It’s time to take our money away from big faceless banks and put it where it belongs. In our own communities. I’m not paranoid or anti business. To the contrary, I’m pro honest business. But I’m also realistic. For many years I worked with clients involved in mergers and acquisitions. I’ve spent time in rooms with investment bankers, financial analysts and accountants who were busy changing financial assumptions, inflating valuations and reassessing risk to make a deal “work.” These are smart guys (and gals) just making it up. I was present when some of our biggest financial institutions were training their sales forces to sell sub prime debt while they explained it would slice and dice parts of risk-drenched loans into a variety of investment portfolios until the risk of any single loan disappeared.
Someone said mixing high-risk debt with low risk debt is like putting a little arsenic in a Jamba juice. Blend it up and pretty soon the poison disappears. Guess what? It doesn’t.
Although that may not make common sense, it made great sense to a commission driven sales force ready to descend on people who had never borrowed money. No, not all these people are evil or even extraordinarily greedy. What they are is extraordinarily tempted. And one of our society’s primary restraints against great temptation is legal regulation.
But with great sadness I see once again our deeply compromised government saying one thing while intending its exact opposite. Like the Clean Air Act, which allowed for greater air pollution, this newly proposed regulatory reform of our financial institutions is simply a word trick. Double speak. Hogwash. Here’s a few tidbits:
First regulations don’t work if the regulators are corrupt. Wall Street firms have averaged paying fines of $1 million a day or $400 million a year for the past 6 years for violating current regulations. This, you see, is just a cost of doing business. It’s cheaper to break the law, pay the fine, and make a fortune.
Now Henry Paulson and the old Wall St. boys want to merge high-risk investment banks like Merrill Lynch and Goldman Sachs into a huge consumer bank like Bank of America and Wells Fargo. It’s the arsenic in the blender again. This works because tens of millions of us put our deposits into commercial banks that give the risky, greed soaked investment banks a platform for more casino games. The reason it’s so tempting is that big bank deposits are insured by you and me, the taxpayer, through the FDIC. Our insured deposits give them a new capital base.
Sure, they claim the Federal Reserve will keep a tight lid on over-the-line risk, but what regulators do you trust today? So…now all of us, the taxpayers, are going to guarantee the continuing risks of investment banks. And what do we get? Zilch.
Not only that, all these new arrangements will do is strengthen the unrestrained power of big banks at the expense of local banks and credit unions. The result could be higher consumer costs, less competition, and more shenanigans.
Our real problem began decades ago when our economy switched from a manufacturing, real value producing economy to a financial one. Real wealth is the result of serious invention and innovation, science and engineering meeting genuine human needs.
We lost our mojo of invention and high quality production into converting all our assets (like our homes) into debt instruments to be leveraged and traded. Today financial services are two times bigger than our entire manufacturing sector. In the late ‘90’s we removed nearly all regulation of banks, insurance companies and real estate debt. That’s why we have 27% interest rates on our credit cards and million dollar home loans to unemployed people. But when finance exceeds its legitimate role to just moving numbers on a spreadsheet and inventing global casino games simply to place bets with borrowed money hoping to make a financial killing, the decline of our economy is inevitable.
So, what’s the greatest thing you can do? First, deposit money in a credit union. A credit union is the bank you can own. Credit unions are owned by their own depositors.
Credit unions operate on a human scale by people like you and me. They began 150 years ago to help farmers be free from big city banks who didn’t understand real life. They have all the same services of a huge consumer bank and they loan money at low rates to their own depositors. They have an international ATM network and have more sophisticated on-line banking that lots of big banks saddled with legacy IT systems. All their accounts are FDIC insured. There is simply no reason why every American should not be a member of a local credit union.
Second, if you’ve ever considered writing or emailing your congressperson, now is the time. We don’t want investment banks and consumer banks united. It’s time to stop this nonsense, create a real economy and re-enthrone ethics. And yes to create financial institutions we can trust. We need fair, effective and enforced regulation. All of us are better off when we have to answer for our choices. It’s common sense for the common good.