The Decomposition of Banking

by C. Ward Bond

Thirty five years ago, Embree Easterly, president of Capital Bank and Trust of Baton Rouge, fought a losing battle for the preservation of banking integrity while he was the leader of the Independent Banker’s Association of Louisiana.

At the time, a bank could not extend its lending outside the parish where it was located. This ensured that bankers knew their borrowers. It helped ensure that lending was made based on character, not formulas. A bank was funded by bank capital which was locally owned and regulated by the institutions that emerged after the Great Depression and provided the soundness of our financial system.

All this ended in the 1970s with the introduction of statewide banking and bank holding companies, which allowed the owners of banks to leverage their bank capital through setting up a holding company for the bank and issuing unregulated commercial paper. This abandonment of the regulatory system became a catastrophe after the development of nationwide banking, which centralized and formularized lending, and created the credit card and derivative debacles. Easterly and his cohort were among the last bastions against what has come to pass.

Also 35 years ago:

  • The rating agencies for bonds, Moody’s and Standard and Poor’s, were compensated from fees paid by the investment industry. Today these two agencies are paid with bribes from the companies and political subdivisions the agencies rate.
  • Accountants did accounting only, not “consulting” on business matters and certainly not both for the same company, which carries with it a blatant, inherent conflict of interest .
  • Mortgage companies kept a piece of every mortgage. They were self-regulating. Their boards of directors had direct and personal interest, through ownership in the company, in making sound loans. Fannie Mae was an infant and Freddie Mac did not exist. Congress had not yet co-opted the mortgage banking industry by exploding the amount of government “sponsored” loans for purchase of “sub-prime” mortgages. Congress left Allen Greenspan playing with his Federal Reserve in the corner while they dumped five trillion dollars of unregulated excess liquidity into the economy.

The day that Greenspan told Congress he was “shocked” by the events of September 2008 was the day that the Keynesian fraud died.

C. Ward Bond
812 North Blvd.
Baton Rouge, LA 70802



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