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BNY Mellon Chief: Losing Money Is No Reason To Doubt Corporatist Myth

BNY Mellon Center (daveynin-Flickr)

Still no explanation for BNY Mellon's monster-sizing. (photo: daveynin via Flickr)

There are a number of untrue things that serious people have to believe about financial matters. One is that this country needs giant banks to stay competitive in the modern world. This bizarre notion was the central argument made by Goldman Sachs brain boy, Robert Rubin, but that doesn’t make it true. Thanks to reader dosido, we have someone besides our usual targets, Lloyd Blankfein and Jamie Dimon, to explain things to us peasants: His Most Excellent CEOness, Robert Kelly of BNY Mellon.

Paul Solman, the interviewer, gives Kelly the opportunity to explain why banks should be allowed to grow to gargantuan size. Kelly offers two reasons. He notes that many large US corporations need money in large amounts.

Many of them, say, want to raise money in China to be able to be more successful over the long term. Wouldn’t you rather that business go to American banks than to foreign banks?

This is a direct appeal to US chauvinism, particularly delightful because it comes from a Canadian: Kelly is from Nova Scotia and spent most of his career at Toronto Dominion Bank. Kelly doesn’t even try to explain why banks need to be big to make big loans. When banks make big loans, they lay them off on other banks, through syndications, or recently, by securitizing and selling them. One of the big problems of Lehman Brothers was its inability to lay off some of its more bubbly private equity and other loans.

For decades, large stock and bond transactions were syndicated among big underwriters, each taking a piece of the transaction and allocating it among their customers. The cover of the prospectus would list the lead and main underwriters, and in larger deals, more would be listed elsewhere. Similarly, groups of banks would get together to fund giant loans. For customers, the transaction is with one entity, and they don’t really care exactly who is providing the money.

I can’t think of any reason that one bank should make a specific loan, other than keeping all the fees, and making more money laying off the loan in a securitized package, and more money managing the securitized package of loans, and who knows, more money off the bankruptcy.

Then Kelly says that there are economies of scale for giant banks. Solman replies that economists like Simon Johnson say there are no economies of scale once a bank has reached $100 billion in assets. Kelly assures Solman that BNY Mellon was much better off than it would have been as a smaller institution.

Solman asks about the losses in 2008 of $1.5 billion. He might have added that Kelly’s bank wrote off $4.8bn in the third quarter of 2009 alone, trying to put its failed securities investments in some kind of order. 10-Q, third quarter 2009, page 5. Kelly explains how this blunder happened on his watch:

We have to do something with those deposits. And you could buy treasuries that are essentially riskless, or you could buy very high-quality securities, for example. The equities are fairly risky, so we don’t buy stocks. But we do buy bonds.

And we [sic] AAA-rated bonds, which turned — which turned which turned out to be not AAA. If we want to be kind about it, perhaps they were CCC.

Let’s run that through the Bizspeak Translator: We bought a bunch of toxic waste, but it’s really not our fault, those foul rating companies misled us.

Solman displays good form by not laughing out loud. This was a double win for him: Kelly failed to explain why banks need to grow to enormous size; and Solman points out that he failed at managing his bank’s principal job. Of course, Solman can’t spike the mike in celebration of his win. The conventions of business media require him to nod in acquiescence to whatever nonsense Kelly spouts. It has to be enough to let the emperor parade around, clothed only in his moth-eaten mythos (H/T reader knowbuddhau).

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