For the 21st century, big bank bad news – large financial losses, fines for malpractice, lay-offs – is hardly news at all. In fact, we’re surprised when things go right.
Bankers deal in credit. They lend and borrow and promise to repay. But when creditors come running for their money, the bankers search their vaults in vain. It seems that the money is elsewhere.
Crisis of liquidity and solvency are recurrent. But the crash of 2007-2009 and its long-lingering aftermath come with a twist. It was, and remains, a crisis not only of leveraged finance but also of socialised risk-taking.Citigroup has played its part in the cyclical dramas for 200 years. It has been safe, and it has been sorry. It has had more lives than a cat, and its survival tells a story about the evolution, if that’s the word, of American banking.
I divide that history into two eras, ancient and modern. Between the civil war and the Depression, banks looked after themselves. There was no federal deposit insurance, the dollar was defined as a weight of gold and no bank was too big to fail. A good banker lent against the collateral of short-dated commercial bills, not – heaven forfend – property.
In those long-ago days, capitalists bore the costs of the downside as well as the fruits of the upside. “If a bank failed,” wrote Jonathan R. Macey and Geoffrey P. Miller in a 1992 article in the Wake Forest Law Review, “the receiver would determine the extent of the insolvency and then assess shareholders for an amount up to and including the par value of their stock” – so-called double liability. After all, it was the shareholders’ bank, not taxpayers’. And, the authors concluded, the shareholders tended to pay: “Despite the large amount of litigation, the overall level of shareholder compliance with assessment orders was relatively high.”
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