« Debt Distress: Symptoms and Treatment | Main | Get a Signed Glossy Photo from Adam Levitin »

The War on Bank Profits?

posted by Adam Levitin

The Wall Street Journal had a peculiar opinion piece today about bank regulation.  I won't pick the low-hanging fruit of its bizarre statements about potential CFPB Director nominees, but I think it's noteworthy for the revealing language it uses.  It says that Washington should "call off the war on bank profits" and allow[] banks to make profits."  

The conceit of the piece is that a subset of businesses have an entitlement to be profitable.  That's deeply inconsistent with a belief in markets.  The fundamental rule of American capitalism is "Go Forth and Profit, but Fairly."  It's one thing to debate what sort of practice is fair or not.  But that's not what the WSJ piece argues.  It argues that legislation like the Credit CARD Act and the Consumer Financial Protection Act are wrong because the restrict banks' profitability.  This is a serious misunderstanding of financial services reform, and if this is how the financial services industry as a whole understands regulatory reform, we've got serious problems as a society.

The reform legislation is aimed at reining in bad practices in financial services. To be sure, the only reason to engage in those practices is because they are profitable.  But the goal isn't to wage "war on bank profits."  We need solvent banks, and to be solvent, and bank needs to be profitable.  Profitability, however, must be found without the bounds of fairness.  Theft is profitable if it isn't illegal; clearly profitability über alles can't be right.  It proves too much.

It's hard to say how representative the thinking in the WSJ piece is.  But anyone who subscribes to the view that financial services reform is about sticking it to the banks doesn't get it.  The reform agenda isn't class warfare, and it isn't trying to rain on anybody's parade.  It's about ensuring that markets operate fairly and safely.  

I'm hopeful that piece isn't representative of the thinking in the financial services industry; it might just be the Journal's ideological chest-thumping, throwing out some red meat to the true believers.  But if it is representative, then we've got a real problem--namely an industry that doesn't realize that some of its practices overstepped the bounds of fair play.  Combine such a lack of self-awareness with a profit motive, and we'll be back at square one before you know it.  

Comments

If I remember it right Nassim Taleb has said that banks have never been profitable,thinking them as one big entity.The so called profits are smaller than the taxpayer money put into them.So the question is how to stop this robbery.

Thank you Adam. You make an enormously important point when you write, 'profit uber alles' proves too much.'

In addition, when you write "To be sure, the only reason to engage in those practices is because they are profitable", I'd also ask this: profitable or unprofitable to whom and over what time period?

The practices that need reining in were not profitable to most folks -- including to the banks and other players themselves -- or over any reasonable time frame.

They were profitable to those receiving bonuses. They were profitable to those who timed stock/bond purchases and sales. And, perversely, they set the table for some of those who profited to continue to do well because we've socialized the losses.

And, therein lies a key point: In saying we've socialized the losses, we also say these practices actually were NOT profitable. They were not profitable to anyone else, to the enterprises in question, or over any reasonable time frame. Indeed, they were so unprofitable as to destroy balance sheets, destroy wealth, destroy incomes and, in general, trigger a financial collapse.

It is so wonderful how cleverly Thomas Jefferson once put it,more true than ever:

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

Absolutely amazing levels of chutzpah, even by WSJ standards. I reads like one of those "War on Christmas" pieces that wallpaper the OpEd pages starting the day after Thanksgiving, complaining about merchants saying "Happy Holidays" instead of "Merry Christmas." And it's just as disingenuous.

While I do agree that banks should not have the right to gauge consumers, such as overdraft, late payment fees, interest rate hikes without notice, and even simple not processing payments on weekends and holidays fees, this is a slippery slope.

I do agree that banks make profit and unfairly by virtue of there existing and monopoly, there should be more competition in banks, too big to fail still exists, you don't have to care much at citibank since you hold much in deposits, bank of america does poor customer service and likes to be the target of customer's angst although at times they can be great, HSBC is the same too but they stay in the business because they are sitting on too much of Americans money.

The financial regulation reform bill however has many special interest legislation, while special interest legislation may always make it into a bill , the exemption of auto dealers and inclusion of debit interchange fees, as well as allowing certain banks to continue derivatives and loopholes, may question its judgment, will minimum asset requirements hurt monoline companies that are start ups such as capital one which started as a risky proposition although I don't agree with certain practices of that company, how do we define market risk? The small community banks are being the ones closed to the fdic not the big ones, of course I am not arguing a bailout from a community bank that had its holdings in risky investments or located in areas that have had risky bets on real estate and may have their share of greed, we have to question who is really benefiting from the legislation.

Not so surprising when you look UP the chain from WSJ. Published by Dow Jones & Co., owned by News Corp. Rupert Murdoch's list of holdings on Wikipedia alone is enough to finish this thought for me... http://en.wikipedia.org/wiki/News_Corporation

Then you look at #2 shareholder in News Corp. Prince Alwaleed bin Talal al-Saud of Saudi Arabia, through Kingdom Holding Co. owns 7% of News Corp. KHC is/was also invested in Citigroup and other heavies according to Wiki - http://en.wikipedia.org/wiki/Kingdom_Holding_Company

Speculative? Absolutely. Plausible? Definitely. Would it be the first time that a major publication attempted to influence public policy and/or legislation? Hardly.

I don't even bother reading WSJ anymore unless a link from another site I read catches my eye. It's 95% garbage. They might as well have the Republican National Committee and Karl Rove take over their editorial duties. Would anyone notice a difference?? And their reporters don't even dig or do investigative journalism anymore. They might as well train their staff at China's Xinhua news agency for all the good they do.

Here is a link closely related to your topic at Bloomberg. Yeah, Bloomberg.
http://www.bloomberg.com/news/2010-09-12/trading-eludes-dodd-frank-as-no-investors-see-inside-black-box.html

Cancel your online WSJ subscription, and send the refund to me. You can satisfy your toilet paper needs at Wal-Mart from now on.

The comments to this entry are closed.

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF