My late father worked for one employer his entire life and that was the state bank of Sri Lanka. During the middle portion of his career, he served as manager at various branches around the country and so we moved along with him every four or five years or so.
The thing about his job that required the most judgment was giving out loans to individuals and businesses. The bank had to make sure that the loans were properly secured and the money spent correctly. Having someone misuse or default on a loan that you had approved was considered a major blot on your career and so he and others like him were very risk-averse. As part of that loan process he would regularly go on what were called ‘inspections’ to the places where the loans were given to make sure that the work was being done as promised, and as a little boy I would sometimes accompany him, especially if the places were to the neighboring towns and villages. It was quite interesting to visit factories and farms and look at machinery and other form of inventory.
While he seemed happy at his work, it was not what you would call exciting. An important aspect of his job was to make sure that the bank’s books were kept orderly and ‘balancing the ledgers’ at the end of the day was the most tense moment since he would not go home until all the money had been properly accounted for. (He also viewed balancing his personal checkbook every month as of prime importance, a value that I picked up from him and to this day will make sure that it is correct to the last cent.)
This was a far cry from the casino-type atmosphere that exists in the current US and British banking sectors where huge sums are gambled on risky investments and that led to the financial crisis of 2008. Such activities are in the news again as scandal after scandal is revealed at places like Bank of America, HSBC, Royal Bank of Scotland, Barclays, and UBS.
Part of the problem is the revolving door connecting these banks to government regulatory agencies, which ensures that these risky and even criminal practices are unchecked. Matt Taibbi argues against having former investment bankers become heads of government banking regulatory agencies because they have the wrong attitude and that what we need is for banks to return to becoming the kind of institution my father worked for.
What the banking system really needs is a guy who will step in and force bankers to go back to being boring, risk-averse drips who lend businesses money to buy new equipment or fleets of trucks or whatever. What we have instead are coked-up wannabe big shots straight out of Boiler Room who are washing Mexican drug money and laundering Middle Eastern cash and playing around with wild price-fixing schemes – pretty much everything you can think of that isn’t quietly counting beans and helping grow the economy.
In other words, they need someone like my father.
Banks are capitalist enterprises so they are owned by their investors. In order for the banks to attract investors they must show big short term profits which you don’t get by being too cautious.
The result is that investors become like the people you see in casinos who watch to see who’s on a winning streak and then bet the same.
Then the streak ends.
Banks used to managed by people who understood the banking business because they had accumulated a lot of experience in it over the course of a working life; -- people like your father! Some decades ago it became the rule for senior executives to be recruited not from within but from outside from a cadre of supposedly “professional” managers. These guys were the products of the burgeoning “business” schools that every university was setting up back then.
Nowadays the situation has become so divorced from reality that actual experience in a business is seen by the “professional” executive class as a drawback -- if you have experience you are closed-minded and resistant to innovation. I’ve seen situations where this “innovation” was actually putting illegal practices in place (in a highly regulated business no less) and those with experience who warned against this “innovation” were punished for their negativism. That company eventually wound up spending a couple of years being very closely monitored by Federal reserve regulators under a MOU. Naturally this was reflected in damaged reputation and diminished stock price -- but no “professionals” were disciplined in any way; the whole episode was written off as a cost of doing business.
In the economic meltdown of 2008, 19 of the G20 countries suffered bank failures, all caused by the same thing: the banks were allowed to play fast and loose with other people’s money, and the lost it. Canada, on the other hand, had no bank failures because after 1999, it maintained its conservative banking policies, similar to Glass-Stegall in the US.
Other countries may finally be admitting that banks have to be run separately and responsibly. The Bank of England recently hired the man who ran the Bank of Canada.
http://www.slate.com/blogs/moneybox/2012/11/26/mark_carney_canadian_central_banker_to_run_bank_of_england.html
… ♪
In their lives ♬ there’s something lacking,♫♪
What they need’s a ♩ ♪ damn good whacking
♪♫…
Another factor is that these wealthy casino bankers then bankroll the election campaigns of compliant politicians, which is why no current politician has the courage to reform the banking sector. End the flow of money from the bankers to political coffers before you expect to see meaningful change.
A banking friend of mine said the bankers forgot the rules of 3s:
Give 3% interest on deposits
Charge an additional 3% (6%) for loans
Go home at 3
I was roomie to a MBA who went on to work for a bank. He pointed out that people typically move up in an organization regularly, and when they do the loans with their name on them get assigned to someone else.
He pointed out that this shifts the motivation away from looking hard for the few people who can carry a loan and pay it off, to the much easier task of finding people who can carry the loan for just the time it takes the issuing officer to move up in the organization.
The kicker is that people were being promoted for issuing a greater number of loans and as long as they don’t default while their name is still on the paperwork they don’t get blamed.
In effect people are getting promoted and making bonuses by making loans just good enough to hold together until they can clear the area. The harder, and more time consuming, work of setting up loans that won’t self-destruct is not rewarded and such people don’t make it to the ranks of the executives.
Apparently it is all about appearances, the ability to harvest credit undeserved and lay your blame on others.