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Most large banks couldn't care less about their traditional and important function as prudent capital allocators.
They've been incentivized not to.
I doubt you think banks are socially irresponsible, but I do.
And while I’m personally appalled at the incestuous nature of our banking system with corporations and governments, I’m excited about an alternative to banking that’s stepping in to fill the gap between “too big to fail” banking behemoths and the regular people and businesses they no longer serve.
But before I get into the opportunity, a quick refresher on why it’s clear to me that banks are socially irresponsible
First off, explicit and implicit government guarantees ensure banks remain cauldrons of moral hazard and ruinous risk taking. Government actually incentivizes bankers to act not only irresponsibly but reprehensibly.
History is replete with examples of bankers responding to the incentives. The latest example occurred in 2008. The entire banking system was brought to its knees by unconscionably leveraged bets on exotic collateralized-debt securities and credit-default swaps.
These bets – technically trades – had nothing to do with traditional lending, and everything to do with maximizing short-term return on a bet. There was little for the banker to lose: If he hit pay-dirt, he received a multi-million dollar bonus. If he rolled snake eyes, the Federal Reserve and you and I made good on the bets.
It's bad enough when bankers get away with socially irresponsible behavior once, but they get away with it repeatedly. And they are getting away with it to this day.
After getting a finger wagged at them and being infused with trillions of dollars by the Federal Reserve, banks were soon betting big again. Last year, JPMorgan Chase (NYSE: JPM) lost nearly $9 billion in botched trades that were laughably filed under the rubric “risk management.”
We should expect to see more botched trades and more bad bets in the future.
The January/February 2013 edition of The Atlantic featured an exposé on Wells Fargo (NYSE: WFC), a “conservatively” run bank. The Atlantic reveals Wells Fargo is hardly conservative. According to the exposé's writers, Wells (and other big banks) remains a black box that conceals enormous risks on trillions of dollars of notional trade volume – the sort that took down the economy five short years ago.
And yet the money keeps rolling into the banks… and rolling out to the bankers. CNNMoney reports that the nation’s biggest banks are expected to parcel out more in compensation in 2013 than they did in the four years, including $23 billion in bonuses – a 15% increase over 2012 bonuses.
Much of these bonuses are tied to trading, not lending. Indeed, banks are actually paid by the Federal Reserve to hold reserves at the Federal Reserve. It is unprecedented in banking history for a central bank to pay a commercial bank not to lend.
You shouldn't be surprised, then, to learn bank credit has been contracting for years. No let up is in sight: Bank credit has contracted in each of the past four months.
Fortunately the market is evolving to meet a need. I’ve found an alternative to traditional banking that cuts big banks out of the loop and passes bigger yields onto investors. At the same time, it gives borrowers access to capital at a time when they can’t get it at a reasonable rate from the too big to fail banks.
The yields are the real draw, of course. Instead of forking your money over to a traditional bank for a 1% savings yield, you can collect yields between 6-12% with this alternative.
And it's easier and safer than you think to make the switch. Click here to receive a special report titled The Banker's Secret, which shows you how To collect much bigger yields from your savings by cutting the bank out of the process.