Fascinating discussion in Alan Abelson’s column in Barron’s today (Courting Trouble) about the Banking Sector.
It is, perhaps, only slightly exaggerated.
The main focus is on misaligned exec compensation, but the subtext is quite astonishing: According to Dennis Butler of Centre Street Cambridge Corp, the Banking sector, on aggregate over time, is a big money loser:
“[Butler] duly notes the key role banks had in the financial collapse and cites “one amazing statistic,” namely that “in the aggregate, banks have never made money over time.” Instead, “like the airlines, banks historically have seemingly made money hand over fist during good times, but they give it all back when the cycle turns.”But he asks, “How many bankers suffer the same fate when it comes to their own personal financial affairs?” And the answer to that question, Dennis believes, was a major factor in setting the stage for the encompassing financial crisis we’ve recently suffered through.
More specifically, he points to what he calls “a fundamental flaw in the corporate form of business organization—the lack of personal liability on the part of the people in charge.” The absence of personal liability is why individual bankers, whose feckless pursuit of loan volumes at the expense of loan quality caused “huge losses and public burdens,” were able to “walk away virtually unscathed” and loaded with loot.
The new reforms enacted by Congress may have a salutary effect for a spell. But he thinks that in the fullness of time, they’ll be diluted by lobbying and corruption of the regulatory oversight process. “As long as the incentives for personal gain and corporate risk-taking remain in place,” Dennis dourly concludes, “we fear that episodes of over-reaching will inevitably recur.”
Fascinating stuff. I should pull the compensation section of Bailout Nation and post it; the conclusions about compensation are surprisingly similar.
I wonder what the math looks like: If we take all the banks, including the Indy Macs WAMUs and Countrywides and others that have collapsed, is the entire sector a negative?
Remove the survivorship bias and what have we got? That seems exaggerated at first blush, but when we consider the 1930s, the S&L crisis, and the current debacle, it may not be all that far fetched after all.
Barron’s, OCTOBER 16, 2010