Dinosaurs in Pinstripes
Stephen E. Jordan 12 February 2009
“A big dinosaur was a long, tall lizard. He drifts through the jungle like a slow-moving blizzard.” That’s a line from the song “Ape Call” that Nervous Norvus recorded back in the ’50s. That line came to mind during a recent dinner party when I was going on about things getting really big before they disappear — dinosaurs, wooly mammoths, and commercial banks.
The big commercial banks have become slow-moving blizzards doing immense damage to the economy and their customers. These behemoths are reminiscent of dinosaurs confronted by new- furry mammals. When a new-furry bit a big lizard’s tail, it took a couple of minutes for the nerve impulse to travel up to the baseball-sized brain; more time for processing; and another couple of minutes before the tail moved. By that time new-furry had eaten the dinosaur’s eggs, pushing the reptile closer to extinction. Like the dinosaurs, the big commercial banks have become so encumbered by their size that they are too big to see problems coming and — even if they did — too slow to get out of the way.
When the sub-prime crisis started, the numbers coming out of the banks were subject to speculation; had they come clean yet? There are a couple of reasons to believe that the big banks didn’t know the amount of sub-prime loans on their books. Mortgages are mortgages. But the rocket scientists in the bank trading rooms were writing options on the packaged mortgages, then options on the options while dreaming up calculus-driven derivatives and financial exotica (such as credit default swaps) that were beyond accounting norms and impossible to quantify.
Secondly, let’s say the manager of a humongous commercial bank’s Midwestern operations was asked by headquarters to provide a finite total of his sub-prime loans. He phoned the rocket scientists; but the rocket scientists had all flown the coop for jobs with other bank financial derivatives groups. After some digging, the Midwest manager discovered that he was facing unfathomable accounting; the internal bank accountants couldn’t answer his direct questions; and the external auditors spoke a language that sounded like English but made no sense. The manager came to the stomach-churning realization that headquarters would probably hang him; so he stalled — citing accounting irregularities that he blamed on the departed rocket scientists.
The headquarters staff had their own accounting problems: while the reports from the Midwest were guarded and incomplete, the reports from the hard-charger running Florida and the hotshot managing California were downright funky. But even the incomplete numbers headquarters received were enough to tank the bank, so they began hemming and hawing. Pretty soon all the big banks were waffling, while their headquarters sautéed the books and assumed that other banks were flame broiling theirs. So the bankers stopped lending to each other; then they slammed on the brakes and stop lending altogether while waiting for a bailout.
Ever wonder why most of the big banks simultaneously got stuck with REITS, bad oil tanker loans, fraudulent energy loans in the ’80s, the ever-cyclical Mexican and Argentine meltdowns, the last Asian collapse, the boom-and-bust real estate cycles, Enron? Big banks, like many dinosaurs, are herd animals. There is an old banking adage about money-center banks like Chase Manhattan and Bank of New York whose bankers sat at their desks waiting for Citibank or Morgan to call them with deals to participate in. Like the bankers, dinosaurs must have watched each other to see if one wandered into a patch of new ferns to graze upon; but, while watching themselves, they outgrew their brainpans. So did Citibank. Years before this crisis, management shirked their fiduciary responsibilities and replaced bankers with salesmen who fell for their sales pitch and convinced themselves and hapless customers that real estate prices were impervious to market forces and would never decline. Once a lean hunter of the corporate fern bogs and tide pools, the Citibank colossus is about to become extinct: no one believes their management or their numbers. The enterprise is unmanageable and will be broken into more nimble businesses that, hopefully, will have the dexterity to get out of trouble’s way before their tails — and ours — are bitten.
Stephen E. Jordan’s professional experience includes international, retail and corporate banking. He is currently credit manager for a manufacturing company in the Chicago area. In his spare time, he writes short stories and novels based on his background in banking and finance — including observations about living overseas.
