breaking the bank

The Future of Superbanks

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  • The Benefits of Being a Superbank »
  • Is the Era of Superbanks Ending? »
  • Charles Duhigg
  • Hugh McColl
  • Joe Nocera
  • Simon Johnson
  • Ken Lewis

Charles Duhigg The New York Times

The history of the last, say, 15 years of banking is this really, really unique period where the concept of bigger is better became very popular. And the idea was that you become a supermarket of a bank, which means every single type of financial need that you, my customer, has, I'll be able to satisfy it for you. And Bank of America was a big part of this. The real guy who is identified with it, of course, was Citigroup.

What happened was that there came about this idea that I make a little bit of money from you when I hold your checking account; I make a little bit of money from you when I hold your mortgage; I make a little bit of money from you when you use one of my credit cards. But I'll bet you I could make a ton of money from you if I did all three of those things for you, because I could figure out how to get you to actually do more of each one. ...

This is what the supermarket of banking allows. I can use information from one part of the bank to drive profitability in other parts of the bank. And the bigger and bigger I get, the more and more information I have. And the more information I have, the more profitable I can make every single customer that I have. ...

The other part of it is, as I get bigger and bigger and bigger, I get access to more and more deposits. So I can go and I can, for instance, undercut my competitors in Miami because I have millions and millions of dollars in deposits in California. All my competitors in Miami, they're just based in Miami, so they get ground into the dirt, or I get to buy them on the cheap. And so in banking, the theory became bigger is better, and you had to get big. And if you didn't get big, you either died or you were acquired. ...

Nobody has really questioned whether the superbank is the model that everyone should be pursuing. ... The logic is, I should be able to make more money off of you because I know more about you than anyone else. But the superbanks also revealed themselves to just be vulnerable to this crisis so quickly. ... It's kind of like the cheetah. ... It can run faster than anything else; it just so happens that because there are so few cheetahs and they've become such genetically undiverse creatures that anytime a disease moves through the community, it infects all the cheetahs immediately, and they all start dying off.

What we found out about the superbank concept is, the superbank concept works exactly how it's supposed to. But because there are so few banks, because they're so undiversified, because they all do business with each other, once the financial virus enters the system, it infects everyone immediately.

Hugh McColl CEO, Bank of America (1983-2001)

I like to always use McDonald's. ... They had a chain of retail stores that went across all state lines and it delivered the same product. If you saw the Golden Arches, [you knew] that you could buy that product there. And it didn't allow artificial barriers like a red line or a map to stop them from doing that. ...

[Small banks can't] really offer the level of service to the consumer or to the corporate customer, because they lack the size to be able to afford the software or whatever it takes to manufacture the service. So it was a function of getting large enough to be ... both efficient and effective. ...

The other thing is, as I see it, you're either growing or dying. There's no middle ground. You can't hold what you have. That doesn't work in business. So we grew. ...

... There are a lot of people ... saying if anything has been learned from this crisis, too big to fail is too big to exist. Give me your take on that sentiment, which seems to be becoming more and more popular, and how it relates to Bank of America.

... I don't agree with the thought. ... Toyota has built itself into a powerful automobile company. It used to make lawnmowers. So I don't agree that you shouldn't grow and prosper. That's what America is all about. ...

But do you think there is a sentiment out there that the reason for the crisis has been because we allowed organizations to grow too much? ...

I think that it's quite clear that what caused the problem is overleverage on the part of the financial institutions, particularly those that were not being regulated, and the public in general. So you can argue that leverage has been the key cause. Now, yes, leverage plays into having large institutions, but it really begs the question: If we had used the regulation that was available to us, or if we want to fix it better, what we need is just this very simple gearing [of] ratio restrictions, and that would have stopped a lot of this.

And so I don't think it's a question of [if] the institution is too big; it's that the numerous institutions that got into trouble, a lot of them are small. I think we shouldn't forget that. We're probably going to have a huge number of fatalities in the small banks that's caused, really, by management problems or leverage problems, as opposed to just the sheer size being a problem.

Joe Nocera The New York Times

What's wrong with the idea of superbanks?

... From a practical, consumer point of view, it's always been more difficult to sort of cross-sell financial products than most other kinds of products. People think about their money in a different way than they think about their clothes or even their apartment, just other aspects of their life. And so you think to yourself, well, I've got my retirement money here at this place, and I've got my checking account here with this place. ... There's no particular reason a credit card has to be attached to a particular bank in this day and age. It could be, I want a credit card that shows that I root for the University of Maryland, or I want a credit card that gives me airline miles. That's what you think about. ...

From what I would call a regulatory point of view, having high-risk investment banking with low-risk traditional banking turns out to be more risky for the entire enterprise, as we have since discovered.

The risks taken by one piece of the operation can, we now know, put the entire bank -- and don't forget Citi operated in 100 countries, and they did all kinds of things -- can put the entire bank at risk and cause it to become, as it now more or less is, insolvent.

Simon Johnson Former chief economist, International Monetary Fund

The superbanks were sort of exercises in empire building and aggrandizement of the CEOs. ... The evidence that these are much more efficient ways of intermediating capital, their basic job -- take it from savers, let it find its way to people who want to borrow -- that evidence is very limited. Clearly, though, they become very powerful politically. Citigroup has some cachet in Washington; so does Bank of America now, and that's very valuable.

There are people who say the main job of the CEO is actually lobbyist, because the CEOs can't control these banks anymore. Nobody understands the risks that they've taken on in these kind of global businesses and their very complicated derivative businesses, for example. I think actually it's self-evident that nobody understood those businesses, because they couldn't have messed up in this way if they had.

So the superbanks I think are finished, should be finished. They're not very efficient, they're politically way too powerful, and they should be broken up and go into decline. Whether they will or not depends on the success of their CEOs in terms of their political lobbying. So that, I think, is where the struggle is right now.

Ken Lewis CEO, Bank of America, 2001-present

There is a mood out there that ... the era of "too big to fail" is over. Time to break up Bank of America. ... It's all too big, too unwieldy, too impossible to manage. Your response to that?

I think if you're scattered all over the world and unimportant in a lot of places, that's one thing. But when you have core businesses where you have dominant positions, ... then it's different. And that's what we have.

We're important to places in which we operate. We like large market shares. We do think there's beauty [in] diversity and people and geography and product. And we think, for the most part, that really protects your earning streams of times of stress and in certain geographies or certain product lines.

And don't forget, there is something in scale, and you in fact can be a low-cost producer when you have the kind of scale that we have. And so I don't believe for a minute that you can't manage a company our size and do it better than, say, a midsize company.

... Has this crisis broken the banks, broken our idea of banks as they existed? Certainly the Wall Street investment banks, but beyond that?

No. I think if you think about what banks really do, they help people realize their dreams. And that's still the core of our activities; that's the reason we exist. And that may be for some middle-size company to be able to expand and do what they want to do, or it may be that consumer getting their first home. But banks still provide a huge benefit to our economy, and they're not going to go away soon. And I'm still proud to be a banker.

posted june 16, 2009

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