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Wednesday, October 12, 2011

Bad Bank! Now, go to your room!

National Bank Oamaru.jpgAs an occasional investor in banks (I currently own Wells Fargo and would like to buy US Bancorp, M&T and Park National), I have to admit to being somewhat surprised at all the bad press banks have faced recently.

As usual, it seems to be a perception versus reality issue, but I believe there is a willful ignorance on the part of both the press and the general public.  I suppose I should elaborate before the hate-mail gets sent.

First off, not all banks are the same.  Just as you shouldn't judge a person by their skin or gender, you shouldn't rush to judge an organization simply because it belongs to a particular group.  There are good banks and bad banks, just like there are good and bad people.  

Several investment banks, like Bear Stearns and Lehman Brothers, were gambling with tax-payer dollars, and they deserved to go bankrupt.  Their shareholders and bondholders should have reaped what they sowed, though, and taxpayers need not have been involved.  Nor should bankers have been allowed to gamble with tax-payer dollars.  I don't blame a 3-year-old for asking for a full-sugar and caffeine soda 5 minutes before bed; I do, however, blame their parents for giving in.  So it is with banks.  I expect a very small minority of bankers will be vicious (that must be accepted in any society), but the real fault lies with a government that supported and encouraged that vice, not with all bankers as a group.

Most U.S. banks aren't like that, though.  They are more like the Bailey Building and Loan Association from It's a Wonderful Life: they take in deposits on which they pay interest and lend those dollars out to borrowers at higher interest.  They don't gamble with tax-payer dollars.  In fact, they provide the vital life-blood that keeps a modern economy like ours flowing.  Lumping all banks together because we know of a couple of bad ones has parallels with Ku Klux Klan "reasoning."

Also, just because a bank has been "bailed out" doesn't mean they are bad, either.  Keep in mind the U.S. Treasury and Federal Reserve didn't give many banks a choice on taking a "bail-out," and most of those good banks didn't need or want it.  Once again, this reasoning is like blaming someone raped or mugged for "giving in" instead of blaming the real perpetrator.  Just because some people are ignorant of these facts does not forgive their avowed but poorly informed conclusions.

Second, a lot of what banks have been blamed for recently is the result of well-meaning politicians that are clueless to the point of being vicious.  Let's take the recent furor over Bank of America charging $5 per month for debit cards.  

A bunch of politicians have decided, in their infinite wisdom, that banks are charging too much for interchange fees.  Instead of letting customers, banks, networks, merchant acquirers, and merchants decide what's fair, the Federal Reserve is now inserting itself in the process of free interaction to dictate what fees the participants can charge each other.  

These same politicians also decided they don't like overdraft fees.  It's not nice, they say, to charge people for trying to buy things they don't have the money for.  The bank should say thank you to their unmathematical customers instead of charging them for borrowing money without making prior arrangements. (As a side note, I have paid overdraft fees several times in my life and didn't enjoy it.  I did not, however, blame the bank or society at large for my mathematical mistakes, I was mad at myself.)  

What is the rational response of an organization that has bondholders, shareholders, employees and more-mathematically-inclined customers to take care of?  Raise the same amount of money elsewhere in the form of additional fees!  Why should some bondholder have to eat that overdraft fee or lost revenue from interchange?  Why should the shareholder, or employee, or customer?  They shouldn't!

No rational person expects one bus-driver to take a pay cut to support another bus-driver who is too lazy to know how much money they have in their account.  Nor do most people think that politicians should arbitrarily cut a bus driver's pay because some passengers don't feel like paying that much.  So, why would it be any different for banks?

Banks are now quite logically raising additional fees and turning away customers it used to accept.  In addition, fewer customers are getting credit and debit cards, fewer merchants can afford to accept the cards, and services that were once free--like checking accounts--now frequently require fees.

This is all quite logical and predictable, even to narrow-minded politicians who wish they could have their cake and eat it, too.  The only surprising thing is that they thought their laws would have no unintended impact!

Third, politicians are crying for banks to lend more money while--at the same time--raising their capital requirements (if banks lent more money, all else equal, they would violate the old capital requirements--let alone meet the new ones).  Politicians are also saying banks aren't being generous enough in offering credit to those who need it while--at the same time--bemoaning the fact that banks have so much bad debt on their books.  The blatant contradictions in both of these views should be obvious to anyone with knowledge of banking, but that apparently isn't required for politicians who regulate banks.

We don't need to send banks to their room for being bad.  We need to unshackle them so they can do their jobs.  I've read that banks now need 1.2 employees to keep up with regulatory requirements for each employee taking deposits and making loans.  Perhaps if banks weren't so busy meeting all these new and old regulatory hurdles, they wouldn't be gambling with taxpayer dollars, charging high interchange and overdraft fees, and they'd be making more loans, offering more services and getting the economy going again.  

That doesn't seem very likely, though, given all the shrieking from the press, public and politicians about how bad banks are.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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