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WHAT IS (AND ISN’T) A BANK OR BANKING?

April 16, 2013

WHAT IS (AND ISN’T) A BANK OR BANKING?

America’s first banker and Secretary of the Treasury, Alexander Hamilton, was killed in a shootout with Aaron Burr. He was a big believer in a national bank, but there were many who did not agree with him. His idea managed to survive, however, as did he, until Burr ended his sojourn here on earth. The national banking system survived his demise and has been a great facilitator of trade, finance and commerce ever since, especially after both state and federally chartered banks were finally rescued from their frequent panic modes by the security of one of FDR’s New Deal creations, the Federal Deposit Insurance Corporation. It worked. We haven’t had a “panic” since.

We had good reason to see panic in banking during the recent bailout brouhaha when banks were under water and several would have failed but for the bailouts you and I provided. However, even then it was not the old time panics of depositors lined up at the banks’ doors, demanding the return of their deposits. Their deposits were insured. They stayed home, thanks to FDR and his FDIC.

Banks in my day took in deposits for checking and savings accounts, maintained Christmas Accounts for the young, made loans to businesses, on houses, cars, refrigerators and other such items a bit beyond the reach of the average American’s paycheck. Unsecured personal loans were even available to the very credit-worthy. Credit cards and services offered by Wall Street “banks,” hedge and equity funds, and other such organizations loosely defined to be a part of the “financial sector” were on the horizon but not yet important players in what we then called “banking.”

The Great Depression with its bank failures throughout the land brought us the FDIC, which has been the answer to panics, but that statute’s effect was limited. We needed another statute that would deal with the practices of bankers in the “Roaring Twenties” just prior to the Great Depression who had begun to use depositors’ funds as their own in playing the markets, essentially as so-called “investment bankers.” It was clear that we needed an Act that would put a wall up between commercial and investment banking in order to keep “banks” from taking depositors’ money to the casino and “playing the market.” It came shortly after Roosevelt’s inauguration in 1933 – it was called the Glass-Steagall Act. Like the FDIC Act, it did the job. So-called “bankers” could invest as they pleased (subject to applicable rules and regulations), but none of such investment could come from the commercial side of their operations.

Fast forward to 1999 – After years of Wall Street banks’ whining about overregulation (and substantial campaign contributions to members of Congress), Clinton (with the blessing of Rubin and Greenspan – both themselves former Wall Streeters – Rubin still is) signed a bill that never should have been passed by the Congress, a tragic repealer of Glass-Steagall, the very worst mistake he made in eight years as president. Wall Street “banks,” vulture capitalists, private equity firms that began doing leveraged buyouts (see Bain Capital), multinational corporate financing (jobs to China) proliferated.

The financial sector very shortly thereafter began reaping over a third of the nation’s income when their share in the 90s had been a quarter. Those who only provide money, in other words, are coming up on forty percent of the nation’s income, which will leave sixty percent for everything else and the rest of us. That is not neighborhood banking as I remember it. In my book, it isn’t even banking. The financial sector is one giant example of casino capitalism with its securitization and establishment of a market for  any and all even faintly identifiable assets, access to leveraged funds from participating “banks” and others for their corporate raids and takeovers of hapless corporations, tenacious resistance to reinstatement of Glass-Steagall and the Volcker Rule (which would prevent FDIC-insured funds from being used by Wall Street casinos – aka “banks”) etc., all accompanied by an air of arrogance that usually goes with being superrich.

Jaime Dimon, CEO of JPMorgan Chase is a case in point. He signed off on a trade in credit derivatives for the bank conducted by a trader known as the “London Whale.” The bank lost over 6 billion dollars on the trade, a trade in the same class of assets which nearly brought us a world-wide depression not so long ago. A Senate sub-committee report revealed recently that Dimon had signed off on the Whale’s trade and also “misled investors and the public” about the trade(s). The Justice Department and the FBI are investigating. The bank’s board punished (but did not fire) their CEO – the board cut his bonus for the year in half –  down to 11.5 million dollars. Some punishment!

So what is going to happen to Dimon down the road? Probably nothing. After all, 2012 was the bank’s most profitable year ever. It appears that arrogance and misleading the investing public pay off. One wag points out that his bank in this Whale deal only “repeated the same misdeeds that other banks successfully pulled off at the height of the financial crisis,” and regulators are still asleep at the wheel. For years, they’ve (federal regulators) averted their eyes “from rotted bank assets and rotted bank morals; why would JPMorgan expect any different reaction in this case?”

This commentator goes on to note that “Even if this (Senate sub-committee) report puts pressure on regulators to finish a simplified and loophole-free Volcker Rule, which would prohibit banks from making bets for their own profit using taxpayer-backed money, there’s no reason to have even the slightest confidence that big banks – or regulators – will play fair.”

The foregoing is a cynical commentary, to be sure, but one presumably borne out of experience. One wishes to believe that government regulators are fair and above-board in their representation of the public interest with the financial industry’s lobbyists and executives, but I must confess myself that I am uneasy with the number of former regulators who go to work for Wall and K Streets upon completion of their government service. It is conceivable that in some instances there are “rotted morals” on both sides of the regulatory table. Such thoughts are depressing; I don’t want to go there.

So where are we? What is a “bank?” What is “banking?” Does the idea of free market capitalism mean that “banks” have an unfettered right to shoot craps with our money? If so, then what about the other side of the free market coin? Does the idea of free market capitalism mean (as Steven Pearlstein asked) that we must live with stagnant incomes, gaping inequality, a string of financial crises, and 20-somethings still living in their parents’ basements? When does our time come to share in this bounty?

Are we the people so rudderless and helpless in the face of arrogance and wealth that we throw in the towel and go along with the takeover of our country (and our meager savings) by these captains of casino capitalism? Let’s hope not – so will real commercial bankers among us stand and be identified? We have business to do, and with our own (unleveraged) funds – just like in the old days.  GERALD  E

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