Posted on 09/18/2011 9:00:54 PM PDT by stolinsky
Too Big To Fail, or Too Big Not To?
David C. Stolinsky
Sept. 19, 2011
The Bank of America was founded in San Francisco in 1904 by A. P. Giannini, the son of Italian immigrants. He never attended a university, but he took courses at a private business school. He made money in the produce business. His friends complained that they could not obtain the loans they needed to enlarge their businesses, so he opened a bank. It was located in a building that had been a saloon.
Originally the bank was called Bank of Italy. At the B of A branch where my parents banked in San Francisco, in the 1960s there was still a portrait of Giannini and a copy of the old Bank of Italy charter on the wall. Remembering your roots helps you know what you should do − and what you shouldn’t.
Giannini opened a bank for “little people.” He felt prospective borrowers hands − if they were calloused, he knew the person was a hard worker and was worthy of a loan. His bank stayed open past the usual “bankers’ hours” of 10 to 3 on weekdays, so people didn’t have to take time off work. He opened neighborhood branches, so people didn’t have to go downtown.
Though it was limited by law to California, Bank of America became one of the largest banks in the world. Then banks were allowed to spread nationwide, and it merged with NationsBank, which was deeply involved with trading in derivatives. Its acquisition of the failing Countrywide did it no good. And in 2009, Bank of America required a bailout from the federal government to avoid insolvency.
What happened to the “little people’s” bank that caused it to expand into a huge, bloated conglomeration on the verge of failure? Here is a clue − Giannini’s first name was Amadeo, which means “love of God.” As young people would say, that’s so yesterday.
The founders of our nation knew that in order to remain free, people had to control themselves, based on moral principles derived from religion. Otherwise, an authoritarian government would have to control them. Current “progressive” politicians want to institute an authoritarian government, so to them, people who control themselves are undesirable.
Yes, regulations are needed. But the government officials who will write and enforce them were a major part of the problem. What makes us think that now they will be part of the solution? Will members of Congress like Barney Frank, who exerted strong pressure on the Fed and on financial institutions to give home loans to those unlikely to repay them, now become advocates of prudence?
When we bought our home years ago, we got the loan from Great Western Savings, a reliable California firm. Then it was bought out by Washington Mutual, a nationwide firm that went on to produce the biggest bank failure in American history. Reportedly it paid employees according to how many loans they wrote, not how sound the loans were.
Such shenanigans were made possible by “securitizing” the loans. The bad ones were bundled with the good, then dumped onto the market, where unwary investors took them off WaMu’s hands. If banks were still limited to one state, and were unable to lay off risky loans onto pseudo-governmental agencies like Fannie Mae and Freddie Mac, they would never have made these risky loans. Only a fool would risk his own money or his own job in such a careless manner.
Great Western, a solid firm with a solid name, became WaMu, with a name that sounded like a circus clown − and with the brainless actions to go with it. And then WaMu was bought out by JPMorgan Chase.
Recently our home-equity loan was due for renewal, but we closed it out and had the lien on our home released. We had used the loan for home repairs, but one of our monthly payments was “reversed.” I knew about reversed charges, but a reversed payment? Multiple phone calls and e-mails were to no avail. Then I copied the last few months of loan statements, my checking-account statement showing the deposited check, added a letter threatening legal action with a copy to a large law firm, and sent the whole thing by certified mail. Finally our payment was credited, but at the cost of many hours of my time − and my confidence in the bank.
I explained that we were closing out our home-equity loan because we no longer trusted the bank to keep our payments straight. I wished them good luck in finding someone better qualified for a loan − I had made every one of the monthly payments for 10 years on time, and had a credit score over 800. I received no answer.
We went from A. P. Giannini, the produce dealer who loaned money to “little people” if they were hard workers, to high-flying financial wizards with MBAs from prestigious universities, who loaned money to people unlikely to be able to pay it back. But the wizards were so traumatized by the crisis their own recklessness had caused that now they are reluctant to loan money to excellent credit risks.
There is an old saying that a cat won’t sit on a hot stove twice, but she won’t sit on a cold stove either. One might hope that bank executives with MBAs from prestigious universities would have more sense than cats. But that would be an insult to cats.
The office handling the loan itself is in a different state from the office handling the loan payoff, and neither is in the state where our home is located. The huge organization had grown beyond the capacity of anyone, or any group, to manage effectively. Basic management principles teach that management is most effective if it is as close as possible to what is being managed. But worship of bigness has led to management being as remote as possible. Managers look more impressive that way.
Instead of A. P. Giannini, who sat at a desk in the lobby and talked directly to clients, we now have The Great and Powerful Oz, who rattles a piece of tin to simulate thunder and speaks through a megaphone, but who hides behind a curtain to conceal his inadequacies. All this makes me nostalgic for Giannini, who learned about business by actually being in business, and for my four uncles, who never finished high school but established two clothing stores and supported their families admirably.
● We need to stop worshipping the idol of higher education, which too often turns out to be leftist indoctrination, and regain our respect for practical knowledge obtained from trade schools and hands-on experience.
● We need to stop worshipping the idol of bigness, and regain our respect for what actually works, rather than what looks impressive.
● We need to think about what will happen years from now, rather than focusing on the next quarterly report.
● We need to reform estate-tax laws that inhibit a family business from being bequeathed to the founder’s children, so he agrees to be bought out by a large corporation.
● We need to reinstitute laws that restrict banks to one state, or at least one region, and to consider separating commercial and investment banking.
● We need to require banks to maintain larger cash reserves, which would have enabled them to withstand the recent crisis.
● We need to forbid “securitizing” shaky loans, and then duping unsuspecting customers into buying them.
● We need to regain our respect for people with hands calloused from actually doing something, rather than for people who got advanced degrees for merely talking about it.
Europeans worship bigness, first in the form of imperialism, which led to two world wars, and then in the form of the European Union, which is in serious trouble. The end result of the worship of bigness is globalization. It is too soon to assess what its outcome will be. But so far, the results of exporting skilled jobs and importing unskilled workers do not look promising.
Sometimes smaller is better. Sometimes local is better. Sometimes doing less is better. In the end, nothing is too big to fail, including America.
Dr. Stolinsky writes on political and social issues. Contact: dstol@prodigy.net.
To Big To Fail = Too Big To Exist
What the libs won’t tell you is, when you force business into shady deals through excessive taxation and regulation this is the kind of thing that happens. What we need is to let the job creators bring back our economy, and it starts by getting rid of the Marxist scum infesting the White Crib. Then we can deal with the RINOs. Don’t retreat, reload.
Banking regulations were written to make the above profitable.
If someone scolds me when my grass is a foot high ( which draws snakes) but PAYS me $10,000 a month when my grass is over a foot high - it'll stay over a foot. The money acts as an incentive. An incentive that trumps the more ethical choice of mowing the grass...
That's a perverse incentive. Bank of American played by the rules government regulators set down - with the obvious outcome..
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