Looking at banking in Switzerland

August 24, 2009

I’m in Zermatt, Switzerland, where I’ve been invited to attend a symposium on the second anniversary of the financial crisis. I’ve only been to one presentation so far, but I’ve already learned two things: (a) that a lot of private bankers in Switzerland have degrees from the country’s famed hospitality universities (service culture is service culture, I guess), and (b) I can actually comprehend the gist of a speech given in German, if the slides are in English, and the points made are conventional enough.

On the way up here I worked my way through the latest edition of The Atlantic, which has an 11,000-word essay by David Goldhill on the US healthcare system, and 7,000 words by William Cohan on the acquisition of Merrill Lynch by Bank of America. Goldhill’s piece is spot-on in terms of diagnosing the problem, and his proposed solution, if implemented ex nihilo, sounds pretty good. Unfortunately, he gives no reason to believe that we can get there from here: healthcare is path-dependent, and we’re far too far down one path to be able to switch over onto a completely different one.

As for Cohan, I’m very unimpressed by the way in which he strongly implies that the government was going around abrogating contracts when it bullied Ken Lewis into acquiring Merrill Lynch. The fact is that Bank of America had signed a contract saying that it would buy Merrill; if anything, it was Ken Lewis, with one eye on the infamous MAC clause, who was looking desperately for a way to get out of that contractual obligation. And Cohan’s reading of the Detroit bailouts is contentious indeed: he says for instance that Chrysler’s senior creditors “were contractually entitled to a much better deal” than the one they got. Which simply isn’t true: when it comes to bankruptcy, the party providing the financing (in this case, the government) calls substantially all of the shots, and in any case the bankruptcy judge has a large amount of judgment in terms of who gets what.

Cohan concludes by raising

the possibility that Treasury and the Fed will continue to simply manage the financial industry informally for some years to come, confident in their ability to pull the right levers and twist arms when necessary behind the scenes. That’s a scenario that seldom ends well; we should hope it doesn’t come to pass.

I’m on the other side of this argument. Banks, left to their own devices, brought the entire national economy to the precipice of disaster. They had their chance to operate outside the realm of political interference, and they flubbed it, massively. Now that Treasury and the Fed are keeping a closer eye on things, there might be less opportunity for bankers to make enormous profits by risking the whole system. If there is, that’s a good thing.


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