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The banker’s fall will be fatal
October 1, 2008
My column in the FT this week is on the death of the banker, which has been predicted before but is now, I argue, plausible.
Bankers have never been popular, but Washington’s rejection of the $700bn bail-out for banks on Monday recalled the odium that attached to them in the Great Depression.
Americans rightly wonder why their taxes should be used to rescue bankers from their folly. In the 1930s, bankers were called “banksters” – to rhyme with “gangsters” – as a result of 1920s swindles such as the sale to small investors of Peruvian bonds that became worthless.
It is odd, as well as infuriating, that investment bankers managed to take the public for such an expensive ride again. Only 10 years ago, the author Ron Chernow declared the “death of the banker”, arguing that Wall Street’s grip on the financial system was ebbing.
Yet here we are again – this time with governments around the world opting to rescue banks rather than risk economic disaster.
At the risk of repeating Mr Chernow’s mistake, however, this crisis will truly kill the banker. By that, I mean it will end the reign of the investment banker as society’s leading figure of wealth and influence, cutting a swath through the world and being deluged with money.
Does this make the rest of you (not the bankers, I mean) sad? No, I did not think so. I know plenty of likeable and ethical bankers, but as a general rule, they are in disrepute.
You can read the rest here and comment below.
Hello Mr. Gapper,
You may well be right that this period will see the end of the banker.
I am not so sure. You have remarked at their creativity. Their stature may be ebbing sharply, but I believe, given a few years, they will once again be actively enlarging and furnishing their personal space with all sorts of fine goods courtesy of their dependably credulous and excitable clients.
Regards,
Posted by: Gary Marshall | October 2nd, 2008 at 3:47 am | Report this commentGary Marshall
The ultimate problem is that greed and stupidity is more generously distributed in the hinterland than it is in the City.
The unemployable masses in the provinces are to blame for most of these problems, showing a bottomless desire to buy any old rubbish. The City dutifully obliged.
It would actually be useful to see a more coprehensive view from this “News”paper, but I argue that the FT’s editorial grasp of current events is as enlightened as its scaremongering over the Millenium Bug, which is to date the largest single Fraud perpetrated by an industry on the public at large.
Posted by: AJGS | October 2nd, 2008 at 8:34 am | Report this commentInterestingly, one of the two points I was going to make was the one of greed and stupidity of the common folk…
I used to be a European broker analyst (15 years of it before I saw the light) and an elderly cousin of mine in the US (a young, ordinary grandmother) asked me a year ago about wanting to move her $40,000 savings out of the USD and into a harder currency (EUR or CHF). Emminently sensible, I thought. But when she saw the lower returns, she changed her mind, saying she was looking for a 20% return over a year… (Gulp!) Yes, she thought that was reasonable.
My other, more important point is this. If my 15 years of working for 5 different banks has taught me anything, it’s that there is no leadership or corporate culture in the banking world. Banks are collections of individuals with no-one to look up to as role model. Indeed, these ‘leaders’ have no skills at all in matters of personnel or team-building. And there is no loyalty whatsoever: it’s simply ‘hire and fire’. No corporate culture means no corporate conscience.
It’s totally different in industry (where I used to work for 10 years prior). Just look at the world’s No. 1 food company: The CEO has worked there for 30 years, the Chairman for 40 years.
So what’s my point? The regulators need not only to put stricter rules and regulations in place, but also to put real leaders in place, leaders who are truly ethical and who will form a new regime, implementing a top-down-bottom-up re-engineering of the corporate culture of these institutions.
As long as the banks remain collections of individuals, it will continue to be like herding cats. Hosing them with water now will chase them off and make them wary about returning… for a while. But one day they’ll be back to feed on and make a disgusting mess of our garbage!
My concrete proposal: Recruit a few dozen, financially-oriented, senior managers from ethical industrials with strong corporate cultures (e.g. P&G, Nestlé, Danone…) and put them in charge of the banking world.
As John Gapper would say, “It’s a start!”
Posted by: James Amoroso | October 2nd, 2008 at 9:36 am | Report this commentPerhaps the flaw lies neither with the bankers nor with their customers. Each is part of a complex ecosystem within which they interact with each other.
Many of the big and ultimately damaging processes in our economy seem to be driven by conspiracy - not small cabals of faceless, secret, plotters but conspiracies amongst huge numbers of people to look the other way whilst enjoying short-term gain.
Perhaps a legitimate function of government is not to regulate either party, but to shine a bright and relentless light on simple underlying economic truths.
Of course, it’s a brave government that willingly forgoes it’s own benefits from that conspiracy of comfort.
Posted by: Nick Buckley | October 2nd, 2008 at 10:06 am | Report this commentThe ‘merchant banking’ function died a long time ago. It’s original purpose was to finance other peoples’ trade not to speculate on ever more byzantine and riskier financial instruments. Now that these have been exposed as fairy gold we are left facing the consequences. These will be most especially damaging to small and medium companies and eventually to the rest of us. Small and medium sized businesses account for some 40% of economic activity and almost half of all employment in the private sector. To date it has been the strength of the housing market that has enabled them to substitute for the lack of a banking sector dedicated to their needs as used to be the case with the traditional merchant bank. Take for example one such where they will no longer be able to afford to fund the acquisition of goods, components, materials or new plant and equipment by letter of credit in the middle of a credit crunch. Many of them will struggle to survive as a result or if they do survive, their ability to compete in the marketplace will be severely constrained. This sort of thing will inevitably have serious implications for competition and therefore inflation, jobs and the economy. Perhaps some shell shocked banker looking for a new career path might care to take note.
Posted by: figurewizard | October 2nd, 2008 at 11:09 am | Report this commentUnfortunately, the ever ambiguous generic “Banker” Mr. Gapper refers to was not the only culprit in this current financial crisis.
Conspicuously absent from blame in this column is the:
(i) Federal Reserve Bank of the US maintaining historically low interest rates (i.e. loose liquidity/money);
(ii) US Government (Senate and House) - where these leaders (primarily Democrats) continuously fueled the “American Dream that every adult should own a house” by ignoring the two quasi-government entities, Fannie Mae and Freddie Mac, that were adding tremendously to the fire;
(iii) The US Consumer - yes, it’s true the actual participant in “Main Street” (I personally can’t wait until this euphemism is buried) continued to obtain substantial adjustable rate mortgages and equity-loans off of the increasing values of their homes - with a sense that the 15% annual increase would never subside;
(iv) The mortgage companies (including Fannie and Freddie) who conveniently created non-standard vehicles that aggressively assisted individuals, that rightly did not have the appropriate credit, to obtain burdensome obligations (ultra-sensitive to interest rate and changes in market valuations)
they didn’t deserve; and
(v) Risk Professionals - who obviously didn’t apply or adapt their credit risk methodologies to adequately capture the increased default risk introduced in these “complex” products.
While this assessment is primarily US-centric, the effects of this crisis unfortunately will not discriminate, particularly in the UK where 125% Mortgages and Buy-to-Let vehicles were quite popular. Alas, the UK housing market seems to be experiencing the same fate as their allies in the US.
Mr. Gapper appears to lack understanding of the remaining universe of bankers by categorically assuming all bankers are the same (what’s also interesting is his introduction that Bankers have never been popular despite their significant presence in Washington with Paulson, Corzine, Rubin et al). It is quite likely “mortgage bankers” will potentially suffer a fatal blow but the majority of others will endure and continue through troubled and prosperous times.
Posted by: Keith Crawford | October 2nd, 2008 at 12:56 pm | Report this commentIf disrepute meant the death of a profession, why are lawyers not extinct?
Posted by: HKLivingston, 26, investment banker | October 2nd, 2008 at 1:23 pm | Report this commentJohn Gapper says “In mortgages, Wall Street found a magical combination of financial leverage and lack of transparency… that allowed investment banks to make money from information-starved investors.” Not true!
John Gapper knows well it had nothing to do with magic and all to do with that credit rating agencies were empowered by the regulators as experts on risks and guides to no-risk land, and then they messed it up, as it only had to happen, sooner or later.
And so, if it is about magic, the real question should… what have the credit rating agencies and the regulators done to a John Gapper so that he is capable of ignoring the facts?
Posted by: Per Kurowski | October 2nd, 2008 at 1:55 pm | Report this commentI cannot agree more with Keith Crawford’s argument that bankers were only one of the many participants in the financial system who deserve the blame for where we are today. Individuals knew they were taking on more risk than they should have, and now they seem to have happily forgotten their contribution to the story.
I take special issue with Mr. Gapper’s comment that “estate agents and brokers cajoled people to buy houses”. Cajoled?? I didn’t see anyone being forced, convinced or otherwise led to do anything they didn’t want to do. Rather, too many people on “Main Street” felt that if someone was willing to lend them large amounts of money, they should borrow as much as they could. And now they want revenge because the undue risk they took has come home to roost.
Posted by: Anu Munshi | October 3rd, 2008 at 11:49 am | Report this commentI agree with much of your commentary;the capital markets will return to their traditional role of advising the corporate sector with M&A and capital raising ideas.It will be very much smaller;the banks will not have the capital and management will now be risk averse anyway.I think the best example of how the ‘investment bank’ of the future will look is to remember the style and shape of Lazard in New York in the 70’s and 80’s.Great M&A and advisory team,backed up by a small but very sharp capital markets team.
Posted by: John Holmes | October 3rd, 2008 at 2:47 pm | Report this commentAndreas Whittam Smith of the “Independent” (a UK newspaper puts the blame for the financial crisis on “the bankers” and comments about Wall Street as follows:
>>Pause here and glance across to Wall Street. There, faced with a similar situation, the FBI recently announced that it has opened preliminary investigations into possible fraud involving Fannie Mae, Freddie Mac, Lehman Brothers and AIG. This is in addition to the 25 cases already commenced in recent months. Hundreds of Wall Street bankers are currently under investigation. That is as it should be.<<
Posted by: J.J. | October 6th, 2008 at 10:39 am | Report this comment