Think Twice Finance

Classifying Banks During the Banking Crisis: Wells Fargo Was Never “One of the Boys.”

In the 21^st Century there have been four archetypical ways of making a living as a bank.

First there has been the way with which we have become most familiar since the crisis. Find the best scam the bank regulators are passing out and push it to the max. This was the favorite among the Large New York, Toronto and London banks, who would have faded into obsolescence long ago if the regulators had not been passing out the candy. The disadvantage of this strategy has become pretty obvious.

Be a genuine investment bank. That means living on the edge, eschewing imitation but constantly needing new and better strategies to outdistance your competitors, requiring vigilance in managing the new risks new ideas entail. Most visibly the archetype in New York is Goldman Sachs (and, yes, Lehman) but hidden “down under” are the still more creative and wisely anonymous Macquarie Group and Babcock and Brown. The disadvantage here is you are constantly being imitated and therefore need to keep creating. Something Adam Smith warned about.

Be a banking WalMart. This is Wells’ strategy as well as that of the Four Pillars in Australia. (Your bad if you don’t know who they are. See Wikipedia.)  One cuts costs to the bone, focuses on retail products only, and does not adopt the latest flim-flam out of the House or Senate Banking Committees. The strategy carries a reputation for being boring. The profits are not as spectacular as those of the investment banks. Most importantly, you have the very difficult job of balancing cheap IT innovation with the need to keep customers happy. In other words, this strategy also requires creativity of an unsung kind. But it works in good times and bad, as we are learning from the institutions’ earnings reports.

Be a Hedge Fund or Private Equity firm. This is sort of an investment banking Darth Vader. You are very cool and very successful, but nobody knows why or how. But these Darth Vaders have been the most important positive factor in banking over the past decade. In banking, “You’re Nobody Unless Everybody Hates You.”