Banks Are Still Evil

CNN repeatedly produces frustratingly stupid economic articles. Paul R. La Monica writes their (daily?) "The Buzz" articles and mostly sounds like an in-love-with-bankers type financial analyst. This screed of his is an excellent example: "Hate the banks if you want. But we need them."

Right off there is a problem: Yes, we need banks but no we don't need these banks. Any banks can do. The problem is the massive banks that we have are not good, and we could do better without them.

Then we get false notions of equivalence as he starts with talking about big banks then moves to small ones and says they are not doing well either:

Hudson City did not run into the problems that many of its peers did when the housing market imploded. The bank even refused to take TARP money. But Hudson City announced Wednesday that profits in the fourth quarter slipped 11% from a year ago.

A couple issues here. First, they are still profitable, so most of the argument turns to garbage right there. The feeling most people have is that banks are making too much money and should be far less profitable--and if there was real competition they would be much less profitable. All the "banks are down" stuff he is saying is bad is utter horseshit. BANKS ARE STILL VERY PROFITABLE! So long as they are profitable, there is zero reason for this garbage article. If you believe in competition then less profitable banks is good: it means they are facing real competition, or at least that regulation has somewhat reduced how much they can screw over their depositors in favor of their shareholders.

The second issue is that small banks (up or down) is not relevant to the problems created by big banks. Yes, many small banks fell prey to the stupid a few years back but when it happens these banks are eaten by the fed, liquidated and depositors are credited out of FDIC. When BofA crashes so spectacularly we have to rush in to bail their asses out! This non-equal footing means comparisons are not really meaningful. Unless competent banks (large and small) are going into the red (not just being less profitable, but actually losing money) what happens to Chase, and BofA and Wells Fargo is completely separate from what happens at Hudson City and any other small bank.

"For a healthy economy and market, you need stable financial institutions," said Michael Cuggino, manager of the Permanent Portfolio in San Francisco. The fund owns Bank of New York Mellon (BK, Fortune 500) and State Street (STT, Fortune 500), two trust banks that also reported disappointing earnings this week.

Repeat after me: "Hugely profitable, massive financial institutions are not, by definition, stable." Banks becoming less profitable is moving them toward more stability, not away from it. Yes, their stock prices may, in the short term, be unstable, but no sane person should give a shit about that so far as "stable financial institutions" are concerned. Especially since stock prices seem to seldom be reflective of anything other than mob mentality ("Dear God! We thought they would make $4.35 billion and they only made $4.34 billion, everyone sell, sell like the wind!" and the stock price is depressed by 8%).

Still, there are some encouraging signs for the banking sector. A long-awaited (and needed) period of consolidation may finally be beginning. In the past month, three notable bank deals were announced.

Really? No, really? Massive banks that tried to destroy our economy leads one to think: "What we really need is more massive banks." Yes, I know that there are likely quite a few weak banks out there and that some level of consolidation among the smaller banks is probably good (and for wise investors could be very profitable) but what the sector really needs is to be more competitive...i.e. split up the big banks or at least get them much better regulated, which the financial reforms passed last year will not do.

So rooting for the big banks to suffer just isn't smart because it probably means the whole economy is still in lousy shape.

Near 10% unemployment means the economy is in lousy shape. The one thing that Paul should have learned but didn't in the past 3 years is that wildly profitable financial sector is bad for the economy. A significantly less profitable (but still profitable) financial sector is good. Right now the banks are wildly profitable, so unless they really start to "suffer" a bit, the economy can't recover.