Monday, May 16, 2011

Follow up to prior post, "banks out of favor"

Two follow up comments to the prior post:

---the big issue for the administration's approach to big banks and the popular approach as well is compensation. The protocol for hiring talent includes significant compensation, compensation almost beyond comprehension for most everyone. With the financial crisis having been survived, that compensation remained largely intact. This outraged many observers, especially President Obama and his inner circle. It's certainly a valid feeling.

Unfortunately it is difficult for one company or one country's firms to decide to pay less than market rates in a competitive global environment. The genie is out of the bottle so to speak. Extraordinary compensation takes place these days in many industries for CEO's and their top tier colleagues, but in financial services it speads broadly to a wide cadre of individuals with distinct specialties that have their own benchmarks. Unlike generic CEO's in other industries these individuals often have very specific and even unique talents and can demand what the market bears. What makes financial services different is that the high compensation spreads well beyond the executive office and numbers well into the hundreds or even thousands of people in many firms. The numbers are big. They reflect the problematic growing disparity of wealth in our country, but at least the recipients of this largesse in financial firms come from a broad swath of our diverse culture and are not just dominated by the fairly homogenous CEO class.

---Loan growth may not be robust but loans are not the way bigger banks make any money. The risk adjusted return on capital for commercial loans is generally breakeven or a loss. Loans do serve as a proxy for other activity in banking so in that sense slow loan growth could mean slower growth of other profitable banking products and services. Loan growth in the consumer area is beginning but is, in comparative terms relative to a few years ago, overwhelmed by the lack of mortgage loan growth. Consumer loans can be profitable, if the risk adjusted product equation is right.


Anonymous Anonymous said...

Stratospheric executive pay levels on one side of the equation and static to declining wages on an inflation adjusted basis for 90% of workers will eventually lead to a political disruption that can't be controlled. Unemployment stuck around 9% with young people being disproportionately affected and hopeless situations for older workers whose skills and location don't match opportunities are other dire warnings of dysfunction that could contribute to political extremism. This could all come to a head in 2014. It's both the facts and the cosmetics of all of this that can lead to an irrational and irate explosion by a basically illiterate television watching America.

2:04 PM  

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