{"id":2723,"date":"2011-10-27T22:18:49","date_gmt":"2011-10-28T02:18:49","guid":{"rendered":"https:\/\/thebigpictureandthecloseup.com\/?p=2723"},"modified":"2012-03-08T15:43:55","modified_gmt":"2012-03-08T20:43:55","slug":"time-to-rationalize-back","status":"publish","type":"post","link":"https:\/\/thebigpictureandthecloseup.com\/?p=2723","title":{"rendered":"Time To Rationalize Back?"},"content":{"rendered":"

The Big Picture Home Page<\/a> | Previous Big Picture Column<\/a> | Next Big Picture Column<\/a><\/p>\n

Time to Rationalize Back?<\/h2>\n

A Shorter Version Was Published In The Maryland Daily Record November 7, 2011<\/p>\n

Union Trust.\u00a0 Signet.\u00a0 First Union.\u00a0 Wachovia.\u00a0 Wells Fargo.\u00a0 These are the banks that have held the stakes to the same trio of banking, checking, and charge accounts I\u2019ve used since 1983.\u00a0 It\u2019s been up and away for my little accounts.\u00a0 When Union Trust was acquired by Signet in 1985<\/a>, my accounts were moved from a smaller local bank to a bigger bank from out of town.\u00a0 And when First Union acquired Signet in 1997<\/a>, my accounts went to an even bigger one, but, needless to say, did not come home.\u00a0 And so on.<\/p>\n

I have been watching the procession for nearly 30 years.\u00a0 Over the changes, I\u2019ve never experienced diminished service.\u00a0 But I\u2019ve never felt happy about the change, either when it came or in retrospect.\u00a0 I\u2019ve known too many out-of-work bankers.<\/p>\n

In Baltimore, where I live, there were once many large and strong local banks and savings-and-loan associations.\u00a0 Each one had its own executive corps, its own lending operations and trust departments, its own branches, its own back offices.\u00a0 Each fell victim to consolidation, just as Union Trust did.\u00a0 And when banks (inevitably from out-of-town) acquired the local ones, it was dicey for the people who worked there.\u00a0 Suddenly strong earners had to worry about where their next paycheck was coming from.\u00a0 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.\u00a0 What justified this loss of local banking employment?<\/p>\n

One approving name business writers and economists gave this process was \u201crationalization.\u201d\u00a0 From an economist\u2019s 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.\u00a0 The smaller number of people and smaller number of operations was more \u201crational\u201d than what had been the norm when I became a customer.[1]<\/p>\n

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.\u00a0 I would agree that not every displaced banker I knew who was \u201cshaken out\u201d was unable to get back in, but not infrequently they retired or left the industry.\u00a0 And the ones who stayed suffered career delays and losses of status that would never have occurred had the business remained as it was.\u00a0 I cannot see that services to me as a customer have become any cheaper.\u00a0 Or better.\u00a0 Surely I cannot be alone.<\/p>\n

Well, let\u2019s see.\u00a0 If neither the customers nor the employees benefited, who was left to reap the benefits of these \u201crationalities\u201d?\u00a0 The obvious suspect would be the investors.\u00a0 All those profits theoretically belonged to them, after all.\u00a0 Well, we all know how badly bank investors made out in the most recent crisis.\u00a0 But they have historically fared abysmally in bull markets as well.<\/a>\u00a0 So, while I\u2019m no investment analyst, I do not see much evidence that investors have historically been the ones to profit from \u201crationalization.\u201d\u00a0 That leaves, uh, well, the few bankers at the top of the banks, right?\u00a0 Ah, now we\u2019re onto something!<\/p>\n

This you can look up.\u00a0 Historically, i.e. up to the 2008 crisis, top bankers were doing quite well out of stripping out our banking infrastructure.[2]\u00a0 For instance Ken Lewis, who drove Bank of America off a cliff<\/a>, received $24.8 million in total compensation in 2007, the year before the crisis, when all those \u201crationalizations\u201d were supposedly working at full tilt.\u00a0 (Think how many local bankers you could hire for that!)\u00a0 Lewis\u2019 successor Brian Moynihan received $10 million for 2010 \u2013 and this, as the New York Times pointed out<\/a>, while \u201cpresiding over a $3.6 billion loss and a significantly negative total return for shareholders.\u201d\u00a0 Less than Lewis, to be sure, but of the same order of magnitude.\u00a0 So that\u2019s who benefited and still benefits from the \u201crationalizations.\u201d<\/p>\n

And as we all know full well, when BofA got in trouble, all those \u201crationalizations\u201d notwithstanding, we the taxpayers had to come to the rescue ($45 billion of TARP money).\u00a0 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<\/a>.\u00a0 And by the way, the temporary stability that taxpayer support brought BofA hasn\u2019t brought jobs back.\u00a0 In August BofA announced<\/a> it planned to cut at least 3,500 jobs, maybe 10,000.<\/p>\n

So it got me to thinking: What about trying to rationalize back?<\/p>\n

Once upon a time, corporations were chartered individually by state legislatures to achieve specific policy ends of those legislatures; that\u2019s the historical root of the declarations of corporate purpose that are still required in charters.\u00a0 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.<\/p>\n

What\u2019s 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?\u00a0 And charter provisions that protect its borrowers from usurious out-of-state lending rates?\u00a0 I can hear Tea Partiers complaining that all that local regulation would drive investors screaming to the exits \u2013 but as we have noted, bank investors have historically done poorly with the existing setup.\u00a0 Could this be worse?<\/p>\n

As John Lennon sang, you may say I\u2019m a dreamer, but I\u2019m not the only one.\u00a0 After entertaining these thoughts, I learned there\u2019s actually a national movement impelled by the same dynamic: the model is the Bank of North Dakota<\/a>, which the state fosters by placing all its deposits there.\u00a0 It does not take consumer deposits but it does do small business lending.\u00a0 The legislatures of five other states have entertained bills that would do the same thing.<\/p>\n

The North Dakota government lends some constitutional cover.\u00a0 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<\/a>, that invisible piece of the Commerce Clause which says that states can\u2019t discriminate against interstate commerce.\u00a0 But I\u2019m not convinced they would prevail.\u00a0 I can\u2019t do the scholarship in the space I\u2019m allotted for this column, but it\u2019s my belief there would be a way through that thicket.\u00a0 The trick is to show \u201ca legitimate local purpose.\u201d\u00a0 Is the protection of local businesses, jobs, and borrowers from utter devastation really illegitimate?<\/p>\n

If so, who\u2019s being irrational?<\/p>\n


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[1].\u00a0 An example from an Irish working paper<\/a> that shows how the term is used: \u201cA strong motive – though not the only one – for mergers and takeovers in retail banking is to achieve more cost-effective operations. Mergers and acquisitions are often seen as an effective response to a requirement for cost rationalization because economies of scale and scope at head-office and, sometimes, rationalization of branches can be used in order to eliminate perceived surplus capacity.\u201d<\/p>\n<\/div>\n

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[2].\u00a0 See here<\/a> and here<\/a>.<\/p>\n

Copyright (c) Jack L. B. Gohn<\/p>\n

The Big Picture Home Page<\/a> | Previous Big Picture Column<\/a> | Next Big Picture Column<\/a><\/p>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

What\u2019s 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 \u2013 but bank investors have historically done poorly with the existing setup. Could this be worse?<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[651,3093,3087,3095,3089,3096,3091,3097,3083,3094,2057,3088,3092,3086,3082,3090,3081,3084,3085],"class_list":["post-2723","post","type-post","status-publish","format-standard","hentry","category-bigpicture","tag-bank-of-america","tag-bank-of-north-dakota","tag-bankers","tag-big-banking","tag-brian-moynihan","tag-commerce-clause","tag-delaware","tag-dormant-commerce-clause","tag-first-union-bank","tag-imagine","tag-john-lennon","tag-ken-lewis","tag-north-dakota","tag-rationalization","tag-signet-bank","tag-south-dakota","tag-union-trust-bank","tag-wachovia-bank","tag-wells-fargo-bank"],"_links":{"self":[{"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/posts\/2723","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2723"}],"version-history":[{"count":9,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/posts\/2723\/revisions"}],"predecessor-version":[{"id":2999,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=\/wp\/v2\/posts\/2723\/revisions\/2999"}],"wp:attachment":[{"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2723"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2723"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thebigpictureandthecloseup.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2723"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}