Back to the good old days of banking
Banking** is not what it used to be. Not like back in the 'good ole days' when banking was a staid male bastion of conservative suits, white shirts, two martini lunches, and placid goals. Banks (and their executives) were the very picture of benevolence, cautiousness, strength, and stability - the pillar of respectability in a hometown environment. Banks were heavily regulated then and innovation was not encouraged. Back then, they were a place where anyone needing credit, such as the little lady by herself or others not meeting the look-alike criteria, required greater scrutiny, a co-signatory, or better yet a respectable guarantor.
Rules is rules. This implicit screening became personal years ago when applying for a renovation loan at a US local hometown benevolent bank. "Well, Missus Myron (no one ever calls me missus), you'll have to have your husband sign for you," said the amply fed gentleman. While, in retrospect, he was probably just doing his job, his attitude hit a real nerve with my newly-acquired independence of earning a princessly sum of $100 per week (I can hear the calculators going, how old is she anyway? Ancient beyond belief some days is the answer). Ah, yes, is that so? I smiled - real careful not to show any emotion although I was so mad that I sorely wanted to hit this pompous individual who acted like he'd had more than three martinis for lunch. I took the loan package, said I would talk to my spouse, and be back in an hour. Instead, I drove around for a while, parked on a side street, signed his name, and returned the loan package. "It's great to do business with you, Missus Myron!" There, one little secret that worked back then on how one had to get around ridiculous discriminatory roadblocks.
3-6-3. The banking strategy for generating income used to be conducted under the 'unofficial' rule; pay three percent per year on deposits, lend that cash out at six percent to worthy borrowers, and be on the golf course at 3pm. What could be easier to implement? Banks were not involved in the marketing of investments to their clients, of course they owned or invested in conservative ones for their own treasury, and were generally thought of as being non-competitive and simplistic. In defence of bankers, too, banking regulations tightly controlled rates to borrow, lend, spatial territories to operate in and many other restrictions. There was little incentive to compete - the whole industry stagnated.
Along came Merrill Lynch, the Investment Bank Shark. In the early eighties, investment banks from Wall Street strolled into smaller towns and opened for business. There were others but Merrill Lynch was a dominate player due to reputation, size and aggressive presence. Immediately, they developed marketing strategies to take advantage of the restrictions placed on 'regular' banks and set about selling their security products and many new ones that involved bringing in (or taking away from banks) new client cash. Before long, there were new and better cash products that provided liquidity (just like banks, or so we thought) with significantly higher yields.
Investment houses moved into mortgage lending, praising the power of not only borrowing against the collateral in your home, but also against your portfolio. It was a revolutionary time as businesses dropped banking relationships and sought these firms out to increase the yield on their daily cash flows, while would-be homeowners and refinancers opted for better mortgage rates than the friendly neighborhood banks. The investment firms moved rapidly into retail mutual funds, often pushing their own poorly performing 'in-house' brands over globally known mutual fund providers. As their market share increased, banks and their lobbyists were forced to watch, until some of the barriers between bank operations and these investment-banking firms equalised. But it took a long time and many bank mergers for banks to ramp up to the accelerated pace pushed consistently by these firms as they rolled out product after product to sell that increased yield and return.
Twenty-five years later, with the benefit of hindsight, we know now that many of these products 'had no legs to stand on' in the long-term. The word investment bank has become a retired slogan.
Today, banks have become absolute global powerhouses for the financial version of one-stop shopping, providing banking, insurance, brokerage, portfolio management and other related products. They have adopted many of the same techniques that investment banks used, some good, and some not so good. One might say that they ultimately got their revenge - except there are few of the old banks left.
In part 3 - in April, we will explore the following:
Cash held in a bank is no longer a simple proposition. There are many versions of cash products: pure cash, near cash, cash funds, cash sweep programs, enhanced cash, money funds, fedfunds, foreign currency deposits, money market funds, insured cash, non-interest bearing cash.
** Banking has changed - across the world. This article is not directed at any specific bank, either here or abroad.
Ask enough questions. Insist on good answers. Understand what you own. Expand your financial knowledge!
Sources:
NH finance reminiscences.
Cash and Cash funds - a Primer www.mercer.com
Wickipedia, the free encyclopedia
Martha Harris Myron CPA - NH1929, CFP® - 67184 (US licenses) TEP (UK) is qualified in finance, tax, retirement and estate planning. She specialises in independent fee-only comprehensive financial solutions for international and domestic residents, multi-national families, executives and business owners. Confidential email can be directed to martha.myron@gmail.com">martha.myron@gmail.com
The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy/sell any investment product. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.
