Why Trust Banks?

The Atlantic’s cover story for January and February is this really terrific piece that looks at the immense lack of transparency that banks have when it comes to how, why, and where banks are investing money, and how a recent slew of criminal activity banks have engaged in in the past couple of years (remember LIBOR? Or HSBC helping drug dealers launder money?) have caused not only the general public to lose their trust in banks, but elite investors who have the power to move markets as well.

The piece looks at the financial statements of Wells Fargo, purportedly “the most conservative of the nation’s biggest banks” that has gained the trust of Warren Buffett, whose firm, Berkshire Hathaway, owns 8 percent of Wells Fargo shares. The examination proves to be pretty scary: Wells Fargo is making a lot of risky investments, and doesn’t disclose exactly what those investments are, and why they’re being done in the first place. Then there are these “minor” losses:

…buried at the bottom of page 164 of Wells Fargo’s annual report is the following statement: “In 2011, we incurred a $377 million loss on trading derivatives related to certain CDOs,” or collateralized debt obligations. Just a few years ago, a bank’s nine-figure loss on these sorts of complex financial instruments would have generated major headlines. Yet this one went unremarked upon in the media, even by top investors, analysts, and financial pundits. Perhaps they didn’t read all the way to page 164. Or perhaps they had become so numb from bigger bank losses that this one didn’t seem to matter. Whatever the reason, Wells Fargo’s massive CDO-derivatives loss was a multi-hundred-million-dollar tree falling silently in the financial forest. To paraphrase the late Senator Everett Dirksen, $377 million here and $377 million there, and pretty soon you’re talking about serious money.

Even more damning are the number of high profile former bankers who are now coming out to criticize the banking industry:

Philip Purcell (ex-CEO of Morgan Stanley Dean Witter), Sallie Krawcheck (ex-CFO of Citigroup), David Komansky (ex-CEO of Merrill Lynch), and John Reed (former CEO of Citigroup). Sandy Weill, another ex-CEO of Citigroup, who built a career on financial megamergers, did a stunning about-face this summer, advising, with breathtaking chutzpah, that the banks should now be broken up.

The banking industry needs better regulation and disclosure rules. The only thing standing in the way of that right now is Congress.

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2 Comments / Post A Comment

The Bell Telephone System was broken up in the year of my birth. Since then the communications industry has been all world-changing innovation and falling prices.

Any compelling argument not to do the same with banks? Considering that systemic risk/”too big to fail” basically gives them unlimited de facto government insurance on any risky trades they care to undertake?

liznieve (#37)

@stuffisthings
Compelling ethical reason? No. Compelling logical reason? No.

Compelling political reason? Yes. Reforming banks is, for many politicians, writing off a substantial part of their financial support, something they deign not do. Just think of the NRA’s efforts to stymie gun control.

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