Wednesday, October 30, 2013


Oh, I do get tired of talking about the damned things, but for a variety of reasons--some good, some not so good--they have become pretty important in our daily lives wherever you may live.  So here we are beginning to look back over the past five years to see what has changed and what has remained the same; what we have learned and not learned ...and what we have forgotten.

Let's start with a fact that has not received as much attention as I think it should:  we have fewer banks than we had 5 years ago and the ones we have are bigger.  Simply stated, the means we are carrying as much risk in a more concentrated form.  Which raises the question are banks too big? Answer, yes--not from the standpoint of Too Big To Fail--but to big to manage, at least with the managerial tools available to the type of mangers we have trained.

CEO's have extraordinary power and control over a corporation but how many CEOs are adept and knowledgeable in all of the businesses in which banks are involved?  My answer would be none.  Therefore, the business today requires more and more reliance on the choice of business line managers and coordination and cooperation between those individuals and the CEO or COO than ever before.  Is there uniformity in practice between different entities?  Again, my answer is no.  We praise the "hands on" chief executive but forget he has but two hands and in modern day finance the calls upon the time of that individual guarantees that his knowledge of all the oprating facets of his organization will be limited at best--and those demand needen't be business related.  How much of Jamie Dimond's time over the past year has been spent on regulatory and supervisory issues?  Considerable.  Because of that has his organization been managed as well as it could have been?  I sincerely doubt it.  And yet, even if none of this had occured could Dimon--as good a manager as there is according to people who know him--have been aware of all the risks facing his company to the degree he should have been?  Again, my answer is no.  There are just too many.  Which brings us to the issue of delegation.

It is a necessity, but how does one know to whom to delegate?  Well, the stock answer is to choose the best person avaailable based upon past performance but how many instances have we witnessed where, say, a bond trader who has made millions for a firm is promoted to manage the entire trading operation only to fail miserably?  There are horses for courses.  And let us not forget that it is an axiom that of the people who rise highest in a corporation one will find the biggest egos and egos are made for stroking.  I have actually heard taught in business schools that the most important direction for managing is upwards.  Thank you educators.  If position and title are the sole measures of success you are correct but woe to the CEO and his shareholders whose ego is the most important part of the management process.  And if there are a myriad of business lines that must be managed, think of the risk one runs in choosing one's subordinates.

Not enough time has been spent in this modern time of what the business of banking is all about.  My deceased friend Stanley of who I have spoken was fond of saying, "Banking is what bankers do."  Now if you had asked Stanley who was the World's Smartest Man, there would be no hesitation in his reply but in this case the ramifications of his opinion caused problems.  Bankers began to believe it and just because one institution got into something the herd instinct pushed all others into the same thing.  Bad result.  Today, I think one of the greatest challenges facing bankers is the choice of businesses not to be in and the elimination of many--some of which may be quite profitable--simply because the level of management time may be too great.  The numbers are too big, the scope and breath of involvment around the world is enormous and, most importantly, the velocity of the business because of the explosion of technology magnifies risk and makes recovery a very difficult thing, compounding mistakes and creating opportunities for competitors to profit at a second's notice.  It was better in so many ways when bankers took in deposits and made loans, but those days are long gone.  Today we must learn to manage risk in an entirely different manner and limit those risks by certainly including a brutal review of what businesses banks should be in and those from which they should retire from the field.  It will not be the same for all institutions, but it must be done.  My fear is that the next step in the made dash to over-regulate that effort will be undertaken outside of industry itself by those whose goals are far more than a better banking system.  That is a sure loser.

Part II tomorrow.

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