Bankers Are The Reason We Have Rules That Say First Cousins Should Not Marry

 

 

In the history of our country, banks have played an important, albeit often destructive, role in our country’s economy. From 1854 to the present, the United States has experienced 34 recognized financial recessions or depressions. A review of these economic downturns shows that irrational, ill-advised, risky, illegal and downright stupid actions of banks were often the trigger of these economic calamities.

Why is it that banks have been so consistently intertwined with financial pain in this country? There is a simple answer to that question: Bankers are congenitally stupid.

Banks have consistently served as a reliable repository for college graduates in the bottom 10 percent of their class. If it were not for banks willing to give these dullards jobs, they probably would have ended up in insurance.  

Instead, these dunderheaded bankers have been entrusted with the safety and security of our country’s financial wellbeing. And over the years, bank customers and the economy has paid a high price for banking on the sketchy ethics and low mental acuity of bankers.

How Stupid Are Bankers?

Bankers are the living embodiment of the idiom, “Stupid is as Stupid Does.” Bankers consistently rank at the lowest levels of standard cognitive ability tests and don’t even register on the Torrance Tests of creativity. As a result of these intellectual challenges, bankers are natural-born followers who are most comfortable and secure as part of a herd. In fact, some who have studied the banking industry have described bankers as akin to a herd of drugged sheep. If one banker is doing something the others will soon emulate the activity, not knowing if what is being done is right or wrong.

One example of the banker herd mentality would be the “sub-prime” lending fiasco, starting in 2007. For decades bankers followed very strict prime lending guidelines. It used to be said, “If a bank is willing to give you a loan, you don’t need one.”

Then, not recognizing or understanding the increased risk, a few bankers, thinking they could generate more business and higher profits, began making loans to “sub-prime” borrowers. Soon, the herd of bankers followed along, thinking the others must know what they were doing. This sub-prime lending fever even expanded to home mortgages. While profits initially grew, they proved to be illusory as defaults began to increase exponentially. This activity ultimately triggered the “Great Recession” of 2007-10.

Thanks bankers!

The Banks Greatest Weakness

The government has long recognized that the greatest weakness of the banking system is the bankers themselves. During the 19^th century there were ongoing efforts to stabilize the banking system by moving from inconsistent and weak state regulations to the federal government that would set clear and consistent standards for all banks. The objective was to protect the bankers from harming themselves, the consumer and the economy. All the efforts failed to be enacted, due to an ongoing debate over federal versus states rights. This allowed bankers the freedom to continue on their merry way, causing grief for customers who lost their savings and rippling pain across the entire economy.  

The Federal Reserve Bank

The Federal Reserve Bank was first proposed in the 1850s, but there were decades of debate and delay before it was finally established in 1913. In the meantime, thousands of banks failed, multi-thousands of customers lost their deposits, and the American economy suffered a number of recessions.

By setting national financial standards, the Federal Reserve went a long way toward stabilizing the overall banking system, but it had one big flaw. The Federal Reserve had no authority to prevent stupid bankers from doing stupid things. Bankers still had license to do what they wanted with the funds deposited in their bank and being stupid (not to mention greedy), they did stupid things. As a result, banks continued to fail, and customers continued to lose their deposits.

Enter the Great Depression

It took the disaster of the Great Depression – triggered in no small part by stupid bankers using customer deposits to make highly speculative and risky investments – to galvanize Congress to pass legislation intended to protect bankers from themselves and to protect consumers and the country from the actions of these stupid bankers.

Between 1930 and 1933 over 9,000 banks failed. This banking calamity motivated Congress in 1933 to pass the Glass-Steagall legislation intended to severely limit the opportunity for stupid bankers to do stupid things.

The essence of Glass-Steagall was to pen bankers into only traditional banking activities – checking, savings and personal loans. Banks were specifically prohibited from dealing in non-governmental securities for customers; investing in non-investment grade securities for themselves; underwriting or distributing non-governmental securities and not affiliating with companies involved in such activities. In addition, to guard against a bank becoming so large that its failure could impact the entire economy, banks were confined to doing business only in the state in which they were chartered.

How successful was Glass-Steagall? From its inception in 1933 until its most important protections were repealed in 1999, not a single large bank failed. (This excludes the disastrous Savings and Loan melt-down of the 1980s, but that’s a story for another time.)

Why repeal Glass-Steagall?

There is an almost unbelievable irony surrounding the gutting of Glass-Steagall. In the 1990s bankers began to spend multi-millions of dollars lobbying congress for the repeal of the Glass-Steagall. Get this: The banks argued that there had not been a single banking crisis since 1933 and therefor there was no longer a need for Glass-Steagall. The banks complained that the other segments of the financial services industry – insurance companies, investment firms and investment banks – were not as tightly regulated as banks. Bankers argued they were only looking for a “level playing field” so they could compete with other financial institutions.

Of course, we know that in politics “money talks” and bankers regained their freedom to do stupid things when Glass-Steagall was repealed in 1999. And the rest is history …

It took only a few years of bankers doing stupid things and taking stupid risks before the American economy was driven into the worst recession since The Great Depression.

Federal Deposit Insurance Corporation

During the debate over passage of Glass-Steagall, Congress came to realize just how stupid bankers really were. (One Congressman suggested that most bankers had no more than “monkey brains.”) Congress concluded you can’t fix stupid and no matter how strict, regulation of stupidity isn’t foolproof. In recognition of this, Congress created the Federal Deposit Insurance Corporation (FDIC) as part of Glass-Steagall.

The FDIC is a quasi-insurance company formed to insure that customers will not lose their deposits (up to a certain limit) in the event of stupid bankers triggering a bank failure. While ultimately the FDIC is backed by the “full faith and credit” of the federal government, premiums for the insurance are assessed to all banks, forcing them to in essence pay for their own stupidity.

Have These Stupid Bankers Learned Their Lesson?

Hardly.

Remember the Wells Fargo (4^th largest bank) fraudulent fiasco that was exposed in 2016? Seeking to increase profits and bonuses, stupid bankers – all the way to the top – concocted a blatant scheme to consciously defraud millions of their own customers out of billions of dollars. For Wells Fargo executives and managers to assume this fraud would not ultimately be exposed is further evidence of the stupidity of bankers.

Ultimately, Wells Fargo was fined $3 billion dollars by the government and forced to return over $2 billion dollars to defrauded customers. (For the life of me, I can’t understand how anyone could still do business with or work for Wells Fargo.)

Wells Fargo is not alone. Bank of America showed that Wells Fargo does not have a monopoly on stupid executives and managers.

In July of this year, Bank of America, the second largest bank in the country, was forced to pay over $250 million in refunds and fines due to the bank’s continuing fraudulent abuse of its own customers. As the Washington Post reported, this amount was in addition to $1 billion in fines and refunds previously imposed on Bank of America for various frauds against customers that included duplicate service fees, credit card abuse and unlawful garnishments. I ask again, how stupid do B of A bankers have to be to believe these stupid actions will not be revealed?

And There You Have It

Let’s face it, if we continue to let these stupid bankers win the battle over regulation of banks and maintain the freedom to do stupid things, we will be the stupid ones. And we will continue to pay the price of allowing bankers to do what comes natural to them and that is to do stupid things.

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Bob MacDonald – Former CEO of ITT Life; founder of LifeUSA; retired chairman and CEO of Allianz Life of North America; author of numerous books on business, management and leadership. bobmac5201@gmail.com