“Too big to fail” is an interesting concept. So far it has cost billions of dollars. Is it likely to cost more? What did we get for the money? The concept is yet unproven – we don’t yet know if “big” is better. What if “big” ultimately leads to failure? Furthermore, what is “big” doing for, or to, American culture? Does “big” apply only to banks?
Most people believe the activists participating in tea parties are fed up with government. I’m fearful that it isn’t just government. Government happens to be the most visible component of our lives, and the one for which we have a vote. I sense a lot of anger simmering just below the surface in a lot of things people say. I fear the anger spreads beyond government.
Wall Street loves mergers. Analysts claim that consolidation is healthy; resulting in expense reduction and efficiency. They have other reasons for promoting mergers; they make billions on them. When it comes to banks consolidation is common. If you believe Wall Street, that’s good for America. If consolidation is good and improves efficiency, then banking should cost the average consumer less than it once did. There should be fewer fees and charges. With improved efficiency there should be better service. Experience shows that none of these things is true.
The average spread between the cost of the money banks lend and the interest rates they charge is known as “net interest margin”. A quick look at the numbers for the last forty years reveals an increase in the spread. Margins have decreased slightly on loans to big businesses, but have increased on consumer loans, meaning that consumers pay more. This is due largely to the advent of credit cards and other high rate products, but also to liquidity in money markets and improved hedging techniques.
Forty years ago fees were few and inexpensive. I know there’s been a lot of inflation since then, but do you really believe that bank fees, adjusted for inflation, are lower? What about the number of fees? Banks charge for just about everything. Some banks even tried to charge fees for using a teller.
What about service? Well, there are ATM’s. That’s service, but one on which banks make additional profit. I don’t begrudge them the extra profit, but I don’t see ATM’s as a benefit of consolidation.
To get loans people used to apply at branches and speak to lending officers. Today, they’re encouraged to apply online where costs are lower and questions go ananswered. They can apply in person, but not to a lending officer. Loans are electronically sent to processing centers located in low-wage states like North Dakota or Delaware, where computers generate credit scores. A low score results in higher rates or a big fat NO. There’s no chance to plead a case.
Years ago cancelled checks were returned with statements. Now, copies of cancelled checks are available for a fee. Computers process checks, replacing those who used to do it. Where did those savings go?
Last, but certainly not least, what about the people who lose their jobs? What about the stress on those in fear of losing theirs? What does that cost society? Has consolidation benefitted us?
Banks have gotten so big that they don’t trust anyone. I’d venture to say that any cost savings realized through consolidation has been spent on lawyers. Lawyers assume that all customers represent potential lawsuits, even long-standing customers. As a result, virtually everything that used to be done as a service now requires signatures on legal documents. In a big bank there’s no such thing as common sense and reason.
Take the case of a long-standing customer with a joint checking account and two ROTH IRA’s. Pre-merger, all he had to do to make a ROTH IRA contribution was call the bank and request a transfer. Now the bank refuses the request until he signs a three page document; two of which consist of disclaimers.
Big banks don’t even trust their own employees. To soothe the resulting paranoia, big banks hire lawyers to write manuals dictating every aspect of the work to be performed. They also require employees to sign attestations. This is to all prevent lawsuits. Unfortunately, this also eliminates any initiative or creativity an employee might have.
Employees can lose identity with their employer. They’ve become little more than numbers. Sure, they get names like “Associate” or “Team Member”, but those are empty gestures when work is conducted according to a manual, or when employers question honesty. That lack of loyalty or identity tends to make some people lackadaisical or, worse, dishonest. They develop a mentality similar to that which prompts people to believe it’s OK to cheat the government or an insurance company.
Span of control is an important concept in management. It’s critical for senior management to be aware of events two layers below – something that’s nearly impossible in very large organizations. A good example of this might be the rogue trader who lost $680 million for Allied Irish Bank. Being Irish, senior managers were in Ireland. American management was in disarray – confused by multiple reporting lines. There were red flags and warnings, but they went unheeded because no one felt responsible.
Big banks are very political in nature. Managers are very protective of their “turf”, and feel little loyalty to the organization. Consequently, bad news is hidden or embellished by each layer of management so that those in senior positions are often unaware of problems. A case in point is Bank of America. In July 2008 as the credit crunch was reaching a crescendo Ken Lewis, CEO and Chairman, announced a dividend increase and stock buyback that was cancelled in August. Someone apparently fessed up.
There is a limit to the size an organization can achieve without significant problems arising. I suggest many banks have exceeded that limit. If I’m right, “too big to fail” will come to mean “destined to fail”. In some businesses little harm would result, but in banking the outcome is likely to be national disaster.
The last article in this series on banks will appear in a few days. I imagine you already have a good idea of what it will recommend.
What value do they add? As Warrren Buffet stated -”when the tide goes out you see who has a bathing suit on”. Banks are now in the fee business almost exclusively.
The Federal Reserve has created a temporary period of virtually free cost of funds for the banks to increase their profitability and earn their way out of this economic struggle. However, their primary new product is a set of fees of every imaginable flavor. This is beyond a lack of creativity. A new low has been achieved and I think the only humane thing to do is to take the patients(banks) off of the life support and move on. If big were better Miss America would weigh a ton.
It appears on every corner where once stood a gas station now stands a bank.
In the world of massive online shifts the banks continue to build virtually empty branches. Don’t they believe any of the oversupply issues faced by other sectors of the market. No I am afraid they are institutionally no longer capable of dealing with the truth. Their business model has been done in by their own hubris and like bad breath you are always the last to know.
Comment by H. Bangs — February 21, 2010 @ 7:26 PM
I certainly don’t know how to “reform” the banking system but perhaps more competition and specialization would help.
Don’t mix standard lending (i.e. retail home mortgages) with credit cards and require institutions to “declare” the business they will be in and enforce that decision.
Should make for “real” competition and then the cost vs. service model could work and cost could come down.
Comment by E — February 27, 2010 @ 7:47 AM