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Why Do Bankers Make So Many Stupid Mistakes?
If you think French bankers are smart, you better think again. Back in 2006, Credit Agricole (OTC:CRARY) spent 2.2 billion euros to buy a majority stake in Athens-based Emporiki Bank, which sold recently for $1 to another Greek bank, Alpha Bank! Add another 550 million euros capital injection last July, and Credit Agricole’s on the hook for 2.75 billion.
Sounds stupid, doesn’t it?
French bankers aren’t alone. Back in the 1980s, Japanese bankers poured billions of dollars into residential and commercial real estate and fine art both inside and outside their country, financing one of the biggest bubbles in modern history. And I can’t begin to talk about Chinese bankers, who finance construction of office buildings that remain vacant for years, shopping malls that very few people visit, and airports without flights.
In early 2000s, American banks poured billions of dollars into residential and commercial real estate that went bust. Most notably, Bank of America paid $2.5 billions for Countrywide Financial, which end up costing the bank north of $40 billion. Citicorp (NYSE:C), and Wells Fargo (NYSE:WFC) have their own stories to tell.
What’s going on? How smart people holding MBA degrees from top schools make these strategic mistakes? What happened to due diligence and risk management?
The short answer is they no longer matter.
Easy money by central banks, and tight government regulations and mandates, has “eliminated” traditional banking risks. Or at least so it’s thought — until the next financial crisis unfolds.
As I explained in a book I co-authored some time ago, in an environment like this bankers have grown up as abacus bankers, record keepers of money flows who derive income from seigniorage, from the passive creation of money through interest bearing-loans and government-backed securities rather than from true banking, and from active risk management.
Does this mean that the financial markets are in for another crisis? I cannot predict that. I want to warn investors, however, that abacus banking doesn’t enhance shareholder value. Just take a look at a Japanese super bank Mitsubishi UFJ Financial group (NYSE:MTU). Right now it’s trading at a tiny fraction of what the three banks that it comprises were trading at, individually, 20 years ago!
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