Best way to Rob a bank, own one
WILLIAM K. BLACK: Well, the way that you do it is to make really
bad loans, because they pay better. Then you grow extremely rapidly, in
other words, you’re a Ponzi-like scheme. And the third thing you do is
we call it leverage. That just means borrowing a lot of money, and the
combination creates a situation where you have guaranteed record
profits in the early years. That makes you rich, through the bonuses
that modern executive compensation has produced. It also makes it
inevitable that there’s going to be a disaster down the road.
To me this seems like painting with very broad brush strokes. In my part of the country (Texas) there are many small community banks that are soundly managed. They operate within the established rules for national or state chartered banks and they make money. It happens that I have a small (i.e., well under one percent) interest in a local community bank, so I have some familiarity with the matter. In my area, community banks tend to be pretty careful about making loans. They expect to be repaid, which is a reasonable expectation.They tend to be relationship banks, which means they are careful to follow the "know your customer" rule. In other words, they are cautious about making loans but will loan money to people they know are likely to repay. This seems reasonable to me.
A community bank CEO once remarked to me that his bank’s job was to "serve the public and make money". That struck me as a profound statement. Banks create money by lending it to worthy borrowers. They comply with the rules. Ironically, these small local banks, which avoided the derivatives plays that sank the big guys, are expected to pay increased FDIC assessments to bail out the money center banks whose too-clever-by-half "quants" helped create the problem by devising those intricate derivatives plays such as credit default swaps.
Perhaps the big banks made bad loans deliberately. I suspect that the truth is more complex. My theory is that those oh-so-clever bankers thought they were making good decisions based upon flawed mathematical models developed by back office types tickling the keyboards of their computer work stations and coming up with "solutions" that failed the acid test of reality. Those big banks deserve to fail, but don’t lump all banks together and condemn them all based upon media stories.
Those big banks deserve to fail, but don’t lump all banks together and condemn them all based upon media stories.
Mr. Black was targeting the large banks in his analysis. Definately watch the show. Actually you may NOT want to watch the show. I thought I had heard all the bad news about this financial mess, and it’s worse than I thought. Mr. Black makes a good case for outright fraud by banks and investment houses and complicit actions by the government officials. Although an Obama supporter, he expresses serious dissapointment with the handling of the financial crisis by his team. It’s downright scary since he basically was saying the oligarchy is doing everything it can to hide the truth and when it finally spills it will be really messy – worse than I thought, and I’m pretty pessimistic about the whole thing.
In particular he talked about the S&L crisis and how the government actually acted before that hit the fan and was able to let it fall apart reasonably gently. The current mess has been actively hidden and no real cleanup has really been started yet.
Really, really good show if you can control your blood pressure.
Excellent interview. Black was a regulator during the S&L debacle, and is now a professor. He breaks it all down in clear, easy-to-follow language. This is a video that folks who don’t have much understanding of economics or finance, and/or or are not yet aware of the massive establishment corruption, should watch. I sent it to a friend of mine who has had trouble engaging with all of the written information I’ve showed her, and she said she finally understood what’s going on in a way that she hadn’t before. Well worth watching for "beginners" and seaoned critics alike.
In my part of the country (Texas) there are many small
community banks that are soundly managed. They operate within the
established rules for national or state chartered banks and they make
money. It happens that I have a small (i.e., well under one percent)
interest in a local community bank, so I have some familiarity with the
Texas didn’t experience much of a housing bubble during 2002-2007, so banks there are healthier than in most of the country.
back, though, essentially ALL of the big Texas banks in the 1970s were
closed or bought out during the 1980s. They got whacked by the 1982
energy bust, followed by the mid-1980s S&L crisis, followed by the
1990 recession. Remember M Bank, Texas Commerce Bank, Allied Bank of
Texas? All gone … or sold to yankees for a pittance.
Is it possible, that Texas banksters actually learned from their errors?
Nawww … c’mon. You might as well try teaching a dog to stand on its
hind legs, smoke a cigar, and recite Shakespeare. It’s just not a
characteristic of the breed.
BSV, you may be right, but be sure you have familiarity with the Texas bank balance sheets to the footnote level and know they have little exposure to the derivatives and mortgage mess. They don’t avoid that just by doing local loans to good people. Almost all banks are sucked into the derivatives mess because they’re customers of Wall St…local bank managers don’t have total freedom to stay separate from that…this is part of the problem of our centralized banking system under the Fed and Wall St. Most banks aren’t reporting their exposure openly on their balance sheets. They have it bucketed under "Cash and Cash Equivalents" or something similar which hides what the "assets" really are, so be sure to read the footnotes on their balance sheets. Wall St sold them as assets but they’re actually gambling chips based on contingent liabilities (they’re claims dependent on other counterparties). Some banks do have solid true solvency/liquidity ratios…most do not because of this fraud…they were fooled by Wall St like everyone else was. But yes most are better off than the big banks and, as you say, they’re getting screwed by FDIC to continue propping up the big ones.
The majority of us have a bank account: Generally speaking, a chequing account at the minimum. Several institutions have free chequing accounts, some have accounts you pay for. But, no matter who you are, you need a bank account now of days! Currently, I work for one of the top financial institutions: I worked for visa for a few years, in the branch for a few years and currently I am working in corporate in the Human Resources division. When I was working at the branch, the main thing I noticed about customers is the ridiculous amount of extra charges they would be paying at the end of the month.