Will Banks Become Utilities?

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Let’s step back from the last 48 hours worth of insanity in banking stocks. (Bank of America and others plunged on Monday and seem to be recovering today.) Let’s step back further, beyond the immediate problems of how to bail out or repair the banks. What are banks likely to look like in a few years? After all, Wall Street, as we once knew it, is now gone with all the investment houses having either disappeared or turned themselves into bank holding companies. The idea of nationalization has been out there but that, I think, is a loaded word and not quite right. We’ve already lost our virginity by partially nationalizing the banks when we put taxpayers money into them and we’re likely to do much more before it’s over. With it’s connotations of South American guerrillas in fatigues, nationalization carries a lot of dire implications. It’s also a misnomer since no one really thinks Citigroup or Wachovia are about to become wholle federally owned and run.

The better metaphor may be the idea that banks will become utilities, like ConEd in New York or Duke Energy in the south and midwest. Electricity in the United States is mostly provided by private utility companies that are heavily regulated even more than banks. For instance, they usually need regulators to sign off on rate increases while no bank has to check in with the FDIC before raising fees for say, an overdrawn check. Still, utilities are not nationalized in any sense. They trade on public exchanges like the NYSE/Euronext and NASDAQ . You can invest in them and put your money at some risk but because their business is so stable their prices don’t fluctuate too widely, relative to the rest of the market, and so they tend to pay large dividends.

Nassim Nicholas Taleb, the author of The Black Swan: The Impact of the Highly Improbable, an investment adviser, philosopher academic, trader and prescient gloom and doomer about the current economy has used this metaphor. On Charlie Rose, late last year he said:

It will be very different. Number one, banks will be utility companies, because we no longer will tolerate privatizing the gains and socializing the losses anymore. If you and I are going to bear the losses of bankers, we don’t want to pay them bonuses for five or six or seven years, and then bail them out. No more of that. Banks are going to converge with utility companies, because if you go to Detroit or LA you want to be able to get cash from a cash machine. It’s a utility.

People will still be able to take risks but there will be no government bailout. As he told TIME:

I think that we’ve got to progressively become a society where banks are deemed to be too precious for us, for our currency, to take too much risk. We need to have a banker who is just as responsible as someone working for the water company. Banks are going to become a utility. And banks probably will not have a lot on their balance sheet, and the risks taken will be borne by individuals like myself who have capital, and who know the risks, with their own money. Otherwise you’re going to keep having a cycle that’s deeper every time.

Getting to this place will take some time. We’re nowhere near the levels of regulation needed to make banks as reliable and safe as the water or gas companies. And it doesn’t mean there won’t be casinos open. In the future, you will have, say, hedge funds or private equity firms taking risks, but not banks themselves. Everyone’s heard of Jamie Dimon or Ken Lewis or other bigshot bankers. I couldn’t name a utility executive.

Will this happen soon, this year? No. I’ve asked around with Democrats involved in the financial crisis and I don’t think there’s anything like this level of regulation coming even given the sensible ideas under consideration such as the ones my colleague, Elana Schor, unearthed from Barney Frank. It would require a reinforcement of Glass-Steagall which kept banks out of the business of being stockbrokers until it was repealed in the 90s. But things are moving quickly and I wouldn’t be shocked if Taleb, who saw the current crash–and has urged clients, by the way, to keep 90% of their money in cash and safe assets–turns out to be right yet again.

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