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We spoke to author and NYT journalist David Enrich about the U.S. financial system.
We spoke with David Enrich, New York Times business investigations editor and author of Dark Towers: Deutsche Bank, Donald Trump, and an Epic Trail of Destruction, about the U.S. financial system. In Dark Towers, Enrich catalogs the many scandals Deutsche Bank has been involved in -- from interest rate manipulation to Russian money laundering to hidden derivative losses. Deutsche Bank was most recently in the news for a $150M penalty for their dealings with Jeffrey Epstein. We’ve condensed and edited the interview for concision and clarity.
VH: For folks who do not work in finance (or care about finance), what do they need to know about the industry? How do bad actors in the sector, like Deutsche Bank as you described in Dark Towers, affect our lives?
DE: Finance makes the world run. It moves financial resources from people who have surpluses of money to people with deficits of money. For centuries, if not millenia, that’s been a crucial ingredient in having an economy that works well for the greatest number of people. In today’s example, the banks have become quite rotten in a lot of ways. One manifestation during this pandemic-induced economic crisis: the banks have been heavily favoring their longest standing, most lucrative, well connected clients at the expense of smaller companies that desperately need the money but lack the professional connections. It’s a very inefficient distribution of capital. The banks are in the middle and aren’t just functioning like a simple utility. They’re screening things for their own benefit.
VH: What's the right amount of profit for the banks?
DE: I don’t know what the right amount is. I can tell you the wrong amount. It’s probably best measured on return on equity (ROE). Pre-2008 financial crisis, it was common practice to have an ROE of 15-20%, in some cases considerably in excess of that. That’s crazy. That means they’re extracting huge sums from the real economy. To me, a single digit ROE is probably about right.
VH: Individual liability is lacking when banks break laws. What would you want to see change and is there any momentum towards improvement?
DE: No and that’s the single biggest problem in the industry. Senior individuals at banks are almost never held personally accountable for the problems that occur on their watch. A bank CEO should be and is responsible for creating a strong, law-abiding culture. At an institution of 100,000 people, it’s not necessarily their fault if one person commits a crime, but if it’s a pattern of misconduct, it’s insane to not hold senior officials to a high level of accountability. Prosecutors are, unfortunately, often reluctant to bring charges against someone unless they are virtually guaranteed success. But if executives thought there was a real risk of being perp walked out of a building or facing debilitating financial consequences, that'd have a huge deterrent effect.
VH: When you heard that banks were favoring their well-funded clients for Paycheck Protection Program (PPP) funds, were you surprised? [VH Note: Recently, WSJ reported that banks may get $24B from PPP loan fees, in addition to 1% in interest on PPP loans they hold that aren’t forgiven. And the government released some (not all) of the names of recipients for the program. Included were Kanye West and hedge funds.]
DE: I wasn’t surprised, but appalled. It’s standard operating procedure for U.S. banks to prioritize their profits over everything else. The takeaway isn’t that they’re trying to get huge profits from PPP, but their client management is a manifestation of maximizing profits out of the system. They’re set up to offer white glove concierge service for the richest and not really interested in providing top notch services to the rest. And yet, how else do you do it? Do you have the SBA (Small Business Administration), this understaffed and underfunded federal backwater vetting loan applications? That’s not a very good approach either. In theory, banks are a smart way to distribute capital, but they’ve been conditioned to prioritize short term profits.
Thanks David for many of these suggestions!
As a citizen:
The banks are better capitalized than they were 15 years ago, not because they want to be but because they were forced to be. Many banks would like to be less so. David says to watch for banks using this crisis to lobby for relaxed regulations that were imposed on them following 2008, especially when it comes to being able to rely on borrowed money rather than banks’ own.
While David didn’t endorse any particular legislation, he says that Jed Rakoff, a federal judge, has thought that executives should be held to a recklessness law. Currently, if you’re driving recklessly and hit someone and kill them, you get a charge. That same standard could be applied to running a big company, but isn’t.
As an employee:
“Look out for misconduct, report it to superiors,” David says, but it’s understandably difficult to make a difference unless you’re senior at a bank. “If and when they don’t listen or they punish you, go to regulators or journalists and tell them.”
As a consumer:
Consider banking with an institution that has the reputation of a good culture and strong principles. Though that may mean giving something up - with scale, banks can often offer marginally cheaper or higher perk products versus smaller local players.
Read The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives. It dives into why post-2008, “there was not a single executive at a major financial institution in the U.S. who faced criminal charges...coming out of a period with more criminality in the banking system since probably the 1920s,” David says.
As an investor:
Don’t invest in big banks, David says. Find local credit institutions, community banks and alternative lenders.
📚 Book club alert: We’re reading The Fifth Risk by Michael Lewis as the 1st book in our summer book club. Mark your calendar for Sunday, July 26 @ 2 PM ET / 11 AM PT (Zoom link here and here’s the calendar invite). Excited to discuss your thoughts on the book and the role of government broadly with you all. And please feel free to come even if you haven’t had a chance to finish (or read a page of the book).
The World Can’t Take Much More Shale Gas: “As other assets recover from the coronavirus meltdown and even exceed prepandemic highs, natural gas has lagged behind. There is simply too much of it. Stockpiles of the power-generation and heating fuel are bloated world-wide.”
UK Jobless Rate 'Could Near 15% in Second Coronavirus Wave': “In the aftermath of the global financial crisis, governments acted far too late to address the labour market difficulties of youth, which left them with long-lasting scars that were still visible before the Covid-19 outbreak.”
Brooks Brothers, Founded in 1818, Files for Bankruptcy: “A restructuring plan was created before the pandemic, and this year, a group of potential investors valued the company between $300 million and $350 million.”
United Airlines Warns It May Furlough 36,000 Staff: “The $25 billion in available government loans sought by some airlines follows another $25 billion in federal aid to pay workers through the end of September to avoid mass layoffs they said would have been inevitable otherwise. The payroll funds are largely made up of grants that don’t need to be paid back if the employment promises are fulfilled.”
Retail Workers Are Being Pulled Into The Latest Culture War: Getting Customers To Wear Masks: “Some workers say they have been told they cannot refuse service to maskless customers, even if local laws require it. Others feel they’ve been put in the awkward and sometimes dangerous position of confronting shoppers who refuse to wear the coverings. In recent weeks, retail workers have been punched in the face, suffered broken limbs and, in the case of a security guard at a Family Dollar store in Michigan, killed while trying to enforce mask requirements.”
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