Printer-friendly page from Finfacts Ireland Business News - Click for the News Main Page - A service of the Finfacts Ireland Business and Finance Portal|
Dr Peter Morici: The eclipse of American Banking
By Professor Peter Morici
May 18, 2012 - 4:02 AM
Dr Peter Morici:
Investors may have overreacted to J.P. Morgan’s $2.3 billion dollar trading
loss, and traders may have an opportunity for quick gains in bank stocks.
Longer-term US banks may never recover to their past glory.
For the Reagan to the Clinton Administrations, US banks profited from unusually
good economic and regulatory climates.
During the Carter years, Paul Volcker slayed inflation, and history will
remember kindly the man from Plains for instigating two decades of privatization
with deregulation of the airlines.
For the next two decades, increased competition and new technologies, like the
personal computer and internet, made the United States the epicenter of what
economists call the Great Moderation—a long period of sustained growth with only
moderate fluctuations in economic activity and inflation.
Banking is inherently an unstable business—borrowing short and lending long. The
combination of stable growth and only moderate inflation permitted US banks to
become very profitable and to dominate the global financial scene.
Deregulation allowed the largest banks to expand across state boundaries. And
after the repeal of Glass Steagall in 1999, commercial banks, which take
deposits and make loans, combined with investment banks, which specialize in new
share and bond offerings, making resale markets for these instruments,
derivatives that permit businesses to insure against risks, and other exotic
Historically, the personality of commercial bankers—who gauge whether Farmer
Grey can repay the loan on his new tractor—and investment bankers—who sell bets
on the price of corn six months from now—were radically different. The former
were risk adverse and paid salaries in line with industrial executives, and the
latter were risk salesmen and earned incomes more in line with entrepreneurs.
When the two, formerly separate, institutions were combined, commercial bankers
aspired to incomes like their richer cousins, and simply made too many risky
loans and tried to peddle those loans bundled together as bonds on unwitting
investors—the real estate bubble, financial crisis and Great Recession owe much
to such excess.
At the same time, banks became less dependent on deposits and more dependent on
selling CDs and mortgage securities nationally to obtain funds—the latter are
inherently less stable and more expensive sources of funds.
The hunt for higher returns to pay commercial bankers bigger salaries and
bonuses, and more expensive funding created a witches brew of creative
Now, the Obama Administration instead of recognizing the fundamental structural
problem, and seeking to re-separate commercial and investment bank, is imposing
wrong headed regulations.
Costly rules are pushing small, regional banks to sell out to big Wall Street
holding companies, and the Volcker rule addresses a myth—bad loans not bad
trades caused the demise of the banks and financial crisis in 2008.
Through both the George W. Bush and Barack Obama Administrations growth has been
sub-par, limiting the opportunities for investment banks—less growth means fewer
good deals to sell and a lethargic stock market. To find new ways to earn money,
investment banks increasingly invented trading products, not intended to help
business hedge risks, but instead to simply permit individuals and businesses to
Those activities dramatically increased market volatility, and exacerbated the
financial crisis. Those also squandered American investment banking’s
reputations for integrity and putting clients first—rightly so because the quest
for outsized bonuses is generally inconsistent with client interests.
For many reasons, the focus of growth has shifted from the Atlantic community to
the Pacific basin, China and others like Korea lead growth, not the United
Commercial and investment banking opportunities follow the growth, but US banks’
spotted record will only serve to embolden Asian protectionist inclinations.
Whereas GE, GM and Apple may profit greatly from rapid growth in China and
elsewhere, Asian governments will keep the likes of J.P. Morgan and Goldman
Sachs on a short leash.
Overregulation and slow economic growth domestically and discrimination against
US banks in Asia will severely limit US banks prospects. Financial stocks will
likely rebound after the recent scandal at J.P. Morgan but long term those are a
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone
Check out our new subscription
Premium , at a low
annual charge of €25 - - if
you are a regular user of Finfacts, 50 euro cent a week is hardly a huge ask to
support the service.
It's a simple fact that in the prevailing economic climate, the provision of
high quality content cannot be sustained through advertising alone.
Business executives who put a premium on time and value high quality
information, should use our service.
© Copyright 2011 by Finfacts.com