Fascinating discussion in Alan Abelson’s column in Barron’s today (Courting Trouble) about the Banking Sector.

It is, perhaps, only slightly exaggerated.

The main focus is on misaligned exec compensation, but the subtext is quite astonishing: According to Dennis Butler of Centre Street Cambridge Corp, the Banking sector, on aggregate over time, is a big money loser:

“[Butler] duly notes the key role banks had in the financial collapse and cites “one amazing statistic,” namely that “in the aggregate, banks have never made money over time.” Instead, “like the airlines, banks historically have seemingly made money hand over fist during good times, but they give it all back when the cycle turns.”But he asks, “How many bankers suffer the same fate when it comes to their own personal financial affairs?” And the answer to that question, Dennis believes, was a major factor in setting the stage for the encompassing financial crisis we’ve recently suffered through.

More specifically, he points to what he calls “a fundamental flaw in the corporate form of business organization—the lack of personal liability on the part of the people in charge.” The absence of personal liability is why individual bankers, whose feckless pursuit of loan volumes at the expense of loan quality caused “huge losses and public burdens,” were able to “walk away virtually unscathed” and loaded with loot.

The new reforms enacted by Congress may have a salutary effect for a spell. But he thinks that in the fullness of time, they’ll be diluted by lobbying and corruption of the regulatory oversight process. “As long as the incentives for personal gain and corporate risk-taking remain in place,” Dennis dourly concludes, “we fear that episodes of over-reaching will inevitably recur.”

Fascinating stuff.  I should pull the compensation section of Bailout Nation and post it; the conclusions about compensation are surprisingly similar.

I wonder what the math looks like: If we take all the banks, including the Indy Macs WAMUs and Countrywides and others that have collapsed, is the entire sector a negative?

Remove the survivorship bias and what have we got? That seems exaggerated at first blush, but when we consider the 1930s, the S&L crisis, and the current debacle, it may not be all that far fetched after all.

>

Source:
Courting Trouble
ALAN ABELSON
Barron’s, OCTOBER 16, 2010
http://online.barrons.com/article/SB50001424052970204742304575546131193805368.html

Category: Bailout Nation, Credit, Earnings

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

37 Responses to “Banks (like Airlines) Have NEVER Made Money…”

  1. DM RTA says:

    In a world where bankers and assorted other businesses can fail and investors can lose all their money, there is a powerful incentive to not let that happen. But when one of these cycles ends in a period where the corporatocracy has a firm control of our legislature, curious minds immediately wonder how long till the next Angelo Mozillo walks away with hundreds of millions for gaming the system? The headlines crowed about a $67 million fine imposed by the SEC only subsequent headlines claim B0fA will cover $20 million of that and meanwhile, one has to wonder how many of those 2006 &2007 mortgages he sold were aomg the 102,000 foreclosures last month, and how many were predictable upon close examination and simply sold off for fast gains under the greater fool principle? (Posing little risk to him personally)

    The fix seems straight forward: Fund all campaigns for Congress with public money. Further define freedom of speech so that one person one vote is attached somehow. Freedom of speech with no liability is fraud fodder. Freedom of speech with unlimited personal liability will give anyone pause. Then, make it so corporate officers have personal liability for their wins and losses. If this leads to a generation of smaller enterprises of all kinds then maybe the focus will return to building true value that will be around in a decade. Worse things could happen.

  2. I could not agree more.

    We have given up our system of Democracy due to dirty campaign money, and replaced it with a system of corporatocracy.

  3. gloppie says:

    Last time I checked, wealth comes out of growing, building or fixing things. Money is not a thing. It doesn’t grow. Money is only a vehicle for wealth, it is not wealth.

    So far, the MSM only reports on this from an almost condescending perspective, rolling out a clearly benevolent character like Deepak Chopra, who may be right but is nevertheless “foreign” looking in his appearance and delivery, as to be easily dismissed as [too strange] by the average wasp. http://www.cbsnews.com/video/watch/?id=4591650n

    You don’t need math, Barry; look at an average U.S. town “downtown” area.
    9 out of 10 times, you will find boarded up C.R.E. , Tatoo Parlors, Pawn shops and Bail Bonds in the shadow of a couple of towering bank buildings. The disproportion in size is very telling, and the amount of bank local branches is astounding. Where I live there is a town of 600 people with 3 banks, 2 of them with 3 and 4 lanes drive-through. The rest of the town is a sh|thole though.
    People need to wake up is all.

  4. Tarkus says:

    As one tv commentator said “You’d have to be a pretty dumb banker not to make money at the Fed’s zero percent rate.”

    But therein lies another question – how can banks even compare themselves in “profitability” to real companies even in the so-called “good times” because of this? It is like a track and field race where the lanes are not staggered and the big banks have the inside track.

    Their compensation should be pro-rated downward by comparison, not bloated as if they had to actually do what real companies do.

  5. rktbrkr says:

    In about 3 bad years Stanley O’Neal erased every penny Merrill Lynch had ever made and in another year ML was history – largely by jumping into real estate with both feet. Maybe it’ll pull down BAC too.

  6. MayorQuimby says:

    Economy leading Wall Street = good.

    Wall Street leading the economy = BAD.

    WS provides the newly created capital for economic growth.

    When that abated (due to outsourcing), WS began to counterfeit profits by securitizing anything and eveything WITH LEVERAGE.

    Combine these two volatile elements with a third – deregulation and an impotent SEC and you get…

    THE PERFECT STORM

    We are many parsecs away from where we need to be to reform a healthy robust economy it may take many decades ONCE WE START. And we have not yet begun. In fact – we’re STILL headed in the wrong direction!

  7. call me ahab says:

    were able to “walk away virtually unscathed” and loaded with loot.

    so did Bonnie and Clyde, Dillinger, Baby Face Nelson, etc, etc, etc . . .until the FBI started making them enemy #1

    look to the the IRS for guidance- there is no “corporate shield” for undeposited payroll taxes- they will slap a penalty 100% against all the officer’s of the company and collect and seize from any and all (from personal accounts) to pay the back payroll taxes-

    maybe the “high rolling” would take a back seat if the officer’s personal assets were at stake

    maybe the FBI should be allowed the same tactic

  8. dss says:

    Great points, DM. We can never fix this broken economic system until we change the root problem, corporate funding for campaigns, etc.

  9. cognos says:

    Hmm… This is bizarre.

    If banks “don’t make money”? How come GS is worth $60B in equity, pays employees over $20B annually, pays taxes of over $10B annually, and the stock rice is up over 100% since ipo and it has paid a div every Q?

    What else is “making money”?

    Numbers would be similar on every other financial firm.

    This is like saying “tech stocks don’t make money” in 2002. I may be buying banks on Monday.

  10. Sechel says:

    Great point. They get subsidies, bail-outs pay out all their returns as comp and do not return value to shareholders. Just compare Citibank stock price today vs the early 1990′s.

  11. Sechel says:

    We have given up our system of Democracy due to dirty campaign money, and replaced it with a system of corporatocracy.

    Ditto!
    For further proof one needs to look no further at the near passing of H.R.3808(which incidentally was unanimously approved by both houses of Congress)

  12. b_thunder says:

    The solution:
    Let’s say if you pay yourself more than $2.5million per year gross (including all stock options, deferred comp, and pension benefits), and your publicly-owned firm collapses or needs a bailout, or loses more than $1billion, you have to pay. Time we learn something from the Chinese: Capital sentences. Confiscation of ALL assets. 30 day to appeal. Firing squad. Sell children into slavery (just kidding)

    But this will never happen, for a number of reasons. First, the corporate officers will never be held personally responsible for looting publicly-owned companies. There will never be “chinese justice model” for the top looters and ponzi-schemers. And finally, the Federal Reserve from now on has guaranteed that the biggest banks will never ever lose a dime. Period. End of Story..

    Damn, it’s good to be a banker!

  13. MayorQuimby says:

    “The fix seems straight forward: Fund all campaigns for Congress with public money. Further define freedom of speech so that one person one vote is attached somehow.”

    This will solve nothing since the majority of bribes come AFTER they are elected. IOW – ‘representatives’ are pretty much guaranteed 7 or 8 figure jobs and enormous speaking engagement fees once they leave gvmt – a la Bob Rubin, Al Gore, Cheney etc. Take away the upfront bribes and they’ll just move more of that money to the post-election phase.

    The solution is not straight-forward. No law will ever prevent people from taking as much as they can – only OTHER PEOPLE can do so meaning it’s up to the sheeple to say, “ENOUGH”. The sheeple have not yet said it so the bs shall continue.

  14. Chief Tomahawk says:

    And here I wondered when The Big Picture was going to get around to an entry on Angelo Mozillo? Was his punishment fair, or did he walk away with too much loot?

    ~~~

    BR: I am bored with the story, partly because it is a Legal issue of the SEC choosing to settle a case than risk a bad outcome on a complicated technically problematic issue

    I’ll see if i can dig up an appearance I did on Kudlow back in 2006 with Mozilo

  15. rktbrkr says:

    FC mess draws in lawyers – part & parcel of the pwobwem

    http://www.nytimes.com/2010/10/16/business/16legal.html?src=busln

  16. Sechel says:

    Along with being really big ( too big to fail) comes really big political influence. Having monopoly size businesses is not just about having undue pricing power. We’d be much better off with 50 medium size banks instead of 5 banks that control everything.

  17. soulmatic09 says:

    I’ve always believed this.

    Case in point: securitization was sought after by the money center banks because retail banking simply isn’t a money maker. The margins are so small, that there is little room for error.

    Banking should be a utility, and the requisite profits should be analagous. Steve Waldman had a great proposal for reforming the banking sector by running things through Treasury with “transactional credit.”

    http://www.interfluidity.com/posts/1242951098.shtml

    Combine this with public finance reform (or fund elections through the spreads made with Treasury’s transactional credit) and you’ve got a system that’s sustainable.

  18. hr says:

    The Name of the Game is Bailout.

    See “Creature from Jekyll Island”

  19. LookoutRanch says:

    I guess given enough time, markets are perfectly efficient.

  20. grumpyoldvet says:

    many, many years ago when I first started to invest money a broker at hayden-stone said to me never ever invest in trains, planes and automobiles…….they never make money for you…………true story

  21. jus7tme says:

    Comment1:

    >> ['DM RTA] The fix seems straight forward: Fund all campaigns for Congress with public money.

    >> [Barry] We have given up our system of Democracy due to dirty campaign money, and replaced it with a system of corporatocracy.

    The fix is to have *real competition* in the political system, and less about changing campaign financing, although the Citizien’s United ruling waw atrocious and should be repealed by law.

    Here’s the solution: We need an electoral system that supports multiple parties (more than two) and a governmental structure where the executive branch can be booted out by a no-confidence vote. The reason we have, in effect, a two-party duopoly is that we have an electoral structure with single-winner election district. THIS is the real underlying problem. Our elected representatives are easily corrupted either before or after the election, one district at a time.

    Comment2:

    Banks make money by risking other people’s money. A recession is nothing but a period where we, the people and bank depositors, have to earn the banks out the losses that they incurred for the sake of their own privatized profits.

    Think of it this way: The reason that the Fed forces down interest rates as soon as recession hits has little to do with stimulating the economy and everything to do with increasing the profit margin (interest spread) on the bank loans that are still good, so that the banks can earn themselves out of the hole at OUR (the depositors/savers) expense.

  22. Sechel says:

    Fed keeps saying we need QE2 to guard against deflation and ensure we don’t repeat the mistakes of the Japanese. Seems to me we are repeating the mistakes of Japan by failing to recognize the banks are insolvent and instead are using the Treasury and Tax payer money to subsidize the banks until they replenish their capital base which could years(not months).

  23. ACS says:

    jus7tme, everything you say is true but I think the problem is deeper than campaign finance or electoral systems. When politicians are allowed to stay in office for long periods of time and amass huge amounts of power, the job attracts the very type of people who should never have it. Congress is no longer about doing good for the country, it’s about becoming a member of the elite that gets to tell everyone else how to live their lives while they live as a protected class. Either they buy their way in with personal fortunes or they sell their soul to special interests to gain admission. The revolving door of elected or appointed office and lobbying or consulting keeps them insiders for life, insulated from the cares or concerns of ordinary citizens. Any real solution needs to change the type of people who run for office otherwise things will never change. Since those very politicians are responsible for enacting any change, I fear anything that has a chance of working, like strict one-term limits or replacing elections with a lottery, doesn’t have a chance.

  24. to the Post:

    What us Think that the Goal ‘of the Banks’ was to ‘make Money’, in the first place?

    also, additionally:
    ~~
    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Creature+from+Jekyll+Island
    ~~
    http://www.webofdebt.com/articles/breakup_banks.php
    “…Why Wasn’t It Done Right in the First Place?
    That raises the question, why were the notes not assigned? Grayson says the banks were not interested in repayment; they were just churning loans as fast as they could in order to generate fees. Financial blogger Karl Denninger says, “I believe a big part of why it was not done is that if it had been done the original paperwork would have been available to the trustee and ultimately the MBS owners, who would have immediately discovered that the representations and warranties as to the quality of the conveyed paper were being wantonly violated.” He says, “You can’t audit what you don’t have.”

    Both are probably right, yet these explanations seem insufficient. If it were just a matter of negligence or covering up dubious collateral, surely some of the assignments by some of the banks would have been done properly. Why would they all be defective?

    The reason the mortgage notes were never assigned may be that there was no party legally capable of accepting the assignments. Securitization was originally set up as a tax dodge; and to qualify for the tax exemption, the conduits between the original lender and the investors could own nothing. The conduits are “special purpose vehicles” set up by the banks, a form of Mortgage Backed Security called REMICs (Real Estate Mortgage Investment Conduits). They hold commercial and residential mortgages in trust for the investors. They don’t own them; they are just trustees….”

  25. jus7tme says:

    ACS,

    Sure, but if there is real competition for the spots then politicians that do not enact the people’s wishes WILL not be re-elected. The problem now is that we flip-flop between two parties that are either in power or playing the role of the obstructive opposition or otherwise spoiling the broth as lobbyists or think-tank employees during their off years.

    The problem with the 2-party system is that the bad guys always win, one way or the other. And the dumbest 5% of the populations, get to decide which one it’s going to be.

  26. sjtall says:

    Two comments:

    1) Perhaps one way to control campaign funding is to limit contributions to constituents. Congressman could only receive funds from voters in their district, Senators from voters in their state. I also agree that donations should only come from ‘natural persons’ as the lawyers say – that is, real people – and not corporations or other legal entities.

    2) I reach a similar conclusion as BR regarding the benefits of private ownership, however for different reasons. I believe, like Jack Bogle, that any firm with a fiduciary duty to its clients will inevitably encounter a conflict of interest with its fiduciary duty to its shareholders. In his words: “You can not serve two masters.” When these firms went from private companies to public, they stepped onto a slippery slope. I believe private ownership (whether that be a partnership or a non-stock mutual) ultimately will deliver better results. The key difference is that private owners are more concerned with preserving the viability of their current income stream while stockholders (many of whom are executives of the firms they manage) are more concerned with market value of future income. These are very different incentives and lead to very different behavior.

  27. philipat says:

    Even without the underlying specifics of this piece, I have never understood why anyone would buy equities in Banks.

    This entire industry, quite uniquely, blatantly disregards the best interests of shareholders in the interests of managers (aka The Bonus Culture). Other industries don’t have this problem for shareholders so why not invest elsewhere?

    If more folks voted with their feet and refused to invest in Bank equities, we would be a long way towards solving the Banker Bonus culture problem.

    Priate unlisted Companies? No problem. If Bankers want to speculate either with their own money or with that of private investors who understand the risks of what they are getting into, that is reasonable and a normal part of the system. What is wrong is for Bankers to sepeculate for personal gain using the funds of folks who don’t knowingly agree (aka shareholders and/or depositors)

  28. TerryC says:

    I thought if you didn’t turn a profit for 7 years in a row the IRS ruled you were a hobby and not a business. I know all of our airlines are hobbies, but now it turns out all of our banks are hobbies too?

  29. victor says:

    Somebody said that “The proliferation of banks signifies the decline of the Republic”. The banking business model has existed from the times of the Phoenicians: borrow money at 3%, lend it at 6% to credit worthy people and keep the spread to cover costs (including an ocasional default) and a decent profit. Eversince our banks deviated from this model bad things happened. Let’s go back to bankers’ hours and honest lending and leave the rest of the “products”to gamblers.

  30. guidoamm says:

    That most banks give everything back in bad times is not a surprising statistic.

    In a debt based fiat monetary system, the system is predicated on inflation. Inflation conforms to the laws of diminishing marginal utility so that as the dynamic progresses, government’s role in the economy must perforce become gradually deeper and more pervasive thus becoming ever more statist. As the inflationary dynamic progresses, financial value runs away from intrinsic value. As this happens, profit concentrates in ever fewer sectors till it concentrates in the finance industry only.

    But not all financial companies benefit equally. Those entities that are first in line for the use of newly issued fiat money benefit first, benefit most and benefit last too as each unit of currency created is progressively devalued at each stage in its journey from the Federal Reserve, to the Treasury, to the Primary Dealers (members of the Fed) and then onwards towards smaller banks and financial institutions and subsequently on to corporations and finally individuals.

    The point at which a fiat currency reaches obliteration, is the point at which debt and debt service are at peak thus individuals and corporations begin to fail in ever greater numbers till even most financial entities are wiped out.

    No surprise here.

  31. [...] Banks, like the airlines, have never made money.  (Big Picture) [...]

  32. guidoamm Says: October 17th, 2010 at 2:36 am

    That most banks give everything back in bad times is not a surprising statistic.

    In a debt based fiat monetary system, the system is predicated on inflation. Inflation conforms to the laws of diminishing marginal utility so that as the dynamic progresses, government’s role in the economy must perforce become gradually deeper and more pervasive thus becoming ever more statist. As the inflationary dynamic progresses, financial value runs away from intrinsic value. As this happens, profit concentrates in ever fewer sectors till it concentrates in the finance industry only.

    But not all financial companies benefit equally. Those entities that are first in line for the use of newly issued fiat money benefit first, benefit most and benefit last too as each unit of currency created is progressively devalued at each stage in its journey from the Federal Reserve, to the Treasury, to the Primary Dealers (members of the Fed) and then onwards towards smaller banks and financial institutions and subsequently on to corporations and finally individuals.

    The point at which a fiat currency reaches obliteration, is the point at which debt and debt service are at peak thus individuals and corporations begin to fail in ever greater numbers till even most financial entities are wiped out.

    No surprise here.
    ~~

    some things should be re-read. esp. when *reality, as presented above, is at strong variance with generally held belief(s)..

    but, as above, it is, too, too, much, like that–for the Schema to sustain itself over the long-run..

  33. drewburn says:

    Fascinating. A good reason not to get married to a bank stock too. I grew up in a small town, Coldwater Michigan, that had not one but two local banks that have been in existance since before the Great Depression I believe. They still exist. I even bought some stock in one during the crisis; I know the Chairman. Still makes you wonder. I sold all my financial holding, Fannie Mae, Citi and others during the late ’90s and early ’00s (completely out by ’02) just on the idea that their time was through for a good long while. Man, am I glad I did.

    Still banks tend to be mom & pop hold ‘em stocks; but this would suggest that is a false assumption of risk.

  34. valuewalk says:

    I assume the numbers would be far different if you excluded AIG’s one hundred billion dollar loss.

    ~~~

    BR: Why? Is AIG either a bank or an Airline?

  35. canadian says:

    I’m somewhat old school here but the problem is not the traditional bank but rather the investment bank part of the large banks. We are not hearing as much about the retail, commercial and corporate lending side of banking being in trouble although I suspect results are not good. Where the largest problem lies is with the investment bank and the huge risks they assumed. When investment bankers get to play with a traditional bank’s balance sheet (or investor’s funds when they become public entities), it is a formula for disaster as they get to roll the dice with other people’s money. The root of the problem is the repeal of Glass Seigel. Traditionally, investment bankers were using their own money as the partners held all of the equity. Their personal fortunes were directly tied to the success of the investment bank and this brings far more discipline to their business model. Now there is a disconnect which has lead to taking absurd risks, gathering in absurd compensation packages and walking away while the house burns.

  36. [...] Banks, like the airlines, have never made money.  (Big Picture) [...]