Somebody had to write a book defending big banks. For years now, they have been the subject of nonstop attacks by Congress, regulators, state attorneys general, irate mortgage holders, and the press. So veteran banking analyst Richard X. Bove has stepped up to write Guardians of Prosperity: Why America Needs Big Banks,1 which demands an end to our reflexive ill will toward the likes of JPMorgan Chase, Wells Fargo, and Goldman Sachs.
Flying in the face of conventional opinion, Bove makes many worthy points. First, we need healthy banks. When banks were not healthy, during the financial crisis, the country hit the skids and people were angry. Second, he says, “it is critical to reestablish balance” in our attitudes toward banks. While banks were not blameless for the financial crisis, they were hardly the only culprits, nor was every individual bank a culprit. Third, many of the punitive regulations adopted against banks will punish consumers as much as they will hinder banks. Thus, restrictions on credit and debit card fees have prompted banks to end free checking. At very least, we should pay greater attention to the effects of such rules.
Another highly controversial point is that the size of big banks, often cited as a threat, is actually an advantage, or so the author asserts. Smaller and undiversified lenders (such as savings and loans) disappeared for a reason: they were one-trick ponies. We should not be so quick to “shrink” the behemoths whose diversity confers a strength.
And finally, Bove claims that America’s obsession with preventing future bailouts is misplaced. America’s signature bank bailout, the TARP (Troubled Asset Relief Program), will cost the taxpayers nothing and was successful in getting the financial sector back on its feet. “It is really difficult to believe,” Bove writes with palpable astonishment, “that this government would have a policy to get rid of struggling financial institutions without trying to help them.”
To illustrate the singularity of our preoccupation with banks, Bove notes the ferocity with which three New York State attorney generals attacked the financial industry. In contrast, “Michigan never sued the auto industry … Texas does not sue the oil industry. Florida does not sue tourists. California does not sue the entertainment industry. Iowa does not sue its farmers.”
In such passages, Bove is reminding post-recession America that banks are not an “Other” that detracts from society at large, much less are they “greedy monsters that suck the life out of our system.” Nor are bank profits “bad” any more than Google’s profits, or oil companies’, are bad. Although banks need to be vigorously regulated, and although they have done many things that warrant being sued, in general more prosperous banks mean more prosperous workers and customers, as well as flusher tax bases. In short, we want banks to succeed.
I wish Bove had stopped here. Or rather, I wish his tone and much of his argument were not just as extremist as that of the zealots he objects to on the other side. It is not the purpose of this review to debate the manifold rules in the Dodd-Frank reform law. Bove objects to most of them, including the newly finished Volcker Rule banning speculative trading by banks. Reasonable people will differ on these rules.
I do object to Bove’s refusal to admit to shades of gray. When you think about it, banking regulations are all about shades of gray. We want banks to issue some loans but not too many. We want them to underwrite (some) risks—but also to exercise prudence. In protesting post-crash regulations, Bove says with a rhetorical flourish, “In sum, banks—not the government—should determine where they want their money to go.” Yeah, well, we tried that. Indeed, Bove elsewhere admits that, before the crash, regulators screwed up by not enforcing tighter underwriting standards. So why object when the rules are tightened now?
He seems to genuinely lament that the government is “herding” banks into plain vanilla mortgages, away from more exotic varieties including negative amortization loans (those risk-on-steroids mortgages in which the outstanding debt went up each year). Is he kidding? We want the government to prevent such loans. He tries to elicit liberal sympathies by pointing out that tougher underwriting standards will make it harder for poorer people, including minorities, to get mortgages. But such restrictions are necessary if America is to avoid another bubble. If we learned anything from the mortgage debacle, it should have been that loaning money to people who cannot pay it back is neither in their interest nor in society’s.
And Bove objects, again and again, to new rules that require banks to hold more capital, on the grounds that such requirements reduce the sum total of loans. But this is a truism. The very point of requiring banks to hold, rather than lend out, surplus capital is to provide a cushion against loss. The trick is to find some reasonable middle ground, so that banks will operate with a margin of safety and yet not be forced to hold too much surplus.
Bove rightly points out that a real problem with tightening bank rules is that more loans will migrate to unregulated “shadow banks.” He also observes that the global imbalance that precipitated the crash—Americans buying stuff from China which recycled the money by investing in risky U.S. loans—has yet to be fixed. However, he is too didactic in referring to this imbalance as “the” singular cause of the crash. While he admits, in a general way, that banks were not blameless, he writes off their terrible loan behavior as simply the result of too much foreign cash seeking a home … somewhere.
Bove refers to the “hysterical” tone of bank critics, and I do not disagree. However, Bove himself is not exactly a voice of calm. He calls regulation against dicey subprime-type loans “redlining.” He says Congress (by inhibiting the growth of large U.S. banks) is “attempting to support the Chinese takeover of the global financial markets.” He says, “Without being hyperbolic, I see [unelected bank regulators] as reminiscent of the old Soviet five-year plans.”
His book is also filled with straw men. He writes that “a fact you rarely see mentioned” is that taxpayers made a profit on the TARP bank bailouts and other government rescues; actually, while the final scorecard is still being tabulated, this is a point you see mentioned a lot. And the author’s view of regulators is blinded by bizarre conspiracy theories. For instance, Bove claims that Hank Paulson, the treasury secretary, blamed banks for the crisis because he was unwilling to cite the true culprit (global financial imbalances) due to having “reportedly” made his fortune “as a consequence of blending his knowledge of China and investment banking.” In a similar rightwing talk radio vein, the author says that “The broader question is whether [regulators] would have been allowed to do their jobs had they tried.” Who might prevent them—the liberal media? The Chinese? Bove doesn’t say. As his sole example of a regulator being “prevented,” Bove cites former SEC chair Harvey Pitt, who, after he began taking steps against fraud, was removed. “Coincidence?” Bove wonders darkly “Who knows.” By the way, Pitt resigned in 2003. Even Rush Limbaugh comes up with fresher meat.
Beneath the snarky tone, Bove says a lot that needed saying. There is a real need to restore balance in our view of banks, and a good, measured book might have helped restore that balance. Bove could have written that book, but didn’t.
Roger Lowenstein is author of The End of Wall Street. He is writing a book on the origins of the Federal Reserve.
Richard X. Bove