Tuesday, 13 March 2012

Your Bank: Fiduciary or Predator?

In the old days when banks were local, and owned either as partnerships or mutuals, bankers had a stake in promoting the prosperity of their clients. They wanted to see their clients do well so that savings in the bank would increase, and then the banker could lend more and do better too. Bankers were meticulous in evaluating the credit quality of local borrowers, because a loss hit their own capital and equity in the business.

Largely as a result of this happy local alignment of depositor/banker/borrower interests, bankers came to be regarded as trusted fiduciaries. Depositors expected the banker to exercise discretion in the lending of capital. Borrowers expected the banker to provide loans on fair and reasonable terms which would help the borrower's business to grow and perform on repayment obligations.

As we know, those days are long past. Banks are rarely partnerships or mutuals. Remuneration models that promote fierce competition and short term bonus mania are unlikely to leave much scope for ethical reflection on the promotion of either depositor protection or borrower prosperity. Modern bank funding models are focused on money markets and shadow banking conduits rather than making depositors secure long term. Their lending models are seeking ever higher margins on transactional speculation, cross-selling and hidden fees. They seek opportunities globally rather than the long duration lending that sustained growth of local businesses. Banks are no longer geographically dependent on the local community for either deposits or borrowers.

We are now forced to re-evaluate the role of banks. They clearly have little interest in performing as fiduciaries. They have a powerful interest in becoming predators.

But if banks are predators, then their beneficial social functions are undermined, and indeed, they become a threat to social welfare, economic growth and non-bank prosperity. If that is true, then they no longer warrant state protections.

It is the depositors and borrowers who now need the protection.

In the UK some banks have threatened to leave if the successor to Mervyn King is not less "hostile" to their predations.

This is like a fox threatening to go elsewhere unless the farmer makes the chicken coop more accessible. Worrying.

UPDATE: Today Greg Smith, head of equity derivatives at Goldman Sachs, very publicly resigned in the pages of the New York Times. It sums up his resignation to say that he preferred the days when he could be a fiduciary to the firm's clients rather than their predator.

21 comments:

S Roche said...

Just reading William D Cohan on Goldman Sachs "Money & Power", he answers your question.

You rightly suggest that state sponsorship be withdrawn, no doubt individual depositors will react over time. Would you agree that the whole notion of consumer protection in banking is ultimately self-defeating, should it too be withdrawn so that individuals assess and counter the risk.

I remember sitting in on trading sessions of a firm I intended to entrust some funds to, and heard traders passing off losing positions to clients. This was 1982. They went bust not long after, but their business plan apparently flourished.

Crinkly & Ragged Arsed Philosophers said...

The only viable tool for change is for governments to reclaim their sovereignty.

And for that to happen governments must fear the people they represent more than the 'elites' that would corrupt them.

It's the first rule of democracy and it's the peoples responsibility to maintain it.

Time to shoot the Fox and classify correctly as a scavenger.

johnm33 said...

We need new banks just like the old fashioned ones you describe,perhaps a reformed RBS would be suitable. They could be capitalised by the government lending money at 1%[to uk nationals, born or naturalised, who are normally resident for tax purposes] paid directly in to new accounts initially paying 4% at the rate of £1000 per month, not dissimilar to the 'recapitalisation' arrangement with the existing insolvent banks.

Knute Rife said...

Guess why Glass-Steagall was passed? Because once upon a time we knew investment banking and consumer banking were two, very different things. And contrary to the myth that drove Gramm–Leach–Bliley (i.e. that the US had to combine banking services to compete with everyone else because they all had combined services), other countries knew this too. Z.B., if you were in Germany and wanted to invest, you went to "die Bank." If you wanted household accounts, you went to "die Sparkasse."

Anonymous said...

It is well worth reading Louis Brandeis's classic "Other People's Money and How the Bankers Use it" (1914) in regard to all of these issues. The means are different, but the predatory impulse the same.

PeterJB said...

@ LB

...from my 70 years filled with full front line experience across the face of this planet and a good deal of academic pursuit in the sciences and humanities, I believe that your observations of the fiduciary are more the exception rather than the rule.

That the banking system is a suite of ritualized and perpetualized fraud and ponzi schema which has existed by the corruption of arrogant and incompetent "leadership" from the political to the bureaucratica is held in full face of abundant and overwhelming publically available evidence.

And, this is neither new or of surprise, as a variety of banking schemes have been in the forefront of destroying civilization for some ~5,000 years and with particular emphasis between the 14th. and 17th. Centuries. During such times history has it that the Merchants of Venice actually utilized the services of the Mongol Hordes under the Khans to totally destroy (read: vanish) out whole cities in their refusal to adopt fractional reserve banking administered by the stealth of Venice.

It can be shown mathematically that the whole edifice of banking today (and as it always was) is a criminal fraud perpetuated against humanity for and by a few and is the pursuit to maintain the status quo for those that are over-leveraged and indulging in the continual feeding frenzy on the masses of their fellow man. I speak of the higher banking system and classes and all that hangs off them.

And where those within the professions associated are guilty of perpetuating this barbaric crime on those that are yet conceived and to be prepared to be born.

Shame.

http://fthebanks.org/matt-taibbi-on-bank-of-america/

PeterJB said...

engsxthempainquedl revences@ LB

You may remember this piece but I post it here again as it appears most appropriate and it comes from real life: deflation is a natural part of the growth cycle but what is going on now is predatory and unnatural.

I wrote:

"(Clearing my throat er, hu_hu_hu_hem, cough, splutter, and I lift my glass and spill some nice cold wine down the back of my neck, er; too early for whisky):

Just to let you know that I'm pretty old in years and a hell of a lot older in experience (damn, I even know what complicity means) I would like to share a thought of my earlier youth...

I was too late to know Sir Harry Flashman and his contemporaries (I do not use the term lightly) as I came into the picture a little after, albeit with serious honest empirical intent and a firm belief in responsibility of duty, ie amongst the natives, that idled outside the Club doors during lunch and then in the evenings, offering their trishaws and muscles to get the Gwei-lo home, no matter how drunk one was, at any particular time.

It was obvious, (is) now, at that time, that the Empire had collapsed and was in a state of deflation (read: remember this term) and I, in my youth and position (being considered 'white' helped a lot) which could only be a state of absolute stupidity, and rank junior class immaturity arising to a God (read: stupid and being able to well afford the "Club") and bearing the markings of the colonial elite (read: drunk, well-lunched and engaged in wife swapping events during the evenings with my peers old boy) and lording it over all and sundry when sober (between the hours of 0600 to 1100 hours daily - except on Sundays when 24 hours drunkenness with cricket and tiffan was mandatory).

But I moved on... I left "that lot" and moved to yet another geo-remnant of the colonial past, and yet another, and another... until that time, that I was founded - self-founded. The time was still of deflation and I suffered; Oh how I suffered.

Firstly: Everything was cheap, so the little money I had left over from the divorces from my past four wives, being very little, was sufficient, in fact, more than enough.

Secondly: Everyday started in a blur; a blur of great local food of all kinds and types and the variety was just fantastic; because everybody was broke and competing for survival (remember that term "everybody).

Thirdly: And then there was that time to greet Ra, the Sun, with a cold cheap beer... and then moving onto a Pink Gin, Martini, a frozen Vodka, and then Whisky (Thank the Gods for the Scots), as the Sun, starting its descent... all this before good, nay, great food and the great company of eager young ladies to join us for supper and beyond...

Fourthly: In the blur of my advanced age, as I rock here in this final retreat, I remember the evenings as the Sun went down over the pounding ocean shores, and the green flashes, the gently breezes, the smell of coconut oil, the fine cigars, the great ladies, magnificent company, good hooch, music, company and leisure; aye, the lack of stress.

Question: Is deflation that bad?

(I also remember the slicks and the Yuppies with their buzz words, suits, and painful breakfast meetings at 0700 hours; the stress, the pain, the pressure...the bullshit, the treachery; I have thankfully lost my lust for stressful emptiness and meetings with hollow creatures who hold themselves human.

Sigh: How I long a cigar (taxes too high here,and they are socially unacceptable and strictly policed by fanatical true-believers who I believe would batter me to death, if caught), Oh, aye, a strong toot of whisky; some good food and lovely charming girls; all in a stress-less environment which we can all afford, and ... enjoy: ah, deflation; it just ain't that bad.

Let me call it "life's values"

Ho hum"

I thought that you may like to read it, as I also enjoyed stumbling over this flippant but fairly honest piece of my former-life.

Is deflation that bad?

PeterJB said...

@ LB

Couldn't resist posting this:

"From Bloomberg:

Goldman Sachs Group Inc. (GS) said it disagreed with comments made by Greg Smith, a departing employee who attacked the firm’s “toxic and destructive” culture in an opinion piece in today’s New York Times.

“In our view, we will only be successful if our clients are successful,” the New York-based firm said in a statement today. “This fundamental truth lies at the heart of how we conduct ourselves.”


http://www.zerohedge.com/news/goldman-responds-greg-smith

Richard Field said...

LB,

I know I have said this before, but the only way to restore your vision of a fiduciary banker and end predatory banking is by requiring the banks to provide ultra transparency in both their on and off balance sheet exposures and the deals they do.

Imagine if Goldman had been required to do this for the last several years.

Do you think they would have created the Abacus deal?

Do you think they would have made a secret loan to Greece?

Where there is opacity in the financial system, there is the opportunity for banks to act in a predatory fashion.

Eliminate the opacity and eliminate the predatory business model.

PeterJB said...

Global Banking System

Legally support Fraud is still Fraud
and bears incestuous rot and coagulation to all that distills within. Basic physics.

My Grand Father who raised me told me over 60 years ago on his far in outback Australia that there were two types of Gangsters: the licensed ones and the unlicensed others. Another lesson he imposed on me so long ago was to never trust government or bankers. A few years later the local rural banker took off with all the depositor's money;

They never did find him. Maybe they just didn't look.

online poker community said...

I never read any thing like that. it classic

Knute Rife said...

I can't help being rather cynical (I know you're shocked by that.) about Greg Smith's NYT flounce. He made a pile, and he made it the old fashioned way: carefully grooming relationships with the exceptionally well-heeled, and carefully ignoring where their money comes from, where it goes, and what's behind the investments he makes for them. Now the young punks want to strip mine those relationships for quick bucks, and he's out of here. Bully for him. A little slow to wake up, I would note. It isn't like Blankfein took over yesterday or that Paulson was any different before that. Bottom line is Smith is Sir Larry Wildman incarnate. He's made his pile, and now he's bucking for sainthood, or at least salvation. Maybe he can get Terrance Stamp to play the role in the bio-pic.
I was an historian long before I was a lawyer, and I'm not impressed this "good old days" stuff. Believing that George Bailey was once the norm is neither helpful nor even true, and to the extent there was ever any truth in it, Garn-St.Germain delivered the head shot 30 years ago. If you want fiction reflecting reality, go read Trollope's The Way We Live Now. 140 years old and ripped from today's headlines.
As an aside, I'm more interested now on your take on SWIFT pulling the plug on Iranian banks. Will this become a common tactic? And will black-balled countries form an alt-SWIFT?

London Banker said...

@ Knute
Agree more or less about Greg Smith. It puts me in mind of the old Wall Street joke that ends, "Where are the client yachts?"

Re SWIFT, I agree that the Chinese, the Pakistanis and anyone else who might find themselves irritating the USA are going to be looking for a new system of plumbing through which they can contract transactions without threat of the plug being pulled. The USA may find the Chinese both willing and able to provide politics-blind transaction services to the rest of the world, and able to build something credible pretty fast.

SWIFT has been a dinosaur for too long. Time for some competition to liven things up and show us what new thinking and web-friendly technology can do.

Worth reflecting that much of the telecoms infrastructure in the UK is now provided by Huwei. Marconi went bankrupt when BT switched suppliers.

Is SWIFT so different to Marconi?

PeterJB said...

Our Adopted Monetary System, of which there is no doubt whatsoever: and,

... which consists of Usury and compound Interest as its base, fractional reserve banking, Central Banking and Government and Bureaucratic Protectionism as well as Commercial License or 'carte blanche' -

... is designed, a priori, and by default, either intentionally or not, but certainly, maintained deliberately to serve the few at the direct cost to humanity as a whole.

“With a gold standard fractional reserve banking wouldn’t be possible. So the bankers wouldn’t own all of the gold.” The moneylenders were banned from England in the Middle Ages long before fiat money was invented, because they were lending gold at interest and were winding up with all the gold. The people were rioting in the streets so the king sent the moneylenders back to Europe. If you lend money at interest and the money supply can’t expand, the lenders quickly end up with all the money. That’s the nature of compound interest."

As Usury, the use of interest as the base of "any" monetary system and I stress "any", it is clear that there exists a group and or attribute and attraction within the whole spectrum of the human diaspora, those that excel at capturing all such tokens as well as, or along with, the productions of human Labour, innovation, creativity and body, etc.

It appears natural as well as a dominant human trait which arises automatically when humans fail to strive for and grasp the human potential of accomplishment. You could actually model this as human behaviours are both well known and well documented, as, turning points in socio-economic trends come from, I propose, ideas born in the glimpse and presence of this human accomplishment.

“Most of the important things in the world have been accomplished by people who have kept on trying when there seemed to be no hope at all.”

- Dale Carnegie

Anonymous said...

Hey LB. First, thanks for keeping the blog up.

Second, I posted here a long while ago about preparing for a crash. Building a store of food came up. I think you said you built one or considering doing so a long time ago, when you were worried about a war with Iran.

That now seems probable and even imminent. Are you sensing the same thing?

Did you see the story from the weekend about Obama updating an emergency order that permits control over all resources in time of war or peacetime?

It seems something wicked this way comes.

Anonymous said...

@ Anon 19:08

I was pretty paranoid about an attack on Iran back in 2005-06, when Cheney was beating the war drums. It does seem like something is cooking now too.

Back then it was stopped by China shooting down a satellite, demonstrating it could - and then Russia marching halfway to Tehran in 48 hours, demonstrating it could. It's a funny old world when you have to look to China and Russia to keep the peace, uphold international law, and restrain the criminally insane and historically ignorant from wars of resource exploitation against thousand year empires.

My stores are low just now. But maybe this weekend I should refill the diesel tanks and restock the dry stores and tinned goods.

They do like this time of year for their invasions.

PeterJB said...

Excellent article on the criminality of the whole Profession of Economists and that which they have wrought on humanity in order to serve the few Banks.

And, how this crime scene continues unabetted and enthusiastically to this day and beyond.
http://betternature.wordpress.com/2012/03/21/bad-theory-bad-practice-bad-ethics/

Anonymous said...

Still think mervyn is a great guy?

http://www.telegraph.co.uk/finance/economics/9170099/Elderly-exaggerate-QE-effect-on-pensions-claims-Bank-of-England-Governor-Sir-Mervyn-King.html

I say he is a cri minal

Anonymous said...

You're back! I had just started reading your blog when you stopped uploading before taking on a new position. Today I was reading about the Spanish debt problems and idly wondered if you were blogging again. And here you are! I'm so happy!

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Nexuiz said...

Can you post an article about Greece/crisis? It would be nice to get your insight at this crucial point in time.