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Maybe bankers aren't so bad?

M&T Bank CEO, Robert Wilmers, wrote an epic letter to shareholders in the bank's annual report.

This is the first time I've seen a banker so clearly articulate the issues that caused the collapse. He spares no punches and lambastes everyone who played a role in the collapse.

From a PR perspective this is brilliant. You simply cannot regain the trust of the public if you do not first acknowledge what happened.

Perhaps we are seeing a shift in the banking sector if bankers are coming out and telling it like it is.

You can read the full letter here, but here's the part I thought was great (fyi, this is also a great primer for  anyone who wants to understand what happened over the past few years):


All this began to change in the 1970s and especially the early 1980s as
these banks grew and began a pattern of investing in areas where they possessed
little knowledge – a trend, which culminated in money center banks forfeiting
their mantle of leadership and tarnishing the reputation of the banking industry
as a whole.

One might trace the beginning of this chain of events to the market
dislocations caused by the OPEC-led increase in world oil prices. But panics and
price bubbles have long been a feature of banking and investing, dating at least
from the time of the 1637 Dutch Tulip Mania. Historically, however, the financial
system has righted itself, responsibly, in the aftermath of such events. That was
not the case, starting in the 1980s.

In a desire to expand their franchises, money center banks sought
alternative investments and extended themselves into unchartered territories.
Loans to energy companies (“oil patch” loans), shipping firms, and less-xiv
developed countries (LDCs) became the flavor of the day. In venturing into these
lines of lending, they chose to ignore the strong and prescient 1977 warning
by Federal Reserve Board Chairman Arthur Burns, who observed that “under
the circumstances, many countries will be forced to borrow heavily, and lending
institutions may well be tempted to extend credit more generously than is prudent.”

The fate of such new exotic ventures established an unfortunate pattern that
would recur at every turn. When the oil price bubble burst in 1982, it triggered
events that ultimately led to the outright failure of Continental Illinois, then the
seventh-largest bank in the United States. The problems of this era spread, as
nearly one-third of all oil tankers were scrapped between 1982 and 1985. Money
center banks, which had not only lent heavily to shipping companies but also
held equity positions in ships, found themselves in significant trouble. 

As U.S. interest rates and the value of the dollar climbed during the early 1980s,
Citibank’s Chairman took the view that “countries don’t go bankrupt” – a
hypothesis that was proven erroneous when 27 countries initiated actions to
restructure their existing bank debt, leading to devastating implications for their
bank creditors. In 1987, these banks began a delayed acknowledgement and
recognition of the losses accruing from loans to developing countries. So great
was the reckless foray that a 1993 study conducted by the Federal Reserve Bank
of Boston found that had the money center banks truly recognized all the losses
inherent in their books in 1984, one major bank would have been insolvent and
seven others dangerously close.

So it was that the underpinnings of recurring crises were introduced as the
money center banks searched for new opportunities and Wall Street investment
banks became more and more creative in the development of financial products.
One’s cash from deposits and the other’s creativity led to a symbiotic relationship,
enhanced by the closeness of geography.

The  decision to live together culminated in a marriage, made possible
by the repeal, in 1999, of the Glass-Steagall Act, which had, at least notionally,
kept investment and commercial banking separate. One can argue whether the
architects of these new Wall Street institutions themselves created a new culture
of greed or whether they merely capitalized on the new arrangements. In either
case, this departure from banking as we knew it helped to sow the seeds of
crisis and embodied a broader change that, in important and unfortunate ways,
continues today.

These trends all came together in 2008 with the sub-prime crisis,
characterized by Wall Street banks betting on and borrowing against increasingly
opaque financial instruments, built on algorithms rather than underwriting. Like
the institutions of the ’80s, the major banks created investments they did not
understand – and, indeed it seems nobody really understood. In the process, they
contorted the overall American economy. The unnatural growth in the industry
led the portion of GDP dedicated to insurance, finance and real estate to rise
from 11.5 percent in 1950 to 20.6 percent during the decade that began in 2000.
In their quest for growth, the Wall Street banks appeared to seek dominance at
the expense of leadership and, through acquisition or aggressiveness, sacrificed
the latter in order to attain the former. As a result, today the largest six banks
own or service roughly 56% of all mortgages and nearly two-thirds of those in
foreclosure proceedings. Indeed, we have reached the point where one bank
services almost $2 trillion and close to 30% of all mortgages in foreclosure.

Undoubtedly, the crisis with whose aftermath we are still dealing has
had wide-ranging effects – for taxpayers, homeowners, small business borrowers
and more. But the list of the deeply damaged must also include the good name
of banking itself. Since 2002, the six largest banks have been hit by at least 207
separate fines, sanctions or legal awards totaling $47.8 billion. None of these xvi
banks had fewer than 22 infractions; in fact one had 39 across seven countries, on
three different continents. The public, moreover, has been made well aware of such
wrongdoing. According to a study done by M&T, over the past two years, the top
six banks have been cited 1,150 times by The Wall Street Journal and The New York
Times in articles about their improper activities. It is not unreasonable to presume
that these findings must represent a proxy for the national, if not international,
press as a whole.

Public cynicism about the major banks has been further reinforced by the
salaries of their top executives, in large part fueled not by lending but by trading.
At a time when the American economy is stuck in the doldrums and so many are
unemployed or under-employed, the average compensation for the chief executives
of four of the six largest banks in 2010 was $17.3 million – more than 262 times
that of the average American worker. One bank with 33,000 employees earned
a 3.7% return on common equity in 2011, yet its employees received an average
compensation of $367,000 – more than five times that of the average U.S. worker.
Thus, it is hardly surprising that the public would judge the banking industry
harshly – and view Wall Street’s executives and their intentions with skepticism.

Nor can one say with any confidence that we have seen a fundamental
change in the big bank business approach which helped lead us into crisis
and scandal. The Wall Street banks continue to fight against regulation that
would limit their capacity to trade for their own accounts – while enjoying the
backing of deposit insurance – and thus seek to keep in place a system which
puts taxpayers at high risk. In 2011, the six largest banks spent $31.5 million
on lobbying activities. All told, the six firms employed 234 registered lobbyists.

Because the Wall Street juggernaut has tarnished the reputation of banking as
a whole, it is difficult if not impossible for bankers – who once were viewed as
thoughtful stewards of the overall economy – to plausibly play a leadership role xvii
today. Inevitably, their ideas and proposals to help right our financial system
will be viewed as self-interested, not high-minded.

As noted before, however, the major banks were not the only ones
implicated in and tainted by the financial crisis. One can, sadly, go on in this vein
to discuss a great many other institutions which have disappointed the American
public in similar ways, in the process compromising their own leadership status.
They have in common a relationship to the crisis associated with the nation’s
housing policies, which were themselves shaped over the course of several
generations by many parts of the government and both political parties. Those
policies marshaled some of the leading government agencies and enterprises, as
well as private financial institutions, in the quest to broaden home ownership.
Even apart from the collateral damage this pursuit has caused the financial
system, it is worth keeping in mind that it was not remarkably successful on its
own terms – particularly when today one finds a higher rate of home ownership
in countries such as Hungary, Poland and Portugal, where the per capita GDP on
average is 56% lower than that of the United States.

While the role of the Wall Street banks in the proliferation of complex
investment securities and sub-prime lending has been well publicized, the
participation of Government Sponsored Enterprises (GSEs) including Fannie
Mae and Freddie Mac in precipitating the financial crisis was just as significant.
In the years leading to the housing crisis, between 2005 and 2007, nearly onethird of all mortgage originations in the United States were guaranteed by these
entities. 

In September 2008, when control of Fannie and Freddie was assumed
by the U.S. government, they had a combined portfolio of some $195 billion
in sub-prime loans, Alt-A loans, and complex derivatives. In total they held or
insured $5.3 trillion – roughly half the total mortgage debt in the United States.

As of September 2011, of the 2.2 million mortgages undergoing foreclosure,
about 730,000 or 33% were owned or guaranteed by these GSEs; of the estimated xviii
850,000 repossessed homes, 182,212 or 21% were held by Fannie and Freddie.
Their intimate relationships with elected representatives are legendary, and their
lobbying abilities notorious, particularly as Wall Street became successful in
infringing on their turf.

So, too, were the good names of credit ratings agencies tarnished – and
for good reason – through the course of the housing crisis. These organizations
proved to be less watchdogs than enablers, helping to accelerate the financial
meltdown, thanks to the favorable ratings they issued for opaque bonds secured
by sub-prime residential mortgages – which proved to be no security at all. In a
recent M&T study, we looked at a sample of 2,679 residential mortgage-backed
issues originated between 2004 and 2007 with a total face value of $564 billion. Of
that sample, 2,670 or 99 percent were rated triple-A at origination by S&P. Today,
90 percent of these bonds are rated non-investment grade.

Even the FASB, in their quest for transparency, had engendered an opacity
that has done much to scare investors away from the banking industry, because
they find its financial statements too difficult to understand. The absurdity of
current accounting principles was emphasized in the third quarter of 2011, when
the value of the debt issued by five of the largest banks decreased $9 billion, and
yet these institutions booked the same amount as profits, representing 44% of
their combined $21 billion in pre-tax earnings. For decades, the role of accounting
principles was to ensure that a company’s financials properly reflected the
performance of the business being conducted. Unintuitive results such as these
do little to bolster the dwindling confidence in the American financial system.

So it is that the crisis was orchestrated by so many who should have,
instead, been sounding the alarm – not only bankers but also regulators, rating
firms, government agencies, private enterprises and investors. That a former U.S.
Senator, Governor and CEO of a big six financial institution was at the helm of xix
MF Global on the eve of its demise due to trading losses, or that the largest-ever
Ponzi scheme was run by the former chairman of a major stock exchange will
long be remembered by the public. The repercussions have stretched beyond
banking, creating an atmosphere of fear affecting and inhibiting those who
should be leading us toward a better post-crisis economy.

fEAr-drivEN rulEMAkiNg ANd iTS BurdEN: 

In this vacuum of credible
leadership, not just in the banking industry but all around it, it is entirely
understandable that regulators believe they must proceed with an abundance –
perhaps over-abundance – of caution. Inevitably, they feel pressure to eliminate,
in its entirety, risk that had been rising for far too long. This tension – based
in their understanding that steps aimed at ensuring the safety and soundness
of the financial system can stifle its vitality and dynamism – naturally weighs
on rulemakers and slows the pace of promulgation. They know too, that, in
designing regulations, the sort of informal conversations with private institutions
and individuals, which were once routine, might now be viewed as suspect,
leaving regulators to operate in isolation, without thoughtful guidance as to
the overall impact of their actions. When all are suspect, no conversation can
be viewed as benign. Ultimately, however, this is neither a recipe to improve
public confidence nor a situation likely to facilitate the expeditious design of a
regulatory structure which will not hobble the extension of credit. One must
be concerned that a lack of leadership and trust, and an overreliance, instead,
on the development of policies, procedures and protocols, has created a level of
complexity that will decrease the efficiency of the U.S. financial system for years
to come – and hamper the flow of trade and commerce for the foreseeable future








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