stupidly mimicked Steve Case by merging a big money loser (AOL) with a big moneymaker (TimeWarner) to create a really, really big money loser, still doesn't understand what he did, or anything about banking. He apprehends that his monster turned into a loser, and because it was less of a loser when it was smaller, considers returning to the old way -- break up the Yankees! Send Ruth back to Boston!

But you cannot do that. Glass-Steagall operated superbly for six decades, in a comparatively simple environment. It took time to transfer funds, and scads of backoffice clerks to keep up with the transfers. A billion-share day on Wall Street was huge. To a degree that people would find extraordinary today, people with money were more or less committed to keeping it in the place they had always had it. The costs to extract a lot of money and move it were significant.

Technology changed that. I can convert my retirement funds into yen without the assistance of a professional moneychanger and at very small cost. I don't (although it would have been a moneymaker for me anytime these last many years), because I treat money like an old-fashioned banker.

Plus, I don't have a great deal of it.

The psychology of modern people with big amounts of money is different. They take a short view of monetary assets and move them around chasing fractions of a fraction of a percent of return -- why do you think all those unnecessary derivative products came from? All their money is hot, as the Wall Streeters say.

Financial operations have become a endless series of one-night stands.

But that means that safe banks, should they be regulated into existence again, will not be able to attract funds. Their returns will always appear meagre compared with the transiently successful risk banks, so the hot money will go to the risk banks, and the safe banks will die of starvation. (Over a longer period, safe banking will, in competent hands, return more than the global total of risk banks, but nobody will pay attention to that.)

If Weill doesn't get that, and obviously he doesn't, then his notion that smaller banks will be able to fail without affecting the overall financial structure is moonshine. (The failure of thousands of small banks during the Roaring Twenties -- about 2 a day -- undermined the middle classes and contributed in the long run to the depth of the Depression when the big institutions also came under pressure. This point is not well understood by macroeconomists, but if you talked to old country bankers when they were still alive, as I did when I was a young reporter, it becomes clear enough. At the simplest level, it drove cash into mattresses, contributing to the debt crunch which forced solvent businesses to close.)

We actually need deposit banks that we can rely on without government props (other than deposit insurance, which is not normally subsidized from the fisc), but it is not clear to me that they can exist in a world of all hot money.

 
 

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