Wednesday, October 30, 2013


Google did it again.  Post yesterday?  Think again subscriber.  So dear reader, you get the blessing of two posts in one day.  What follows is Bank Refrain, Part II.

The focus of the bank bashing public remains the management of the leading institutions, especially those that somehow attract the limelight and boy, does Jamie Dimon attract the limelight.  Never shy, Jamie tends to tell it like it is forgetting that there are a number of people that don't want it told at all. Agreed, he should know better but all in his position should recognize that the institutions they run are perhaps ungovernable even with their exceptional talents and that they expose themselves to harsh oversight for occurrences that technically speaking are not their fault except for the fact that they have made them their fault by an unrealistic opinion of their abilities to manage all situations.

What occurred in 2008 was not a Black Swan; what has occurred or been uncovered since then are certainly not Black Swans.  In many cases the past 7 years has been predictable; in most cases what has occurred are aberrations of sound or certainly proscribed business practices.  But it should also be recognized that while a bad trade resulting in a $6 billion loss may not be a matter of serious consequence in the long run and therefore no big deal, the Law of Large Numbers makes it a big deal because unless you are running a $2.5 trillion institution, $6 billion is a hell of a lot of money to people who don't have much use for banks anyway--especially when there is a political agenda thrown in.  It cannot be dismissed lightly and it cannot be so dismissed because an individual is simply too busy with other things to fully think through the consequences of his explanation, which is what I think happened.  The scope of these businesses must be downsized.

Of course the problem is that banking tends to be judged like other publicly owned businesses: hired managers are expected to produce on a consistent basis which means an increasing profitable basis.  Forgotten is the fact that their is no bank in the world that resembles Apple.  Apple is the greatest innovator in an innovation industry.  Banks are not innovators except on the margin.  A bank sells one product: it is made by another person, looks the same, smells the same and essentially costs the same.  Banks buy most of it for resale and innovate only in the sense that it is repackaged with attractive differences to beat out the guy on the same corner trying to sell the same thing.  But a huge difference between a bank and Apple is that Apple can create demand whilst banks cannot.  Sometimes, economic conditions are such that the bank's customer has absolutely no desire or requirement to by the product the bank is selling.  It is therefore ridiculous, IMHO, to expect banks to produce a steadily rising stream of income when in fact the business is entirely cyclical, dependent upon and vastly affect by exogenous factors.  But that is what management tries to do either through diversification from the main business or by an increase in the risk profile of it's businesses. What too often occurs is not a diversification but the very real possibility or certainty of more things going wrong.  Now one may ask that if that is so clear, why is the business run in that manner?  Remuneration--which is at the bottom of most of the bad things that happen and the manner in which it is dispensed.  And that, provided Google will let me, is the subject of tomorrow's discussion.

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