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Are Banks Actually Evil, Or Does It Just Seem That Way?

Over the last fifteen years, America's biggest banks have amassed a record of exploiting their customers in order to boost the bottom line. This presentation walks viewers through why and how this was allowed to occur.

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Are Banks Actually Evil, Or Does It Just Seem That Way?

  1. Are Banks Actually Evil, Or Does It Just Seem That Way?
  2. Do America’s biggest banks intentionally exploit customers, or have they just gotten a bad rap from the financial crisis?
  3. That’s the question I’m going to answer for you today.
  4. But before doing so, it’s important to make one thing clear...
  5. I’m referring only to the nation’s three biggest banks: JPMorgan Chase, Bank of America, and Citigroup.
  6. Together, these firms control $3.7 trillion in deposits, which equates to a third of all U.S. bank deposits.
  7. JPMorgan 13% B of A 11% Citigroup 8% Other 68% Deposit Share of the Nation’s Three Biggest Banks
  8. And together, these firms are responsible for most of the misdeeds committed by banks over the past decade.
  9. To cite just three examples...
  10. First, for years, they rearranged the timing of customers’ debit card transactions in order to charge more overdraft fees.
  11. Second, they forced credit card customers to submit disputes about inappropriate charges to arbitration firms that were paid by the banks to side against customers.
  12. And third, they routinely submitted forged documents in court proceedings to speed up the foreclosure process on their customers’ homes.
  13. So, here’s the question: Why do these banks do this?
  14. To answer this, we have to travel back in time to the 1920s.
  15. As that decade progressed, it came to the attention of Citigroup’s predecessor, National City Bank, that it had a serious problem on its hands.
  16. It was holding massive loans to Latin American countries which were defaulting at alarming rates.
  17. To avert almost certain bankruptcy, in turn, National City Bank came up with an ingenious plan.
  18. Instead of taking the losses itself, it packaged the loans into bonds, and then sold the bonds to individual investors through its investment banking affiliate, National City Company.
  19. For National City Bank’s executives, it seemed too good to be true.
  20. Until, that is, it wasn’t…
  21. After the ruse came to light during 1933 Congressional hearings, Congress passed the Glass-Steagall Act, which forbade the comingling of investment and commercial banking operations.
  22. By doing so, Congress hoped to stop banks from taking advantage of customers.
  23. And, importantly, the act also prohibited traditional banks from proprietary trading, whereby banks use customer deposits to make risky bets on stocks, bonds, currencies, commodities, and derivatives.
  24. Over the next 66 years,,Glass-Steagall worked pretty much as designed.
  25. This isn’t to say that nothing went wrong between 1933 and 1999...
  26. Because things most certainly did.
  27. Thousands of banks failed in the S&L crisis of the 1980s as well as during a downturn in the commercial real estate market in the early 1990s.
  28. And there was the ever-present Wall Street scandal.
  29. The most notable of which was the insider trading ring that ensnared junk- bond pioneer Michael Milken and led to the downfall of Drexel Burnham Lambert, the 55-year-old investment bank that employed him.
  30. But the scandals during this period were different from those of the past because we didn’t see retail banks exploiting their own customers to the degree that, say, National City Bank did in the 1920s.
  31. Or to the degree we’ve seen over the past 15 years.
  32. So, what’s changed?
  33. Why have America’s biggest banks reverted their old mischievous ways?
  34. The answer to this will seem obvious, but there’s more to it than meets the eye.
  35. Our story picks back up with the Gramm-Leach-Blilely Act of 1999, which repealed what remained of Glass-Steagall.
  36. By doing so, Congress once again opened the door for traditional banks to operate trading operations akin to those at highly leveraged hedge funds.
  37. Moreover, because trading proved to be so profitable, the executives in charge of it moved up the ranks at the biggest banks.
  38. While it seems preposterous in hindsight, Citigroup’s former CEO, Vikram Pandit, was previously a hedge fund manager.
  39. And the current heir apparent at Bank of America, Tom Montag, once ran the trading operations at Goldman Sachs -- which, it’s worth pointing out, is itself now run by a former trader as opposed to an investment banker.
  40. As traders gained power, in turn, they paved the way for the take-no- prisoners ethos associated with trading to contaminate their institutions’ retail banking operations.
  41. According to many first-hand accounts, it changed how bank executives perceive their duty to customers.
  42. According to Goldman Sachs’ CEO Lloyd Blankfein:
  43. "We didn't have the word 'client' or 'customer' [when I was a trader]. We had counterparties -- and that's because we didn't know how to spell the word 'adversary.'"
  44. And here’s Richard Marin, the former head of Bear Stearns' asset management division, touching on the same topic:
  45. "When you become arrogant, in a trading sense, you begin to think that everybody's a counterparty, not a customer, not a client ... [and] as a counterparty, you're allowed to rip their face off."
  46. Indeed, this is why Charlie Munger argues vociferously against allowing retail banks to run trading operations:
  47. “We do not need [banks] doing this vast array of activities with this miasma of super profits and a lot of gross immorality in terms of the way that they deal with the customers. The derivative traders have tended to rook their own customers. That's not a pretty sight. It's a dirty business.”
  48. In other words, the reason the nation’s biggest banks have once again gotten comfortable exploiting their customers is because their executives have adopted a trading mindset.
  49. And the reason they’ve been able to adopt a trading mindset stems from the 1999 repeal of the Glass-Steagall Act.
  50. This isn’t to say that Glass-Steagall should necessarily be reinstituted in its entirety, as many of its provisions were indeed outdated.
  51. It is to say, however, that as long as we allow the nation’s biggest retail banks to run high-risk trading operations, then their millions of customers should expect to be treated as counterparties as opposed to clients.
  52. While banks do bad things, that doesn’t mean they always make bad investments. To discover one way to profit from a massive trend in the bank industry, click here to download a free report from The Motley Fool.

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Over the last fifteen years, America's biggest banks have amassed a record of exploiting their customers in order to boost the bottom line. This presentation walks viewers through why and how this was allowed to occur.

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