Stock talk for the main street investor.

Utility Banks May Be The Best Solution

Last week I attended a talk by Andrew Cecere, CFA of US Bankcorp. He was a straightforward man, who I found to be very impressive.  He spoke about how US Bank had avoided many problems other banks had in the financial crisis by keeping their structure and funding simple. He also spoke about how the worst thing that could happen to the banking industry is over regulation, which would lead to a utility style financial system. This regulation would kill innovation at banks.

As an engineer, by training, and having worked at 3M, an “innovative” company I find talk of innovation by bankers a vexing topic. Innovation in financial services generally means complexity, finding ways to bend the rules and increased leverage. No matter who you think may be at fault for the credit crisis I would argue that it would not be possible without bank innovation. Credit default swaps, option ARMs, balloon mortgages, over the counter derivatives among other products are the innovations banks have made in the last 20 years. And these products are also what brought the system to it’s knees. I challenge anyone to find an innovative and new product created in the past 20 years that has been a positive for the market.

My argument is not that these products are inherently bad, although they may be. I’m simply trying to say that innovation at banks is bad. It only leads to disaster because it allows for a false sense of security while increasing underlying risk. Holding a CDS against a bond gives the sense of “insurance”, but there’s not assets backing that “insurance”, so therefore, IT”S NOT INSURANCE.

I learned a long time ago a good innovation makes things more simple than they were before. Take any product Apple makes as an example of good innovation and making things more simple than they had been before. None of the innovative products I mentioned above do anything to make the banking system more simple and therefore are inherently bad innovations.

Banks as utilities may not be such a bad idea. Innovation at banks has proven to do nothing but cause problems.

Disclosure: The Mayor does not have a position in any financial institutions.

Comments are closed.