A business model that came and went
For a very long time, commercial banking was a staid business, with lenders lending and borrowers borrowing, all in a fairly predictable way.
Apparently that changed a few years ago to a go-go model, wherein the Big Banks didn’t really “lend” any more, but packaged loans to fob them off on the marketplace. In addition these so-called “bankers” set up all sorts of off balance sheet vehicles to capture the spread between the bank’s funding cost and the yield on various classes of corporate paper. (And don’t get us started on credit default swaps.)
The result of all this was a period of enormous growth in bank profits, followed by a period of enormous bank write offs. WSJ:
Through 2006, the three big banks’ average annual profits had grown at a roughly 20% clip during the past three years…
The subprime crisis and ensuing credit crunch have thrown a wrench into the highly profitable bank business model: Make loans that are then sold off to investors while arranging corporate financing through off-balance-sheet vehicles that keep banks’ capital costs down. Now, banks are holding on to more of the loans they make, as they did years ago. And the off-balance-sheet lending business is crippled…
Commercial and industrial loans at commercial banks in the U.S. have risen about 20% since the start of the year to about $1.43 trillion this month, according to Federal Reserve data.
That rise has come at the same time as a fall in commercial-paper issuance by off-balance-sheet conduits typically sponsored by banks. These vehicles issue short-term commercial paper to purchase debt such as corporate receivables, mortgages and auto loans, capturing the difference in rates between the two. The amount of this paper outstanding fell to $763 billion as of Dec. 19 from a peak of almost $1.2 trillion in August.
Banks have traditionally used such conduits, which are close cousins of the now-infamous structured investment vehicles, to arrange lending without having to set aside regulatory capital. With that market shrinking, banks have to hold on to more of the loans they make…
bank executives…used to thinking about the long-term intrinsic value of debt, rather than how much it can fetch if sold today. That has led to repeated write-downs at big institutions such as Citigroup and UBS AG.
Commercial banking should be an unexciting business. When that changes, as it did after 1999, something is wrong. The only surprise to us in all this is that an new business model for a great industry came and went, and we just this very minute noticed.
December 26th, 2007 at 11:50 am
Bad outcomes from following a computer model and ignoring histoty, evidence, human experience [and perhaps {un}common sense]. Hm. Sounds familiar. Did Al Gore play the bellweather?
December 26th, 2007 at 12:58 pm
The name Robert Rubin pops into my mind.
December 26th, 2007 at 4:00 pm
On the surface, banking is very unexciting. However, nothing could be further from the truth because in reality, the entire monetary system that is in place is operated by a “global elite” of bankers that manipulate and control to their own ends. Since 1913, the United States has been a part of that. Check my blog for more.
December 26th, 2007 at 4:14 pm
Just about EVERYBODY was in on this one, starting with the mighty Greenspan.
Because this is at bottom a monetary phenomenon, as inflation always is. Unrealistic mortgages, and the unpaid for war (plus the usual welfare, corporate, and medical subsidies) are simply the conduits through which the money supply was increased.
Anyone who says he didn’t see it coming is stupid, ignorant, or a liar.
Anyone who didn’t denounce the free money and warn about the necessary result is complicit.
And in looking for A. G. ’s retirement date, I found
themessthatgreenspanmade, warning about this since 2005.
http://themessthatgreenspanmade.blogspot.com/
December 28th, 2007 at 8:32 am
One can’t help wondering about the relationship between the FED, the banking system and the short term thinking that prevails within the bureaucratic, administrative state. Irresponsible fiscal policy leads to the same in monetary policy. Easy money for the banking system on the backs of the consumer and his ‘keeping up with the jones’ mentality’ as the money flows into Washington D.C. is a good thing for those on the tax and spend gravy train. What’s good for the banks is good for the country, until the music stops. Right now, we seem to be at the stage where federal liabilities can only be inflated away but not if the spending continues at the current pace. The genuises in DC would rather take the approach that inflating some liabilites away is a good thing while the spending can’t be stopped. That’s their ‘business’, after all. The FED has been reduced to protecting the status quo by tinkering around the foolishness since the fundamental, long term imbalances cannot be addressed.