Tuesday, January 22

Blame it on the banks!

I read an article by Roger Lowenstein in the February 2008 Smartmoney Magazine called Blame the Banks. Roger opines that banks are the blame for the subprime fiasco. He feels that the bankers acted more like stock brokers instead of lenders. His arguments are compelling.

"... they played a dangerous game. They issued and repackaged loans on the basis of whether they could be resold-not on the basis of wheter the loans were any good. They forgot they were bankers and acted like traders. A Banker loans money with the expectation of getting it back. A trader merely hopes to fob the loan off on the next guy."

Why did the banks do this? Simple answer- PROFIT!

Bankers are struggling to get and keep deposits. What is the one thing that they can do to almost guarantee that we'll deposit our money with them? Pay us high yields for our deposit accounts. Where does the money come from to pay us these high yields? Fee income and interest income earned from loans.

How do bankers get loans to earn income? By lending money at low loan rates.

In a market that requires the paying of high yields to attract deposits and low loan rates to attract loans, it is very difficult to earn a profit for the stockholders. How can you pay 5.00% for a 5 year certificate of deposit, and make a 15 year mortgage loan for 5.25% and not go broke? One way is by selling off the loan and re-investing the cash into another loan. A money recycling mill. Each time the money is cycled through, it comes back with a little more. The more your recycle, the more money you have.

I agree with Mr. Lowenstein, bankers should stick to banking and come up with another way of satisfying their stockholders, as long as it doesn't involve charging their customers a fee every time they exhale. Maybe the bankers should take a look at the way credit unions operate; non-profit financial cooperatives. I wonder what this subprime mess would have looked like if banks were more like credit unions; would it even have happened?