Bankers’ Hours column: Banking changed in 1985
I recently read of the woes of Credit Suisse, the Swiss banking behemoth with a planetwide presence, which recently received a devastating one-two punch. The bank took a loss of $1.5 billion as a result of the failure of Greensill, a non-institutional lender with operations on four continents. And then, in just weeks, Archregoss Capital Management, a very big borrower from Credit Suiess, imploded, and the bank is now facing another $5 billion hit to capital.
So Credit Suisse is going broke, right? Nope, they’ll be fine, because of the profit they post from other divisions of their rather extensive platform; net income for 2020 was $2.7 billion.Things are going quite well for banking as the industry emerges from the bunkers into the post-pandemic landscape. Oh, the bank will have regulators from at least two countries on their case, and a lot of top execs will get fired or take early retirement.
But I was struck by the details of the two problems, and it came to me I’ve seen this movie twice before. I realized that there have been three great systemic bank failures of the last 100 years — the collapse of the Great Depression, the S&L Crisis of the 1980s, and the Great Recession of 2008 — and that I’d been a witness and on the front line of the last two. Those events have a remarkable similarity, and an epiphany of sorts struck me: We bankers are no different than anybody else. We all fail to heed the famous quote of George Santayana, the American philosopher and writer: “Those who cannot remember the past are doomed to repeat it.”
So in the next several columns, let’s take a look at 1985 and 2008, and, just for fun, throw in some real life anecdotes to spice up the story. And speculate, can it, will it, happen again? If one were to venture a premature response, “yes” to the first question and “who knows?” to the second.
Ronald Reagan was elected president in 1980, and the administration was committed to deregulation in all federal venues, and particularly in banking. Savings and loans, (thrifts) became the poster child for rewriting bank regs, primarily because they were arguably the most regulated business in the country. These institutions made only real estate loans, and most of those were single-family residences. They were stodgy relics from the 19th century, and thrift execs tended to adhere to the 3/3/3 rule: Pay 3% for your savings accounts, mark up the money by 3%, make home loans, and be on the golf course by 3 p.m. They were dull in the extreme. And they seldom went broke.
That changed with Reagan. Thrifts could make more types of loans, and S&L presidents could act like what they’d always wanted to be: bankers.
And then there was the direct investment concept, a radical reworking of those old Victorian-age thrift rules. Through a so-called service corporation, of which the S&L had to own at least 51%, thrifts could step out of the role of lender into a new suit of clothes labeled “entrepreneur.” They could get directly into land development and construction projects as developers and builders and make a lot more than a 3% spread on deposit money.
It was common for a thrift to take on a builder as a partner for the other 49% of the enterprise. For their part, builders thought they’d died and gone to heaven. “You mean I don’t have to borrow from a bank, I can partner up with one? Yahoo!”
It didn’t take long for entrepreneurs on the cutting edge to wonder, “Hmm. … Why be a partner with a bank? Why not, well, be a bank?”
You smart ones in class probably know where this is going. Stay tuned for the next episode. …
“Cowboys and daisies.”
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His email is firstname.lastname@example.org.
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