Friday, July 17, 2009

Banks being Banks

So Goldman-Sachs, Bank America and Citi-Group recently announced second-quarter profits, each in the billions of dollars. All are recipients of billions in federal bailouts, which I am sure they are eager to return as soon as possible, in order to avoid regulation -- especially of executive compensation.

Several things seem clear. First is that these profits mean nothing in terms of the health of these banks or the banking industry in general. In fact, the money that pushed them into the black this past quarter has nothing to do with banking as we think of it. Goldman, as usual, makes the big bucks in trading -- including the misnomer "investment banking", another form of speculation these days. Goldman's forte is computerized high-speed trading of securities, including securitized loans and mortgages, a good chunk of which are now familiarly known as "toxic assets." CitiCorp, a disaster on wheels, similarly owes its temporary spurt to trading, not to fundamentals in any way related to healthy banking. If Bank of America is very sick, Citi is at -- or through -- Death's Door. But still its traders keep "slicing and dicing", as they say, loans and other assets of dubious value, and unloading them on anyone they can unload them on.

It's not like they told us in school, where companies raise money for innovation and growth by selling stocks and bonds to Average Folk who want to invest in American Business. In fact, a lot of the daily churning of market securities is day-to-day speculation, not in the actual fortunes of companies but on guesses about market reactions to these fortunes -- or on guesses about guesses. Also, the trading companies are constantly shifting their own positions -- positive, negative or straddling -- by buying or peddling to their own customers. If you want to get some idea of the ethics and attitudes underlying this kind of "investment", check out Michael Lewis' "Liar's Poker": a memoir of his days at Salomon Brothers in New York and London. In spite of warnings such as the Savings and Loan debacle of 20 years ago, the banks have been in the thick of this. Michael Lewis reports on this latest disaster for the banks in The End:

The sad -- no, outrageous -- part of this is the lack of any real re-regulation of these banks, even under the Obama administration. This is undoubtedly due to the fact that the financial community contributes more to the political parties than any other industry. Timothy Geitner, the Secretary of the Treasury, is, after all, a product of Wall Street and was supported by the Street during his confirmation hearings -- in fact, the market went up immediately in reaction his nomination for the post. He has done nothing to indicate that he supports stringent regulations for the financial community.

What's needed is for banks to go back to being just ... banks; i.e. lending money to qualified individuals and businesses, collecting interest, and paying dividends: no speculation, no slicing and dicing of obligations into securities, and no dealing in insurance policies on these securities. Today's news about Bank of America and CitiCorp shows that banks don't seem ready to resume this restricted role, and lawmakers don't seem to have the stomach to restrict them. But but these restrictions are necessary because, as Paul Krugman observes,

"The next crisis could look something like the savings-and-loan mess of the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers’ money — except that it would involve the financial industry as a whole."


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