Review of “The Great Bank Robbery – Nassim Nicholas Taleb and Mark Spitznagel”
This is a fascinating piece by Taleb (Black Swan) and Spitznagel. It is fascinating because it summarises much of what I talk about here in a very concise manner yet goes way beyond by suggesting that portfolio managers should boycott investment in bank stocks.
Mainstream megabanks are puzzling in many respects. It is (now) no secret that they have operated so far as large sophisticated compensation schemes, masking probabilities of low-risk, high-impact “Black Swan” events and benefiting from the free backstop of implicit public guarantees. Excessive leverage, rather than skills, can be seen as the source of their resulting profits, which then flow disproportionately to employees, and of their sometimes-massive losses, which are borne by shareholders and taxpayers.
Having made the point that banks only make loads of money due to artificially high leverage that is supported by government guarantees he goes on to observe that banks keep the upside for employees yet pass any downside risks to “shareholders, taxpayers, and even retirees”.
In other words, banks take risks, get paid for the upside, and then transfer the downside to shareholders, taxpayers, and even retirees. In order to rescue the banking system, the Federal Reserve, for example, put interest rates at artificially low levels; as was disclosed recently, it also has provided secret loans of $1.2 trillion to banks. The main effect so far has been to help bankers generate bonuses (rather than attract borrowers) by hiding exposures.
The middle section of the article is a little perplexing by speaking about lack of return on bank stocks, which seems to ignore the key point that banks pay enormous dividends. If he had brought that aspect into play it would have supported his contention that banks make no money.
Money comes in, gets paid out to employees and shareholders and next year we do it all over again. That is the picture of bank financial results.
Anyhow the article finishes off with a strong point that banks only make it into the investment portfolios of portfolio managers due to their impact on the indexes. It finishes with the suggestion that banks should be viewed as immoral investments by using ethical criteria such as that used against tobacco companies or those supporting apartheid. PM’s should use their power to shift the behaviour of banks, and we should not have to rely on regulation which banks are experts at staying one step ahead of.