Where the Banks Went Wrong – The Beginning
By
It is always interesting to
hear U. S. Treasury officials, members of Congress and even candidates on the
campaign trail stating precisely the cause of the financial crisis we are
currently experiencing. It’s bad mortgages, they say, or greed on Wall Street or out
of control mortgage lenders or possibly Congress itself. One thing that is certain, there is plenty of
blame to go around.
The problem is that they are
all missing the point. Everyone’s frame
of reference seems to have a beginning sometime within the past ten years, so
let me give you a different view.
In 1976 I was responsible for
the lending activities of the
The bank in question defended
its decision by claiming that its loan review process would be able to weed out
the expected bad loans from the good ones.
Those of us who were in the business of
reviewing, analyzing, approving and recommending board approvals, knew
differently. However, we also believed
that no one would be dumb enough to follow such an ill-conceived concept
devised by a local Los Angeles bank, especially the major banking institutions
in
It was about a year later
that we learned that a major bank based in
What is particularity instructive
is not the specific issue of the sales commission but the shifting of emphasis
from courting and rewarding the customer to that of rewarding the employee at
the expense of the customer.
The era of the Depression of
the 1930’s has many lessons for us and I offer the following as an example that
we are not in new territory but a place we have been before. The quotation below is by Lindsay Bradford in
an address to the Savings Division of the American Bankers Association meeting
held in
“The actual facts are that
the problem is a simple one if we follow the logical rules of not attempting to
speculate in either credit risks or future interest rates. It is when we depart from the simple
principles and by a policy of expediency endeavor to make what I choose to term
‘unnatural banking profits’ that we sometimes find ourselves in
difficulties. Those banks will best
overcome the inevitable hazards of our complicated economic existence who have established principles of operation and faithfully
adhere to them.”
More importantly, he subsequently
mentioned a variation of something I had learned early on in my own financial
training with regard to the duties and focus of a bank officer: the number one
priority is the depositor, the customer who has placed his financial trust in
you; number two is the community, which is to be the beneficiary of the credit
activity of the bank; number three is the shareholder of the bank, who has
staked his own funds in its success and future.
The basic concept is that if you take care of the first two the third
one takes care of itself.
What began in 1976 was the
beginning of a change in focus. To bring
in accounts, no longer is the industry going to focus on the customer: no more toasters and free dinnerware for a new account as a
way of rewarding the depositor or the borrower.
The focus in the future would become internal when it came to
rewards. Rewards going forward would be
for employees and management.
The end result becomes a
reverse of what had been taught about banking and the bankers’ responsibility
so that the customer suddenly ends up at the tail end of the pecking order with
the bank staff being first, followed by the stockholder. The community completely disappears from the
plan because banks no longer have a sense of community, as they have gone
global.
As mentioned at the start,
this is where the problem for the banks began.
It is not the creation of the bad loan or even the creation of complex
financial instruments it is the system, culture and philosophy that has come to
permeate the financial sector which rewards bad and excessive behavior at the
expense of its customers in the name of having the ability to generate ever
increasing profits. Coming back to haunt
the banks is the old saying “Be careful what you wish for.” The banks have made
case after case in favor of de-regulation so they could compete in the global
marketplace, well, they’ve been successful.
The problems did not begin a
few years ago. Everything is tied
together and when the financial history of the 20th and 21st
centuries are written for the text books of the 22nd century what we
are trying to fix today will be seen as the second stage of the Savings and
Loan crisis and the deregulation of an industry that should never have been
deregulated as it was, nor allowed to roam free in the marketplace.
© 2008 Timothy Holland
First
Published: 10/06/2008
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