The Great Debate

In April, U.S. banks dusted off the dividend again, a trick they’d mostly abandoned during the financial crisis. JPMorgan Chase plans an 8-cent-per-share hike. Wells Fargo’s will be 5 cents. Same for Morgan Stanley. Bank of America will raise its dividend a penny. Some might celebrate the move: The banks are back! But there’s more to it. In this fairly anemic economy, dividends are yet another strategic, if counterintuitive, hedge that won’t get our loved and loathed financial institutions lending again anytime soon.

Although good news for shareholders, the payouts don’t mask the reality that banks are still unstable. Executives are scared of looming regulatory schemes, such as the Brown-Vitter bill in the Senate, that could raise equity requirements to cushion the excessive debt of borrowing-prone banks. While earnings are up, balance sheets are deceptive. The big banks still rely heavily on income from the stock market, which overall has been stronger, and take in about $83 billion in subsidies. Their equity and cash reserves are a tiny fraction of their debt.

The banking sector certainly seemed more robust in the first quarter. Take JPMorgan Chase. It was solid enough to purchase $2.6 billion in stocks and $6 billion in buybacks, but its $25.12 billion in revenue was weaker than expected. The bank crowed that is the nation’s No. 1 Small Business Association lender, with a 10 percent increase from the same period last year. But commercial loan growth overall slowed to 1.2 percent in the first quarter compared with 3.6 percent in the first quarter, while consumer loans declined 4.2 percent from the same quarter a year earlier. Mortgage revenue was down 31 percent. According to one estimate, the bank’s $440 million annual subsidy paid 40 percent of its last dividend, which was about $1.1 billion.

That’s where dividends come in handy. As even a novice stock trader knows, they project an aura of confidence and stability. When shareholders are rewarded with swag, the banks signal confidence that operations are back to normal. Like clockwork, shortly after the banks’ announcements, analysts recommended that investors buy JPMorgan, Wells Fargo and other financial stocks.

Dividends help counter news reports of a system in transition. Sure, Citigroup may have sold off liabilities, and it’s still strong enough to spend $1 billion in share repurchases. Credit Suisse might have slimmed down, but it’s strong enough to consider issuing a dividend and is still a worthy competitor to UBS, which is downsizing its fixed income unit as it focuses on private banking. One analyst recently described the end of one-stop “financial supermarkets” that would make these big institutions “un-investable.”

Banking integrity has become an oxymoron. Top bankers need to change this and take responsibility for tackling ethical issues. For this to happen, every part of the organization – from senior management to human resources managers to those on the trading floor and beyond – should be assessed according to the contribution it makes to promoting ethical values, not just the bottom line.

The investigations into the LIBOR rate-rigging scandal showed how commonplace bribery among dealers had become. For example, between September 2008 and August 2009 a single trader at the Royal Bank of Scotland had made corrupt payments to interbank brokers on 30 occasions, by means of risk-free transactions known as “wash trades.”

While the likes of Barclays and RBS have acknowledged wrongdoings and vowed to change course, it’s no longer enough to mollify critics with soothing words, apologies and empty gestures.

There are the Liberty Tax guys dancing at strip malls in Statue of Liberty costumes. The “FA$T CA$H” banners plastered on storefronts. And in a cult classic of advertising, all over the South there were those ridiculous Mo’ Money Taxes commercials in which buffoonish Southerners bumble through financial crises. Each one ends with advice on how to avoid a similar mess: “Just come on down to Mo’ Money!”

All of these campy promos are actually selling costly loans against your own money, but they have in fact generated lots of easy cash – for the lender, if not the borrower.

Refund anticipation loans, as they are called, have been risk-free business for most of the past decade. Lenders offer roughly 10-day advances of tax refunds, for which they charge exorbitant subprime fees. More than 12 million taxpayers got anticipation loans in their peak year, in 2004, according to the National Consumer Law Center. IRS data shows that over 90 percent of people who applied in 2010 were low-income.

Don’t be fooled, though, refund anticipation loans are no fringe market. Throughout the so-called boom years, the same banks that sit at the center of our high-end economy spread this fraud-ridden industry throughout its bottom tier. Take for instance Mo’ Money, which has faced several fraud probes. Until 2010, its storefronts were actually agents of JPMorgan Chase. The bank backed roughly 13,000 independent preparers in this business.

On the basis of “stress tests” it ran, the Federal Reserve has given permission to most of the largest U.S. banks to “return capital” to their shareholders. JPMorgan Chase announced that it would buy back as much as $15 billion of its stock and raise its quarterly dividend to 30 cents a share, up from 25 cents a share.

Allowing the payouts to equity is misguided. It exposes the economy to unnecessary risks without valid justification.

Money paid to shareholders (or managers) is no longer available to pay creditors. Share buybacks and dividend payments reduce the banks’ ability to absorb losses without becoming distressed. When a large “systemic” bank is distressed, the ripple effects are felt throughout the economy. We may all feel the consequences.

The recession officially ended in July 2009, and yet the speed and scope of the subsequent recovery have been disappointing. Recent economic data have been encouraging, but there are three ominous trends in the consumer banking space that signal the waters ahead may be choppy.

1. No new banks were chartered in 2011

The Financial Times reported recently that not one new, or de novo, bank was created in 2011. (The FDIC actually lists three new bank charters for 2011 — the lowest number in more than 75 years — but they all involved bank takeovers of other failed banks.) What are some of the possible implications?

First, investors are clearly still gun-shy about banking. The dearth of new small banks is also a negative sign for small businesses generally, as they are particularly dependent on small banks for loans. Since most employment growth in the U.S. comes from small businesses that use external finance to grow into large businesses, a decline in these businesses’ access to loans could limit future employment growth as well.

By Don Tapscott
The views expressed are his own.

In the wake of the 2008 global financial crisis, we need to rethink and redesign many organizations and institutions that have previously served us well but are now beginning to falter. Fortunately, the Internet lets us do this. It slashes collaboration costs and makes possible completely new models of combining people, skills, knowledge and capital for economic and social development. Around the world, individuals and groups are working together, developing new businesses based on peer-to-peer (P2P) collaborative networks.

The financial services industry has always been the antithesis of P2P collaboration. Hierarchy is deeply entrenched in this industry, for good reasons such as security, auditing, and regulatory compliance. But we are now seeing the rise of three types of P2P activities in this sector.

First, financial services companies are moving beyond electronic mail, document management and other primitive technologies to new collaborative software suites like Jive and Moxie Software Spaces, which encourage P2P collaboration within corporate boundaries.

- Laurence Copeland is a professor of finance at Cardiff Business School. The opinions expressed are his own.-

Worries about Europe’s banking system go back at least to 2007, but whereas the U.S. (and UK) banks appear to have weathered the storm, there are fears that for European banks the worst may lie ahead.  Concerns centre on four areas.

First, there are obvious worries about Greece and the other small countries facing debt problems, notably Portugal and Ireland, where the local banks have lent heavily to their governments and in addition may need to make provision for a substantial build-up in the level of bad debts in their respective corporate sectors as their economies struggle through the recession.

-- Mark Kobayashi-Hillary is the author of several books, including ‘Who Moved my Job?’ and ‘Global Services: Moving to a Level Playing Field’. The opinions expressed are his own --

After thirteen years, it’s all over. The New Labour project is dead. Or is it? Tony Blair brought British politics to the centre-ground and ensured that a single party could support free-market economic policies as well as social justice.

And that’s what most people want today, a government that can help the citizen without hindering the economy through the dogma of dated ideology. The old notion of socialists waging war on small-government-right-wingers feels somehow quaint. Clearly Tony Blair knew that David Cameron would be his successor in the New Labour project, but nobody told Gordon Brown.

The trouble with moving big amounts of cash, from a criminal’s point of view, is threefold. It’s bulky, it’s heavy and it smells.

A stash of $1 million in mixed bills weighs around 100 pounds (50 kilos). Specially-trained dogs can sniff out bulk cash in a heartbeat.

All of which helps to explain why drug cartels and financiers of terrorism appear to have been making increasing use of what FBI chief Robert Mueller calls a shadow banking system.

Did the financial system blow up because it was built and largely operated by people with many of the characteristics of a mild form of autism called Asperger’s syndrome?

As explanations for the crisis go, it’s on the extreme side but forms an interesting counterpoint to the “blame the looting bankers” story line.

People with Asperger’s, a mild form of autism, are characterized by, among other things, a deficit of “theory of mind,” essentially the ability to understand that other people have different beliefs or knowledge than themselves. Nicholas Nassim Taleb, author of The Black Swan, has written that a lack of theory of mind left many in positions of responsibility without the ability to conceive of and guard against black swans, which are rare, high-impact and hard to predict events.