"Why do we need these banks?"
How much investor equity has been written down- destroyed- in the past twelve months by the managements of the financial service firms I listed above, plus Bear Stearns? It surely tops $200 billion. And to those firms, you can add UBS, a foreign bank with substantial US operations.
Fannie and Freddie are now in danger of having to be resuscitated because they imprudently risked their investors' capital, too.
But with all this capital vanishing down the drain in less than a year, has our economy seized up? It has not.
I can still use my credit card. If I chose to buy a home in my locale, with 20% down, I could.
I don't read about any going concern complaining that they cannot finance operations.
So, let's ask the question again, in a modified form,
"If the largest US commercial money center and investment banks- except Goldman Sachs- vanished tomorrow into a single entity, would it matter to the US economy and its consumers?"
I believe it would not.
In this first of a two-part post, I'll explain why I believe that contention. In part two, appearing within a few days, I'll describe what I believe a perfectly functional, better-managed, private capital solution would look like.
Banks essentially do six things:
-take deposits
-lend to consumers for housing
-provide installment lending- a/k/a credit cards- to consumers
-finance business operations and underwrite their capital issues
-manage assets
-operate and participate in the financial 'plumbing system' of the US.
So let's review the potential outcomes of removing publicly-listed, privately-owned, meaning not government owned, commercial and investment banks from each of these activities.
Deposits below something like $100,000 are FDIC-insured. So if tomorrow, every commercial bank were replaced by a US Treasury or FDIC branch on the same corner, dispensing your cash and taking new deposits, you wouldn't really know the difference.
Consumer lending has been more successfully done by non-banks for decades. MBNA, Capital One, First Card, to name three, were or are non-bank credit card startups. MBNA was spun out of the Maryland Bank, but it ran and grew as a standalone firm.
You don't need to be a bank to be a successful credit card firm. These companies ravaged commercial bank credit card customer bases for a decade, than let themselves be bought back, at premiums, by the same banks off of whom they made their fortunes.
Mortgage lending has actually never been a big commercial bank business. That's why S&Ls were around. Before Countrywide, there were other national mortgage lending companies, the most recent from the 1980s being Lomas & Nettleton. Again, banks would buy these standalone mortgage lenders at premiums. No need for a publicly-listed bank here, either.
What about lending to and underwriting of businesses? Private equity can do that. And does. Or dozens of smaller investment banks which are still private partnerships.
In fact, due to the loss of their AAA credit rating by most commercial banks two decades ago, they have used their balance sheets as staging areas to securitize commercial loans and capital offerings.
What about asset management? That's not even a commercial or investment bank business to begin with. It's probably one of the two (the other being retail brokerage) largest cottage industries in the financial services sector. Think: Fidelity, Vanguard, T Rowe Price. Commercial banks buy these units. Or compete half-heartedly with second-rate employees who aren't paid as much as their more skilled colleagues at hedge funds, private equity shops and the better fund management complexes.
What's left? Financial plumbing.
The one thing that a Federally-chartered US commercial bank can do that nobody else can do is access various secure financial transaction networks. Fedwire, Chips, etc. Somebody has to provide secure, identity-assured means for clearing and settling any transaction in the US that requires cash to be exchanged. From your debit card to settling large-scale asset sales of businesses, DDA accounts and electronic transfers have to be made. Foreign exchange transactions have to be settled.
But a 'bank' that does these things, like BONY-Mellon or State Street Bank, doesn't have to even be a big player in anything else. And their risk is nearly microscopic, next to the tens of billions of losses being taken by their lending brethren.
You could easily have just two or three financial plumbing-oriented competitors in the financial clearing-systems sector, and most Americans- consumers or business- would never know the difference.
So if, on Monday morning, only one or two 'banks' existed where once Citi, Chase, BofA, Wachovia, Wells Fargo, Lehman, Merrill Lynch and Morgan Stanley had once been, doing the same businesses with the same inept class of employees and senior management, would anyone really notice, from a functional perspective?
Credit would be available. Deposits would be available. Capital offerings would be underwritten. Assets would be managed.
We don't have a financial/bank crisis in the US. We have an oversupply of mediocre management running too many mediocre, publicly-listed financial service firms.
Now is the time to weed them out and let them die/consolidate.
As I will discuss in part two of this post, the Blackstones, TPGs, KKRs, Blackrocks, SACs, etc. of the financial sector are where the most competent, astute managers are. They have done a better job of risk management. Because, like financial partnerships of old, they own their risk.
Our modern, heavily-overseen and -regulated, publicly-listed financial services sector is a testament to the fact that all the regulatory oversight in the world can't take the place of good risk and business management in financial services.
In fact, it can be argued, and I do argue and contend, that regulatory oversight has taken the place of good management. The result is a crowd of less-talented people mismanaging publicly-listed, privately-owned financial services companies.
Don't prop them up. Don't rescue them- including Fannie and Freddie. Let them consolidate/fail, and make room for the more astute practitioners in the privately-owned, unlisted world of finance.
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