I've Decided to Become a Fashion Writer

Sure, I’m a middle-aged, white guy who loves fishing in farm ponds.  I live smack dab in the middle of one of the classic 'fly-over' states.  And I may look at a dress worn by an emaciated, morose model on a runway and think, “Golly, I wonder how she even puts that sucker on?”

But, come on, I wear clothes!  And I know that Milan is in France, how hard can it really be?

A little thing like not knowing what she's talking about doesn't stop NPR’s Terry Gross.  It’s one thing to not know what you’re talking about—can a radio host possibly be an expert in everything?—it’s something else entirely to know so little about a subject that you choose to interview someone who doesn’t know what they’re talking about.  

Am I being caustic again?  Probably.   But before you write me off as mean-spirited, I just want to note that Charlie Rose never seems to make these kinds of mistakes.   

Here’s the transcript to Gross’s recent interview with Jesse Eisinger.  Now, admittedly, understanding the financial crisis has been very, very difficult for those of us who get how these things normally work.  For most of the population, I’m sure it’s almost impossible to understand.  But Eisinger should know better—he’s at ProPublica now and was previously at the Wall Street Journal and The Street.com.

The interview is riddled with misinformation.  It's appalling, really.  

Here are a few problems I have with this bit of “news” from Terry and Jesse:

Is it really news that Sheila Bair thought the banks needed more capital but the Fed did not?  And why does Eisinger think the Fed is subject to lobbying pressures but FDIC isn’t?  What if both Bernanke and Bair just arrived at independent but different conclusions?  No one knew exactly how much additional capital was needed and how fast the banks needed to get there.  All anyone suspected was that bank capital was too thin to sustain another major financial crisis.  The original stress test wasn’t totally rigorous, but it was real—it confirmed that JP Morgan was significantly better capitalized than Bank of America. Also, it's not like the Fed stopped at one stress test; the most recent results were released this past Tuesday.

On the other hand, our fractional reserve system relies on banks retaining a small minority of each deposit as capital.  Jacking capital retention ratios north of, say, 15 – 20%—as we saw some Swiss banks do—would only serve to weaken velocity when the banks began to lend, putting more strain on the central bank to stoke growth.    Besides, Basel III is raising capital levels and requiring more secure types of capital for banks globally.  US banks could quickly become disadvantaged if they pushed farther faster than their European and Asian competitors.  The key was, and is, to get there (higher, stronger capital) in a coordinated fashion. 

Can we really generalize about “the banks” when critiquing things like dividend payments and acceptance of capital from the Fed?  JP Morgan had Fed capital forced down its throat—CEO Jamie Dimon never wanted it and never needed it.  In fact, he was the white knight that kept Bear Stearns’s clients tucked in.  Bank of America (thanks to its Countrywide and Merrill Lynch acquisitions) was an utterly and completely different story—they were a hair’s breadth from failing themselves.  

Is the fact that the Fed took a position in preferred stock something to lament?  And who cares that they didn’t get a vote with the preferreds?  They’re the Fed, for crying out loud!  They have all the voting power any stakeholder could ever want.  A share class is “preferred” because its owners have a senior claim to common stock holders.  In hindsight, sure the Fed could’ve made more money by buying the common shares, but when you don’t know if Bank of America is going to ultimately fail, should you really gamble with tax-payers’ money?  

Also, Warrant Buffett owns preferred shares in Bank of America and that means one thing: the bank just isn’t in the bad shape that Eisinger thinks it is.  Buffett may make goofy, populist, guilt-induced, political arguments about taxes, but he’s an incredibly sharp investor.  

Eisinger is correct that banks are currently making a healthy spread between their cost of money (what they pay to depositors), which is almost 0%, and what they can earn from buying Treasury bonds (2-3%).  And, sure, it would be nice for them to lend more (though Commercial & Industrial lending has already been pretty strong).  But ask yourself this question: if the Fed really wanted the banks to lend, why are they paying interest on bank excess reserves at their Fed accounts?  Shouldn’t they charge the banks to keep the money in the mattress?  Moreover, if the banks are really in the trouble Eisinger wants you to think they are, then shouldn’t he be delighted with healthy net interest margins because they’re allowing the banks to beef up capital?  

Dividends are taxed twice—there is no good argument for taxing them more.  Terry & Jesse are concerned that banks want to reinstate dividends because it's a more tax efficient means of compensation for executives than cash.  Well, let's see, here JP Morgan's tax rate last year was 27%, so if we add 15% tax on CEO Jamie Dimon's dividend (because dividends are after-tax cash flows), we get an effective tax rate of 42%.  If Jamie Dimon instead took the full amount of his dividend as a cash bonus his top federal tax rate would've been 35%, 7% less than his actual rate.  No, my friends, the banks aren't trying to pay the executives through stock dividends so they can avoid taxes, they're incentivizing them as owners.
   
Last point: if you prohibit the banks from paying dividends for a long period of time, who would want to own their shares?   Let’s face it, banking isn’t exactly a growing industry, and bank stocks aren’t that exciting.  For seniors, pensions, or endowments which rely on dividends (which, because of ultra low rates, have replaced reliable CD & bond interest) they’ve been a reliable source of income.  The point is that if you eliminate all dividends indefinitely, you drive away the vast majority of your potential investors.  And when those guys leave, your stock price falls.  Bad idea.

I should be more fair to Terry Gross: she's a widely respected interviewer who's been doing her job a long time.  Still, she has a story to tell, airtime to sell.  She's naturally drawn to a certain type of interview, one that's controversial—apparently even when the controversy is fanciful.  If you don't get something, should you really comment on it?