Globe business columnist Shirley Leung, on whom we can always rely to be highly attuned to the sensitivities of corporate executives, recently shared with us what drives retiring Bank of America board member Chad Gifford crazy — “big-bank bashing.”
Gifford, who’s stepping down as chairman of Bank of America’s board with an eight-figure retirement package, plans to devote his retirement years to countering the impression that some of us (notably Senator Elizabeth Warren) have gotten that big banks bear an enormous amount of responsibility for the currently precarious financial condition of what we once referred to as America’s middle class.
While conceding that in 2008, the banking industry “made some mistakes,” Gifford insists that’s not the whole story. “Bigger isn’t always bad,” he explained. “Banks need to be well-capitalized to handle the increasingly complex transactions of their clients.”
And, as Bank of America vice chairman Anne Finucane pointed out to Leung in further defense of bigness, Bank of America now gives away $12 million locally — more than its earlier incarnation, FleetBoston, donated. (Which is all very nice, but considering that FleetBoston had $200 billion in assets before merging with Bank of America, and Bank of America now has $2.1 trillion in assets, it’s rather less impressive than it first appears.)
And something the Bank of America folks did not pass on to Leung. In addition to the $12 million annual local donation, Bank of America is also the source of $5.6 million in one-time funds to be distributed to legal assistance programs in Massachusetts. This extra funding is not a charitable donation, but instead, as Massachusetts Lawyers Weekly (sub. req.) reports, it is part of the settlement between Bank of America and the U.S. Department of Justice under which the bank will pay $17 billion in penalties and partial restitution for the financial fraud it committed in the years leading up to the Great Recession of 2008 (and beyond). The settlement includes the bank’s admissions that it sold billions of dollars of residential mortgage-backed securities without disclosing important facts about the dubious quality of the securitized loans and that it originated risky mortgage loans and made misrepresentations about the quality of those loans to Fannie Mae, Freddie Mac and the Federal Housing Administration. The additional funding for legal services is welcome, but of course it will not even begin to repair the damage inflicted on homeowners and their tenants, many of whom continue to struggle to put the consequences of the bank’s fraud behind them.
And that’s what drives us crazy about Chad Gifford and Bank of America.
The problem/danger of today’s banks is not their size and not a lack of regulations. The issue is their intertwined system where no one knows where any financial “instrument” begins and ends, what’s connected to it and what’s not. Then there is the problem of banks no longer representing their clients and in some cases, betting against them. Banks are now in this for the banks, not the public. As to regulations, many are being written by the banks themselves via the revolving door or lobbyists as they travel from Wall Street to congress to K-Street and back. Finally, there is the issue of responsibility. A person working at a bank does something horrible, knowing that it is horrible, but does it anyway because it will make them rich and no one goes to jail. Yes, the bank gets caught and pays a fine, but the fine comes from the bank’s shareholders and gets written off as an expense. No one goes to jail.
We do not need to make the banks smaller, we need to cut their ties to each other. We need the banks to act in our interests, not theirs, and we need the bank leaders to know that they will go to jail if they or any of their associates do horrible things.
And none of this is possible if we keep electing representatives who are close to Wall Street.
I think size does matter. I live in a community where there are still hundreds, if not thousands of foreclosed properties. They are almost all owned by large banks, not local banks. Those large banks don’t have much skin in the game, locally. The properties sit, empty, blighted, bringing down everyone else’s property values. In Springfield, once the property goes vacant, there is a good chance that it is gone forever because the rehab costs exceed the market value of the property.
I tracked a property that was financed by a local bank. They moved the property from foreclosure to auction in a couple of months, taking a huge financial hit on it, but moving it to redevelopment with virtually no vacancy on it.
and to some degree it makes sense moving a loan off their balance sheet. They either pocket a lump sum for their work originating the loan, and/or get a continual fee for servicing it.
Besides default, the bank also suffers a loss (opportunity cost) if interest rates rise- technically the value of the loan is then reduced.
The big bank has the resources to survive more losses than the local back.
That’s certainly one way to look at it. Another way is to say that big banks can make more reckless loans because their size allows them to make up for stupid mistakes. That is what happened – instead of each loan as being seen as a personal, responsible thing, they were seen as a tiny grain of sand in a much larger pile. Each became so inconsequential that it did not matter in the grand scheme of things.
My point about the local bank was that they moved their non-performing loan from foreclosure notice to actual foreclosure in a couple of months. The larger banks take *years* to move through their properties. Why? Because they are so big that it doesn’t matter to them.
we can all empower local economies by using local resources. I have been a member of a credit union for forty years, used them for housing, and they have all the bells and whistles that most people need. ATM, internet banking, etc.
And they will sponsor a local little league team.
When johntmay writes “We need the banks to act in our interests, not theirs…,” he’s expecting banks to act like credit unions. Local banks do act more like CUs than megabanks do, but they are still corporations that adhere to the Corporate Bushido — maximize profits above all else. Regulate the hell out of all of them, they way we did for 65 years. That worked for our interests; letting them decide what’s best is never going to.
How did the large banks get all these mortgages from small communities? That’s the problem. The large bank was not the originator, it was part of a web of banks all connected with mortgages sliced into “traunches” and bits and pieces turned into “products” that other banks bought as they also bought and sold credit default swaps and so on, an arcane and obtuse system where the bankers make their money. It’s the system, not the size that is the problem.
It was the lack of underwriting standards in the 00’s that sunk those sold mortgages. Furthermore the ratings agencies didn’t do their job.
Originators wrote garbage loans and sold them to institutions that didn’t know (or didn’t care to know) how bad they were.
Why the lack of standards? Why did the agencies not do their job? Why did the buyers and sellers not know or not care to know? It was because they are in it for them, not us and that by the time anyone figured it out, they took their profits. Mortgages were sold for the past few years, yeah. How’s that working out? Cui Bono to find the answer.
it’s just that most people didn’t realize that their job was to give groups of loans AAA ratings no matter how worthless they really were. Ratings agencies have no incentive to bite the hands that feed them.
if a bank knows it’s too big to fail, it doesn’t have to worry about creating a catastrophe because they’ll just get bailed out again.
if it’s small enough to fail, it will know — with a fair degree of certainty — that if it fails, the federal reserve will…. let them.
Eastern Bank is a pretty darn big bank these days — one of the 100 largest in America last time I checked. Yet, it’s not so big that it can’t be allowed to fail. And, not surprisingly, it behaves very, very differently than a Bank of America.
…but I was waiting for you to comment on something so I could get your attention for a question.
Earlier you posted a diary about GE getting rent-free property in Boston which at this writing is on the rec list with nine comments. However, when I click on either the diary or directly on one of the comments on the right column I get a “not found” message. Did you take it down, but still somehow leave evidence of it? If not or you don’t know, paging the editors.
Whatever the issue was appears to be fixed now. I was able to read the diary today and added a comment to it.