Wall Street banks are some of the biggest and most powerful companies in the United States. They're also exceedingly unpopular thanks to their tendency to treat customers as adversaries, not clients. This tendency is far and away their single worst practice.
The evidence of this is voluminous and dates back many decades:
- Throughout the 1980s, the nation's premier lenders financed hostile takeovers, oftentimes despite the fact that the takeover target was a former client.
- During the Internet bubble of the late 1990s, telecom analysts at Morgan Stanley, Citigroup, Goldman Sachs, and others touted companies like Pets.com and Webvan even though they knew the companies had dubious prospects of success at best.
- In the decade after the turn of the century, the nation's biggest banks including Bank of America and JPMorgan Chase surreptitiously reordered debit card transactions in order to maximize overdraft fees.
- At the height of the housing bubble, Goldman Sachs knowingly structured derivatives that were designed to lose money for unwitting clients.
- After the housing bubble burst, virtually every big bank in the country wrongfully foreclosed on legions of homeowners, sometimes doing so by submitting falsified documents in judicial foreclosure proceedings.
The problem is that banks have forgotten their primary role in the economy. Their purpose is to facilitate transactions; to allocate capital from savers to spenders. By doing so, they play a vital role that's central to economic growth.
But as the regulations put in place during the Great Depression have slowly eroded, the nation's biggest banks have veered away from these core activities, choosing instead to engage directly in commerce as opposed to merely facilitating it for others.
"That culture of two and a half decades leading to the [financial crisis of 2008-09] represented a departure from a long period -- for the better part of the 20th century prior to the 1980s -- in which prudent regulations established in the wake of the Great Depression shielded exuberant entrepreneurial spirits from ill-considered risk-taking," wrote M&T Bank's CEO Robert Wilmers in his 2013 letter to shareholders.
By M&T's estimation, the largest lenders in the United States at the time had ownership in 186 storage warehouses, 100 oil tankers, 81 power plants, 61 transport terminals, and about 14% of total U.S. natural gas pipeline miles. "Such practices give rise to potential for conflict of interest and market manipulation due to an excessive concentration of market power," noted Wilmers.
The net result is that many of our premier banks have been conditioned to perceive their role in the economy not as financial intermediaries serving as fiduciaries to others, but rather as direct participants that must do whatever it takes to succeed, irrespective of their once-revered duty to clients. It's this unfortunate evolution that I believe to be the single worst practice of Wall Street banks.
