A few years ago, the business school held a panel on finance and its influence on society. One of the panelists was David Swensen and he shared his distaste for bankers.
Let me pick up on Bob’s [Professor Robert Shiller] comment that there’s a tendency to think of finance as a less than noble profession. It shouldn’t be that way, but I’m afraid today that it is. The financial services industry has lost its way. If you look at what’s happened during my more-than-30-year professional career, finance moved from a profession where fiduciary responsibility mattered to one where only making money matters. In an ideal world, financiers provide services that benefit society and consequently allow people to live a better life. Today, all that matters is how much money bankers make, at the expense of the character and quality of what it is that they do.
Making money at all costs, especially during a crisis, is unseemly behavior.
Fast forward to the recent financial crisis. It is absolutely clear that the participants in the financial services industry didn’t care one whit about what it is that they did, as long as it was profitable. They engaged in all sorts of activities that were detrimental to society at large, knowingly participated in these activities, just so they could make money. Any tension between fiduciary responsibility and the profit motive just disappeared. The profit motive overwhelmed everything and as a consequence Wall Street’s actions put us in a pretty tough place in 2008 and 2009. It’s a tough place from which we’ve yet to recover.
Swensen does point out why the Yale model works.
The fact of the matter is, the underlying principles of what people refer to as the Yale model are diversification and equity orientation. Those are sensible fundamentals upon which to build a portfolio. If you look at the results of those institutions that have adopted the Yale approach, they’ve produced superior returns. The top-performing endowments over the past 10 years, a period that includes pre-crisis and post-crisis environments, are institutions that have followed this equity-oriented, diversified approach. They produced the best returns not only before the crisis, but also in periods that include the crisis.
But he goes back to why banking should be simpler.
Or maybe we don’t need to move ahead to something different. Maybe we need to move back to where we were in the past. The basics of what we need in the financial system are pretty simple. I would like to see a return to the separation of commercial banking and investment banking.
I’ll bet that you’ve all seen the movie It’s a Wonderful Life. Well, that’s what our banking system should be like. It should be Bailey Brothers Savings and Loan, where George Bailey knew his borrowers and he knew his depositors. It was a simple gathering of deposits and making of loans that stayed on the balance sheet. These basic banking activities benefit society. Of course, deposit insurance was missing in the Bailey Brothers Savings and Loan era, which was why there was a run on the bank. But if you take the gathering of deposits and making of loans and add deposit insurance, you get a pretty basic system that adds to the functioning of society.
Unfortunately, it’s too late to close the stable door after the horse has bolted.
Post by Marcelino Pantoja