Friday, November 28, 2008

The Bank Life: Isn't It Swell

With banks getting preferred treatment by governments across the world, one wonders what life as a bank might be like. Toni Straka from The Prudent Investor dreams of a better life, a life as a bank.

Flirting with the Hindu theory of reincarnation I have decided to do my utmost that may give me a chance to be reborn as a bank.

Just imagine what life must be like. Compare it maybe to a video game where the drunk driver can crash into a wedding party, killing most attendees and wrecking the car. At that point Uncle Sam comes around, saying "no problem boy, never mind all the mangled corpses around you. Here's a bundle of cash so you can get a new car and mess around again."

No. Let's get serious. When being a bank, one does not need to draw on outdated analogies. Reality is already a paradise and this is a true story from cloud nine.

Let's begin with working hours. As the only industry in the world retaining a 5-day workweek, banks have an easy life. In contrast to all other businesses that have to stay open to fill the till banks have an enormous advantage. The money they lend out collects interest for at least 360 and in most cases 365 days. Not bad for working only 250 days. That's as close as one can get to "money for nothing and chicks for free," at least for the first part of this former Dire Straits hit.
Does a bad credit score hike your borrowing costs in real life? Again, better become a bank eligible for central bank refinancing. No matter what crap spoils a bank's asset portfolio, your central bank will be a most reliable buddy, lending you as much money as you want at negative real interest rates and far below what they charge for the risk associated with a client.
As a bank you are basically getting paid for borrowing.

Doesn't that sound like paradise? No, it is not paradise, this the very real world of banks these days, almost entirely free from any consequences for all its acting participants.

Are Banks Except From Common Sense Thinking?
This does not apply to the clerical workers level of course. A bank just needs to fire a couple of hundred secretaries etc. in order to keep its masters of the universe happy with gazillion bonuses. Sssshhhh, nobody wants to be reminded that the suipposed masters of the universe did nothing else than a herd of sheep: Staying together while stampeding in the same direction most times.

While mere mortal humans are told to save up for a nest-egg in case times turn to the worse, banks are again exempted from such profane common sense thinking.

Skimming the profits off shareholder's dividends in order to pay themselves bonuses in the good years banks apparently felt themselves expected from the need to create reserves for loans going bad. OK, they were not the first ones but only followed examples set by companies in many other industries where the aim to create shareholder value led to a short term oriented strategy that was dominated by the desire to raise the share price and not the strength of the company in the long term. Call the game by its true name: CEO compensation roulette.

The years in the casino with freely flowing champagne that came from selling increasingly risky products to clueless customers have created a resistance to change in the banking industry. While other drunks are thrown into the locker cell to sober up, a bank can instead stumble into its concerned parliament and tell a few horror stories about the importance of the credit industry.

Incompetent politicians may feel like heroes when they throw billions after the banks they do not have in the first place. But this recipe for hyper inflation is so old that it has been long forgotten by today's caste of international leaders. They will find out together with revolting populations when Europe and the USA follow the nasty path of monetizing the debt that has reduced Zimbabwe from Africa's bread basket into a lawless impoverished society depending on food aid from abroad.

The common man meanwhile is told that banks deliver an important function to the public by guaranteeing the smooth and efficient flow of funds. What the public is not told is the sour reality that it will be them who will pick up the bailout bill of the banks with its future tax payments.
Declining property prices, the prime driver behind the global debt boom of this millennium, will chip away more of the prosperity the West has become used to in the past 2 decades of surging home values that have financed many luxuries people probably would not have bought had they had to use their savings.

A shrinking business base at least on the consumer level where a sudden change to frugality out of necessity means fewer loans may bring what politicians are so far eager to avoid with their donations to the banking sector: A resizing of the industry to the level needed to service other industries and consumers without dominating them. After all banks profits have seen a higher growth rate in the past 4 decades than all industries.

All attempts to rein banks under stronger regulatory umbrellas were squashed in the past by them. Voicing their commitment to free market ideology it was argued that only self-regulation was sufficient and the state's hands would only hamper business. As the world now finds out that this was not the case, to be polite, banks have turned into super socialists at the same speed they saw their business model of taking on too much risk for lavish profits disappear because we cannot all get rich at the same time.

After all, it may still be most comfortable to be reborn as a bank in the near future. History shows a repeating pattern after bank crises. The bigger the excesses of the banks were the stronger the regulation they were relegated to.

It will not be different this time and for a while banking may become what it was for most of the time: A 3-6-3 business. Borrow at 3%, lend at 6% and be on the golf course at 3 PM. Life could be worse.

This article has been reposted from The Prudent Investor. The full post can also be viewed on The Prudent Investor.

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