where's the Dharma?
If shareholders realized they they are getting the same
shaft as depositors a major impediment to true bank reform
could be swept away. Senior bank employees are using complexity
of operations (which is more myth than reality) to hobble
shareholder control and progressive era legislation to hobble
Let the senior financiers keep their salaries and bonuses,
and let them do with their banks what they will. If, however,
their bank fails, let the bankers themselves fail. Let the
value of their houses, cars, yachts, paintings, etc. be
assigned to the firm's creditors.
James Grant: Let the Bankers Fail
As the news of Wall Street's underhanded dealings goes
mainstream thanks to the SEC's case against Goldman Sachs (
), the idea of letting the bankers fail never seemed so sweet to so
many in recent history. Yet, failure might have nasty consequences.
Just as one wouldn't want a skyscraper to topple over in a crowded
city, one wouldn't want the TBTF banks to collapse. Better, I
think, to effect a controlled demolition.
While he has been opining about finance more wisely and for far
longer than I, Mr. Grant's ire may be somewhat misdirected
(although the effect of his proposed renewal of the fear of God
seems a wise idea) at shareholders, when senior bank employees are
those whose behavior must be modified. They take the least risk and
benefit the most.
Explaining the problem's emergence, Mr. Grant draws our
attention to the FDIC, an institution ostensibly designed to
benefit the man on the street whose limited life savings might be
lost in a bank failure. An additional effect, however, was to
shield bank owners from liability, at state expense.
Another key effect, particularly when the lender of last resort
(in the US, the Federal Reserve) supports banks rather than credit
markets more generally, was to dampen depositors' desire and
hamstring their capacity to demolish a bank. It is no surprise that
the vigor with which Big Finance worked to repeal Glass Steagall
was not directed at FDIC or Federal Reserve legislation.
Banking is a curious business, as Louis Brandeis noted in
Other People's Money
The goose that lays golden eggs has been considered a most
valuable possession. But even more profitable is the privilege of
taking the golden eggs laid by someone else's goose
. Bankers, by which he meant bank shareholders, combined their
equity capital with deposits in 1929 at a deposit to equity ratio
of roughly 10 to 1 and kept a majority of the profits thereof.
Prior to Fed support of banks, depositors had a significant
controlling interest (whether they were aware of this is another
issue). A bank run was the means by which they exerted this
control. As noted, this control was greatly diminished (but not
lost), and obscured by the Fed and FDIC.
Of course, what is good for the goose is good for the gander.
Bank shareholders had it good for a while, but lately they too have
been getting the shaft from senior bank employees, who may not have
any investment in the bank.
As noted here
full article here
) at the Big 4 US Banks (Bank of America (
), Citigroup (
), JPMorgan (
), Wells Fargo (
)) depositors were paid $25B on their investment of $2.5T,
shareholders were paid $18B on their investment of $660B and
employees were paid $111B for their time.
If shareholders realized they are getting the same shaft as
depositors a major impediment to true bank reform could be swept
away. Senior bank employees are using complexity of operations
(which is more myth than reality) to hobble shareholder control and
progressive era legislation to hobble depositor control. Simon
Johnson and James Kwak should take note.
Explaining that shareholders' interests are aligned with
depositors' might ignite the controlled demolition of TBTF
Why should senior bank employees with the least "skin in the
game" reap the largest benefits?
A controlled demolition of TBTF might proceed something like
1) Depositors could begin to reassert their lost control by
withdrawing money from the Big Banks (
There already is such a movement underway
2) Minimally, shareholders could begin to reassert their lost
control by wiser appointments to the Boards of Directors with the
view that cost control includes direction as well as magnitude (to
wit, why should shareholders pay for lobbying which enriches
employees and not them). Preferably, sell the shares and reinvest
the capital in various smaller banks, presumably some of whom might
be the recipients of moved depositor funds and none of whom have
significant derivatives' exposure. In a controlled demolition of
TBTF, the numerous banks left standing should benefit
3) Depositors and shareholders could understand that institution
size dilutes control and allows employees to usurp control leaving
you (or the state) to deal with the risk.
4) If an aligned group of depositors (aka voters) and
shareholders (aka those funding the lobbying) demanded action,
change would come. One key change: The Fed would need to stop
supporting banks and instead support markets mitigating collateral
damage from the demolition. They should open lines of communication
with the hundreds of banks with assets between $1B and $100B.
They will also need to deal with foreign depositors at the TBTF
banks and begin to unravel the nightmare of derivatives (admittedly
a task easier said than done).
Instead of a full frontal approach, TBTF should be imploded from
within. Those with "skin in the game" need to take back
It's your money, and only your wisdom (not the government's or
bank employees') will keep it safe and perhaps allow it to grow.
Concentration of money occurs when investment is passive. Move Your
Is the Stock Market Rolling Over?