Holman Jenkins On Bank Bashing

Holman Jenkins, Jr., of the Wall Street Journal wrote a thoughtful, if somewhat murky piece in this past weekend's edition of the paper.

Entitled Why We Aren't Bashing Banks, Mr. Jenkins seemed to attempt to address a number of specific topics related to the Greek and European debt/bank crisis, including responding to left-wing economist Paul Krugman.

What interested me about Jenkins' article, however, were two of his contentions.

The first is that

"politicians find no upside in bashing bankers right now for good reason, since the whole game- 100%- is maneuvering the European Central Bank and its chief Jean-Claude Trichet into a more pliant mood so they will prop up Europe's banking system to permit sovereign debt restructuring to go ahead."

In effect, Jenkins, along with others, alleges that the truth is that bankers bought now-nearly-worthless Greek sovereign debt which, if carried at its correct value, would result in insolvent banks, a severely damaged European banking system, and, for good measure, no more private banking institutions to roll over and hold more of the rotten paper while the European Union figures out what to do about the mounting financial problems of larger EU countries, such as Ireland and Spain.

Thus, despite criticisms of cronyism, the regulators and central bankers are seen to be bailing out Greece, in order to bail out Europe's banks. And right now, that more or less equates to Germany bailing out the EU's banking sector.

My own fascination with this situation is how twisted and selective our international central banking and regulating authorities have become, such that they implicitly suspend the need for banks to recognize losses in value of assets they hold, so soon after the recent financial crises which involved precisely this sort of phenomenon.

Ask yourself why anyone in his right mind would own equities of large banks when such flagrant misstatement of asset values is allowed. If it weren't sanctioned by regulators, it would be called what it is- fraud.

Jenkins' second topic of interest was this passage,

"Here's guessing that a world without too-big-to-fail banks would not be bereft of financial innovation or diversified services aimed at every kind of customer."

He's probably right. My original research on consistent total return performance took place when I headed the research function at then-independent Oliver, Wyman & Co, revealed that the worst-performing financial institutions were the broadly-diversified banks. They hit every financial pothole which occurred- credit cards, mortgage lending, third-world debt, etc. The most consistently-superior performing firms were the more focused asset managers, credit card lenders and mortgage banking firms.

When income from diversified business mixes isn't used to prop up ailing units and mask weaknesses, firms tend to either succeed or fail rather dramatically.

Whether that would happen again, or not, I can't say. It may well be that we've had more financial innovation than any global economy can stand for a while. But, as Jenkins implies, with smaller, more nimble and focused financial institutions, profitable innovations would succeed, others would not, and investors in and lenders to such enterprises, rather than taxpayers, would enjoy the appropriate consequences.