Wherefor Artless Banks

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Man Bites Man! Wherefor Artless Thou, Banks?
Congratulations to Mark Carney taking the chair at the head of the table at the Financial Stability
Board (FSB). As the highly regarded Mark Carney takes the head of the table can we be hopeful
this hardworking acolyte of Goldman Sachs provenance will embrace empirically proven
banking? We can hope financial industry insanity of regulation, risk management and leverage
restrictions removal is not a terminal infection of the financial industry as he grabs the tail of this
banking industry tiger perennially in need of cash injections. Is the industry in persistent turmoil
because it wants greater fees and bonuses than the market economy otherwise provides?
Brother Bank wherefore artless thou? The G20 appointment is attached with expectations, those
of the politicians, heads of state and their finance ministers – and financial industry lobbies that
finance their political rides to the microphones. How do the financial industry lobbies see the
Volkcer rule, like kids losing their free-candy when the Halloween trolls hit home:
Brother Bank wherefore artless thou? The pick-pocket blames the carelessness of this victim. “If
it is good for your own wallet does it matter whatever it costs the other guy?” they do not ask.
Caveat Emptor, welcome to the “I Agree box” of agency risk as entitlement.
Our government lines up at the microphones to be the ally of the financial industry lobbyist
search for more skimming of the wealth we create. The net worth of firms has grown an
aggregate of 5% each year, over the past five, as other indicators have declined, like earnings,
and jobs while GDP slowed and our productivity of firm profits soared. Government wants to tax
firms less. Government knows its place at microphones is no longer to regulate and mediate
corporations as constitutions intend, but to subvert those rules to corporate ends. Get a PRPP?
It is not appropriate as new serving lobbyist for financial industry marketing that former Bank
Governor, David Dodge, last winter rose to convince us we need to save doubly for our
retirement. The defined benefit CPP was not coping with demographics that were set when we
were born. The problem emerged on his watch. The financial industry has not kept its promises
excusing their failures under a cloud of exogenous events. “Who knew?” they cried. Neither the
politicians nor the financial advisers keep their promises. The reality is they do not know
anything more than to make promises. We show there is no integrity in what they know to do.
Banking fees and spreads charged are historically higher than ever. Best you defer your wealth
building and take a loan on the accumulated equity in your home, they say. More fees for them

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(so they can afford a bigger one), that you pay with all their operating expenses paid for in
MERs, Management Expense Ratios that without scrutiny can even exceed the rate of the basic
fee costs – it is a cost plus contract without any defined benefit. Next, get more homeowners,
those who cannot otherwise buy without exotic supports like lower entry financed by
government, balloon payments, then transfer the risk to insurance companies in default swaps.
Canadian banks did have to take a bailout in form of $75 Billion CMHC mortgage absorption
many have forgotten in all the newspeak since the “Who knew?” excuses expressed starting in
2008 elections. That is slightly higher ratio per capita than the US 2008 bailout of toxic US
mortgages. Will empirically sound experience of banking for the past millennium be resurrected?
What got the financial system into difficulties will not mend the problem, as it is the problem.
What they know is in error. Mindsets are impediments. The paradigm shift has to be made.
With the Canadian banks having garnered reputation for more prudence is Mark Carney being
rewarded for that in which he has little share or appetite? After serving each in the credit
department, trading and investment banking, Carney was flying higher when he left Goldman
Sachs for a deputy governor position under David Dodge at the Bank of Canada in 2003. They
say the knowledge he had gained at Goldman Sachs, has served him well in public service. The
culture of deregulated trading and banking layered with agency risk prevailed at G-S. It is the
culture for incubating Rubin and Greenspan, Paulson and Geithner, the culture of deregulation,
risk management and leverage restrictions removal. It is the mindset that matters. Laissez-faire is
not the notion of “let’s be fair.” His former boss David Dodge now as lobbyist insisted
Canadians redouble their savings to salvage losses their pensions suffered by fund managers. Our
Minister of State believes we should have a cost-plus-fee PRPP with no defined benefit.
The Governor’s role is to ensure stability of the economics that banks are well served, that
banking is safe, for the banks. With deregulation that occurred while in his service at G-S Mark
Carney is well versed and practiced in the “reintermediation” the banks aimed at supplanting
depositor security with higher risk new financial products the banks were newly able to engage.
Carney witnessed wide debate of World Bank conference reports we cite below.
Mutual funds, proprietary trading and investment banking, and derivative instruments that
evolved were entirely unregulated, while their fees earned were exponentially higher than
deposit interest they would otherwise pay for depositor money, while also being outside the
deposit insurance regime whose costs were also eliminated. As proprietary traders, banks
become a present systemic risk to client economic interest. Raising that risk by raising their
leverage and decreasing capital requirements also raises their profitability. Therein is the agency
risk (moral hazard) of bailing banks, in 13% losses of our wealth they played imprudently.
In true laissez faire style it does not matter what their gain costs you in their exercise of agency
risk in handling our wealth. We have let them make our wallet their playground. According to
the Congressional Budget Office, the U.S.’s medium-term debt-to-GDP increased about 50

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percent, or roughly $7 trillion, due to their crisis making. It appears they took their working-cues
from The World Bank report of 20001
, as much as they distained the bad press,
“Not only do banking crises hit the budget with outlays that must be absorbed by higher taxes (or
spending cuts), but they are costly in terms of forgone economic output .. crisis management strategies
appear to ...unlimited deposit guarantees, open-ended liquidity support, repeated recapitalization, debtor
bail-outs, and regulatory forbearance ... add greatly to fiscal costs
Their findings clearly tilt the balance in favor of a strict, rather than an accommodating approach to crisis
resolution. At the very least, regulatory authorities who choose an accommodating or gradualist approach
to an emerging crisis must be sure they have some other way to control risk-taking.
The acolytes of Goldman Sachs serving at Securities and Exchange Commission and revolving
through government offices changed the leverage rules for just five Wall Street banks in 2004.
The “Bear Stearns exemption” replaced the 1977 net capitalization rule’s 12-to-1 leverage limit.
In its place, it allowed unlimited leverage for Goldman Sachs, Morgan Stanley, Merrill Lynch,
Lehman Brothers and Bear Stearns. These banks ramped leverage to 20-, 30-, even 40-to-1. An
historic list, 3 of those 5 failed. Extreme leverage leaves very little room for error, it is high-
strung not resilient, not robust by their design but prone to jamming, for spreading on their toast.
This was just the denouement from the climax of deregulation. An April day in 1998 brought
together Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin and
Securities and Exchange Commission Chairman Arthur Levitt Jr. - all Wall Street legends, all
opponents to tighter regulation of the financial system that had earned them wealth and power.
That President's Working Group on Financial Markets convened to excoriate Brooksley Born,
chair of Commodity Futures Trading Commission (CFTC) on her proposed regulation of over-
the-counter financial derivatives. They didn't believe possible fraud needed to be enforced, and
she did. The road map to their land of moral hazard was cleared through Congress, in 1999.
The banks became investment managers selling the removal of depositor’s funds from insured
deposits to effectively risk laden investment financial products that they controlled decisions on,
aside from marketing and creating these financial products. That as “professionals” they allude to
their trustworthiness, without a Hypocratic Oath, or a sworn Duty of Care, to be in the position
of self-regulation while also in agency risk without fiduciary oath. “Shell game anyone?” They
call it reintermediation by the way, a new way for investment managers to make a living from
introducing more risk to the investor portfolio. Caveat emptor, check the “I Agree” box or else,
leave, but better, leave with your wealth on their counter? Their incentives are not ours.
Any form of intermediation introduces a layer of management between the investor and the investment.
A key question is how aligned are the incentives of managers with investors, and what distortions are
created by misalignment? ... the changes in the financial sector have altered managerial incentives, which
in turn have altered the nature of risks undertaken by the system, with some potential for distortions
2
.
1
Honohan and Klingebiel, Controlling the Fiscal Costs of Banking Crises, Policy Research Working Paper 2441, The World
Bank Development Research Group Finance and Financial Sector Strategy and Policy Department, September 2000
2
Raghuram G. Rajan, Has Financial Development Made the World Riskier?, Federal Reserve Jackson Hole Symposium, 2005

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Political policy serving narrow interests undermines our democratic government principles. Most
especially so when lobbys whom it serves most are writing those rules into law. Policy needs to
be in civil orientation. The fictitious corporate ‘person’ now has more power and with that, rights
vastly exceeding those of any individual. Corporations are never found culpable to sit on death
row as one pundit quipped recently, and their legal fees are a business expense before tax, not
after tax as a personal expense. Obfuscation cloaks the bandit. Their deck is stacked. Ethical
compasses are reduced to spinning by legal departments that can pursue irrationally longer than
the individual can remain solvent. The enormous pile of legal loopholes surrounding the Volkcer
rule (he summarizes and states in one concise sentence) do need to get removed. Banks are eager
to step around taking away their free-candy from holding our wallets deep in their risk appetites.
As we have shown, the banks really have not understood or abused their balance sheet position3
.
Canadian Banks Exhibit 1(Goetze 2010): The Four Ways of the Net Worth, N(δ), N(now), andN(then)
Canadian Bank
Report (Year-end
2008)
Balance Sheet
($000,000)
Modal Geometry
Net Worth R P Modality N(δ) N(now) N(then) e-factor
Bank of Montreal 16,158 416,081 399,892 1.040 108,847 49,278 131,058 1.2
Bank of Nova Scotia 18,782 506,458 488,843 1.036 99,346 59,877 159,246 1.6
Canadian Imperial Bank 11,200 352,866 342,730 1.030 86,294 41,604 110,649 1.3
Laurentian Bank 873 19,752 18,685 1.057 3,966 2,359 6,275 1.6
National Bank of Canada 4,735 129,162 124,597 1.037 48,461 15,281 40,640 0.8
Royal Bank of Canada 28,095 715,324 695,754 1.028 185,431 94,231 249,949 1.3
Toronto-Dominion Bank 29,799 546,984 533,415 1.025 156,215 71,937 190,815 1.2
Total 109,642 2,686,627 2,603,928 1.032 688,560 334,567 888,633 1.3
All of these banks, except for the size of the accounts in ($000,000), are theoretically the same as
regards that is, the Debt Structure Ratio (R/P) which is about R/P=1.030 in each case.
US Banks Exhibit 1(Goetze 2010): The four ways of the Net Worth, N(δ), N(now), and N(then)
US Banks are Special
(Year-end 2008)
Balance Sheet
($000,000)
Modal Geometry
Net Worth R P Modality N(δ) N(now) N(then) e-factor
Bank of America 177,052 1,534,200 1,640,891 0.935 315,748 190,069 504,345 1.6
Citigroup Inc. 141,630 1,679,957 1,796,840 0.935 283,890 208,130 552,270 1.9
JP Morgan Chase 107,211 1,840,412 2.008,168 0.916 368,382 238,074 630,867 1.7
Wells Fargo & Co. 99,084 1,132,713 1,210,555 0.936 202,204 140,424 372,613 1.8
Total 524,977 6,187,282 6,656,454 0.930 1,169,224 776,697 2,060,095 1.8
From the table, we see that the modality (0.930) of these four large US Banks at the end of 2008
is quite different from the modality of the Canadian Banks (1.030), although that has not been
the case in the past when all the banks exhibited a modality slightly above one, meaning that
“they were owed” (R) more than “what they owed” (P). Moreover, the e-factor of the US banks
is 1.8 and nearly 50% above the e-factor of the comparably large Canadian banks.
3
E. Goetze, Proscription to Bankers Hegemony, March 2010.

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What got us into their mess, taking our wealth along for their ride into these dark woods of their
creation, is not the same thinking that will get us out. Mark Carney must know banks have
departed far from empirically sound models. Rote political-economics need to be set aside. As
AllianceBernstein’s Peter Kraus commented on his -14% return after abysmal three- and five-
year performance records, “Put simply, the fundamental rules of prudent long-term investing
aren’t working.” We know that is so, as shown in our new theory. The A-B board still supports
his further two year contract. Pervasive paradigm shift is needed not the “who knew” excuse of,
cognitive dissonance — the intellectual crisis that occurs when a failed belief system or philosophy is
confronted with proof of its implausibility is reduced by justifying, blaming, and denying.
Laissez-faire freshly raised, from the crypt, a 350 year old zombie, to exploit current policy
affairs debate of the past 40 years. Plausible deniability, obfuscations and incrementalism seek
unfettered exploitations in dysfunctional partisanship. European Financial Stability Facility
(EFSF) and banking consequences are fresh in on background of Senate and Congress failure;
while, corporate owned parks and “public” malls are (were) being occupied in just protest. Even
Harvard students staged walked-out of economics classes they lambasted in open letter as,
“espous[ing] a specific – and limited – view of economics that we believe perpetuates problematic and
inefficient systems of economic inequality in our society today.”
It is widely perceived if not well known where responsibility for inept political economics lies.
Firms earnings are growing while finance industry dysfunctions. Trust in financial professionals
is eroded by moral compass abandoned. The financial industry has tithed society with their
irresponsible 13% losses by incentivising shedding the prudence of history. The ethos of
deregulation wrought this disaster as much as debt financed tax cuts in fiscal good times where
2/3 of public debt arose. Conservatives values depend on whose pocket it suits.
Our reasons for having any equity in our portfolios are clear, concise and consistent. The equities
we hold are “likeables” tending to gain 67% of the time. We do not make stock prices but can
reasonably respond to stock price tendencies, by our knowing the price of risk, the downside, and
buying and holding accordingly. That is new fundamentals from theory we have put into policy
obtaining 29% IRR average. Know What You Have. Have What You Know
Our view is risk averse. Of course we require a fee for doing that. Mail us for our help.
Ernst and Hans Goetze,
Architypes Inc and StockTakers Limited
Head Office
76 Midridge Close SE
Calgary, AB
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