Bank and the Beanstalk

There there little bank,
It is you that we should thank/
It is you whom still we bleed,
It is your work which feeds our need.

I often miss the times I never got to see. The Victorian times for instance, with their verbose conversations and clownish gestures of courtesy and class, intertwined with monthly bathing and incest-promulgated elitism.

The phony and crooked ways in which those who did it right are made to suffer and pay for those that screwed things up, can only be faithfully described in Shakespearean lingo. To simply call it the thievery and robbery that it has been, would be way too honest and open for our phony world of American Idols and Daily Shows.

A new book called "Too Small To Fail: How the Financial Industry Crisis Changed the World's Perceptions" by Louis Hernandez tackles the poorly described petty treachery befitting of real life Montagues and Capulets. I shine the spotlight on this rare cut of non-fiction filet because it addresses the foremost issue facing financial services firms and the global economy going forward.

Simply, how does an industry powered by incentive perform a good job (both for customers and ourselves) if the swimmers are tasked with saving drowners?

Consider the following:

Small banks actually have emerged from the crisis with their balance sheets in good shape. They are poised to lend and capitalize on their bigger competitors troubles.
They are not doing so, though, in large part because these banks are being asked to pay for the sins of their bigger cousins. They have had to pony up future premiums to keep the FDIC's insurance fund solvent. And now they are being asked to add to their compliance costs by tackling onerous paperwork and scouring their loans for potential trouble.

While that may seem like a good idea, consider that the vast majority of smaller banks already do this before they even make the loan. That is because unlike the Citigroups and Bank of Americas of the world, they hold most of their loans on the books to maturity. It is what the industry calls relationship banking and it is pretty much the way all banking was done before massive consolidation made it impractical and Wall Street got in the game.

This is a wonderful thought.

How exactly is the banking world supposed to recover when good service to customers is de facto cause for punishment? The relationship banking aspect of big banking which died along with Glass-Steagall is now one of the primary hindrances to growth for smaller banks, which have the necessary funds to buy and cultivate a ton of troubled assets from their older, slower and less competent brethren.

I have spent the better part of two years defending Wall Street from the glass house rock bombers.

I am having a harder and harder time doing so. Recently, I had a chance to look at the books of a tiny community bank and was both pleasantly and unpleasantly surprised. Pleasantly at how good of a shape they were in. Unpleasantly when I heard about the punitive structure they now had to navigate, for making no mistakes at all.

Consider the long range ramifications. I have stated in the past and will repeat it here again: Boutiques are our future, the sooner, the better.

The low hanging fruit may be the easiest to grab, but the rotten apple will always outweigh the healthy.