Author: ken

Watch Out

A significant number of the wizards who put together the giant banks now “too big to fail” are having second thoughts.  “Sandy” Weill, the key player in setting up Citigroup, for example, recently proposed on CNBC, “we should probably . . . split up investment banking from banking . . . .  Have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.”

He added:  “I think the earlier model was right for that time.  I don’t think it’s right anymore.”  But what is different now?

Earlier there were lucrative deals that ended up making Weill a very rich man, along with many M&A specialists.  As a result, though, we now have banks that are bloated, rife with competition, fraudulent practices and incompetence, obviously unable to manage their internal complexity.  But did it ever work?

According to The New York Times, the answer is a resounding “No.”  “By the mid-2000s, Citigroup was a flop. The business synergies never materialized and the stock was lagging.”

Moreover, “Throughout the 2000s, Citigroup was riddled with scandal. It settled with the Federal Trade Commission over deceptive practices. Its CitiFinancial unit was embroiled in predatory lending controversies before it was fashionable. The bank was an entwined backer of both Enron and WorldCom. Citigroup employed Jack Grubman, who was at the heart of the research conflict-of-interest scandals of the early 2000s . . . . Things got so bad that the otherwise somnolent Federal Reserve actually banned Citi from making any more acquisitions while it sorted out its mess.”  (See, “As Banking Titans Reflect on Their Errors, Few Pay Any Price.”)

Weill is not the only banker now publicly questioning the wisdom of these behemoth banks.  Philip Purcell, the former chief executive of Morgan Stanley and David H. Komansky, the onetime leader of Merrill Lynch, two other main figures in the fight to repeal Glass-Steagall, have echoed similar concerns about deregulation.  And John Reed who jointly managed the original Citibank merger in 2000, called it a mistake in 2009.  (See, “Weill Calls for Splitting Up Big Banks.”)

The bankers with second thoughts may have another concern apart from the safety of the global financial system:  the listless stock values of Citigroup and the other big banks.  Big banks may promise big synergies, but they have not delivered.  Investors, mindful of the problems managing banks on such a scale, have not been enthusiastic.  The Times commented,“Both Mr. Weill and Mr. Purcell noted that cleaving apart big banks would improve their stock market values.”

In other words, back then creating the behemoth banks was a way for their top executives to make a bundle of money.  Breaking them up now would be a way to make another bundle.  One has to wonder if, without such a motive, would the industry elders be speaking up?

When the elephants dance the ground gets trampled, and the smaller animals had better watch out.

 

 

 

 

 

 

Or Would They Rather Just Make Money By Themselves?

We used to take banks for granted as places to store our money, and sometimes we borrowed money from them as well.  But recently it has looked like banks were getting tired of those boring and unprofitable tasks.

The dismal interest rates they offered for our savings didn’t offer much competitive excitement.  The increasing role that robotic ATMs play in our daily lives didn’t provide relationships with consumers.  Or perhaps you’ve had a frustrating run-in with a “Relationship Manager,” trying to sell you a “financial product” you didn’t need or want?  This is all in dramatic contrast to the exuberance with which banks offered money to those without assets a few years ago, loans and mortgages they could then securitize and sell to investors.  You had to wonder what business they thought they are in.

Such thoughts recently occurred to Richard X. Bove, a well-known bank analyst, reflecting on the poor service to be had received at his local bank:  “catering to customers may actually distract from the pursuit of making money in the new world of finance. What really matters, he now believes, is pushing products and managing risk.”

“I’m struck by the fact that the service is so bad, and yet the company is so good,” said Mr. Bove.  In other words, you might well consider investing in a bank you would never want to patronize.  As reported in The New York Times, “Mr. Bove upgraded his recommendation on Wells Fargo stock to a buy last year at about the same time that he began to move his personal bank accounts to a nearby JPMorgan Chase.”

He concluded: “Whatever it is that drives people to do business with a given bank, in my mind, now has to be rethought.”  And it looks like the public agrees. Only 21 percent of Americans had confidence in banks, according to a recent Gallop Poll, “down 2 percentage points from a year earlier and way off the 41 percent in 2007 before the crisis.” (See, “Bank Analyst Sees No Payoff in a Customer-Friendly Focus.”)

But perhaps the banks themselves are beginning to see the problem.  JPMorgan Chase just reported a plan to separate its consumer and investment operations.  It is being viewed, in part, as a way to prevent disastrous investment blunders in the wake of its recent six billion dollar trading loss.  But it is also a way to strengthen its consumer business.

On one level the restructuring is a way of “showing that plain-vanilla banking operations are entirely cordoned off from the bank’s potentially risky investments.”  But on another, they need the income.  As one analyst put it, “Banks like JPMorgan . . . cannot depend on profits from trading.” (See, “After Huge Loss, JPMorgan Rearranges Top Officials.”)

Perhaps Mr. Bove would be pleased to find banks on the verge of a turnaround, rediscovering the value of their retail operations.  One analyst with Barclays, commenting on the decline in investment profits, put it more dramatically:  “These companies will live and die on their ability to serve the clients.”

 

 

 

And What Is the Going Rate For a Felon?

So many convicted felons in the US seem to go on to have active and lucrative media careers.

The BBC News Magazine recently complied a list.  Martha Stewart, convicted on insider trading, is back on TV.  G. Gordon Liddy, the Watergate burglar, became a staple of Fox News.  Jack Abramoff, the lobbyist convicted of corruption and jailed for 3 years, was recently invited to comment on CNN.  Henry Blodget a former Wall Street analyst convicted of fraud regularly comments on CNN.

And the list of those in the financial industry is growing. “Is there a financial news channel that wouldn’t take an appearance from Bernie Madoff?” asks Todd Gitlin, a sociologist and professor of journalism at Columbia University.  “American television networks long ago relinquished their role as a moral arbiters,” noted the BBC reporter.  (See, “Jack Abramoff on CNN: Why does US TV book bad guys?”)

What does this mean?  Another sociologist attributes this “decline of public moral standards” to “the moral relativism of the 1960s.”  He notes,  “We live in a world where it’s much harder to define good guys and bad guys.”

Though that is true, there is little ambiguity about the jail sentences of the culprits, and often little doubt that they were well deserved.  It looks as if this is more about celebrity trumping ethics.

Decades ago Andy Warhol claimed, in a burst of optimism, that everyone would have 15 minutes of fame.  Certainly he was right that fame would be increasingly distributed and cheapened.  But it has not worked out quite as equitably as he predicted.  Not everyone gets 15 minutes, and some get inordinate amounts and go on to enjoy lasting careers.

The BBC article quotes Ron Powers, a Pulitzer Prize-winning television critic, who says it illustrates “the contempt” TV producers have for audiences.  “It’s a way of saying to the viewer: ‘We put this guy on the air not because he has any particular expertise, but because we have a strong suspicion you don’t read much, and here is a name that you can maybe titter over.’”

That’s probably closer to the truth.  But you can tell that Powers himself has some contempt for the producers who have such debased standards as well as for the ignorant public to whom they pander.  Todd Gitlin tells of calling the TV news host Tim Russert some years ago after the right wing firebrand Rush Limbaugh appeared on Meet the Press, a much respected Sunday morning interview program.  Flabbergasted, he asked why the show had booked Limbaugh.  “The answer was not he knows something about Iraq,” Gitlin says. “He said to me, ‘he speaks to 20 million people.’ That was a marker of what is considered valuable about a person on exhibit on a major news show.”

Basically it boils down to money.  More viewers mean more advertising revenue.  But that is not the only way in which attention has become valuable:  hits on a website, “friends,” YouTube clips, tweets, “likes,” endorsements, “reviews” – they can all be used to produce profit.  There is a simple equation.

In our culture, where news is entertainment, fame is money.  We may worry about the lack of judgment involved, but it doesn’t seem to matter.  You just have to be remembered.

 

Too Close?  Not Close Enough?

 

An investigation into why federal regulator’s failed to detect the dangerous trading practices at JPMorgan Chase reveals a dilemma that has not gotten enough attention.  The examiners have to get close to the banks they regulate or else they won’t understand what they are doing or why.  On the other hand, if they get too close, they will inevitably get sucked into identifying with them.  If that happens, they can either fail to see the danger or they will discount it.

According to The New York Times, the New York Federal Reserve Bank “in mid-2011 replaced virtually all of its roughly 40 examiners at JPMorgan Chase to bolster the team’s expertise and prevent regulators from forming cozy ties with executives.

“But”, the Times went on,  “those changes left the New York Fed’s front-line examiners without deep knowledge of JPMorgan’s operations for a brief yet critical time.”  Enough time, apparently, for traders at the bank to lose at least five billion dollars. (See, “Regulators’ Shake-Up Seen as Missed Bid to Police JPMorgan.”)

The dilemma is familiar to virtually all professionals.  As “participant-observers” we become part of what we need to understand, while trying to maintain the detachment essential to seeing clearly.  Certainly as a psychologist I feel it all the time.  I have to get close to my clients to understand them and to empathize with the meaning and motives behind their actions.  At the same time I have to maintain sufficient objectivity to see the dangers in what they do and feel free to speak up about them.

“Cozy ties” with clients are not only inescapable in a professional relationship, they can be a vital source of information.  As a psychologist, what a patient wants me to see about him tells me a great deal about who he feels he needs to be, how he needs me to think about him in order for him to feel safe.  Moreover, how he maneuvers and manipulates our relationship offers clues to what he want to obscure about himself not only from me but from his own consciousness.

It has to be the same with bankers and fund managers, and not just because they want to evade oversight.  They have their own unconscious desires to believe in their success and to fear their failures, and they want those who scrutinize their actions to share those convictions.  Those are not malevolent desires, but normal human impulses.

The secret to seeing what no one wants you to see is being willing to make mistakes and to learn from them.  It’s a skill, and it requires continual effort and self-knowledge.  Replacing examiners who make mistakes rather than training them to learn how they made them is just the wrong way to go about it.  They need to better detect the signals they missed and reflect on their vulnerability to collusion,

We are not machines whose “defective” parts can be simply replaced.  We have to learn from experience, and enlarge our consciousness in order to be more effective.  Indeed bringing in new examiners who haven’t made those mistakes is almost certainly a way to increase the likelihood that the same mistakes will be repeated.

 

How Cynical Have We Become?

Americans seem to take for granted the almost daily revelations of corruption in the financial industry.  It’s news, of course, when the manipulation of interbank interest rates is reported or a senior executive is convicted of insider trading.  But it fails to stir much outrage.

It seems different in London.  As the financial reporter for The New York Times, Gretchen Morgenson, wrote about the forced resignation of Barclay’s CEO:  “An American by birth, he probably thought he’d be subject to American rules of engagement when confronted with evidence of wrongdoing at his bank. You know how it works on this side of the Atlantic: faced with a scandal, most chief executives jettison low-level employees, maybe give up a bonus or two — and then ride out the storm. Regulators, if they act, just extract fines from the shareholders.”

She adds:  the Chancellor of the Exchequer, George Osborne, voiced before Parliament the question that so many have asked recently in the United States. “Fraud is a crime in ordinary business — why shouldn’t it be so in banking?”  In Washington, meanwhile, proposals to increase transparency in the trading of financial derivatives are being quietly squelched.  (“The British, at Least, Are Getting Tough.”)

Why are Americans so inured to such scandals? On the other hand, why are the British not?

America has become like a third world country, in a way, where people expect government officials to accumulate fortunes, or routinely pay bribes to local officials to do their jobs.  It is how their systems run.

But why?  I suspect there are two reasons.  America has always thought of it self as “the land of opportunity,” and making money on Wall Street, in a way, is just another opportunity for the up-and-coming to get ahead.  So unless we are directly affected by the unethical and immoral behavior of the bankers, the victims, say, of a Ponzi scheme or mortgage fraud, we can identify with their success.  We are all adversely affected by such bad behavior, but the connection seems remote.

The second reason is that we have, in effect, ceded control of the economy to this new class of financial “experts.”  Following the collapse of communism, we have devised no plausible alternative to the logic of markets.  Old perspectives are discredited, but until new ones come along we are in the hands of those who think they know what they are doing, who claim success, and ridicule others.  And the vast sums of money they have raised increasingly stifles debate while maintaining an enormous lobbying presence in the halls of power.

England is not as far down this road.  Moreover, it still has robust unions as well as civil servants more insulated from politics than ours.  It also has different traditions, traditional identities, traditional practices, and traditional values that act as a break against our relentless “innovations.”

Our political debates can highlight the excesses of our “experts,” their greed, and corruption.  But in the absence of alternative policies, we are forced to accept their practices – including scandals – as the inevitable cost of doing business the only way we know how to do it.