Usually when I see James Surowiecki’s byline I do two things. First, I force myself not to run away. And two, remind myself that there is insight to be gained by reading him to find out what he thinks. That way I know that the exact opposite must be true.
But his New Yorker spurt attempting to discredit comparisons between American banks now and those in Japan in the 1990s contains an unexpected nugget of truth. Japanese banks really did not exist to book earnings by making arms-length loans. They were basically expected to extend credit in order to float industry along, industry which would then go out and making the earnings, usually by growing market share relentlessly. Japanese banks, via a number of interlocking relationships, were essentially equity partners in the operation, not lenders. So of course they kept extending bad loans.
This evergreening of loans meant the banks in Japan booked no earnings via lending for years. But as their obligations were being evergreened, they didn’t have to. It is this lack of earnings in Japan that many pessimists point to when they doubt U.S. banks will be able to grow out the current hole any time soon. But Surowiecki is quite correct to point out that U.S. banks do not operate like Japanese banks, and hence the comparison is a bit off.
Yet the earnings solution has an ever bigger problem apart from comparisons to Japan a decade ago. We still do not know how big a hole earnings must fill. All those Countrywide and Golden West loans from 05-06 are being cleaned up and replaced…but with what? Are the borrowers any less likely to default on re-worked loans in significant numbers?
I submit no. I believe Citi, BofA etc. extended credit to persons who should have had no credit at all. Can’t prove that, but if so the earnings fix is a bit of tail-chasing. Don’t know if Surowiecki would agree, so plan accordingly.
Bonus Observation: Malcolm Gladwell has finally over-stepped. This ode in praise of full-court, pressing basketball is bad. Really bad. Cringe-inducing. To use Rick Pitino’s 95-96 UK NCAA champs, the one with nine future NBAers on the roster as an example of under-talented squads using the press to win….
