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Banking Should Be Boring
By Erik Hare   
Not "rated" by the Author.
Last edited: Sunday, January 13, 2008
Posted: Sunday, January 13, 2008

This was originally done for StPaulRealEstateBlog.com, and is an update to an earlier essay.

Back in March, when the whole mortgage mess was just starting to unfold, I stated a simple philosophy that I take as a basic rule: Banking should be boring. A recent event shows that this idea is starting to take hold in the world of investment, even if it is a bit late.

The basic idea is this: when the investment world comes up with complicated new products for shuffling money around the world, they wind up increasing the overall risk of the entire system. There was a time when rock-solid stability was what made a bank strong. Bankers themselves were the image of a boring, but dependable life.

Last week we saw this play out when Bank of America said they were buying Countrywide for stock. They thought it would be a good idea, but Wall Street responded by punishing their stock, down 2%, and ravaging the overall market. That happened because investors saw this as the purchase of a whole lot of liability and not much in the way of assets. Put simply, they didn’t have a lot of confidence in the real estate that was in the process of being foreclosed on.

In many ways, it’s like the primary season. We hear a lot about what’s going on in the press, but something different happens when it’s time for people to vote. Last week, the investors finally had their chance to vote on the situation. They decided that too many deals might actually be a bad thing after a while. They seemed to long for the days long ago when banking was boring.

Bank of America saw things differently. To them, it’s about the customers, and the potential to sell them all kinds of other products like checking accounts and so on. They also have a corner on a quarter of the mortgage market now, which sounds impressive. Wall Street just didn’t see it that way. If you look at it from the perspective of the customers, there will be many months of confusion and long waits on the phone trying to figure out just who approves the short sales and where to send the mortgage coupons.

The top brass of Countrywide didn’t care about any of this, of course. Angelo Mozilo, the CEO, got a $110 million severance package, which is on top of the $140 million he got over the last few years selling stock options. That’s a quarter billion for messing up the whole financial industry. Who says real estate isn’t about realizing dreams?

Well, the investors do, for one. They want out. It’s clear that people are starting to long for the days when banking was boring, and the financial world worked something dead opposite of Hollywood – there is no such thing as good press. Right now, the less we hear about banks and finance companies, the better. Since we shouldn’t count on banks to provide us with entertainment, that only makes sense.

There will be more such consolidations in the industry, but it’s obvious that they will be handled a bit differently. My hunch is that they will heed what investors are starting to want and do all of this very quietly and prudently. Maybe, perhaps, banking will once again become boring. Here’s hoping.