Looking at banking in Switzerland

By Felix Salmon
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.

Comments
9 comments so far

Felix, it doesn’t matter whether banks “operate outside the realm” of politics.. fact of the matter is that Washington is completely controlled by Wall Street. If banks actually operated outside the realm of politics, all the “too big to fail” banks would have failed long ago.

BB&T took a 37% writedown on Colonial’s assets.. without political interference, ALL loans at ALL banks would have to be marked down that amount. Bankers did not “FLUB” anything, Felix – they are continuing to take government paychecks whereas if they actually operated “outside” the realm of politics, they’d be out of a job!

There is less opportunity for bankers to make enormous profits.. only when the government is NOT involved.

Posted by Unsympathetic | Report as abusive

People defaulting on their debt obligations brought the national economy down, along with the election of the current president. Felix brings to light the largess of his propensity for smut financial “journalism,” and shows his lack of integrity and proclaiming the banks as the bogey man as always. People caused this disaster not banks, peasant.

Posted by Dogma | Report as abusive

@Dogma I don’t think anybody is saying that people couldn’t have been more responsible too. However it is also undisputable I think that the banks and their employees due to their education should have known better, unlike all those people with the mortgages, who have vastly less if any financial knowledge.

Posted by step21 | Report as abusive

Dogma,

Banks caused this disaster, not peasants. $1.2 trillion dollars was spent on the bailout by Bush before the current president took office – with zero effect. This disaster is on the heads of BOTH parties. Rush is wrong.

Banks knew they were making bad loans – they fired all the underwriters. Banks knew they were selling bad securities. Banks knew they were taking on way too much leverage.

All of the above were enabled by Washington, most notably during the Bush administration’s deliberate removal of all regulation of those banks.

Posted by Unsympathetic | Report as abusive

ad) Switzerland
Hey Felix, when you come to Zurich,
just give a call for a drink or lunch in downtown.

That’s a great piece Felix. Thanks for pointing it out.

I agree that his proposed solution would be very difficult to implement, but what’s the alternative (especially if you agree with his diagnosis)? At some point, we NEED a radical solution. Health care costs can’t continue to grow at the current rate without bankrupting the country.

Posted by ab | Report as abusive

Felix, I 2nd ab’s comment and would like to read your response.

Posted by Dave | Report as abusive

Two things:

First, re: you versus Cohan. You\’re both right.

Second, >> healthcare is path-dependent, and we’re far too far down one path to be able to switch over onto a completely different one.

That is the most cogent reason I have yet heard as to why health care reform is so difficult.

Posted by Curmudgeon | Report as abusive

Cezmi, sorry, not in Zurich this time around.

ab and Dave, you’re both right. We need radical reform along the lines that Goldhill suggests. But, as you must know in your heart of hearts, we’re not going to get it.

Posted by Felix Salmon | Report as abusive
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