Of money and morals

Moneylending has been taboo for most of human history. So how did usury stop being a sin and become respectable finance?

In 2014, Citigroup called. The bank had been battered by successive scandals and a wave of public mistrust after the financial crisis, so they wanted to hire Miller as an on-call ethicist. He agreed. Rather than admonish bankers to follow the law – an approach that Miller thinks is inadequate – he talks to them about philosophy. Surprisingly, he hasn’t found bankers and business leaders to be a tough crowd. Many confess a desire to do good.

.. And then we spend next hour talking about ethics, purpose, meaning. So I know there’s interest.’

.. Miller wants people in finance to talk about ‘wisdom, whatever its source’. To ignore these traditions and thinkers, as the bulk of the industry tends to do, is equivalent to ‘putting on intellectual blinders’, he says.

.. Lending money has long been regarded as a moral matter. So just when and how did most bankers stop seeing their work in moral terms?

 https://aeon.co/essays/how-did-usury-stop-being-a-sin-and-become-respectable-finance

China’s Debt Crackdown Is Driving Borrowers Into Riskier Territory

Beijing’s game of Whac-A-Mole against financial risks is sending some borrowers into darker corners

China’s crackdown on debt is driving some companies to a murkier form of financing as it gets harder to secure bank loans or tap the bond market.

New loans from so-called trusts, firms that raise money from individuals and corporations to plow into riskier areas of the economy, reached 882.3 billion yuan ($129.5 billion) in the first four months of this year, according to data from the People’s Bank of China, nearly five times as much as the same period in 2016.

Trust firms, which often charge borrowers higher rates than banks, occupy a middle ground between banking and asset management. They are licensed and loosely regulated by China’s banking watchdog, but they lack some of banks’ protections, such as government deposit insurance, and they have more flexibility to invest in risky areas than banks do.

 .. Authorities continue to give trusts more leeway than banks to invest in risky projects, including property, steel and other sectors, where authorities have tried to dial back borrowing… A record surge in the first four months of 2013 led regulators to crack down on the sector. Two years later, trusts helped investors leverage bets to buy stocks, which contributed to a flood of borrowing that culminated in a market crash that summer.

Bankers Use Trump Rally to Cash Out

Executives, directors at nearly 100 community banks and regional players netted $1 billion in stock sales since election

 Insiders at publicly traded commercial banks with a market value greater than $1 billion, but excluding the largest national banks, sold about $1.4 billion in their company stock between the election and the end of March

.. Private-equity investors with board seats also sold. Four of them accounted for more than $310 million of the sales, or about 22% of the total, since the election. These same investors sold $46 million in 2016 before the election.

The Shattered Arguments for a New Glass-Steagall

Investment banking isn’t risky. What’s dangerous is creating stand-alone firms that can’t diversify.

The 1999 repeal of Glass-Steagall was unfairly blamed in the aftermath of the 2008 financial crisis. Some people—apparently Mr. Cohn among them—mistakenly believe that investment banking is so risky that it should be once again kept separate from commercial banking. The truth is exactly the opposite: Traditional investment banking entails very little risk. The danger is stand-alone investment banks that are not diversified enough to survive a shock.

 ..Banks are at risk of failure when they become too concentrated by geography, industry or product line. Risk needs to be diversified so that no one mistake can bring down the entire institution. Even firms like Citigroup and Bank of America that made a series of mistakes in the 2008 crisis survived because they were diversified. Investment banks that were not properly diversified did not survive: Bear Stearns, Lehman Brothers, Merrill Lynch.
..The major perpetrators of the 2008 financial crisis were 20 or so institutions that had originated, securitized and distributed exotic subprime mortgages with toxic features. About 10 investment banks packaged mortgages made by savings-and-loan associations such as Countrywide, Washington Mutual and Indy Mac, and by state-chartered mortgage brokers—many of which committed outright fraud. These S&Ls were the remnants of an industry that had cost taxpayers some $150 billion during the 1980s and early 1990s. Notably absent from this array of culprits were large commercial banks, with an exception or two.