Like Ducklings Furiously Paddling, Small and Medium Sized Banks Are Now Looking for Mom

Just a smidge of history to set this up

In the late 40s and early 50s, my Dad knew the President of the First National Bank and Trust Company of Evanston. Matter of fact, he landscaped his home, several blocks from where we lived. They operated on a first-name basis, banker and customer who often shared a pipe in the office and knew each other’s needs.

Banking was a dull business in those days, holding deposits and making loans. The President drove a Buick, probably earned $10-15,000 a year and was a respected member of the community. He knew his customers and they knew him.

These days, long after de-regulation, there are 4,844 insured commercial banks across America

But today only eight banks are considered too big to fail and the pressure is on, with the recent failures of First Republic Bank, Silicon Valley Bank, and Signature Bank. They were all pretty large banks and were subsequently bought out rather than allowed to fail. So you can see the pressure for thousands of lesser banks to find the safe-haven of mamma-duck before the music stops. It’s a buyers market for the eight big guys.

And of course it wasn’t always this way

Way back in history—mid-eighties, remember then?—banks began to expand across state lines. Individual state legislatures passed bills allowing bank holding companies to acquire out-of-state banks on a reciprocal basis with other states. “Ah, what a tangled web we weave, when first we practice to deceive”-Shakespeare.

Then Bill Clinton—surely you remember him—put his signature to The Riegle-Neal Act in 1994, a piece of federal legislation that sanctioned the establishment of nationwide banks and we were off to the races.

That’s only 29 years and four presidents ago

Keep in mind that banks were once instruments of either state or national governments—if they wanted to offer guarantees to depositors

President Roosevelt took care of that after the disastrous run on banks in the Great Depression. But another president, Ronald Reagan (the great communicator) privatized everything he could get his hands on and began the deregulation of the banking industry. There are such things as toolboxes in government regulation and there were such things as tools in those toolboxes.

It is said, as if it were actually true, that no one wants to go back to the old days. Having lived those days—and many of them—I can positively state that we would be hard pressed to do without many of our technological advances. But the demise of banking law is not one of them.

The CEO of the ultimate owner of The First National Bank and Trust Company of Evanston, J.P.Morgan Chase, does not know a depositor’s name nor does he give a shit

His job, and his very purpose in life, is to screw the last penny out of every bank client, juice the local stock price, get the hell out of Evanston and move up the Morgan food-chain. That's what privatization delivers, once the tools of oversight are gone. In banking, that’s a guarantee and the way it was meant to be.

As a side-benefit, the banking industry has given us a recession, on average, every six years. Since the end of World War II, the U.S has suffered through 12 recessions, or an average of one every 6.5 years. (Sorry about that, I was off by six months)

So, where does that leave our ducklings?

Dis-oriented, to say the least. There are only so many seats at the table and it’s not enough to simply be a pretty little duckling. You need to be in trouble (not much problem there), you need to have enough assets to make you worth the trouble and your CEO needs to be willing to take a hit for the team. It’s that last requirement that’s sticky, but surely there’s a better offer on the table for him or her than going down the tubes.

I expect that at least 4,000 banks will not survive. But who knows, maybe too big to fail will get resized downward like a hand-me-down shirt to a younger brother.

In any event, that’s a hell of a bunch of furiously paddling ducklings.