Why Do We Need Publicly-Listed Commercial & Investment Banks? Part Two

Last Friday I wrote this post about why publicly-listed commercial and investment banks are not, in my opinion, necessary any longer in our advanced, sophisticated economy. In that post, I wrote, in part,

"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."

Perhaps it's just best to view publicly-owned and -listed banks as distributors of other people's risk-managed lending. A sort of storefront with a shingle bearing one name- Citi, Chase or BofA- while the money being disbursed inside is supplied by another- TPG, KKR, Blackstone.

Who would know the difference? Would you really care if your loan officer is simply executing Blackstone's credit standards and approval process?

The major commercial lenders and underwriters seem to only be capable of safely operating retail financial sites or making connections between lenders/investors and borrowers. Beyond that, every one of them, save Goldman Sachs, proved itself incapable of prudent, proper risk management during a time of temptation.

As I wrote here, in March, there is a sort of 'wheel of financial services,' similar to that in retail merchandising. Only, in financial services, the wheel revolves through private and public ownership of the risk management institutions providing the capital. I wrote,


"It's a sad commentary on the acumen of the CEOs and senior managements running these firms: Citigroup, BofA, Merrill Lynch, Morgan Stanley, and Bear Stearns. The natural, if erratically-timed governmental response, is to save the financial system, and, thereby implicitly restructure the sector.

Risk and capacity are likely to be further concentrated, but, in exchange, more tightly overseen and regulated.A natural consequence to this will probably be even more smart financial services people migrating back to the privately-financed arena. Just like consumer goods merchandising has the 'wheel of retailing,' whereby new entrants compete at the low-cost end of the market, as existing players migrate upwards in terms of quality, service, selection and price, so, too, it seems, will financial services now have its own version of this 'wheel.'

Only in financial services, the 'wheel' is between publicly- and privately-held concentrations of capital and risk management. Again, viewed from afar over decades, the story of commercial and investment banking for the past forty years has been a gradual selling of transactions, asset and risk management businesses at their 'tops,' as formerly-private banks of both stripes went public, followed by managerial ineptitude, decline in risk management, and excesses in pursuit of growth via more risk.

Now that the public is absorbing the brunt of the losses, via equity ownership of these firms, the logical next step is for the better executives to join the early-adopters in forming new, or joining existing private equity and hedge fund shops."

I'm not sure that, in the long term, our financial services capital provision businesses are not better off in unlisted hands. Managers of publicly-held and -listed growth-oriented financial services firms, a relatively new creation, have generally demonstrated an inability to provide shareholders consistently superior returns. Rather, they tend to cycle through credit booms and busts, exercising no real risk management, pay themselves well during the booms, and wreck the companies during the busts.

Surely, companies owned by the managers who make the risk decisions can't do worse than this, can they? For both the economy and any of their private investors?