Tuesday, June 16, 2015

Books About Banking: Why Did We Bailout the Banks?

A surprising number of bank books have been published during the past 10 years. Why is this and what does it mean for most of us who are not closely involved with the banking industry?

Certain books frequently become relevant and popular because of problems in society at large. Other books become "must read" because they address specific issues that directly impact our daily lives. A third category of books becomes popular because they entertain us, often dealing with gripping drama that makes us wonder how the story will end.

While bank problems often qualify for the first or second category, banking stories have rarely entailed much in the way of entertainment value. However, the financial and banking chaos that emerged during the past decade has not only made it clear that these problems can change our lives forever but has also left us with a dramatic plot that keeps changing before our eyes. Here are some books that will help unravel at least some of the underlying mysteries.

Yes, these books about banking are all based on true stories and actual events.

Will Banks Survive?

Banking problems have surprised many people because for a number of decades bankers were viewed as the last individuals who would ever take unnecessary financial risks. To a very large extent banks were not legally permitted to take risks as a direct result of the Glass-Steagall Act that was passed during the Great Depression era banking reforms of President Franklin D. Roosevelt. This legislation was intended to stop excessive bank risks that were one of the major contributing factors to the financial chaos that led to the Depression.

Eventually bankers came to resent the regulations imposed by the Glass-Steagall Act and lobbied unsuccessfully for many years to remove what they considered to be excessive restrictions on how they ran their banks. The banking institutions finally succeeded when this law was deactivated in 1999. However, there was a banking crisis during the 1980s involving the failure of many savings and loan associations (S&Ls) because financial regulations were removed and banking officials promptly assumed excessive risks. Despite that graphic evidence of what happens when banks have less regulation and undertake more risks, the removal of Glass-Steagall proceeded.

One of the best bank books that effectively ties the events of the S&L crisis to recent banking problems is aptly-titled "The Best Way to Rob a Bank Is to Own One" (by William K. Black).

Why Did We Bailout the Banks?

Why do governments save banks from their own mistakes? The most recent bailout of banking institutions occurred during 2008. The best bank book about this troubling financial event is by Neil Barofsky and is simply titled "Bailout," although there is a longer and informative sub-title: "An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street." Like many books about banking, this is stranger than fiction at times. This is a behind-the-scenes accounting of the most recent banking bailout.

Sheila Bair was in charge of the Federal Deposit Insurance Corporation during the recent bank chaos and bailouts. She is one of the few people who accurately identified the subprime mortgage crisis before it brought the banking system to its knees. You should listen carefully to what she has to say in her book, “Bull by the Horns.” By the way, this is what she had to say about the bailout — “The banks should have been let go.”

For a few other relevant perspectives about banking, please visit the following website to view a SlideShare presentation that I prepared —

A Few Candid Comments About Banks