Word: banke
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...past few years, executives have been using thinner and thinner capital - acquisitions and questionable off-balance-sheet arrangements - to build their money pails. In good times, the more of those cheap sources of capital you use, the more profitable your bank will...
...understand why nationalization may be inevitable, you have to get a handle on the true source of the banks' problems. The banking business - at least the way George Bailey practiced it in It's a Wonderful Life - was all about deposits and loans. You take in deposits, on which you pay a relatively low interest rate, say 2%. Then you lend that money to other people at a higher interest rate, say 7%. Pocket the difference. Repeat. But starting in the early 1970s, banks began funding less of their lending with old-fashioned deposits. Bank deposits backed...
...Regulators have long had a lower capital requirement on loans that are not backed by deposits. But in 2004, the Securities and Exchange Commission (SEC) removed rules that capped leverage at 15 to 1 for investment-banking firms like Goldman Sachs. That allowed the firms to vastly expand their lending activities without raising a single new dollar of capital. One big backer of the rule change was reportedly former Treasury Secretary Henry Paulson, who was then Goldman's CEO. By that time, the regulatory separation between investment banks and traditional banks had long since been removed, so traditional banks such...
...firms leading the charge to capital-light banking was Bank of America (BofA). Starting in 1993, a predecessor firm became one of the first banks to develop and embrace computer models that were supposed to improve a bank's ability to determine the risk of a particular type of loan. After a merger in 1998 that formed the bank, BofA officials often argued to investors and regulators that these new advanced risk controls meant the bank needed to carry less capital per loan. The officials also frequently fought regulations that would boost capital requirements for them and other banks...
...billion on share buybacks, according to S&P. The result is that over the past decade, BofA's tangible-capital ratio - the amount of tangible equity in relation to tangible assets - has nearly halved from 5% in 1998 to 2.8% in the third quarter of 2008. It became a bank built on air. (See pictures of scared traders...