NYT's Joe Nocera: The Good Banker

[flpoljunkie]

Democrats in Congress need to do a lot more to show us the big banks do not 'own them,' as Senator Dick Durbin warned us last year. So far they have failed. President Obama needs to lead here, as well, and make sure Elizabeth Warren heads the new Consumer Financial Protection Bureau.

In the run-up to the financial crisis, the giant national banks — which he (the 'good banker' Robert G. Wilmers of M & T Bank) viewed as a distinct species from the typical American bank — had done things that deserved condemnation. And, he added, “They are still doing things that I don’t think are very good.”

Such as? “It has become a virtual casino,” he replied. “To me, banks exist for people to keep their liquid income, and also to finance trade and commerce.” Yet the six largest holding companies, which made a combined $75 billion last year, had $56 billion in trading revenues. “If you assume, as I do, that trading revenues go straight to the bottom line, that means that trading, not lending, is how they make most of their money,” he said.

This was a problem for several reasons. First, it meant that banks were taking excessive risks that were never really envisioned when the government began insuring deposits — and became, in effect, the backstop for the banking industry. Second, bank C.E.O.’s were being compensated in no small part on their trading profits — which gave them every incentive to keep taking those excessive risks. Indeed, in 2007, the chief executives of the Too Big to Fail Banks made, on average, $26 million, according to Wilmers — more than double the compensation of the top nonbank Fortune 500 executives. (Wilmers made around $2 million last year.)

Finally — and this is what particularly galled him — trading derivatives and other securities really had nothing to do with the underlying purpose of banking. He told me that he thought the Glass-Steagall Act — the Depression-era law that separated commercial and investment banks — should never have been abolished and that derivates need to be brought under government control. “It doesn’t need to be studied for two years,” he said. “I would put derivative trading in a subsidiary and tax it at a higher rate. If they fail, they fail.”

more...

http://www.nytimes.com/2011/05/31/opinion/31nocera.html?ref=opinion