Banking in America

Thinking about America's banks:

(This is further thought about this article: "Obama & Co. Invests Our Money in CitiGroup.")

With all of this talk about CitiGroup, Bank of America, Wells Fargo, and the like so pervasive in the news, I want you to think about this:

Start focusing on the GOOD banks and GOOD bankers for now. Then later go back and punish the bad ones.

Lets go back to 1970 shall we: A really good bank could only get so big. For one thing they couldn't cross state lines. So, to be a really good bank they had superior customer service, and because they were restricted geographically they had superior balance sheets. They were also hampered by the basic law of talent, "only 10% of any one group are really great managers." Next they were physically hampered because a good manger could only get so much done in a day.

The game changer: Technology. Technology allowed a good manager to manage more assets and also manage assets remotely. But, they still had their superior customer service in the lobby.

By 1990 the management at banks like NationsBank, Wells Fargo, Bank of America, Washington Mutual (a thrift), Bank of the West, US Bancorp, etc. thought that they could replicate what good banks were doing in a smaller geographic area all over the country.

Problem was, as they bought out the good managers in each state, the good managers eventually "retired" and took the buyout money and started another small bank, or bought into one, or really did retire.

A good group of managers back at corporate headquarters can only manage so many people, and if half of the original 10% of the talent matrix in each state quit (or heaven forbid, all 10%), then the game changed.

The corporate office only had one option left, technology. They shifted good banking from the lobby to the top of towers where they sifted through computer screens looking for an edge. The really good banks had four things; good technology, good management in the lobby, good management in the board room, and good analysis of the other three.

But, now the ability to have good managers in the lobby was gone. (One leg of a four legged stool.) The good managers that were left in the ivory towers knew that they were good bankers back in the day. But, they were so full of themselves and their self confidence, that the hadn't realized that the game had changed and one key component (maybe the one most crucial) was now gone: The GOOD managers in the local lobbies.

This has happened with a lot of consolidation roll ups. (Know the story of Miller Industries for one example?) The investment bankers find a good management team, and come calling on you. They fill your head with what 'geniuses you guys are.' They sing a song about how you 'have done so much, and you can bottle that and roll it out across the land.'

They were right of course, you were a good banker. But they were also trying to make money off of merger and acquisition fees, and/or IPO fees, or the game of growing earnings geographically, or the game of growing earnings by consolidation. But, those things are short term ideas. They only last so long. You were great an managing a 50 branch bank in one state. But, they wanted you to manage 500, or 5000 branches.

But after the buyouts, the other good bankers walked away and now you had to play narrower and narrower spreads on a larger and larger pile of cash. The Wal-Mart approach: VOLUME fixes everything. Or, the AT&T business model, you only make a dime on every transaction, but you have a huge amount of transactions. Problem is a $500,000 loan is not a t-shirt made in China nor is it a phone call. Applying the volume matrix to banking ignores the risk to the individual pieces of the pie. Do you think Wal-Mart would work if they financed that T-shirt for 30-years?

So now the good "lobbyeers" have gone, there aren't enough good managers to watch the berries in the pie. The pie is so large that nobody can watch it all. Nor do they notice that some of the berries put in the pie had turned and were spoiled. So you had rotten berries next to the good ones.

I have moved twice in the last 10-years. How I picked my bank each time? I picked the smallest bank in that market that was publicly traded. 1) Smallest for the "good lobby" model. 2) The extra scrutiny that being public brought. 3) The ability for me to scrutinize their quarterly's myself. 4) I also picked a bank that was primarily a bank focused on small businesses, but also had consumer accounts. And, 5) Easily invest in them if I chose to do so.

Bottom line: Not enough good bankers to manage the lobby of the local branches. Focus on the small banks. Superior M&A, IPO, LBO, etc., talents should not be co-mingled with retail outlets nationwide. This would be like your local family physician being bought out by a group of top flight laboratory researchers.

I'll leave you with a jingle:

"Let's all go out to the lobby,....."

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