February 22, 2010
By now everyone has heard and read plenty about the bad loans of the big banks, their trading against their own customers and bonds deals, and their collapses and near-collapses. The giant bailouts have been exhaustively chronicled as have the banks' robust rebounds. But the history of the last 30 months is far clearer than is the way forward for the biggest of the banks.
Those banks - Bank of America, Wells Fargo, JP Morgan, Citigroup, and let's not forget Goldman Sachs - have been raking in huge profits lately, mostly due to trading and investment banking activity. Yes, the same banks that cashed government bailout checks to stay in business are now making a bundle with trading that puts their recently rescued capital at risk. How better to earn their huge bonuses? Don't get me wrong. I am happy for anyone to pursue profits with risk capital. That's what sent Columbus off sailing westward and what drives our economy. But when you take a risk and seek a gain, you have a chance of loss. It's that chance, that terrible inconvenience of loss, that the banks seem so eager to avoid.
Paul Volcker has a suggestion. You may remember Mr. Volcker - I certainly do. As Federal Reserve Chairman in the early 80's he helped crush our out-of-control inflation (that helped me to refinance my 18.92% mortgage down to only 12.25% - I was ecstatic). Recently President Obama appointed Volcker as head of his Economic Advisory Board, and Volcker has assumed the mantle of Skunk At The Garden Party. Volcker's idea is that banks should not engage in proprietary trading by risking their capital buying and selling in the financial markets. He thinks that banks should make their money by making loans and collecting them with interest, and he is right. The banks must choose: if they want a safety net, they must run a safe business. That means get out of investment banking. If they want to pursue the Big Win, they must live in the shadow of the Big Loss. They cannot have it both ways.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).