Whither Commercial Banks- Again?

Friday's Wall Street Journal featured a surprisingly illogical and, frankly, misrepresented editorial by David Smick, who was described as CEO of Johnson Smick International, entitled "Europe Is No Model for Our Banks."

The heart of Smick's contentions appear in this passage, early in his piece,

"The Krugman Democrats opt for nationalizing today's troubled banks. The Summers Democrats counter that dramatic bank restructuring, including nationalization, could collapse the system. Instead, the Summersites favor turning big banks into something similar to local electric or water companies -- heavily regulated, unimaginative public utilities.

Given their recent spree of arrogance, stupidity and greed, bankers deserve as much. But would it be in America's best interest for banks to be talent-deficient utilities?

Our largest 10 banks control 75% of total bank assets. They channel pensions and other investable assets as well. If these banks start acting like utilities, they'll take far fewer investment risks. That will lead to less investment in business expansion, lower economic growth and higher long-term unemployment.

Few want to admit it, but economic prosperity and job-creation depend on financial risk-taking. Because of the credit crisis, we are moving from an era of reckless financial risk-taking to an ironically more dangerous era of virtually no risk-taking."

I'm afraid Mr. Smick misunderstands how modern money center banks actually work. First, they aren't the incubators of venture capital and job-creating innovation he seems to think they are. Their recent risk-taking was not in the area of portfolio lending. And his citation of "pensions and other investable assets" refers to the rather stodgy money management units of banks, which, again, are not typically making loans to startups.

I don't know in what alternative universe Mr. Smick studies commercial banking, but it pretty clearly isn't one containing the US economy or banking sector.

Smick writes, near the end of his editorial,

"If the banks become public utilities, innovation is at risk of drying up. That's what happened in Japan in the 1990s when policy makers focused on saving existing banks in lieu of creating healthy, financial risk-taking.

America has traditionally been the world's hothouse of innovative risk. The long-term consequences of losing that position could be catastrophic."

His last statement is true, but has little to do with America's commercial banks- especially the largest ones. He is referring to venture capital and private equity, but not to commercial banking as practiced in recent decades by our money center banks.

Granted, another recent editorial put fear into the hearts of some friends of mine, and me, when we learned that the current administration wanted to 'stress test' the debt involved in venture capital-backed startups. That is worrisome. Venture capital firms don't typically allow for much debt in their funded companies, nor do most banks, as the article noted, extend much more than receivables-backed operating financing.

However, Smick misses all this and mistakenly worries that acknowledging the moribund nature of lending at our large commercial banks will somehow change venture capital funding.

We have some challenges in our financial sector at present, but they aren't what concerns Mr. Smick.

I don't even understand how his ill-conceived and mistakenly-reasoned piece made it into the Journal.