Business Models: Banksters Still in Denial

picture-91.thumbnail.pngThere’s a lot of bad reporting on the auto announcement from yesterday, most focusing mistakenly (IMO) on Wagoner’s ouster and not the plan to move forward and/or the double standard with banksters.

But the worst take, IMO, is that one that claims the auto industry was being forced to adapt to a new business model but the banksters’ business model was still fundamentally sound. 

Here’s one of Josh’s readers (a view Josh challenges):

One reader writes: "One easy answer to this question is that the banks have a viable business model. They simply need to stop taking so much risk, and they’ll be immensely profitable given the current interests rates they’re borrowing at."

And here’s a bankster quoted in a WaPo article.

Bert Ely, a banking industry analyst in Alexandria, said the administration will likely exercise its powers in only a limited number of a cases, if at all. Even banks that have received repeated injections of government funds, analysts said, appear to be making some progress, and more importantly, are showing more willingness to respond to new economic realities than the automakers were. 

"There is a key difference between GM and Chrysler and the large banks going forward," Ely said. "Those two companies have major questions about their [future] profitability. Whereas the large banks by and large have good business models going forward. The problem is that they’ve got to pay for the sins of the past." 

Now, I find these takes infuriating for two reasons. 

First, it’s not clear these people know WTF they’re talking about, in terms of business model. Are they suggesting that the Big 2.5 focus on larger cars was the failed business model, in spite of the fact that Honda and Toyota–the favorite poster child for "successful" business model–have now embraced the love of big (and in spite of the fact that Obama’s own auto task force demonstrates that middle class buyers favor big)? Or are they suggesting that GM–which has aggressively and successfully expanded into growing markets like China and India–is failing because they’re successful overseas? Or are they saying that GM and Chrysler have failed because they have chosen to stay home and do business in a climate that–because they’re competing against cars assembled with subsidized health care and pensions–penalize them for remaining in their home country? Or are they saying Chrysler failed because it got looted and discarded by Daimler?

It’s easy to say GM and Chrysler have failed–and they definitely made some crappy decisions, particularly in the 1990s (though some of those were perfectly logical, from a business perspective, given the reality of the market and the cost structure of these companies). But these complaints display zero awareness of what the business model in the auto industry really is, or how GM and Ford had already started making changes when events of the last year devastated them.

And then there’s the claim, with little reflection, that the banking industry has a successful model.

Now, frankly, I think there are a lot of market pressures that brought us to the collapse that have gotten little attention. For example, banking regulators in the US have embraced deregulation not just because of Phil Gramm’s ideology, but also because the US’ leadership position in finance has been under threat internationally and we’ve deregulated to remain competitive internationally. And while Fannie and Freddie did stupid things, they did them out of competitive pressure. I suspect the same is true of the brokerage houses. The big publicly held finance companies have to engage in the latest scam or lose business and margins to their competitors. But that deregulation and those scams are precisely the things that brought down the finance industry.

And then there are the presumptions such claims make–such as Josh’s reader, who assumes banks will continue to have access to virtually free money. Many of the assumptions the banksters make when they claim they’ve got a viable business model assume the the federal government will continue to coddle them–and will continue to have the ability to. That may not be the case.

One of the better takes on yesterday’s auto announcement pointed out that the banksters are denial largely because the Obama Administration is, too.

First, the Obama Administration suffers from cognitive regulatory capture. Former denizens of Wall Street are so ensconced in the Administration that they cannot but see events from a ‘Wall Street perspective.’ In effect, they operate like a horse with blinders. Their view takes as axiomatic the importance and needed continued existence of the big banks that they dismiss alternative workout solutions out of hand.

I argued last week that the banksters need someone like Steven Rattner who doesn’t know shit about their industry to assess their business model. 

But as this graphic makes clear (the graphic for 2009 is above, but click through to see how this list has changed over the last decade–you will be fascinated) US banks have lost a great deal of their dominant position (h/t Tom Ricks). At least by market capitalization–one of the measures people focus on to claim GM a failure–US banks’ business model is failing just as spectacularly as is GM. I’m not convinced that means we ought to do more deregulation. But it is high time we stop assuming the banks are healthy but for a few crummy decisions. 

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50 replies
  1. damagedone says:

    If the banks were forced to clean-up their acts, I doubt that their strategic models would look so profitable. From enabling tax haven scams and shams to high interest rates on credit cards to trickly penalty provisions to predatory lending there is a lot that they have done. Perhaps at least some this will get cleaned up.

    http://news.bbc.co.uk/2/hi/business/7974190.stm

  2. BooRadley says:

    The big publicly held finance companies have to engage in the latest scam or lose business and margins to their competitors. But that deregulation and those scams are precisely the things that brought down the finance industry.

    Bullseye, as per usual.

    Thanks ew.

    Digg is open.

  3. klynn says:

    EW,

    Great post. I am EPU’d over at the Lake in the Morning Swim as I hit the supply chain issue, which ties in here.

    The auto industry supply chain has a 98% on time and quality rating in terms of effectiveness. Many argue the supply chain needs a better business model, one that allows for more tailoring of car design and features and that the supplychain will be broken down into large assembly and micro-custom assembly on Tier I and Tier II. But again, if you look at the stats on the auto supply chain, the fulfillment record is the best of any industry and looked to by other industries globally.

    The banks can go take a flying leap in terms of trying to state their model is better…Oh yeah, they did that and we are throwing a bigger safety net to catch them then we are to the auto industry. I think the truth is in the dollars as far as better model. So, the auto industry trumps.

    • klynn says:

      Here’s a reference from the supply chain in the auto industry.

      So, what does the banking industry have to show as far as excellence in fulfillment?

      Crickets…

  4. pdaly says:

    The double standard is infuriating.

    OT: Has Vaster Books sent a copy of Anatomy of Deceit to actor Sean Penn and to the writers of the Valerie Plame movie they are shooting in DC?
    Seems they (Sean Penn and the writers) have read (and memorized?) David Corn’s book Hubris already. See David Corn’s post.

    • Leen says:

      The double standard will take Obama down in 2012. If GM or any other U.S. car maker is allowed to go down by the Obama administration…the UAW will pave the way for Obama to go down in 2012. I am sure they will give Obama a guarantee on that.

  5. selise says:

    For example, banking regulators in the US have embraced deregulation not just because of Phil Gramm’s ideology, but also because the US’ leadership position in finance has been under threat internationally and we’ve deregulated to remain competitive internationally.

    phil gramm is by all accounts an asshole, but i seriously do not get why you call it “phil gramm’s ideology” when it was also rubin’s, greenspan’s and summers’. as far as i can tell, wendy gramm and the clinton administration were far more important to things like the cfma 2000 and the final repeal of glass-steagall than phil gramm.

    edit it case it wasn’t clear: the reason i think it’s important not to inaccurately blame phil gramm for the financial services industry deregulation of the ’90s is because of this (which i completely agree with):

    …the banksters are denial largely because the Obama Administration is, too.

    the obama administration’s economic team is lead by people who, during the ’90’s, were intimately involved in the push for deregulation. and now, they show every sign of being committed to proving they were right to do so.

    • emptywheel says:

      selise

      My reference to Gramm is a reference to a shorthand people use to disavow any involvement. Including those who disavow Clinton’s involvement–so your point is rather besides the point (thta is, your point only argues for the point I’m making with it).

      Though I’d also say that so long as we’re still blaming the Gramms and Rubin and the CLintons and Summers, we’re ignoring the question of what role finance should have in this country and how we let it refuse to compete internationally. The point about competitiveness is a real one. But it also demands a rethinking of the structure of our economy. Now I know that that’s a structure largely championed by Rubin, but until we meet the Rubins of this world on their ground and point out the consequences of those, then we’re not going to make headway.

      • selise says:

        not besides the point at all – because this is a pro-D site. that is why using gramm – the most prominent R involved – instead of for example rubin, as shorthand feeds a confirmation bias that unfortunately serves to distract from people’s (not necessarily yours) understanding of rubin’s and summers’ role. and that does not advance the goals which you, rightly imo, espouse: meeting them on their own ground and a rethinking of the structure our of economy.

  6. PJEvans says:

    The newspaper story I was looking at this morning talks about fixing the auto industry with concession from workers, suppliers, and others. Nothing about management concessions, and nobody is asking for these from banks and @#$%^&*(s like AIG.

    • Rayne says:

      There will be nothing left to concede on the labor/suppliers’ side of the fence. I can tell you they are now preparing for the worst. Nothing quite like watching a president of a manufacturing firm prepare a plan to shut down his facility in an orderly fashion and then can himself.

      We are now down to days and minutes before the silent implosion of Tier 1 through Tier 3, which is far bigger than the Big Three put together.

      • klynn says:

        Thank you! I have been commenting on that over at the Lake in the Morning Swim. There are some interesting links over there.

        Maybe I should carry them over here.

        • Rayne says:

          Agreed, selise has done fine work.

          But the labeling of political ideology is open to interpretation; as many of my progressive friends say, “Bill Clinton was the finest moderate Republican president we’ve had.” I think you could safely apply the label to many of his peeps.

          And not unlike the Iran Contra hydra that won’t die in spite of losing many heads, those moderate Clintonites continue to pop up like whack-a-moles in the most inconvenient places.

      • PJEvans says:

        Having been through some of this stuff in previous downturns, I know about the suppliers and the suppliers-to-suppliers and how much damage one major business can do to a region when it closes down. There used to be aerospace and auto manufacturing in California, as in ‘more than one location of each, building stuff’.

        Best symbol of this: the former GM plant in Van Nuys and the former Lockheed plant in Burbank are now shopping centers.

        • klynn says:

          I guess I am now numb to the language “previous downturns” and regional impact and recovery. This is not your Mothers’, Fathers’, Grandparents or Great Grandparents’ kind of “previous downturns”. This is bigger. Thus, it is not a time to afford the depth of the supply chain damage.

          This time, there will be no conversions of former plants. Unless they become giant homeless shelters.

          • ShotoJamf says:

            But there could be, if our elected officials had any F-n brains. So many possibilities that it boggles my mind. Then again, it’s much more important to throw more Trillions down the bank black hole.

            Can the people in Washington be any more stupid and/or corrupt? (That was sort of a rhetorical question.)

            • klynn says:

              Yes, there could be conversions, if all was done effectively. But again, the point is, this is not an economic crisis like “previous downturns.” It is far worse. And requires short term preservation of the auto supply chain.

    • klynn says:

      There are over a million in Ohio alone that are part of the supply chain (Tier I and II). More if you start hitting Tier III. That is a large number, just in Ohio, to ask to make concessions. As I noted over at the Lake, many have been making concessions since November. Asking for more, will flop big time.

      The banksters are not going to get very far with talk of the auto industry having a bad business model and the banking industry having a better business model…Maybe from a criminal perspective the banking/finance industry would be a better business model.

      Although, the model is bad for the majority, I guess for the chosen few, the bank model works like a charm.

      • MarkH says:

        I guess for the chosen few, the bank model works like a charm.

        Maybe the so-called shadow banking system is even better for the elite. If so many of the biggest banks in the world lost that much capital, then where did it go? Shadow banks. Will the G-20 do anything wrt that or are the powerful who don’t want their money in the visible banks for fear they’ll be nationalized or whatever?

        This is a very strange situation.

  7. BayStateLibrul says:

    The term “Business Model” is as useless as the word “transparency”
    Vague, trite and overused.
    The best business model, I’ve seen is embodied in our own Bain Capitalist,
    Mitt Romney….
    His business model is “becoming Prez in 2012″

  8. bell says:

    those 2 quotes are from people that don’t know WTF they are talking about.. business model my ass.. wall st is still considered royalty which is really too bad, as they have been screwing people for a very long time, while having the politicians in their back pocket as well..

    just a matter of time before the banking industry suffers the same fate as the auto industry.. politicians still need to exercise caution when confronting wall st, for fear of their own short term survival i suppose..

  9. LabDancer says:

    Bearing in mind the FT graph only tracks the 20 largest, this is interesting:

    Of the 5 which lost the LEAST in market cap over the 10 years considered:

    2 are Aussie
    2 are Canuck
    1 is Swiss

    Of THOSE 5 – all but the Swiss show up on the list for the first time [!] in 2009.

    The lessons range from the ridiculous:

    that the dramatic ’success’ of the 4 Aussie & Canuck banks is entirely relative,

    to the sublime [distinct from sub-prime]:

    they might share more than a strongly parallel heritage: a central banking system with a national body exercising industry oversight through regulations established under legislation, all in pursuit of a goal, or set of goals, in stark contrast with “Greed is good”:

    Australia

    http://www.rba.gov.au/AboutTheRBA/His…..e_rba.html

    The statutory “charter” of the Reserve Bank Board of Australia — per section 10(2} of the Reserve Bank Act of the Aus parliament:

    “duty of the Reserve Bank Board … to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:

    (a) the stability of the currency of Australia;
    (b) the maintenance of full employment in Australia; and
    (c) the economic prosperity and welfare of the people of Australia.”

    Canada

    en.wikipedia.org/wiki/Bank_of_Canada#Roles_and_Responsibilities

    “The principal role of the Bank of Canada, as defined in the Bank of Canada Act, is

    “to promote the economic and financial welfare of Canada.”

    The bank’s current mission statement is: ‘The Bank of Canada’s responsibilities focus on the goals of low and stable inflation, a safe and secure currency, financial stability, and the efficient management of government funds and public debt.’”

    Probably just a coincidence.

    • emptywheel says:

      One thing that I think is going on is that other countries have a greater proportion of their economy in grey or black markets, and so those banks are catering to the unique needs of such markets more than we are or can (with teh FCPA). That’s a shitload of business in markets that are largely still growing.

  10. TomWells says:

    Amen, emptywheel. Excellent analysis.

    This, about Barack Obama, is absolutely right: They suffer from “cognitive regulatory capture.”

    Obama places this ideology over a pragmatic solution.

    • ShotoJamf says:

      He’s becoming a smoother-talking form of Bush in my mind – sort of Bush Lite, if you will. Yes, I’m glad Bush is gone, but I really thought we’d see a sharp change in policies across the board, and it’s just not happening. In my mind, the worst of the decisions so far is the trillions being shoveled into the “financial services” sector. It’s a one-shot deal and if/when it fails, we’re going to be in a world of hurt.

      I’ve written my senators, the speaker, and the majority leader to demand REAL, full-blown hearings on every aspect of the so-called “bailout”. I’m urging others to do the same. They need to be pressured.

  11. ShotoJamf says:

    “…it’s not clear these people know WTF they’re talking about, in terms of business model…”

    Hey EW: You don’t have to sugar-coat it for us. *g*

  12. foothillsmike says:

    I guess having a business plan that relies on Cayman and Swiss etc interests is the mark of a great business plan.

    • ShotoJamf says:

      I am of the very strong opinion that money gets shoveled into offshore accounts by large corporations for the benefit of our elected officials, thus circumventing US campaign financing laws. No, I’m not the conspiracy theorist type. I just think it’s smart to assume this is happening and to proceed on that basis. Put the burden of proof back onto those who twiddle the levers of power in DC.

      Go ahead, Twiddlers. Prove I’m wrong.

    • MarkH says:

      I guess having a business plan that relies on Cayman and Swiss etc interests is the mark of a great business plan.

      Okay, banks capitalization drops like a rock. UBS accounts for tax evasion discovered. Discussion of shadow banking rises. Discussion of tax havens in G-20 and suddenly we’re in a new world.

      Will our new smaller banks leave our economy in the tank for years, decades? Will shadow bankers (using secret accounts in the Caymans, Gurnsey and elsewhere) continue loaning to American businesses, so it all works out?

      What is this brave new world? How does it work? Who’s in charge?

      And, for government, will tax revenues shrivel up?

  13. ThingsComeUndone says:

    in spite of the fact that Honda and Toyota–the favorite poster child for “successful” business model–have now embraced the love of big

    I thought Honda and Toyota were losing money and their full sized trucks?

  14. ThingsComeUndone says:

    And then there’s the claim, with little reflection, that the banking industry has a successful model.

    Ponzai schemes don’t work once the rubes catch on. GM actually makes a product they can make a better one banks don’t have a product that generates the profits they used to make that is not a Ponzai scheme.
    I am not even sure they have a legal business model that works in this economy. After all just how do the banks plan to pay us back?

    • foothillsmike says:

      After all just how do the banks plan to pay us back?

      Why by raising credit card interest rates to usury x 2 of course. Now there is a business model.

  15. OrganicGeorge says:

    The banks are still holding their pistols to their foreheads, threatening to bring down the financial system if they don’t get their way. The auto companies have no such leverage.

    There is a once in a century battle being waged by the Masters of the Universe to retain control of the world, over the interest of sovereign nations. It’s a epic battle that will fill history books in the near future.

    We should be so lucky if it was just a double standard issue.

  16. acquarius74 says:

    Here is the link to an article 10/10/2008 at the AutoChannel webside which, for me, tells me all I need to know about Warren Buffett.

    “HONG KONG Oct. 10, 2008 – According to Chris Oliver, writing for MarketWatch, Warren Buffett’s recent purchase of a $232 million stake in China’s BYD Co. represents an unusual move for the value investor who professes to favor companies with simple business models. Based in the southern Chinese city of Shenzhen, BYD Co. has risen from obscurity in a few short years to become the world’s biggest producer of rechargeable batteries for cellular handsets. Another business line makes handsets for companies such as Nokia Corp. (NOK), while another makes gasoline-powered compact sedans and subcompacts, in addition to automobile parts.

    [my bold]

    Last October we were in shock and uproar about Paulson’s stick-em-up note to the Senate, leaks about threatened martial law by Paulson in that closed-door session of the House, etc., so news about Buffett’s investment in the Chinese BYD Co. (Build Your Dreams) went unnoticed. (at least by me). I don’t think we had yet heard of the Big 3’s money trouble back then.

    I googled: electric cars, China, Walmart and got many menu items about this. Bottom line is that these Chinese electric cars, made in Mexico, are expected to be for sale in Walmart and Costco in US in 2010 for about $5,500. BYD’s cars are among these. (GM’s electric car is expected someday to sell for about $25,500.)

    So, GM and UAW workers, how’s that for support from a ‘loyal American’???

    • MarkH says:

      Last October we were in shock and uproar about Paulson’s stick-em-up note to the Senate, leaks about threatened martial law by Paulson in that closed-door session of the House, etc., so news about Buffett’s investment in the Chinese BYD Co. (Build Your Dreams) went unnoticed. (at least by me). I don’t think we had yet heard of the Big 3’s money trouble back then.

      I googled: electric cars, China, Walmart and got many menu items about this. Bottom line is that these Chinese electric cars, made in Mexico, are expected to be for sale in Walmart and Costco in US in 2010 for about $5,500. BYD’s cars are among these. (GM’s electric car is expected someday to sell for about $25,500.)

      So, GM and UAW workers, how’s that for support from a ‘loyal American’???

      Buffet also had a significant ownership position in the asset ratings agency Moody’s. You know, the one that called every CDO “AAA” quality.

      Shall we all learn Mandarin now?

      At least the cheap goods we’ve been buying from China to keep going with sinking U.S. wages can now be backed up by cheap cars. I wonder, do the Chinese also make cheap houses they can ship over here for about $25,000?

      How much can we buy from them if our economy continues sinking like a rock? Maybe we need to get our finances in order and stop selling them bonds. Then they’d have to do something with that cash. Oh, they’d just buy us all.

      Maybe we should produce more goods to export.

      It’s like our dependence on oil and the influence of Arabs with oil money, only about 100 times larger. Just how much money ARE we sending to China (and the rest of E. Asia) every year?

      We can get away from oil. What can we do about cheap goods & labor from the East?

      I guess the American Rich see it coming and are just riding the wave to a brighter future in the lands of the rising sun.

      What is there for us?

      • acquarius74 says:

        I am a child of the Great Depression. Before this era of ruination by the Greedy Banksters is finished, I think we will learn self-reliance in ways which most people younger than I cannot yet imagine. But necessity is the mother of invention, and Americans don’t lie down easy.

        Oh, on those Chinese cars: Think twice before buying one. I presume that the underframe is to be made of steel. Remember, we hurriedly shipped all that steel in the World Trade Centers to China (so it couldn’t be tested for cause of its melting down etc.,) Radioactive??

  17. robspierre says:

    The idea that a good business model could have led banks to where they are is indeed ludicrous. But I’m not ready to be so dismissive when it comes to the shortcomings of domestic auto business and its plans.

    In a lot of ways, GM’s and Chrysler’s business plans seem very similar to that of the banks and insurance companies: focused on paper profits and short-term gains, obsessed with cost-cutting, cost-shifting, and exchange rather than on productive uses of capital, such as development.

    Yes, Japanese makers built high profit-margin big cars and trucks. But they also built lower-profit vehicles as well. They contested the high-profit niche while still developing and selling a full line of vehicles. They even accepted some initial losses on hybrids as a hedge against future demand.

    US makers ONLY built the highest-margin cars. They were thus peculiarly vulnerable to a sudden gas-proce shock and sudden scaling back of demand for size and luxury. Despite early success with its Japanese-styled Saturn organization, GM ran it down and converted it to just another GM badge. Chrysler is worse, throwing out one impractical, showcar-based, V-8 bus after another and basing their claims to engineering excellence first on Mercedes and then on the Hemi, of all things, a dinosaur engine design that was looking back to the 1930s when it came out in the 1950s. Ford, on the other hand, sold a full line of cars throughout this period. Unanticipated market and economic shifts have not hit it as hard and it will probably survive (if the US economy does, that is).

    Ultimately, we need real globalization, not the globalization of corporate power and local isolation of labor that we have seen to date. I am absolutely in favor of free trade–but with free labor and protection against monopoly and oligarchy. Let the best working conditions and wages spread from country to country, not just the products. And let the profits spread out evenly as well.

  18. goldstandard says:

    A good friend of mine has a client who is a CPA in a very affluent area of New Jersey. The CPA told him that he has several highly compensated Wall Street clients who have lost their jobs, have big prime-rated mortgages and have stopped making their mortgage payments. He said that several clients have stopped making payments for over three months and have still not been contacted by the mortgage servicer about it. This means that deliquency and default data are not yet reflecting the true scope of the problem.

    This article does a great job explaining what’s coming next:

    http://goldversuspaper.blogspo…..arted.html

    Bottom-callers in housing have not even begun to factor in the effects unemployment are having on the ability of prime borrowers to make mortgage payments. The size of the prime mortgage market is nearly 10x the size of the subprime and Alt-A mortgage market.

  19. MrChip says:

    Quoting “One of the better takes on yesterday’s auto announcement pointed out that the banksters are denial largely because the Obama Administration is, too.

    First, the Obama Administration suffers from cognitive regulatory capture. Former denizens of Wall Street are so ensconced in the Administration that they cannot but see events from a ‘Wall Street perspective.’ In effect, they operate like a horse with blinders. Their view takes as axiomatic the importance and needed continued existence of the big banks that they dismiss alternative workout solutions out of hand.”

    I’d say that is the ‘best’ case scenario you can ‘hope’ for. I believe hope and change were just slogans for his ‘08 campaign now. He’s not ‘blinded’ there is no way he can’t tell the difference. Blaming this on his ‘treasury dept.’ will hold water the first few months I guess…

  20. MarkH says:

    emptywheel wrote:

    click through to see how this list has changed over the last decade–you will be fascinated) US banks have lost a great deal of their dominant position (h/t Tom Ricks). At least by market capitalization–one of the measures people focus on to claim GM a failure–US banks’ business model is failing just as spectacularly as is GM. I’m not convinced that means we ought to do more deregulation. But it is high time we stop assuming the banks are healthy but for a few crummy decisions.

    The last click from 2008 to 2009 is a shocker.

    We have been royally screwed by whomever has been benefitting from all this. Cui bono? No, not you Taleban or Al Qaeda. Put your hands down.

  21. acquarius74 says:

    Tonight on BBC there was a warning about a new computer worm that has already spread and infected millions of computers over the world. They expect a massive assault tomorrow. Apparently this is NOT an April’s Fool joke.

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