Wednesday, May 4, 2016

In God and Banks We Trust

There are only a few things humans willingly place all their trust in. God is one of them, despite only one generation ever laying eyes on Jesus^. Banks are the other. It's the place we entrust all our money essential for survival.

There has probably never been an industry so disdained, so trusted, and yet so vital to our progress throughout the centuries as banking. Banking in all its primitive forms has been around since humans progressed out of the hunter-gatherer stage into more clustered forms of community. Banking and finance laws are found in the written stone tablets governing ancient civilizations, and even The Bible. Behind the scenes banking even played a role in the split between Martin Luther and the Catholic Church. In American history Thomas Jefferson was deeply mistrustful of banks, but understood their necessity. Andrew Jackson even closed down America's first central bank in retaliation which eventually played a large role in the wildcat banking era.

Yet to this day our society finds itself entrapped in the same predicaments our ancestors experienced centuries ago. Financial crisis are rooted somewhere within every major economic downturn the human race has experienced. Yet they are fundamental to ensure the downturn does not last forever. What a muddled and tarnished history.

So who can we trust for our banking needs?

If you want a mortgage certainly don't go to Bank of America with their near $17 billion dollar whopper. So maybe you decide to head down the street to Wells Fargo since they are Americas largest home lender. Not so fast a they basically plead guilty with this $1.2 billion dollar settlement. 

How about Goldman Sachs? Let me stop laughing before I answer that one. No ($5 billion). You can't even go to JP Morgan($13 billion) or Citigroup($7 billion). 

What about if they manage your money? Don't even think about it.

There is this $6 billion LIBOR trading settlement involving JP, Citi, UBS, Barclays, and RBS. Plus another $2.5 billion from Deutsche Bank. They can't even get trading in equities right with this $154 million settlement between Barclays and Credit Suisse. Maybe having them handle your commodity trading will be OK. Nope, can't even trust them with that.

The total of these recent settlements is approximately $52 billion in penalties, fines, and other financial claims. Worse yet this doesn't include every fine paid by other banks - just the ones I chose to highlight. It doesn't even put a large dent in the profits the largest banks realized over the years from their illicit activities. For comparison JP Morgan took in over $83 billion during the last 4 years. So the fines are not death knells for any of the banks. Additionally part of the fines usually involve pledges for individual debt relief, or other claim payments that are tax deductible to the firm which actually lowers their tax bill. So the stated headline number is not the ultimate net financial effect. The real financial impact is lower than the headline number suggests.

In some instances above the banks actually admitted criminal misconduct! In fact it's barely reported by the media that these banks get special waivers issued(Stein Dissent) to keep operating. They are now convicted felons and should have lost their banking licenses. It's the equivalent of the local drug dealer getting convicted of selling drugs only to be allowed back on the corner the following day. Yet these institutions are deemed necessary for a global economy. It's almost like sleeping with the devil. It's all eerily reminiscent of a quote by Joker in Batman(1989).

"And now, folks, it's time for "Who do you trust!" Hubba, hubba, hubba! Money, money, money! Who do you trust? Me? I'm giving away free money. And where is the Batman? He's at home washing his tights!"

How did it all end up like this? That's an even better question with four answers.

  1. Politicians realize personal gains by protecting the banks
  2. Government needs these large institutions to issue and hold public debt
  3. Criminally prosecuting employees would undermine confidence.
  4. Banks are essential to the government for tax purposes

A1 - It's widely discussed that Wall Street and Bankers own politicians through campaign donations, consulting fees, speaking fees, and jobs for themselves after public service(sometimes for family and friends). Banks are large donors to political parties on both sides of the aisle at all levels of government. Politicians of course deny these relationships skew their decision making which is absolute BS. If you were raking in extra thousands while in office, or had the prospect of a board seat with another pension paid for by shareholders would you really say it was a conflict? It's that type of relationship which gets you a phone call from your favorite representative to whichever bureau is causing you problems. In return the bank usually gets a slap on the wrist, or the problem goes away. We should be asking the Clinton's about this one. During Bills term in office he repealed the original Glass-Steagall regulations allowing banks to turn into traders. Meanwhile Hilary made sure to get her hands in on the legislation that forbade students from declaring bankruptcy on their student loans. Since then it seems bankers and the Clinton's have done quite well for themselves. Meanwhile students and homeowners have not fared so well. I should note that this type of behavior is found throughout history.

A2 - Another no surprise is the amount of debt the government issues. Governments need the assistance of larger banks to participate in debt auctions from the Treasury. The banks in turn trade it, sell it to clients, and hold the debt on their books. It would be extremely difficult for the government to operate without this relationship. Additionally banks of all sizes are required by law to have capital buffers(Tier 1 reserves) designed to protect the institution during financial panics. So what qualifies as a Tier 1 reserve? You guessed it I'm sure. GOVERNMENT DEBT! That's a basic quid pro quo scenario a 5 year old could understand.

A3 - How could criminally prosecuting bank employees undermines confidence? The reason is a full trial would be public and it would expose the fact regulators are privy to most of what goes on inside financial institutions daily. Everyone would then know regulators are aware banks managing your money actually trade against your position. That's evident in the mortgage fraud settlements above which banks admitted(surprisingly) to taking positions against the mortgage bonds they were selling to other investors. For example if banks notice plenty of clients taking long positions in a market, they can have their own trading desks take the opposite side to profit from a fall. That's why there is never a trial. Having a trial ends the entire money making game for everyone. Now if no one begins to trust banks what would they do? They'd all start to withdraw their money creating a financial panic. Confidence must be maintained at all costs. It's reason number one the settlements I listed above are just that. If there were trials instead of settlements the whole show would be put on display. Instead behind closed doors the punishment is mutually agreed upon and all is well. Plus you can't have people withdrawing all their money otherwise we would never get to #4.

A4. The IRS and Justice Department also need the banks to help them trace money for tax purposes. Ever hear of the person who has accounts seized because they made to many withdraws or deposits just under $10k despite not breaking the law? Or having to show ID if you make deposits or payments in cash? Or how about your bank charging your business fees when cash deposits are over a certain limit each month? Yep you guessed why. Taxes. Even if all your transactions involve electronic payments that information is a cornerstone in tax audits. All this information is used by the IRS allowing them to analyze who to target. Of course they need the banks to send them this information. So you can't bite the hand that feeds you.

I'm sure by now you are saying, "OK we get it!" So trusting big banks is unfortunately not the wisest move in my opinion. But hey what do I know considering millions of people still believe otherwise. I think they should be broken up into smaller banks which would help create competition and better service. Some alternatives are online only banks, PayPal, credit unions, or the smaller regional and local bank where you'll likely get better rates and service. The list is small and I apologize for that. Until the FinTech revolution reaches maturity these are our options. I unfortunately don't recommend storing it in a mattress, or in the same hole Fido hid his bone.

Who you ultimately trust for your banking needs is up to you. Since trust is something each person defines differently for themselves. I can however give you as much information as possible so you can make an informed decision. Hopefully you walk away from this understanding that are a lot of reasons for the problems we have in our banking industry today. I haven't necessarily listed them all, but it's a start.

^From a Christian perspective only.

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