The end of banking as we know it....
By Number Six
Monday, January 19, 2009 at 01:27 PM
Excerpt from Wikipedia:
Chairman and CEO Kerry Killinger had pledged in 2003 âWe hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Loweâs-Home Depot did to their industry. And I think if weâve done our job, five years from now youâre not going to call us a bank.â
Killinger was the CEO of what used to be Washington Mutual. It's been five years, and yes, we cannot call them a bank anymore, now can we? No, we call them a total trainwreck, upside down, smoking just off the rails of finance. And they are not alone.... As a follow-up to my last piece, sort of, a piece in The New York Times sums up nicely a lot of what I'm aiming at: The era of "Big Finance" is now playing taps:
The concept of the financial supermarket — the all-things-to-all-people, intergalactic, behemoth banking institution — bit the dust last week.Reminds me of what was once said of the Convair B-36: So big, it was like flying a house....
The first death notice came on Tuesday, when Citigroup, Exhibit A for the failure of the soup-to-nuts business model, said it was dismantling. Just over a decade after the deal-maker Sanford I. Weill tried to meld insurance, investment banking, mortgage lending, credit cards and stock brokerage services, the dissolution began.
Citigroup, it turned out, was too big to manage, too unwieldy to succeed and too gigantic to sell to one buyer.
A few days later, Bank of America, another serial acquirer of troubled institutions —Merrill Lynch and Countrywide Financial most recently — fessed up that its deals now need taxpayer backing. The United States government invested an additional $20 billion in Bank of America (after $25 billion last fall) and agreed to guarantee more than $100 billion of imperiled assets.More like rolled in flour, egg, milk, stuck into a pressure fryer and now, we wait to see what french-fried banking looks like, methinks.
Clearly, the entire financial industry is in the midst of a makeover. And while no one wants to call it nationalization, perhaps we can agree on this much: The money business as we have come to know it over the last two decades — with its lush salaries, big-swinging risk-takers and ultrathin capital cushions — is a goner.
Got that? Toast. Toe-tagged.
But, weren't these the same a-holes who lobbied Congress no end to do just that? To become Uberbanks??
And that’s a good thing, because maybe we can go back to a banking model that is designed to do more than simply enrich the folks at the top of the enterprise while shareholders and taxpayers absorb all the hits.And the Big 3, and most of industry and you and me sit and wait for them to start pooping loans again, else, we'll need President Obama to get himself a cigarette holder, a monacle and start doing fireside chats....
It’s too soon to say how much taxpayer money will be spent trying to rebuild banks hollowed out by bad lending practices. Paul J. Miller, an analyst at Friedman, Billings, Ramsey, thinks that the nation’s financial system needs an additional $1 trillion in common equity to restore confidence and to get lending — the lifeblood of a thriving and entrepreneurial free-market economy — moving again.Translation: Banks that over-leverage, that is, that invent too much money won't do that anymore. Lehman, when they went nipples skyward, we're told, was at 80 to 85:1 leveraged, and that's totally insane, yes.
That $1 trillion would come on top of funds disbursed through the Troubled Asset Relief Program, which has tapped $700 billion, and the president-elect’s stimulus plan, clocking in at $825 billion.
Larger capital requirements, beefed up to serve as a proper buffer when lenders misfire, will be one change facing banks when we emerge from this mess, Mr. Miller said. He thinks regulators will require banks to hold tangible common equity of 6 percent of assets. Now many institutions hold under 4 percent.
But, I personally feel strongly that what will also be required is a return to FDR's deal about making money available directly to the public, as the banks, so far, are playing keepsies...with our money.
Finally, what will a humbled financial services industry mean for consumers? Higher borrowing costs, Mr. Miller said.Which means cars stay unsold, which means factories idle back or close, and this recession becomes a full-blown depression. Yeah, keep thinking that, guys, keep thinking that!
“The leverage that these companies were using allowed them to lower their rates,” he said. “Rates have to go higher for the banks to operate in a safe and sound manner and make money.”
Credit is also likely to remain tight, in Mr. Miller’s opinion. A result is that consumer spending won’t recover to bubble levels.
“It is going to be difficult to get credit, and that is something the system has to adapt to,” Mr. Miller said. “That is where the government is going to have to step in and replace that debt growth to make sure there is a smooth transition.”
In other words, Barack Obama’s first stimulus plan is not likely to be his last.Means? Several ideas, many which Big Finance won't like, but may become a necessity:
A Superbank. A fed-run and operated bank that sells loans direct to you and me, at a low, low interest rate, for consolidation, etc.
Restore Chapter 7 Bankruptcy: Allow the bench to sweep away credit cards, medical bills, signature loans, but you keep the house and yes, can bargain for a better rate doing so. Debtors get a clean slate, which, yes, will stay on the books for seven years, but....a clean slate...is a clean slate.
Reform the entire credit reporting industry: These bastards fictionalize crap out of thin air to make the good look bad, the okay look worse, and those with problems...non-existant. This needs serious work.
And finally, let's outlaw lobbying. The banks themselves lobbied to get their way, now, we see the end results of such shenanigans. The death of Big Finance is now, and let's bury it and move on.