A Timely Guide to Banking, and Why Banks Fail

Wealth meanagers and their clients couldn’t ask for a better pocket guide to banking than Bank Failures:  as American as Apple Pie, by veteran financial historian John Steele Gordon.  Although the article appears in the latest online issue of the once beloved American Heritage magazine, the closing section suggests Gordon may have written it in the wake of the S&L crisis. Even so, this quick, readable trip through financial history is timely. Especially this century-old quote from Walter Bagehot:

“Every banker knows that if he has to prove that he is worthy of credit, however good may be his arguments, in fact his credit is gone.” 

Megabanks vs. Local Banks

In a crisis, it’s no contest:

Banks Gave Richest Clients ‘Concierge Treatment’ for Pandemic Aid. Most megabanks mean well, they're just too big to cater to all their customers. (One megabank may not have meant well, according to this USA Today report.)

How a family-owned Nebraska bank became a leader on coronavirus loans. Working from home, The Washington Post reports, employees hustled to process small-business applications under the Paycheck Protection Program.

Union Bank and Trust is nowhere near the top of the banking leagues. Last year the family-owned institution, with 900 employees, was the nation’s 202nd largest bank by assets, according to the Federal Reserve. Yet 72 hours into the emergency lending program, it ranked second in the nation for number of loans approved, according to the Small Business Administration.

One of our daughters recently switched from a big, multinational bank to a local bank. She says she couldn’t be happier. I begin to see why.

Investors, Beware of Financial Weaklings

Back in the Mad Men era, ads offering the trust and investment services of banks stressed "financial strength" and "financial responsibility." The banks wanted to remind readers that while their competitors went bust in the 1930s, they didn't. And they wanted to reassure potential clients: "We'll do our best not to goof up, but if we do, or if our trust officer loots your trust and runs off to Tahiti, we have the financial resources to make good."

Financial strength remains a desirable attribute in an investment adviser. Unfortunately, The Wall Street Journal warns, it's one that many of today's small advisory firms lack.

Many individual investors are using advisers instead of brokers these days, drawn by regulatory and structural changes that favor the advisory-business model of charging steady fees instead of trading commissions. The number of people working as investment advisers has grown 33% since 2008, according to the Financial Industry Regulatory Authority.

*** 

 Smaller investment advisers often are thinly capitalized and, in many cases, don’t carry enough insurance to cover a significant legal judgment against them.

Banks and trust companies aren't the sexiest source of investment services, but their capital should enhance their clients' peace of mind. 

Cross Selling at Bank of America

Megabanks want customers to use more of their financial products and services. They emphasize cross selling (to a fault, in the case of Wells Fargo).

Why then would a big bank go out of its way to trash its reputation and stink up its brand?

Latest example, Bank of America and a couple who were unfortunate enough to have the bank buy their new mortgage, which they hoped to modify.

For torturing the couple, Bank of America has been fined $45 million by Judge Christopher Klein of the U.S. Bankruptcy Court. His decision begins like this:

Franz Kafka in 1910

Franz Kafka lives. This automatic stay violation case reveals that he works at Bank of America. 

The mirage of promised mortgage modification lured the plaintiff debtors into a kafkaesque nightmare of stay-violation foreclosure and unlawful detainer, tardy foreclosure rescission kept secret for months, home looted while the debtors were dispossessed, emotional distress, lost income, apparent heart attack, suicide attempt, and post-traumatic stress disorder, for all of which Bank of America disclaims responsibility.

The Great Recession triggered the couple's woes. Most likely they'll recover their financial footing and return to prosperity, and one day a Merrill Lynch broker from Bank of America may ask for their wealth management business.

Will they welcome him with open arms?

Or will they pick up sticks and  beat him like a piñata?

You're No Apple, You're a Bank

Happened on Heather Landy's last column for American Banker. Financial-services folks, she notes, seem fixated on emulating the success of Apple and Amazon.  That's not easy.

For example, while a focus on cross-selling makes perfectly good sense as a general business strategy, it doesn't hold up very well in an Apple business model context. Notice how when you visit an Apple store, nobody ever says, "Well, sir/ma'am, I see you have one of our phones. Have you considered trying one of our tablets?" There's no need to push products on us because we already know that we want them. We'll even line up around the block to get them. (Whereas a line around the block is never a good sign for a bank.)

Can banks develop a cross-buying culture? Can they give us new conveniences even more welcome than those smart credit cards the Europeans enjoy?

Can they create true wealth-management centers, units so innovative and quality-obsessed that customers clamor for the privilege of a referral?

We'll see.

•

Landy is leaving her post as editor in chief of American Banker Magazine to join Quartz as global news editor.

Ads from the Mad Men Era, Continued

Did you know the United States had – and I guess still has – the fastest ocean liner ever built? Instead of hitting an iceberg, the United States got docked by the jet age.

Mad Men's costumers and set designers may already have checked out this 1969 Chemical Bank ad – contemporary guidance on how a high net worth family was supposed to look. (That $580,00? Think $4 million or so today.)

You can bet Irving would not have addressed this ad to businessmen today. But isn't it cool that in the 1960s a bank could decorate an ad with flowers?

History (in 16 Slides) of British Banking

Upstairs Downstairs fans who didn't see enough of bygone days in the U.K. on PBS last evening will enjoy this slide show from the Telegraph.

Did you know the Scots introduced a mobile bank in 1946?

The most revolutionary development in British Banking? "It could be argued that the appearance of women in banks was the biggest banking revolution of the 20th century."

British banking's greatest marketing challenge over the years? "We had to explain what a credit card was - it was a massive marketing task, like nothing ever done before by a bank."

Be sure to dig the Burroughs TC500 computer, c. 1961. (It definitely wasn't dainty.)

When the Financial World Shrank

In 1958 BOAC launched transatlantic jet airliner service. Banks and other businesses started thinking globally. Among the enthusiasts was Irving Trust. The Irving called attention to its global banking aspirations with a series of colorful ads, including this one from just fifty years ago.


Picture similar traditional costumes on children of the world. Disney did, and the result opened in the Pepsi pavilion at the 1964 World's Fair: "It's a small world after all, it's a small world after all . . ."

In today's global village, businesses large and small routinely operate internationally. Yet the financial side of global life remains inefficient, cumbersome and expensive.

How come a credit card issuer considers it business as usual to charge me an extra three percent if I'm rash enough to charge something in pounds or pesos?

How come the Euro Bloc can't seem to keep its act together?

Shouldn't we be able to do better in the 21st century?

Another Big Bank Fails, Virtually

You can't make this stuff up:

Uh-oh! Another big bank is the subject of a depositor run amid charges its chairman has run off with customers’ money. Thankfully, this scandal is taking place in Eve Online, a space-age virtual reality created by CCP, a games developer and Iceland’s coolest company. But these troubles in the ether may offer some valuable lessons for earthly banking and regulation.

Needed: A New Name For Huge, Sickly Banks

Community banks, the dull side of banking, receive front-page attention in today's New York Times.

New deposits and new customers keep trickling in at these safe-and-sane institutions. For some of them, that spells opportunity to gain new trust and investment business as well. But as David Segal writes in his Times article, community banks have an identity problem:

[T]he public, politicians and the media have made little distinction between the stress-tested behemoths and the 7,630 community banks across the country — the vast majority of which have watched the crisis like bystanders at a 10-car pileup.

What we need is a term to distinguish giant, high-toxicity "banks" from the real and healthy banks. "Blankety-banks'? No, there's got to be a better word or phrase. Ideas, anyone?

Two Banking Questions Answered

Why are investors still paying well over $2 a share for Citigroup?

If Citi and other megabanks are nationalized, on what day of the week will you hear about it?

Answers here.

"What If Your Bank Collapses?"

Talk about signs of the times! This Wall Street Journal Q&A examines What if Uncle Sam Takes Over Your Bank?

The picture painted isn't rosy. For instance:

How will private-banking and brokerage-account customers be affected?

That depends on whether the government takes a short- or long-term view. If it intends to be a long-term owner, then it will probably sell off the brokerage, investment-banking and other auxiliary operations as nonessential to the core banking business. If, however, the government sees its step as a short-term fix to shore up the system temporarily, then it may hang on to such operations.

What other products and services might be affected?

If the government takes over a bank, management will be under even more pressure to cut costs. Expect more branch closings and poorer customer service. "Think of the bank as the DMV of the future, run by government employees who have little upward mobility," says [Dave Kaytes, managing director at Novantas].

For a preview of what could lie ahead, The New York Times suggests, we should keep an eye on financial developments in the U.K.