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Wednesday, June 22, 2011
Bhidé Cites “Rampant, Extensive Criminality” As Proof That Bank Reform Has Gone Down the Wrong Path
I though readers might welcome an antidote from the nonsense that bank industry touts like the Office of the Comptroller of the Currency’s John Walsh routinely puts forth.
I’ve known Amar Bhidé, who is now a professor at Tufts, for thirty years; we both worked on the Citibank account at McKinsey (although never on the same study). He’s long had a reputation for being incredibly smart and iconoclastic.
Amar enjoys annoying people by saying completely commonsensical things that are not acceptable and watching chaos ensue. The last occasion I witnessed first hand was at a dinner party with a lot of finance journalists and markets professionals in attendance. Amar matter of factly said Obama blew it by not having a one week bank holiday to get to the bottom of how bad a mess the biggest banks really were and making needed interventions (which presumably could include resolving them). Consternation ensued: virtually everyone save yours truly argued that there would be a revolution because people would not be able to access their money market funds (no, I am not making this up, this was pretty much the only objection voiced, but it was made with considerable energy).
Now there are some legitimate concerns to be raised about the Bhidé plan (what happens to the Eurodollar market? What happens if any banks have payments on bonds held by foreigners due during the week when they are shuttered? What if Citigroup’s foreign depositors freak out? Are you sure the government can resolve either Citi or Bank of America if they were deemed to be terminal?). But instead all this group did was effectively recoil and say, “No, you can’t do that. The world would come to an end.” This reaction was testament as to how successful the banks have been in conditioning the elites to act as their mouthpieces.
Bhidé also managed the neat trick in his recent book, A Call to Judgment, of annoying both the right and the left. He uses Hayek to argue that that banking industry has evolved in a way that leads to bad decisions and it now destroys value on a large scale. He calls for a return to what he depicts as “primitive banking” and it has a lot in common to the utility banking model we have discussed here. And Bhidé, who was briefly a proprietary trader and continues to be a successful investor, really means “primitive”. For instance, he thinks stocks should not be publicly traded; the only relationship that makes any sense for a legal promise as ambiguous as that of equity ownership is a venture capital/private equity relationship, where the investor knows the management of the company and is meaningfully involved in its affairs.
I suspect readers will enjoy this interview. Bhidé pretty much calls JP Morgan a criminal enterprise, although in context, he is merely citing that bank as typical of the industry. He also very clearly says CEOs are not in control of these enterprises and that the engage in activities that “can’t be managed, can’t be examined.” That of course begs the question of why these corporate chieftans are so well paid. We argued in ECONNED that the major capital market firms were engaged in looting and that top management was at best hostage to the producers (the business unit managers) and at worst, in cahoots. Bhidé’s gloss might strike some readers as unduly charitable. However, if the top brass is incapable of doing its job, that means the banking industry needs to be radically restructured.
I’ve known Amar Bhidé, who is now a professor at Tufts, for thirty years; we both worked on the Citibank account at McKinsey (although never on the same study). He’s long had a reputation for being incredibly smart and iconoclastic.
Amar enjoys annoying people by saying completely commonsensical things that are not acceptable and watching chaos ensue. The last occasion I witnessed first hand was at a dinner party with a lot of finance journalists and markets professionals in attendance. Amar matter of factly said Obama blew it by not having a one week bank holiday to get to the bottom of how bad a mess the biggest banks really were and making needed interventions (which presumably could include resolving them). Consternation ensued: virtually everyone save yours truly argued that there would be a revolution because people would not be able to access their money market funds (no, I am not making this up, this was pretty much the only objection voiced, but it was made with considerable energy).
Now there are some legitimate concerns to be raised about the Bhidé plan (what happens to the Eurodollar market? What happens if any banks have payments on bonds held by foreigners due during the week when they are shuttered? What if Citigroup’s foreign depositors freak out? Are you sure the government can resolve either Citi or Bank of America if they were deemed to be terminal?). But instead all this group did was effectively recoil and say, “No, you can’t do that. The world would come to an end.” This reaction was testament as to how successful the banks have been in conditioning the elites to act as their mouthpieces.
Bhidé also managed the neat trick in his recent book, A Call to Judgment, of annoying both the right and the left. He uses Hayek to argue that that banking industry has evolved in a way that leads to bad decisions and it now destroys value on a large scale. He calls for a return to what he depicts as “primitive banking” and it has a lot in common to the utility banking model we have discussed here. And Bhidé, who was briefly a proprietary trader and continues to be a successful investor, really means “primitive”. For instance, he thinks stocks should not be publicly traded; the only relationship that makes any sense for a legal promise as ambiguous as that of equity ownership is a venture capital/private equity relationship, where the investor knows the management of the company and is meaningfully involved in its affairs.
I suspect readers will enjoy this interview. Bhidé pretty much calls JP Morgan a criminal enterprise, although in context, he is merely citing that bank as typical of the industry. He also very clearly says CEOs are not in control of these enterprises and that the engage in activities that “can’t be managed, can’t be examined.” That of course begs the question of why these corporate chieftans are so well paid. We argued in ECONNED that the major capital market firms were engaged in looting and that top management was at best hostage to the producers (the business unit managers) and at worst, in cahoots. Bhidé’s gloss might strike some readers as unduly charitable. However, if the top brass is incapable of doing its job, that means the banking industry needs to be radically restructured.
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