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We’ve come a long way

April 12, 2013

One of the great movie classics stars Mr. Jimmy Stewart in the Frank Capra 1946 movie, It’s a Wonderful Life. The movie is about George Bailey (Stewart) who is tied down to an “old broken-down savings and loan owned by his late father and his brother Uncle Billy.”

There is a scene in the movie where the 1929 stock market crash creates a run on the bank. Long story short, if the Bailey Savings and Loan cannot survive the run on their bank, they will be closed down for good. Of course, all the depositors want all their money today. George explains why their money isn’t at the bank and that if they demand all their money they will essentially be foreclosing on their neighbors because that is where the money went — loans for homes, cars and businesses.

It is a quaint thought and that is how local banks largely worked up until about 3 or 4 decades ago. Local banks were community banks that served both the personal and small business needs of a local community. There were also the Wall Street investment firms (that we now refer to as Wall Street banks or “too-big-to-fail” banks) that did not try to compete with community banks, but centered on the needs of national and international business and investments. It is this side of our banking business that seems to have lost its way. I refer to Wall Street banks as the world’s largest casinos because that is exactly what they are.

Actually, that is being kind to the “too-big-to-fail” banks. The game they play is far more rigged than a casino’s odds. Investigations into the 2008 financial crisis proved that firms like Goldman Sachs established subprime loan portfolios for hedge fund managers like John Paulson, who packaged those loans into mortgage-backed securities and then sold them to unsuspecting investors (largely foreign investors, pension funds and endowments) based on the assurances of the credit ratings agencies that they were AAA-rated investments.  However, what Paulson and other insiders knew, after looking at the actual mortgages behind these securities, was that most of the loans were destined to end in default.  So Paulson designed and purchased an insurance product that would pay if the loans defaulted.  And when they did default, Paulson and others received huge payouts, while the foreign investors, pension funds and endowments that had purchased the original mortgage-backed securities lost huge sums of money, right along with the companies who issued the default insurance (think AIG).

If this does not qualify for the worst of a rigged casino, I don’t know what does. And Lloyd Blankfein, Goldman’s CEO, in the mist of the financial collapse, had the gall to suggest he was doing “God’s work” running his Wall Street too-big-to-fail casino that screwed the very clients that were entrusting their money to him. That might also be the best example of blasphemy I have ever seen. It all comes down to a level of arrogance where you can screw people over and never be touched criminally, all while scraping off the top for your own personal treasury!

As an example of the exact opposite type of banker, let me tell you a story about Carl.  Carl, a very close friend of mine, loves to tell stories and I love to hear them. Carl is a 92 year-old WWII veteran, truck driver, bus driver, heavy equipment operator, farmer and he’s the salt of the earth.

Carl and his wife are good people. One day Carl and I were talking about our current economic situation (imagine that☺ ). Carl shared a story with me that highlights how far we have drifted in the wrong direction, particularly in the area of finance/banking.

Carl grew up on a small farm and he had to take over the farm after his dad died when Carl was only 11. He and his mom did the best they could, but Carl said they were very poor. Carl told me that one day after his mom had sold the year’s crop, she took the money to the bank to deposit it. The bank president knew the family personally, so when Carl and his mom went in to deposit their annual earnings into their bank account, the bank president pulled them into a private office.

The president told them they could not tell anyone, but advised that they should not put their deposit in the bank. “In fact,” said the president, “take whatever you have on deposit with us out today.” He then instructed Carl on how to bury it safely and how to choose a place where they would be the only ones who could find it when they needed it. You see, the bank president did this because it was a few days before the 1929 stock market crash and he knew that there would be a run on the bank. He knew there was a strong likelihood that in a few days, this poor widow and her son would not be able to get their money. Very simply, this bank president gave Carl and his mom a chance to keep their hard-earned money and, therefore, gave them a chance to survive what would eventually become known as the Great Depression.

Think about how things have changed in just one generation. We used to have bankers who took care of and watched out for their customers.  Today, we have Wall Street banks that don’t just dominate the banking and investment community, but politics and our government as well.  We’ve come a long way, just not in the right direction.

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