Later today then President Obama will give his inaugural address. There isn’t much likelihood that the speech will directly discuss banking and the mess its in or how to get the mess straightened up. I expect soaring rhetoric and hot air.

The title today is a take off Shakespeare’s oft quoted, “lets kill all the lawyers,” which has a certain appeal right now. The very large banks are busily driving themselves deeper into holes only the taxpayers can extricate them from. But first, before we bail them out or think to kill them just who are these bankers?

Real bankers, the ones who take deposits and make loans are the classic and likely only factual form of bankers. Lets call them “DLBs’ for deposit and loan bankers as we go along. DLBs are not the problem today even though they are being blown about by the economy, the basic business of accepting deposits and returning the money to the economy in loans isn’t in much trouble, yet. But losing these business would be a serious economic problem.

The next group that claim to be bankers are not bankers by half. These businesses sell securities and then use the money from the securities sales to make loans, usually in credit cards and lines of credit. Lets call them SCCBs using securities to credit card bankers for short. They aren’t on the economic list of problems yet, but can reasonably and deservedly expected to be anytime now. These are the “bankers” who invented the loan agreement that changes at their whim with a gangster like approach to business. One should expect they will try that “change the deal” technique on their investors any moment now. Losing these businesses would be a disaster to the buyers of their securities, not the economy as a whole if the system is fixed in time.

The third group isn’t banking at all. They call themselves “investment bankers” who act as middlemen between investors wishing to place money into income generating securities and those businesses and governments wishing to get money by issuing securities. Lets call them ISBs as they are actually investment to securities businesses, not classic bankers. We’ve have allowed them to kidnap “bank” for decades and they have managed to grow hugely only to become a disaster of unprecedented dimensions today risking everyone’s well being across the planet. I saw a $14 trillion dollar number of what losses might be that need bailed out worldwide. This is a serious problem. It has to be when the business is selling both ways, to investors out of one hand and borrowers out of the other. It’s not banking, it’s brokering at best, a conflicting interest agency operation at worst.

ISBs are who make the list of who should be killed. And getting killed is just what’s happening along with securities buyers who trusted them. Bear Stearns and Lehman Bros are dead, gone and buried. Others have been shot gunned into mergers, sales and other devices to get them on life support and the shots may well kill the new partners as well.

The problem for taxpayers is that much of the barrier between ISBs and the real DLBs formed back in the Great Depression has been avoided by political pressure to remove law and regulations that kept them separated. Hence, as we saw last week, CITI is flying apart; the facts are now driving events at least in that company.

One huge driver of our recession becoming a depression is that money connected to investment has become too incestuous. The variations of money on to safekeeping, then investing has been broken. It had to happen somewhere as markets swing up and down, so when the mortgage securities market got pressured by defaults in one of its segments the whole system crashed. Amazing. Or amazing?

Mortgages are wonderful devices that get people into home ownership. Pooling the mortgages, then selling parts of a pool as securities is a good idea that pulled more money in; so making mortgage loans was much easier. But Congress, then regulators leading the securities businesses lost sight of managing the risk while the money poured in, which drove more mortgage (re)financing and drove home prices higher. Absent risk disclosure in a truthful way both in offering mortgages to borrowers and the securities to investors that provided the money, then mortgage products were sure to drive high defaults – destined in the past years’ events to a certain end. This was foreseen by many, in the press by the Wall Street Journal and others, in the banking business that actually made sensible mortgage loans that were non competitive to securities backed mortgages, by the Bush administration who warned the Congress there was a disaster in the making and many in Congress. It was stopped the last time by Sen. Chris Dodd and Rep. Charles Rangel, with a lot of help from the then independent Fannie Mae and Freddie Mac business lobbyists.

Now pooling loans into securities isn’t a bad or good idea. In fact DLB loans have been securitized for centuries by syndicating them, or selling parts of the loan to a wide base of many bankers. The difference is each banker could see the loan details and choose win or lose whether or not to get in. Securitized loans can hide that opportunity of seeing the loan details. It doesn’t have to be that way. Loans by type could have been packaged and the packaging could have increased the availability of money and reduced the risk. It still can if sensible packaging and truthful disclosure is applied.

The lesson isn’t much different than what was learned 70 odd years ago. Separate the risk and separate the businesses that work in the risk fields. Require the risk be disclosed, truthfully. Be sure the blending of the investments is done all the way at the investor’s desk only. Government’s primary job is to keep the risk tied to the reward, visible for everyone to see – failing that is an invitation to criminal activity – which is what happened even though the crime isn’t seen as such even yet.

Sure, it’s a lot of markets, sales types to bother investors, and a bunch of information to wade through. But the investor must choose the risk to reward alone. Doing the risk reward management prior to the securities sale isn’t a management, it is an invitation to a manipulation whether intended or not. A security itself isn’t a dynamic thing, if it was it would be, if possible, priced that way, but the risks behind a security are always dynamic and will find their way into its price someday. That brings us to the closing point.

President elect Obama’s speech today will likely be meant to lift hearts, build confidence and layout a vision for a future for hundreds of millions of people worldwide. I wish him God’s blessing. But I don’t expect that the basics, fragmenting the finance industry again into industrial segments and keeping it that way is going to get mentioned. Nor will we hear that enforcing the law on the books now will be brought back into regulation conduct. Or that certain people should be tried, found guilty and imprisoned for selling mortgages and mortgage securities without the truth being told. There is little chance that certain Senators or Representatives will be expelled for making such huge and damnable acts contrary to the financial security of the nation and the whole world. Not likely to be mentioned, not likely to happen, either.

What might happen, maybe, one can hope anyway is that all those mortgages that are “junk, sub prime” or labeled with a similar meaning will get separated out of the sliced diced and reformed securities in the market now and be fairly priced. It a huge amount of work, something the ISBs should pay for, but they’re essentially broke now, so the taxpayers will get nicked for it, unless the businesses are required to recover those huge bonuses they paid to their executives.

But now the economy needs people’s castles, home sweet home, made safe again. And until that gets done – the recession or depression will stay with us.

Lose the confidence of people in their homes, and the economy might lose everything.


6 Comments so far

  1. Crystal on January 20, 2009 7:42 AM

    Hot air…hmm? Hope fuels confidence which fuels positive reactions. Don’t write Obama off yet, let’s see what he’ll do. I have subscribed to your blog as well, it’s getting addictive.

  2. Matt in NC on January 20, 2009 9:09 AM

    Your points are exactly correct. Look at the three parts of Bank of America that just reported annual results. Consumer Banking made money. Wealth Management made money. Investment Banking lost enough to put the entire bank in the red.

    Btw, surely you are implying that the Democratically Controlled Congress bears some responsiblity for removing these barriers? I thought this was all Bush’s fault.

  3. Brian Westenhaus on January 20, 2009 1:19 PM

    I read rather than watched or listened to the speech which was more warm air than hot, thanks Crystal.

    The barrier issue aka the return of the securities business into deposit banking is a result of Congress and clever lawyers. It has little to do with any president. Thanks Matt.

    As for Obama’s prospects, I am very worried. Change isn’t being answered with exactly what, and the Congress in its current membership and Obama’s past votes point to a socialist agenda. Its just now becoming alarming. I am vacant of hope coming from political leadership for now. It is now time to do – and it better be “fix the system” instead of “pouring money on the wounds.” i.e. Do you want a pile of dimes on your belly button or your infected appendix OUT?

  4. Finance Blog » Blog Archive » Let’s Not Kill All the Bankers on January 20, 2009 5:30 PM

    […] Let’s Not Kill All the Bankers […]

  5. Steven H. on February 24, 2009 9:38 AM

    Matt forgets that the congress and senate was republican controlled for 6 of Bush’s 8 years, and the remaining two years of Bush brought a record 94 filibusters when democrats tried to propose legislation. He must have just forgotten. If you do your research, it was republicans that helped to get the Usury Laws and Bankruptcy laws changed which is why you cant get out of that house, and why your now paying 30% on your card so that the banks can “make up for lost money” as they have so eloquently put it. Wake up, your life is controlled by the “economic elite” that literally control your markets you love so much, that aren’t “free” by any means, and screw you and the other tax payers of this country because they committed crimes that are “to vital to the economy” to prosecute. Keep fighting for the super rich that don’t care about you anyway, that is, unless, your part of that “economic elite”.

  6. colon cleansing on November 8, 2010 10:09 AM

    Pretty nice post. I just stumbled upon your blog and wanted to say that I have really enjoyed browsing your blog posts. In any case I’ll be subscribing to your feed and I hope you write again soon!

Name (required)

Email (required)


Speak your mind