Guest Piece: The Long, Grey Line

By Marilyn Barnewall

We’ve all heard of the “Thin Blue Line.”  It suggests a thin line of policemen in blue uniforms is all that stands between civilized society and the chaos of predators descending upon us.  It is also a term used to express a sense of “brotherhood” that exists between police officers.

There are other lines… thin lines that stand between society and other forms of chaos.  I remember a movie about West Point cadets that referred to the military as The Long Grey Line.

There is, however, another Long Grey Line –in one of the places you would probably least expect it.  You will find it in America’s independently owned commercial banks.  Our small-enough-to-succeed commercial banks may be all that stand between the American people and an international body set to take the place of the currently ineffective regulatory agencies responsible for overseeing America’s financial services industry.

According to the Federal Reserve Bank of St. Louis, as of June 30, 2009 there were 6,898 commercial banks in the United States.  That sounds like a lot – unless, like me, you were a banker in the 1970s and 80s.  As of June 30, 1984, for example, there were 14,369 commercial banks.  By 1994, that number had been pared down to 10,623.  In other words, it doesn’t take a mathematical genius to determine our independent banks have been drastically reduced by number – over half of the commercial banks doing business in 1984 have either been absorbed by bigger banks, or are otherwise out of business.

Who – or, what – might want the number of independent American commercial banks to be reduced by such a substantial number?

According to statistical data provided online by Canadian bank officials, as of February 2009, there are 21 domestic commercial banks in Canada.  Additionally, there are 25 foreign- owned commercial banks.  The foreign-owned banks include familiar names like Amex Bank of Canada, Bank of America Canada (in voluntary liquidation), Bank of China, Bank of East Asia, (The) Bank of Tokyo-Mitsubishi UFJ, Bank One Canada (in voluntary liquidation), BNP Paribas, United Overseas Bank (UOB Singapore), and Citibank Canada, among others.

America’s neighbor to the North once had over 900 caisses populaires (similar to credit unions and mostly in Quebec).  By 2007 consolidation reduced this number to 525 credit unions and caisses populaires outside of Quebec.  In essence, Canada (including Quebec) has about 1,000 financial institutions that require regulatory control.  Of that group, only 21 are domestically-owned commercial banks.

Before nationalized health care can be successfully implemented, the financial sector must first be compact and easy to control

Why are Canada’s numbers important?  First, because these numbers explain why it has been so much easier to bring socialized everything to Canada and why it’s more difficult to do so in the U.S.  For example, before nationalized health care can be successfully implemented, the financial sector must first be compact and easy to control.  Second, Canada’s statistics compare favorably to Europe’s banking industry.  In other words, while America has 6,898 commercial banks which must be regulated – audited by the Office of the Comptroller of the Currency (OCC) or State Banking officers and monitored by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve System (FRS) – most other nations have far fewer commercial banks that must be regulated and audited than does the U.S.

I have long believed that the independent banking community in this country is one of the best defenses America has against the forced centralization of bank regulatory oversight on an international basis.  It’s our Thin Grey Line.  Regulatory controls must be in place before the financial services industry can be “internationalized” and the large number of independent commercial banks in America is helping prevent that from happening.

Once an international banking system is established, sovereign nations will be a thing of the past.  One world government supported by one world currency (or a basket of currencies) will rapidly follow.  It is very difficult for international bank regulators to keep tabs on almost 7,000 commercial banks – a number that does not include thousands of savings and loans plus credit unions – that dominate the American banking scene.

Looking at the trends over the years, one could deduce that independent banks have been targeted for annihilation.  The shrinking numbers of independents tend to verify that.  Nothing happens by accident in the world of finance – not even derivatives that get leveraged 40 times.

Regarding the “too big to fail” banks (a/k/a “too big to succeed”), in 2007 two physicists at the Swiss Federal Institute of Technology in Zurich did a physics-based analysis of the world economy.  Stefano Battiston and James Glattfelder analyzed 24,877 stocks and 106,141 shareholding entities in 48 countries.  They found what they called “the backbone” of the financial markets in each country.  The “backbones” (a handful of investors) held 80 percent of each country’s market capital and represented remarkably few shareholders.

The “backbones” with the fewest people in control of wealth included the U.S., Australia, and the U.K.  Regarding America, Blattfelder and Battiston’s analysis found that though an American company may show links to many owners, the owners varied little from stock-to-stock.  In other words, very few hands hold the total pie.

Add that knowledge to the epidemic of fraud and insider misconduct that caused numerous bank failures in past years and three-quarters of savings and loan failures in the 1980s, and it becomes apparent why it’s important to control our financial alternatives.  We need to keep them in as many different regulatory hands as possible.

Much of the abuse was undetected.  Federal regulators have made huge errors… some think intentional errors.  The OCC needs to schedule regular bank examinations.  And, since the office does not seem to keep up with the changing marketplace, its auditors need to be better trained; those who do not understand new financial service products should be dismissed. An auditing team capable of spot-checking results of bank audits needs to review and grade those who do the audits. 

The FDIC, which also regulates commercial banks, could not have been doing its watchdog job or the banking industry would not be in the mess it is in now. 

The Securities and Exchange Commission (SEC) ignored so many things that it is still next to impossible to find all of the errors overlooked by SEC Chairman Christopher Cox on his watch.  If any single action can be named in causing the ongoing demise of America’s stock market from 2007 to the present, naked short-selling is at the top of the list.  Doing away with uptick laws happened on Cox’s watch.  It was malfeasance.  Why isn’t he being investigated – along with Timothy Geithner who, at the time, was the Fed Head of the New York Federal Reserve?

What can people do to protect themselves from the lack of skilled bank audits and sad lack of regulatory skills?  What do you need to do to protect yourself from a failed bank?  And, what happens when a bank fails?

Everyone knows about the FDIC’s $250,000 deposit guarantee.  It makes everyone feel safe. But, when you look at the status of funds available to the FDIC to pay depositors up to $250,000 each when banks fail, it should cause you concern.  This is a ball on which you need to keep a watchful eye.  What ball is that?  The bank where you have money on deposit.

People forget that when they deposit money in a bank, they are investing in someone who lends their money to other people.  Some bankers are better lenders than others… some banks have better loan policies in place.  Because it is difficult for non-bankers to know how to evaluate their banks, here’s a link that can help .  Bank Rate offers a one-to-five star rating.  If your bank gets only one star, you might want to move your account.

Too, it’s a good idea today to spread your deposits among two or three banks (I use three).  Why?  After all, you’re insured by the FDIC, aren’t you?  Sure you are!  But it takes time to get an appointment with an FDIC representative when it takes over a bank.  What do you use for money until you get your appointment?  What if the same thing happens to the FDIC as happened to the Federal Savings and Loan Insurance Corporation (FSLIC) when savings and loans failed in the 1980s?  In Ohio, I watched as people could get only $900 per month from their accounts, regardless of the amount available in the account.  The FSLIC did not have sufficient funds (very similar to the FDIC’s situation today) to pay account holders the total amount of their deposits.

If you have money in a second or third bank, it’s very unlikely you will be forced to live on funds made available by a government regulator should the predicted large number of bank failures occur.
Keep an eye on your bank – and be supportive of your local independent banks.  They are a very important piece of the financial services puzzle that is trying to unwind itself… and would unwind itself if left alone by politicians who support their buddies on Wall Street.

President Obama recommends that bank regulation be consolidated within one or two organizations.  I read an article last week that called the FDIC/Fed – the regulators President Obama thinks should regulate not only regulate our commercial banks, but everything involved in the business of money – the “axis of evil.”  Personally, I prefer the term “source of malignant energy,” but the two mean relatively the same thing.

The point is, politicians are protecting the very system that needs to be abolished.  They want you to support them in this effort and are trying to buy that support by promising that your money will be safer if you do.

And if you buy that, I have some Fannie Mae subprime mortgages in the form of derivatives I’d like to sell you at a bargain price! 

                     © 2009 Marilyn Barnewall — All Rights Reserved

Marilyn Barnewall received her graduate degree in Banking from the University of Colorado Graduate School of Business in 1978. She created the first wealth creation (credit-driven) private bank in America in the 1970s. Prior to her 21-year banking career, she was a newspaper reporter, advertising copywriter, public relations director, magazine editor, assistant to the publisher, singer, dog trainer, and an insurance salesman and manager.

She was named one of America’s top 100 businesswomen in the book, What It Takes (Dolphin/Doubleday; Gardenswartz and Roe) and was one of the founders of the Committee of 200, the official organization of America’s top 200 businesswomen. She can be found in Who’s Who in America (2005-08), Who’s Who of American Women (2006-08), Who’s Who in Finance and Business (2006-08), and Who’s Who in the World (2008). She can be reached at: emembee@ymail.com