Monday, December 29, 2008

Banks Did It, in the Dining Room, with the Rope

The Jan 2009 issue of The Commonwealth has a fascinating speech by Dick Kovacevich, Chairman of Wells Fargo (WFC). Most interesting is how quickly the banking sector grew.

Wells Fargo started as a business in 1852, and Norwest, where I worked before merging with Wells Fargo, started in 1873. By 1950, our combined assets were less than $3 billion...By 1985, both companies together were still only about $50 billion. Today, they are $610 billion. When our merger with Wachovia is completed, we will be nearly $1.5 trillion. So what happened...that caused this unprecedented growth? ... deregulation, new technologies, non-bank competition, and industry consolidation.

The banking sector is a rarity--despite multiple mergers, competition continues to be fierce. The internet banks, especially ING Direct, keep threatening the big players. Consumers owe (in the abstract) more to ING and other internet bankers than we realize.

The 1980s was a very difficult time for our economy. We had 16 percent inflation, 20 percent interest rates, double-digit unemployment and a severe recession.

Mr. Kovacevich differentiates between an economic crisis and a financial crisis. He says the 1980s was worse than today's crisis, because it was a full-blown economic crisis. Today, however, we have more of a financial crisis than an economic crisis:

We're probably in a recession; we'll be in one until early next year, but we've still got 6.1 percent unemployment, not 14 percent. We have 2 or 3 percent inflation, not 20 percent. We have interest rates at record lows, not at 20 percent...[So] It is a more serious financial crisis...We [the financial sector] really caused this crisis.

His willingness to accept blame should earns points. It's nice to see a Chairman of a major banking company speaking so frankly. He ends with a positive note:

I wouldn't want to bet against all the regulators and all the governments of the world -- this is a coordinated effort. If you want to bet against them, go right ahead, but I wouldn't. They'll get this thing fixed.

Very reassuring words from Wells Fargo's chairman.

Disclosure: I own shares of Wells Fargo (WFC). Warren Buffett's Berkshire Hathaway also holds WFC shares.

Bonus: In the same issue of The Commonwealth, Meg Whitman, former CEO of eBay, talks about California's budget:

Revenues have got to be greater than costs. This is one of the real laws of business. Otherwise, we go bankrupt. We need to change the structural way our budget is being done.

Although I live in California and consider myself a fairly comprehensive reader, I have no idea what's really going on with my state's budget. Last I heard, the Democrats were trying to call taxes "costs" to push through a budget over Republican objections. Come state election time, I may just vote against all the incumbents.

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