Wednesday, May 23, 2012

Banks should be boring

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In Frank Capra's movie "It's a Wonderful Life," the Bailey Building and Loan Association has an $8,000 shortfall, a bank examiner is soon to discover it and George Bailey certainly faces jail time.

Bailey's bank was not too big to fail. He did not have lobbyists galore, pleading his case. He did not have toadies from the financial networks fawning all over him. George Bailey knew nothing about credit default swaps or derivatives. He just loaned money for houses to people who would, probably, be able to pay it back over time. George Bailey is a fictional character and his is a fictional story.

Compare that to the recent story straight out of Reality TV.

J.P. Morgan Chase has discovered that it, too, has a shortfall. Über banker Jamie Dimon has a somewhat larger discrepancy than the Bailey Savings and Loan. Bailey was short $8,000. Chase, in its glory as the largest bank in the U.S. and having paid $23 million in salary and bonuses last year to its CEO, Dimon, isn't so sure of its exact loss. It's something like 2 or maybe 4 or even maybe 5 billion. That's billion, with a "b," dollars.

There is no bank examiner, no threat of jail time, just Dimon standing in front of microphones saying, "Oops, my bad."

For all the talk of credit default swaps, yield curves and financial "instruments," J.P. Morgan Chase was sure it could make some really big bets and never lose. Like any other compulsive gambler, the bank stayed at the table long after everyone else in the game had lost their shirts.

The banking elite don't see any need for bothersome government regulations like Dodd Frank (2009) or, better yet, the Glass-Steagall Act of 1933, to keep them focused on saving and loaning. Without those regulations and the examiners to enforce them, loss of banking focus brought the world's financial system to within, literally, hours of total meltdown in 2008.

Banks too big to fail, regulators too intimidated to regulate and executives who think they have a system that makes them too smart to lose have made banking exciting. Casinos are also exciting, with bells and whistles and flashing lights and fortunes being won and lost.

The J.P. Morgan Chase debacle once again demonstrates the imperative that banks should be boring, just like the little plodding S&L in the movie.

We need elected leaders who are not intimidated by hoards of lobbyists and bank super PACs. If gigantic banks need to be downsized and bankers need to be reigned in, so be it. Anyone who wants to make big exciting bets can go to Las Vegas.

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