Words from the Wise

It's not everyday I highlight a banker who, I believe, has it right. But I gotta tell you, this is one of those rare exceptions.

A friend of mine is related to the late Edmond Safra, founder of the late Republic NY Bank. The writer tries to imagine what Safra would have said about today's banking and credit fiascos, and the morals of those who brought us to this.

It's very prescient, very telling, and more importantly -- maybe -- can offer a road map on how to avoid these messes again. And it's not a complicated road map. It boils down to this little tenet:

"My father taught me that if you loan a man too much money, you turn a good man into a bad man."

Because, this paragraph boils down nicely what's become of banking ever since the Glass-Steagall Act was shredded:

President Obama is right to keep bankers out of proprietary trading and otherwise prevent banks from doing stupid things. But think about it: Why is that necessary? It’s because bankers are in a hurry to make money, because they are too eager to turn good people into bad people by loaning them too much money. It’s because they think that banking is a smart business, requiring supercomputers and not a human brain.

I think the public values righteousness over money;
I am putting together a charity organization called "ENVIRONMENTAL PROTECTION"

"My father taught me that if you loan a man too much money, you turn a good man into a bad man."


That doesn't hold up to scrutiny. I can borrow big loans, but I'd rather pay cash. If I borrow money to buy something someone else owns my stuff.

My logic is I can buy more stuff if I don't have to pay interest. If I can't afford the principle, I sure can't afford the interest. At first payments are almost all interest, by the time I pay that part off what I bought is worth far less than what I bought it for. So why get a loan to buy something I can't afford that's going to be worth less than what I paid for it.

reply to post by Dbriefed


I think the point is that it's not your money, and hence your restraint in how to use it is lowered. Hence you make bad investment decisions.

reply to post by behindthescenes


I don't think the two are related. It comes from the time when the banker knew his client and lending him too more money than he could afford could turn a friend into someone who is no longer your friend. Think of banking in the era of "Its a Wonderful Life".

Today's world of banking is much different. The government is intimately involved with bank governance. They have rules about what interest rates they can charge for loans (a credit card is in essence a short term loan), where they can lend, who they have to lend to, how much capital needs to back a loan at a given level, how home values need to be appraised. It goes on and on. Banks are also public companys today. That creates a fiduciary responsibility for the folks running the bank to maximize share holder value. That drives them to enter areas of finance that are very speculative. Is greed a part of it? You bet. Its a big part. is the fact that banks, being public, in an intensely competetive industry that has essentially been commoditized create situations where the bank pushes the envelope of what would be a reasonable risk profile? You bet it does.

This notion that we can takes banks out of the trading, hedge fund, private equity and M&A (investment banking) industrys is nonesense. Banks do not make enough on the deposit business to turn a profit. They have to expose their deposits to the equity markets in order to have the ability to cover their withdraw expectations and still deliver a return to the share holder. There are financial organizations that in large have a much smaller percentage of assets in equitys and other products. They're called insurance companys and they invest mostly in bonds because they can very precisely determine when they would have to pay out their money through actuarial calculations.

Now you can nationalize the banks. The Soviets tried that and it did not work out too well. You can mutualize them which could help a bit on the margin, but you can not place government regulations on top of the lending/deposit elements of a bank while forcing them to exit other areas of finance and expect them to stay in business. If the banks were able to more effectively compete and yes, that might mean that a bank would not loan any money to anyone who had less than a certain net worth or to charge what ever they wanted on a credit card, it might be different. Keep in mind that in many communities there would be whole classes of folks who would never receive credit from the bank. (the reason they are getting credit from the bank now is that the government is forcing them to give credit). It is the more speculative areas where the bank makes enough money to cover the losses on the loans that they would not have given in the first place but the government forced them to make!)

In days the old banker was talking about, you knew your banker. He knew if you were a hard working person and despite having a rough time were "good" for the loan. Those banks don't exist, by and large any longer. Now you may know the dude who runs the local Wells Fargo branch, but he has no discretion over the Ts&Cs of the loan parameters. The big boys in SanFrancisco call those shots.

Banking and bankers are not evil. Bankers overly regulated by an increasingly intrusive government who often looks to lever into social policy by regulating them creates a situation where bad things happen

Originally posted by behindthescenes

"My father taught me that if you loan a man too much money, you turn a good man into a bad man."

That applies perfectly to the government on so many levels it is astonishing.

reply to post by dolphinfan


Interesting beliefs on returning share holder values and not generating enough returns on deposits.

Now that's pure hogwash. It's greed all the way and its crap justification.

How did even banks started at all? Some smart aleck back in our ancient past who was trusted by others with their money realized many depositors do not close account anytime soon, or all at the same time, and that the money was sitting down there not earning anything at all, but if it could be used by others, it would generate returns and profits to the bank who loaned them the money.

It was tested and worked pretty well. Deposited money was loan to others to start their biz, buy trade goods and then sell, and pay back the bank at least a percentage of the profits.

Bankers became rich, and being human, naturally greedy, they wanted more and offered interest rates to attract MORE depositors, growing Banks avaliabity of funds. As many would say, the rest is history.

Of course there were curbs and limits on how much banks can use the deposits, righfully and an intelligent intrusion regulation by responsible govts, otherwise banks will go the whole hog and when the borrower defaults, hell is let loosed.

And with only a small percentage of deposits that banks can play with, it is true that it would be difficult to pay interest to depositors.

BUT the REALITY is,

-how much is saving interest today? Close to zero.

-How much does the banks earn on interests for loans? est spread of 5-10% above savings interest. Isn't this enough to pay depositors and earn an honest keep?

-How much does the banks earn, with their huge amount of funds, play and manupilate the stock market - a ponzi scheme that dupes the naive - 6-8% DAILY!!!

Now you know how and where banking officers get their obscence bonuses? Pump a buy option with billions and herd instincts in the stock market stampede up. Drop a short sell sell option with billions and the naive few lots investors follow suit on a free fall.

Question is, is Wall Street even necessary? It is comprehensible that companies would need funds to expand, and those who buys shares are helping the funding.

Good idea, dividends return yes, but ROI (return on investment ) within days instead of a year??!!! GAMBLING in the name of Investment is lame justification when all saw the carnage of the last financial crisis that almost doomed the world.

Banks and financial sectors were knee deep in the ponzi scheme of trading papers, and no one put a stop or could stop it, till it crashed on its own. And now you are still crying at increased and better oversight, vigilance and regulation of the banking sector????

Sigh...when will mankind ever learn.......

Just my 2 cts sharing of insight for others to consider, and making no claims of being wise or foolish.

[edit on 3-2-2010 by SeekerofTruth101]

reply to post by SeekerofTruth101


Couple of issues here.

Investment is a coin-flip. The best stock pickers are right about 53 percent of the time. Additionally, the typical return you can guarantee over time from a planning perspective is 5%. Obviously the bank needs to ensure against a spike of withdrawls, hence the need for a cash reserve and their need to play the equity markets.

The bank is legally required to maintain a cash reserve relative to outstanding debt. This must be held in liquid instruments, hence the banks don't have a tremendous amount of cash to play, despite the amount of deposits they hold.

Banks are not cheap to run. The physical assets are expensive. Technology and back office infrastructure are complex and expensive and much of that work requires people and well paid people, like network engineers and accountants. Banks typically run on a single digit margin.

Traditional banks are not manipulating the markets. Asset managers working on soverign wealth funds and institutional assets manipulate the markets. It was Lehman acting on behalf of counterpartys that caused the problem more than Lehman trading their own book. That and the artifical synthetic instruments that Lehman was trading.

The issue and problem we have is a lack of transparency into the instruments that are being traded and the trading pracitves of investment banks and hedge funds. In this area there are legitimate roles for the government to play. Greater transparency would ensure a more accurate accounting on the banks balance sheet and provide for a vehicle in which holders of bank assets, including counterpartys would be able to assess the quality of the paper the banks are holding (and trading).

My basic point is that you can not force banks into a sub-optimal business model on the credit side and eliminate their ability to participate in the higher margin businesses. What the government is proposing is to further restrict the lending side of the bank's business while at the same time, excluding them from high margin businesses. It won't work.

As it relates to credit in general. You can have that world-view - that we should operate an economy that does not rely on credit. I don't know where one exists and this economy could certainly not exist absent credit. Hell even the tribal cultures use credit. "let me have two chickens today and when I get my crops in I'll give you the chickens back and a bundle of corn". Thats credit

Certainly the government has a role to play in regulating the banking sector. There are very legitimate reforms that should be in place and would be easy to implement that for some reason, have not been even proposed, let alone implemented. For example, the integration between the rating agencys and commercial paper could easily be cleaned up. How debt securities which were mostly trash were able to receive a AAA rating is something that needs scrutiny. I personally think the government should do the rating rather than firms like Moodys and S&P. That model has at least the appearance of a conflict of interest inherent to the business model. We've recently had senior executives of rating agencys fired and charged with fraud over a "pay for play" deal. I can not fathom how this business model is not inherently corrupt. The creaters of indexes are in a similar place, albiet this is not as sever a potential conflict.

As it relates to bank salarys, I don't disagree with you in principal, but think that is better controlled by increasing the rights of shareholders rather than by the government. Tying the pay to longer-term compensation is also a legitimate reform

You can bash banks and the model we have which is based on credit all you want. Its not going away and there are reasonable reforms that can be implemented that provide greater transparency yet allow banks to operate with relative freedom in the market.