Notes From the Fieldby Martin Weil

June 2, 2011

Too-big-to-fail banks essentially hedge funds

And the public treasury (read “you and me”) is guaranteeing them. The CEO of a major regional bank is quoted in The Good Banker, a NYT Op Ed, on the subjects of “true” banking and the outrage of the TBTF banks :

It has become a virtual casino. To me, banks exist for people to keep their liquid income, and also to finance trade and commerce. Yet the six largest holding companies, which made a combined $75 billion last year, had $56 billion in trading revenues. If you assume, as I do, that trading revenues go straight to the bottom line, that means that trading, not lending, is how they make most of their money.

By trading, he means speculating in the market for their own accounts. This is called “proprietary (prop) trading” and is no different from what hedge funds do. Like hedge funds, banks employ considerable leverage, 10, to often 30, times capital. But banks have two advantages that hedge funds do not – their cost of capital, courtesy of the Federal Reserve, is considerably lower than non-banks and they can take more risk because the public will pick up the tab if they fail.  It is all too depressing, as one hedge fund colleague reminds me in an email just about every day.

Read the whole article if only to be reminded by by a “real” banker of the simple truths of what the true socio-economic purpose of banks is and how far we have strayed from that model.

Note that the six biggest banks he refers to, as of 3/31/2011, are: Bank of America, JPM Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley. See this page for a list of the top 50 banks by assets.

h/t The Big Picture

Return to main page
© Copyright 2020 MW Investment Strategy All rights reserved. Site Credts
Site Credits

Site Design
Tracey Lebedovich

Andrea Scheve
Martin Weil

Jim Erickson
Kelvin Geis