For almost 10 years, we watched Milburn Drysdale, a gray-suited, money-hungry banker, do whatever was needed to keep his richest depositors, the Clampetts, in Beverly Hills and firmly deposited in his bank. He often had to humiliate himself just to keep their business. And sometimes he even bent bank policy a bit. (Sometimes more than a bit.)
That was back when the banking industry was fairly stodgy, operating on slim profit margins and an entrenched policy of conservative behavior. (Not that there weren’t occasional rule-benders like our Milburn.)
For many years, banking was mostly a sleepy enterprise, with deals being done that in no way rivaled the excitement and risk of Wall Street (investment banking).
Then Glass-Steagall crumbled. (The Glass-Steagall Act of 1933 had separated investment banking and commercial banking activities to try to prevent the great crash of 1929 from ever happening again, by lowering risk for investors through protective barriers between different types of financial institutions.)
The crumbling actually began earlier, but sped up in the mid-1990s as bank holding companies began acquiring investment banks. In 1999, The Gramm-Leach-Bliley Act was passed by Congress to legitimize some of those acquisitions and dealings that were already happening. It repealed the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies.
What I also think it did is turn once traditionally conservative institutions into free-for-alls, competing with each other as well as among groups within the companies themselves to show the greatest profits. But in finance, the trade-off for higher returns is called RISK.
And suddenly all the rules bankers learned in training programs (I graduated one of those) were turned on their heads. Long-standing loan formulas were stretched ever thinner. Riskier divisions began making loans some of the other divisions would never approve of. And as huge profits flowed from the now riskier areas, more rational voices were drowned out by the steady cha-ching of revenues.
And so many many loans were made to folks who never before would have qualified, and who, for the most part, were woefully ignorant of what they were getting themselves into. After all…would a bank really make a loan they couldn’t pay back?
We all know the answer to that now. Yes. And while Wall Street rocks and reels from the seismic shifts, real people are being thrown to the ground amid the turmoil, losing their savings and their homes.
And why do I blame Milburn Drysdale? Because all of us baby boomers, many of whom now run these institutions, saw Milburn doing whatever he had to do to make money. He twisted himself around and turned upside down if necessary to keep his Clampetts in Beverly Hills. And sometimes, we just aren’t ready for Beverly Hills. Our banker used to be the person we could trust to help keep us grounded – not flying high well beyond our means.
Banking is about fiduciary responsibility and not the roller coaster rides of Wall Street. And when the two got mixed up, our inner Milburn Drysdales went wild.
Note: This is a repost with some changes.