Wednesday, June 1, 2011

The Bad Journalist

In a recent New York Times op-ed with the headline “The Good Banker”, Joe Nocera, a career journalist with no actual banking experience leverages a conversation with the 77 year-old CEO of M&T Bank, Robert G. Wilmers, to regurgitate the three populist pillars of the Banks are Evil argument, which also happen to be the weakest:
  1. Banks are “virtual casinos” and they “make most of their money” from trading, not lending. 
  2. “Derivatives helped bring about the crisis and need to be regulated.”
  3. “Bank executives are wildly overpaid.”
I can’t really blame Mr. Nocera for reporting the opinions of a CEO of a S&P 500 bank, who, in theory, should understand how Banks operate. However, I can blame him for not researching his argument and not asking the same questions of a more relevant bank CEO. Using the opinions of the M&T Bank CEO to prove your thesis about the largest Banks is the equivalent of making the Newspapers are Evil argument based on a single conversation with the editor-in-chief of The Sacramento Bee or The Roanoke Times.

Actually, it’s worse.

The average total assets of the top six bank holding companies referenced in the piece is $1.572 trillion. M&T Bank ranks 29th on this list with $68 billion, or roughly 4% of the average reported by the top six bank holding companies. The average daily circulation of the top six newspapers (which includes the New York Times) is just over 1 million. The Sacramento Bee ranks 29th on the list with circulation of 205,000 (20%) and the Roanoke Times ranks 99th with a daily circulation of 75,000 (7%). I didn’t have time to find a newspaper with a circulation that is 96% smaller than the average of the top six newspapers.

The ignorance of the op-ed doesn’t stop there. Let’s look at each pillar of the Banks are Evil argument in turn:

Banks are “virtual casinos”

Both Mr. Nocera and Mr. Wilmers make incredibly misinformed statements in attempt to show that Banks are gambling with our deposits. Mr. Nocera makes the statement that “the six largest holding companies, which made a combined $75 billion last year, had $56 billion in trading revenues.” Mr. Nocera clearly has never taken an accounting course, and must not be much of an investor if he confuses net profits with revenues. The $75 billion is net profits (i.e. revenues less expenses), the $56 billion is only the revenue – anyone who writes about business for a living should know that trying to compare a net profit figure to a revenue figure is a fool’s game.

Let’s take the largest bank holding company, Bank of America, as an example of this foolishness. In 2010, Bank of America reported $10 billion in “trading account profit (losses).” That’s a lot of trading profit for one year. However, the relevance of these trading activities is quickly diminished when you look at the “Total Revenue, net of interest expense” which was $111 billion. Therefore, trading activities contributed less than 10% to the total revenues.

This argument hinges on the statement by Mr. Wilmers that “if you assume, as I do, that trading revenues go straight to the bottom line, that means that trading, not lending, is how [Banks] make most of their money.” If I was an M&T Bank board member, I’d have serious concerns about Mr. Wilmers competence after a statement like this. Trading revenues do not go straight to the bottom line. Do trading revenues just appear from nowhere without any related expenses? Do all the traders generating these revenues work for free? Do they all work from home, without a phone, computer, network access, trading software, front office systems, back office systems, collateral management, financial controllers, risk officers, legal teams and others who support their efforts? Do the traders have access to free cash? What about taxes? Seriously, how could a CEO of a “large” bank make such a ridiculous statement?

Strike one.

“Derivatives helped bring about the crisis and need to be regulated.”

According to Mr. Nocera, Mr. Wilmers believes that “trading derivatives and other securities really had nothing to do with the underlying purpose of banking” and that derivatives “need to be brought under government control” and put into “a subsidiary and [taxed] at a higher rate.”

Strike two.

I could go on and on with concrete arguments proving why this would amount to throwing the baby out with the bath water, but instead I’ll just share another fact from the M&T Bank financial statements that proves my point.

At the end of 2010, M&T Bank held derivatives worth $472 million, with notional amounts in excess of $15 billion. Additionally, almost 80% of these derivatives were classified as trading assets.

If Mr. Wilmers really believes that derivatives have nothing to do with banking, I’d be curious why his company, which is “one of the most highly regarded regional bank holding companies,” holds $472 million worth of derivative assets (and $336 million in derivative liabilities).

“Bank executives are wildly overpaid.”

Bank executives do not set their own compensation; the markets do. You’re worth what someone is willing to pay you. The $20 million of compensation for JPMorgan’s CEO, Jamie Dimon, might sound excessive, but let’s compare his “value” to Mr. Wilmer’s using hard facts. It’s clear that Mr. Dimon received $18 million more in compensation, but when you look at the numbers relative to their banks performance, one could argue that Mr. Wilmer got paid twice that of Mr. Dimon. For every million of JPMorgan net income, Mr. Dimon got paid $1,352. For every million of M&T Bank net income, Mr. Wilmer got paid $2,717. Mr. Dimon’s compensation soaked up 0.08% of JPMorgan’s total compensation pool, while Mr. Wilmer share of M&T Bank’s total compensation was 0.2%, or almost two and a half times more than Mr. Dimon’s share.

As a shareholder, which CEO is giving you the bigger bang for the buck?

Strike three, you’re out.

Based on the comments to Mr. Nocera’s op-ed, you would have thought he was the ultimate purveyor of truth and wisdom. However, his entire piece is built around the opinion of a single CEO whose chest thumping (at least through Mr. Nocera’s eyes and ears) isn't backed up by his actions as CEO or economic reality.

Mr. Nocera is just another example of talking heads in the media - who for some reason people actually listen to and rely upon for information - developing a conclusion first, then searching for evidence to support that conclusion, with a reckless disregard for research and actual facts.

It took 10 minutes to find the facts presented above, shouldn’t we expect a bit more effort from a New York Times columnist?