The Big Picture and the Closeup

The Big Picture Home Page | Previous Big Picture Column | Next Big Picture Column

Time to Rationalize Back?

A Shorter Version Was Published In The Maryland Daily Record November 7, 2011

Union Trust.  Signet.  First Union.  Wachovia.  Wells Fargo.  These are the banks that have held the stakes to the same trio of banking, checking, and charge accounts I’ve used since 1983.  It’s been up and away for my little accounts.  When Union Trust was acquired by Signet in 1985, my accounts were moved from a smaller local bank to a bigger bank from out of town.  And when First Union acquired Signet in 1997, my accounts went to an even bigger one, but, needless to say, did not come home.  And so on.

I have been watching the procession for nearly 30 years.  Over the changes, I’ve never experienced diminished service.  But I’ve never felt happy about the change, either when it came or in retrospect.  I’ve known too many out-of-work bankers.

In Baltimore, where I live, there were once many large and strong local banks and savings-and-loan associations.  Each one had its own executive corps, its own lending operations and trust departments, its own branches, its own back offices.  Each fell victim to consolidation, just as Union Trust did.  And when banks (inevitably from out-of-town) acquired the local ones, it was dicey for the people who worked there.  Suddenly strong earners had to worry about where their next paycheck was coming from.  Suddenly local charities had to scour harder to find qualified board members, and corporate contributions steered to them by the local, and locally-answerable bankers who served as board members and contributors.  What justified this loss of local banking employment?

One approving name business writers and economists gave this process was “rationalization.”  From an economist’s standpoint, it is not necessary to the working of the banking industry, for example, for there to be dozens of back-room operations in one medium-sized metropolitan area, when the same processing could be done by a relative handful of such operations in much larger areas.  The smaller number of people and smaller number of operations was more “rational” than what had been the norm when I became a customer.[1]

And if it were objected that there was a certain irrational lack of utility in depriving so many bank workers of their jobs and so many local cities of a corps of locally-answerable bank officers, the answer these economists would provide would be that customers would benefit, in terms of lower-cost services and better services, and that the market would eventually find newer places for the displaced.  I would agree that not every displaced banker I knew who was “shaken out” was unable to get back in, but not infrequently they retired or left the industry.  And the ones who stayed suffered career delays and losses of status that would never have occurred had the business remained as it was.  I cannot see that services to me as a customer have become any cheaper.  Or better.  Surely I cannot be alone.

Well, let’s see.  If neither the customers nor the employees benefited, who was left to reap the benefits of these “rationalities”?  The obvious suspect would be the investors.  All those profits theoretically belonged to them, after all.  Well, we all know how badly bank investors made out in the most recent crisis.  But they have historically fared abysmally in bull markets as well.  So, while I’m no investment analyst, I do not see much evidence that investors have historically been the ones to profit from “rationalization.”  That leaves, uh, well, the few bankers at the top of the banks, right?  Ah, now we’re onto something!

This you can look up.  Historically, i.e. up to the 2008 crisis, top bankers were doing quite well out of stripping out our banking infrastructure.[2]  For instance Ken Lewis, who drove Bank of America off a cliff, received $24.8 million in total compensation in 2007, the year before the crisis, when all those “rationalizations” were supposedly working at full tilt.  (Think how many local bankers you could hire for that!)  Lewis’ successor Brian Moynihan received $10 million for 2010 – and this, as the New York Times pointed out, while “presiding over a $3.6 billion loss and a significantly negative total return for shareholders.”  Less than Lewis, to be sure, but of the same order of magnitude.  So that’s who benefited and still benefits from the “rationalizations.”

And as we all know full well, when BofA got in trouble, all those “rationalizations” notwithstanding, we the taxpayers had to come to the rescue ($45 billion of TARP money).  These are the same taxpayers who watched as BofA and its ilk gobbled up almost all the local and regional banks, putting those same taxpayers in their roles as banking customers at the mercy of states that allow usurious lending rates like South Dakota and Delaware, to which all the big banks nominally relegated all their consumer lending relationships.  And by the way, the temporary stability that taxpayer support brought BofA hasn’t brought jobs back.  In August BofA announced it planned to cut at least 3,500 jobs, maybe 10,000.

So it got me to thinking: What about trying to rationalize back?

Once upon a time, corporations were chartered individually by state legislatures to achieve specific policy ends of those legislatures; that’s the historical root of the declarations of corporate purpose that are still required in charters.  The purpose and the means of doing business were not totally private concerns; instead they were something in which the public was understood to have an interest and a voice.

What’s to prevent, for instance, a legislature chartering a bank one of whose very purposes is to be locally owned and controlled, with charter provisions that prevent out-of-state takeovers or incorporation into bigger banks?  And charter provisions that protect its borrowers from usurious out-of-state lending rates?  I can hear Tea Partiers complaining that all that local regulation would drive investors screaming to the exits – but as we have noted, bank investors have historically done poorly with the existing setup.  Could this be worse?

As John Lennon sang, you may say I’m a dreamer, but I’m not the only one.  After entertaining these thoughts, I learned there’s actually a national movement impelled by the same dynamic: the model is the Bank of North Dakota, which the state fosters by placing all its deposits there.  It does not take consumer deposits but it does do small business lending.  The legislatures of five other states have entertained bills that would do the same thing.

The North Dakota government lends some constitutional cover.  Trying to duplicate this old-timey kind of incorporation in the private sector would probably run into opposition from Big Banking, which would cite in opposition the Dormant Commerce Clause, that invisible piece of the Commerce Clause which says that states can’t discriminate against interstate commerce.  But I’m not convinced they would prevail.  I can’t do the scholarship in the space I’m allotted for this column, but it’s my belief there would be a way through that thicket.  The trick is to show “a legitimate local purpose.”  Is the protection of local businesses, jobs, and borrowers from utter devastation really illegitimate?

If so, who’s being irrational?