Drive through the Pioneer Valley, and you’ll likely see this royal blue bumper sticker: “Don’t Blame Me … I Bank Locally!” In 2009, at the height of the crash, Florence Savings Bank started handing them out free to customers. The back story: Florence is a village in Northampton, and the bank is the top mortgage lender in Hampshire County. As such, it was quite proud to have made exactly zero subprime mortgage loans, thereby staying out of the hot mess. That’s ALSO how it worked for the other hometown banks out here, and in much of the country; the little guys made better choices.
In this scenario, blame lay with the big banks. And, four years later, we still live in a climate of big-banker hatred. This makes it easy to liken institutions such as Citibank or J.P. Morgan—any of the “too big to fail” crowd — to mean Mr. Potter from “It’s a Wonderful Life.” Humble places like Florence Savings Bank, in contrast, glow like George Bailey.
Nevertheless, we need big banks to propel the national and world economy. So then: Is their vile reputation deserved? And what’s up with banking now? To find out, I checked out “The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It” (Princeton University, 2013). Economists Anat Admati and Martin Hellwig, as the title indicates, are all about seeing through the mystique. They say the world of banking is “dangerous and distorted.” They say banks portray themselves as fragile, unique, and hamstrung by regulations, and they are none of these things. They say banks use fog machines of jargon to throw us off, and feel justified in going rogue. Case in point: With most NONFINANCIAL corporations, borrowing represents less than 50 percent of their assets. But banks? It’s often 90 percent plus!
How can a supposedly prudent institution act like a wild child? Because banks can get virtually anyone to lend to them, seeing as they’ve got the twin safety nets of government default insurance (see FDIC) and government bailouts (see TARP).
“The present situation is perverse,” write Admati and Hellwig. The government doesn’t offer tough love, but rather a sort of laughable non-discipline. What to do? The book pounds quite the drumbeat here: Force banks to borrow less (they should make up the difference through issuing more equity stock) and so inject sanity into the system. Otherwise “[d]istressed borrowers MAY become excessively cautious or excessively reckless,” the authors explain. A reckless over-extended bank makes highly chancy loans and implodes (see IndyMac). A cautious over-extended one cuts its loans so much it stalls the economy (see Bank of America). Either way, the rest of us bear the brunt.
Remember Bedford Falls’ black umbrellas in the rain, when there’s a run on Bailey Building & Loan? Bank runs still exist, but they aren’t so cinematic now — mostly people withdraw like crazy from their ATMs. And so to “The Lost Bank: The Story of Washington Mutual — The Biggest Bank Failure in American History” (Simon and Schuster, 2012). Kirsten Grind, of The Wall Street Journal, follows the under-reported smash of this Seattle-based prime player in subprime mortgages. One of its boom-era TV ads, for instance, showed a fellow digging through the garbage, looking for a pay stub to prove his creditworthiness. “WaMu can make getting a mortgage easier,” said the voiceover, adding their slogan: “The Power of Yes.”
WaMu would later learn the power of no when the FDIC chose not to save it. Why? If WaMu went down, it would take the FDIC’s entire $45 billion insurance fund with it. Thus J.P. Morgan bought it at a fire sale, paying $1.9 billion for WaMu’s combined assets of $307 billion and total deposits of $188 billion. FORMER FDIC chairman Sheila Bair covers that story and much more in “Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself” (Free Press, 2012). A Kansas Republican who’d worked for Bob Dole, Bair thinks conservative bankers “are the best kind.” As for the bailouts that did occur, she thinks “in retrospect, the mammoth assistance to these big institutions seemed like overkill.” She also acknowledges that it’s hard to pin banks down, much less regulate them. Bair is incensed at how banks cook up a spaghetti of different legal entities to skirt regulations and tax requirements. They hide assets like Mr. Potter hides Uncle Billy’s wad of cash in his folded newspaper.
And now I will ask an obvious question: Why have banks gotten so big? Not long ago — from 1933 to 1999, to be exact — there was a firewall between investment banks and commercial banks. That’s because the CONGRESSMEN behind the Glass-Steagall Act, passed in the wake of the failure of more than 5,000 banks during the Great Depression, realized that smaller was safer, and also reduced conflicts of interest. Before Glass-Steagall existed, you had the Roaring Twenties and the crash. After A chunk OF Glass-Steagall was repealed (allowing investment banks and commercial banks to combine into behemoths) you had the Roaring 2000s and the crash. Have we learned nothing?
Nothing at all, according to James Rickards. His “Currency Wars: The Making of the Next Global Crisis” (Penguin, 2011) foments lots of fury against banks (not to mention those behind Chinese currency manipulation). He says that we still haven’t regulated the banks enough, and that the Federal Reserve and Treasury, which should be on the job, are instead useless, like “two drunks leaning on each other, so neither one falls down.”
’Twas ever thus, I guess. “This Time Is Different: Eight Centuries of Financial Folly” (Princeton University, 2009) tries to explain why developed nations have managed to confine other financial calamities (sovereign debt default, runaway inflation) to history, but “no country has yet graduated from bank crises.” Partly it’s the double-edged sword of deposit insurance (banks take higher risks because they have a Plan B). Partly, it’s flimsy regulation. Carmen M. Reinhart and Kenneth S. Rogoff, the book’s economist authors, feature some meaty charts to drive their point home: One shows a glaring correlation between lax bank oversight and fat bank catastrophe.
Well, then. Are there any banks worth admiring? “The Price of a Dream: The Story of the Grameen Bank” (University of Chicago, 1997) spells out the remarkable (though hard-to-transfer-to-the-West) story of Muhammad Yunus’s micro-lending phenomenon that began in Bangladesh and whose overall goal “is to relieve suffering,” according to author David Bornstein. But if you’re talking seriously about poverty reduction, then you must read up on another pathbreaking institution. That bank doesn’t exactly tug heartstrings, but attention must be paid, if only for the sheer scale involved.
“Superbank: Debt, Oil and Influence — How China Development Bank Is Rewriting the Rules of Finance” (Bloomberg, 2013) comes to us from two BEIJING-BASED Bloomberg News REPORTERS , Henry Sanderson and Michael Forsythe. China Development Bank obviously believes that government control is a good thing and freewheeling Western banks offer a cautionary tale (China largely avoided our recession). Along the way, it’s arguably become the biggest poverty reducer of all time. Yes, there’s a dark side: CDB plunders rural areas to serve urban ones and is draconian in its loan requirements. Still, its emphasis on the long-term — the bank is dramatically reviving parts of Africa and Latin America — sets it firmly apart.
When it comes to modern banks, I guess the lesson is that big isn’t necessarily bad. Unchecked big, however, CAN SPELL big trouble. But don’t blame me: I bank locally.
Katharine Whittemore is a freelance writer based in Northampton. She can be reached at email@example.com.