The Death of Banking

I think I've read nine "finance" books in the last 10 months or so; this is honestly a bit sad, and my history tutor would probably be very disappointed if he found out (sorry George). None of them, however, get close to the highfalutin prosody of Ron Chernow, the Yale- and Cambridge-educated writer whose 2004 biography inspired the musical Hamilton. His pleasingly thin 1997 survey of financial history, The Death of the Banker, is full of vocabulary which other writers would never dare to deploy. 

In the space of just twenty pages, you can find a story populated by cognoscenti, mandarins, and vulgarians (p. 84), with lagniappes (p. 67) and Grands Guignols (p. 65), where narratives are cashiered (p. 79) and blown to smithereens (p. 65), where corporations slavishly genuflect (p. 71), the duchess elopes with the footman (p. 82), and the peasantry have burst through the gates, overrunning the palace grounds (p. 74). Indeed, the title of the essay is itself a reference to the French literary theorist Roland Barthes’ 1967 essay The Death of the Author (really worth reading! influential on my thinking). Chernow blends a vigorous interpretation of the development of the banking industry with a wonderfully florid rhythm of analysis, anecdotes, and apophthegms; here are a few extracts to illustrate the method:

“What had changed that allowed the Rothschilds to hurl insults and thunderbolts so freely and treat the loftiest politicos with undisguised condescension? How had they crept out from under the awful, oppressive shadow of local sovereigns to stand forth as unrivalled magnificos in their own right?” (p. 11)

“More than eighty years after his death, John Pierpont Morgan continues to define our image of the tycoon as a big-bellied man, top-hatted and frock-coated, a fierce, swaggering buccaneer. Here was a big-time financier as P.T. Barnum might have conceived him, with a thunderous voice and a daggerlike gaze, a portly man of vivid appearance and kaleidoscopic moods. On the street, he wielded a cane that might become an instrument of relations if he wished to go mano a mano with an overly importunate photographer. With a murderous glint in his eye, Morgan would lift his club and wave it until the unwanted intruder disappeared. Clearly no Milquetoast, he felt no need for a public-relations man. He epitomised the high-testosterone tycoon, blessed with a lusty appetite for big deals, big boats and big, bosomy women.” (p. 19)

“If Morgan was such a bloodthirsty ogre, why did his mangled victims fail to plead for their liberty? Why didn't they rattle their chains more? One possibility is that they were too cowed and bullied to criticize their master openly. Another plausible explanation is that many board members were recruited by Morgan and therefore remained beholden to him. Yet we must also entertain a third possibility: that such bondage possessed signal advantages for companies in those days.” (p. 29)

This writing is anathema to the style preached by writers like Paul Graham, who places the most value in clarity. But Chernow is trying to a paint Romantic picture of the past, and in doing so, he breaks all of Orwell's first three rules of good writing, laid out in Politics and the English Language:

(i) Never use a metaphor, simile or other figure of speech which you are used to seeing in print. 

(ii) Never use a long word where a short one will do.

(iii) If it is possible to cut a word out, always cut it out.

Chernow luxuriates in his voluptuous diction, a hammam to Orwell's plunge pool. 

But there's also a clear analytical framework to the book: the idea of a graph with 3 bars, which represent the relative power of creditors, financial intermediaries, and debtors. The book literally charts the relationship between providers of capital, middlemen, and consumers of capital in the West, returning to the theme nine times; but Chernow never actually lays this out on one page, so I've done it for you before below.

I’m not really qualified to say whether this analysis is strictly true; I’m not an expert on modern financial history, unfortunately. But two things about this do jump out to me.

First, Chernow (writing in 1997) identifies the key financial trend of his time as the rise of asset managers; he refers to Fidelity, Vanguard, Capital Research, Merrill Lynch, and Franklin/Templeton as the “five financial dreadnoughts” which were going to dominate the industry. It’s not a bad prediction in some ways - asset managers are important, and these five remain important (even though Bank of America acquired Merrill Lynch in 2009, and firms like Blackrock have become even larger than the dreadnoughts).

Furthermore, asset managers may have changed corporate governance in meaningful ways. Matt Levine makes an interesting argument that Blackrock practices stakeholder, rather than shareholder capitalism. If I own shares in one firm, then I will vote my shares to maximise value for myself and other shareholders of that firm; I don’t care about negative externalities, and I am just as keen to win zero- or negative-sum games as positive-sum ones. But if I am Blackrock, and I own a large stake in the entire S&P 500, then, when I vote the shares of any individual firm, I want to make sure I’m maximising value across my entire portfolio. If I own everything, then minimising negative externalities becomes important! Price wars and pollution may not damage shareholder value for Walmart or Chevron respectively, but they might hurt other firms in which these asset managers are invested.

This is certainly an interesting concept; it probably means good things for ESG agendas, and bad things for people who like competitive efficiency and a dynamic economy? I’m not sure it’s much more than a concept at the moment, though; and I’m fairly sure it’s not the most important trend in the modern economy since 1997; certainly not more important, than, say, the housing market, or the rollercoaster performance of technology stocks.

Secondly, Chernow identifies “banking” - which he says had died a death by 1990s - with net interest. Real banking, for Chernow, involves making money by lending out deposits at a higher rate of interest than you offer to savers. There can be some financial alchemy around this basic proposition, but Chernow is writing a history of this fairly narrow phenomenon. On page 69 he writes:

“Citibank, for instance, now collects only 50% of its revenue from interest payments as it segues into fee-based services. To offset this loss, commercial banks have become more deeply involved in the capital markets that stole away their primary clients in the first place. In the retail banking world, they have bundled loans - whether for mortgage payments or credit-card receivables - into securities that can be marketed and traded like bonds. Such “securitisation” has blurred the line between lending and underwriting, rendering it meaningless. A growing portion of commercial-bank profits comes from trading securities, dealing in foreign exchange, offering derivatives and other hedging instruments, selling insurance and mutual funds, and offering credit cards.”

According to Citi’s 2021 annual report, they did $71.8bn in revenue, of which $27.3 came from their Global Consumer Banking division, and $43.9bn from their Institutional Clients Group, of which $18bn was net interest and $26bn was non-interest. If you look at Mayer Amschel Rothschild’s bank, then you’ll see that only Fr.23m of the Fr.166m in revenue they did in 2021 came from ‘net interest’. Even you assume that part of Citi’s consumer banking revenue was net interest, the decline of net interest banking has only continued since the 1990s.

Incidentally — I am (again!) not really qualified to comment on these numbers, but I’d love to see someone more familiar with the annual reports of major banks plot these ratios as a graph. How have the revenue streams of these institutions changed over time? How are different institutions different? Patrick McKenzie suggested in the 2021-11-12 edition of Bits about Money that it might be valuable to become familiar with these things - in this case, I think it’d be really interesting:

"Finally, if you have dozens of hours to invest in the topic, getting familiar with the quarterly and annual reports of a small number of banks will, over time, really help to develop intuitions about both banking and the payments industry. If you’ve not previously worked professionally on this, try First Republic’s reports; they’re large enough to have good production value on their reports but they have a very simple business to understand relative to e.g. the largest banks in the world. Wintrust and Silvergate are also good for similar reasons. After you feel like you largely understand what a typical bank’s reports look like, try Green Dot Bank or Evolve Bank and Trust to see how interaction with fintechs changes the equation."

Chernow’s argument does feel a little “old man yells at cloud”, though? Net interest banking was the first and most obvious way to get capital to where it’s needed most - but since then, we’ve developed all kinds of other ways to make the economy more efficient, whether that be securitisation or any of the other “fee-based” services that he sees as being not proper banking. Mayer Amschel Rothschild used to take money from one client (Wilhelm IX) and help him allocate it profitably to borrowers; now, Rothschild the bank advises large clients on M&A deals, helping them to allocate their capital profitably. The distinction for which Chernow’s book is named seems arbitrary and ill-chosen, despite the felicity of its language and the clarity of its narrative arc.