The Bankers, by Martin Mayer
by Martin Mayer.
Weybright and Talley. 566 pp. $15.00.
If, as we are still on occasion told, war is too serious to leave to generals, banking, Mr. Mayer suggests in his disquieting and important study, has become far too serious to leave entirely to bankers, whose collective role as prime movers in the economy is vast, growing rapidly, and remains largely unknown to a public profoundly affected by their decisions.
There has in fact been a revolution in banking within the past decade, one that has enabled banks to exert an increasing influence on the money supply, and therefore on the level of prices in this country, and has established national and international credit markets, linked by enormously sophisticated communications networks, that threaten to escape altogether the relatively puny supervisory efforts of governments and regulatory agencies. This man-made revolution, a product of technological advances on an unprecedented scale and the influx of intelligent and eager business-school graduates into higher banking echelons, is characterized by stock market-oriented banks aggressively expanding into risky but profitable fields remote from traditional banking, usually through the device of selling themselves to their own holding companies, which in their turn own and operate such businesses as real estate, leasing and factoring companies, often across state and even national boundaries. Bagehot’s dictum that “adventure is the life of commerce, but caution, I had almost said timidity, is the life of banking” has been jettisoned along with much else of traditional banking wisdom in the indiscriminate lemming-like pursuit of “performance” at all costs, defined in terms of increasing the prices for bank shares rather than insuring the collectibility of loans or the stability of deposits.
Mr. Mayer amply demonstrates that the dimensions of the banking revolution are imperfectly grasped by bankers themselves, let alone legislators and the public at large; the purpose of his impressively researched, clearly written analysis is to anatomize that revolution and make its implications comprehensible to laymen as well as specialists. In this ambitious aim, despite a wealth of often fascinating, occasionally chatty detail, he is only partially successful, perhaps inevitably: there surely cannot be many readers who will entirely follow his perforce technical discussions of Federal Reserve operations or the Eurodollar market, nor will everyone relish being taken behind the scenes to observe the complex fate of checks drawn on Mr. Mayer’s personal account, or the arcane rituals of trading in federal funds. That some readers may weary of these subjects is a pity, not merely because Mr. Mayer describes them with knowledgeable enthusiasm and a sharp eye for human detail, but also because he convincingly argues that discussion of these technical and esoteric matters leads inevitably to a consideration of crucial problems at the very center of national policy.
This book is in fact a carefully constructed argument that proceeds from a detailed description of how to start a bank to an analysis of banking operations, including the sources and employment of funds. In his discussion of lending practices and the sometimes far from subtle pressures on bank lending officers, we are shown how such fiascos as the Penn Central and Franklin National collapses occurred, and given disturbing evidence of the terrifying insouciance with which some of the biggest banks compiled their frequently appalling loan records of the past several years, often taking indefensible gambler’s risks in the hope of recouping earlier losses. The explosive growth of term loans—loans unsecured by collateral, payable out of cash flow that often enough fails to materialize—has meant that some banks have in effect become creatures of their own borrowers, compelled to keep “rolling over” loans as they mature rather than push such shaky debtors as real-estate companies into bankruptcy. Uncollectible term loans on bank books now amount to billions of dollars, Mr. Mayer charges.
Going on to analyze the pernicious influence of stock-market performance on managerial judgment, Mr. Mayer describes the almost overwhelming incentive to maximize short-term profits by indulging in “creative-accounting” practices that distort earning, thus misleading shareholders, security analysts, and often regulatory agencies as well; the notion that “accounting is a way to tell the truth” has become as quaintly obsolete to the nimble-witted new breed of bankers as the steel-tipped pens and hand-posted ledgers of their predecessors.
The growth mania that has swept banks far from the familiar guidelines of elementary banking prudence has also, Mr. Mayer tells us, enabled the banks to damage the economy by artificially swelling business and individual demand for loans, thus undercutting the Federal Reserve System’s attempts at restraining inflationary pressures, and helping to push interest rates to their recent record levels. The banks have fueled the enormous growth in their loan business by avidly borrowing from other banks, the public, and a Eurodollar market unregulated by United States or other authorities, whose sheer size and volatility are menacing in themselves. Nobody knows the precise dimensions of the Eurodollar market: what is certain is the tremendous speed with which billions are transferred from one jurisdiction to another, often overnight, to take advantage of minute fluctuations in interest rates and to balance bank books for cosmetic purposes. If some day the music stops in this market, holders of perhaps as much as $250 billion in paper will be looking to someone, somewhere for repayment; very few believe the world financial system as we know it could survive that day.
It is in considering the international aspects of the banking revolution that Mr. Mayer demonstrates most vividly how the vastly improved technology of banking—the sheer ability to move enormous sums of money at high velocity—has become the fuel for the hyperinflation that has swept the world in the past several years, with profound political consequences. In almost prophetic language the author concludes that “greed, curiosity, and pride join to push the best people in the system toward maximum exploitation of the emerging technology, with the Devil to take the hindmost: we have seen the phenomenon elsewhere.”
Indeed we have; and Mr. Mayer’s tentative prescription for solutions acknowledges that our problems were not created by bankers and cannot be resolved exclusively by them. He insists nevertheless that it is high time for the Federal Reserve and other government authorities to reassert their influence over the banking system: the risk of a few more bank failures now is nothing compared with the horrendous prospect we face if present trends continue unchecked. Moreover, we must all—Congress, the administration, the public—face the unpalatable ancient truth that what we purchase collectively must ultimately be paid for, just like those goods and services we purchase as individuals; and that we cannot continue simultaneously to improve the quality of life, extend technology to its ultimate limits, increase the real income of every individual member of society, without paying some price. Mr. Mayer is justifiably not sanguine about our chances of avoiding economic disaster over the next decade: even if the Federal Reserve and Congress display a degree of moral courage and sagacity they have until now signally failed to do, most of the world’s savings over the next few years will still flow to the oil-producing countries, whose employment of these gigantic assets has thus far been notoriously unconstructive.
Mr. Mayer’s analysis thus leads at last to a consideration of those essentially moral dilemmas that are implied in political choices for a country whose economic resources are vast but nonetheless finite. That a book about banking should arrive at these key issues is a mark of its seriousness and importance, as well as an indication of the centrality of banks in our economy and society.