Too Big To Fail? Banks, Detroit, America?

By | March 1, 2021 | 0 Comments



San Francisco, 1904
Building up

Detroit, 2013
Tearing down

The Bank of America was founded in San Francisco in 1904 by A. P. Giannini, the son of Italian immigrants. He never attended a university, but he took courses at a private business school. He made money in the produce business. His friends complained that they could not obtain the loans they needed to enlarge their businesses, so he opened a bank. It was located in a building that had been a saloon.

Originally the bank was called Bank of Italy. At the B of A branch where my parents banked in San Francisco, in the 1960s there was still a portrait of Giannini and a copy of the old Bank of Italy charter on the wall. Remembering your roots helps you know what you should do − and what you shouldn’t. Giannini opened a bank for “little people.” He felt prospective borrowers hands − if they were calloused, he knew the person was a hard worker and was worthy of a loan.

Though it was limited by law to California, Bank of America became one of the largest banks in the world. Then banks were allowed to spread nationwide, and it merged with NationsBank, which was deeply involved with trading derivatives. Its acquisition of the failing Countrywide did it no good. And in 2009, Bank of America required a bailout from the federal government to avoid insolvency.

What happened to the “little people’s” bank that caused it to expand into a bloated colossus on the verge of failure? Here’s a clue − Giannini’s first name was Amadeo, which means “love of God.” As young people would say, that’s so yesterday.

The founders of our nation knew that in order to remain free, people had to control themselves, based on moral principles derived from religion. Otherwise, an authoritarian government would have to control them. Current “progressive” politicians want to institute an authoritarian government, so to them, people who control themselves are undesirable.

Yes, regulations are needed. But the government officials who will write and enforce them were a major part of the problem. What makes us think that now they will be part of the solution? Will members of Congress like Barney Frank, who exerted strong pressure on the Fed and on financial institutions to give home loans to those unlikely to repay them, now become advocates of prudence?

When we bought our home years ago, we got the loan from Great Western Savings, a reliable California firm. Then it was bought out by Washington Mutual, a nationwide firm that went on to produce the biggest bank failure in American history. Reportedly it paid employees according to how many loans they wrote, not how sound the loans were.

Great Western, a solid firm with a solid name, became WaMu, with a name that sounded like a circus clown − and with the brainless actions to go with it. And then WaMu failed and was bought out by JPMorgan Chase.

We went from A. P. Giannini, the produce dealer who loaned money to “little people” if they were hard workers, to high-flying financial wizards with MBAs from prestigious universities, who loaned money to people unlikely to be able to pay it back. But the wizards were so traumatized by the crisis their own recklessness had caused that now they are reluctant to loan money to excellent credit risks.

The office handling the loan itself may be in a different state from the office handling the loan payoff, and neither is in the state where the home is located. The huge organization grew beyond the capacity of anyone to manage effectively. Management is most effective if it is as close as possible to what is being managed. But worship of bigness has led to management being as remote as possible. Managers look more impressive that way.

Instead of A. P. Giannini, who sat at a desk in the lobby, we now have The Great and Powerful Oz, who rattles a piece of tin to simulate thunder and speaks through a megaphone, but who hides behind a curtain to conceal his inadequacies. All this makes me nostalgic for Giannini, who learned about business by actually being in business, and for my four uncles, who never finished high school but established two clothing stores and supported their families admirably.

And then we have Detroit, “Motor City.” General Motors used to be the biggest corporation in the world, not just the biggest automotive company. Despite its size – or perhaps because of it – GM, along with Chrysler, went bankrupt and were bailed out by the feds. Ford barely escaped a similar fate. Not only did the auto industry support tens of thousands of good jobs and a great city. It also supported important charities. Ever hear of Memorial-Sloan Kettering Cancer Center in New York? Sloan and Kettering were GM executives who funded the institute.

What happened?

Call it corporate sclerosis. Call it too big to adapt. Call it sweetheart contracts with auto workers’ unions, with overly generous benefits and pensions. Corporate and union executives must have known this was unsustainable, but they didn’t care – the reckoning wouldn’t come until they were dead or retired. Call it kicking the can down the road. Call it anything you like – just learn from it.

As automotive journalist David E. Davis wrote, “When the MBAs replaced the engineers as masters of GM’s universe, everything went to hell.” Engineers made cars; MBAs made deals.

To this severe erosion of Detroit’s economic base, the public employees’ unions added the coup-de-grâce – still more unsustainable benefits and pensions. And now Detroit is the largest American city to go bankrupt…so far. If you continue kicking the can down the road, eventually you run out of road.

In the private sector, union leaders and company executives must keep in mind the long-term wellbeing of the business, and not make short-term agreements that are popular but unsustainable. The same thing is true for public-sector unions. But here, in addition, unions must be forbidden from contributing to politicians’ campaigns. We need to stop politicians and union leaders from conspiring to further their own interests at the public’s expense – the ultimate result of which is Detroit.

If we don’t want America to become Detroit writ large, we need to pay attention.

● We need to stop worshipping the idol of bigness, and regain our respect for what actually works, rather than what looks impressive.

● We need to think about what will happen years from now, rather than focusing on the next quarterly report.

● We need to reform estate-tax laws that inhibit a family business from being bequeathed to the founder’s children, so he agrees to be bought out by a large corporation.

● We need to reinstitute laws that restrict banks to one state, or at least one region, and to consider separating commercial and investment banking.

● We need to require banks to operate under sounder principles, which would have enabled them to withstand the recent crisis – as did Canadian banks.

● We need to stop worshipping the idol of higher education, which too often turns out to be leftist indoctrination, and regain our respect for practical knowledge gained from trade schools and hands-on experience.

● We need to regain our respect for people with real-world experience of actually doing something, rather than for people who got advanced degrees for talking about it.

● We need to emulate Henry Ford, who paid his workers higher wages so that they could buy the cars they made, rather than what we are doing now – shipping skilled jobs overseas, while importing low-skilled immigrants to fill low-paying jobs that may or may not be there. Now that’s unsustainable.

● We need to emulate A. P. Giannini, who looked for people with calluses on their hands, not on their behinds.

Europeans worship bigness – first in the form of imperialism, which led to two terrible world wars, and then in the form of the European Union, which is in serious trouble. The end result of the worship of bigness is globalization. It is too soon to assess what its outcome will be. But so far, the results of exporting skilled jobs while importing unskilled workers do not look promising.

Sometimes smaller is better. Sometimes local is better. Sometimes doing less is better. In the end, nothing is too big to fail, including big corporations like GM and WaMu, big cities like Detroit, and big countries like America. The dinosaurs were really big, too, but their brains were small, and you don’t see many of them around anymore.

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