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Dick Bove on Why Wall Street Should Be Allowed to Embrace Risk

Editor's Note: In his new book, "Guardians of Prosperity: Why America Needs Big Banks," analyst Richard X. Bove explains why financial disaster will ensue if it becomes impossible for big banks to fill their role in the economy. The following passage is "Chapter Fourteen: The Return of the Charging Bull."

Bowling Green is a small park in lower Manhattan at the foot of Broadway—a tiny oasis of green surrounded by the massive real estate of Wall Street. The oldest public park in New York City, it has come to represent both the beauty and the vitality of the area.

In the wake of the 1987 crash, the Italian-American sculptor Arturo Di Modica sculpted a massive bronze charging bull as a sign of "the strength and power of the American people." The work was not commissioned.

The artist made it on his own, then personally trucked the 7,100-Pound bull down to Wall Street and illegally left it there. It became so beloved that it was permanently located in the Bowling Green park. There, more than two decades later, it would be draped with protest signs when Occupy Wall Street protesters took over the park.

The contrasting symbolism of the charging bull and the Occupy crowd says a lot about the way our financial center’s reputation has fallen. It is not just due to the crisis of 2008, although that ramped up the pressure. It results from more than two decades of assault on the financial industry by politicians, law enforcement, and the media.

There was a time when New York was the envy of America, and Wall Street a place of pride. My family came to this country in the 1860s, settled in the "City," and thrived. My father loved New York almost as much as he loved his family. But times have changed, and New York is no longer what it once was. Major industries do not look first at locating in New York before going elsewhere in the United States; they probably do not even consider New York at all. More alarming, banks no longer want to be located in what was once the mecca of their industry. The reason is that the capital of modern finance is no longer a friendly place for banks to do business. People want the charging bull corralled. They want him quieted.

Yet what is needed is the opposite. We have a choice to make: Will we be powerful or will we be small? Will we merely be a nation that plays it safe, or will we embrace our heritage of taking great risks to achieve great results?

A Great Nation Built on Risk

Think about it. Do you avoid risk by emphasizing safety and soundness, or do you avoid risk by embracing risk? The United States is the most successful political, economic, and financial enterprise the globe has ever seen. It has this position because it has always embraced risk:

When the Pilgrims set out for Plymouth Harbor in 1620, they were embracing risk.

When George Washington went to war against the greatest military power in the world, he was embracing risk.

When Thomas Jefferson bought Louisiana from Napoléon, he was embracing risk.

When Abraham Lincoln fought to keep the nation together, he was embracing risk.

When Theodore Roosevelt built the Panama Canal, he was embracing risk.

When Dwight Eisenhower built the national interstate system, he was embracing risk.

When Lyndon Johnson launched his Great Society and set out to build twenty-six million housing units, he was embracing risk.

This list goes on and on. Embracing risk is not solely a political matter. It is also financial, as most people recognize. The risk might be as big as funding the creation of the Internet, or it might be as small as granting a loan to buy a car. The success of this nation is based on embracing risk, not running away from it.

Is This Safe and Sound?

Even if we needed to take a more cautious approach, the irony is that the actions of the president and Congress have not achieved that either. The result is almost the opposite. Consider whether safety and soundness are increased by any of the following:

  • forcing all Americans to pay higher prices so that the misusers of banking services pay less
  • pushing bank account holders out of the banking system and into the shadow banking system
  • forcing more Americans to rent rather than buy their homes because they can’t get loans
  • leaving small businesses unable to get loans to grow their companies, and favoring big companies at their expense
  • discouraging innovation through insurmountable bank rules
  • taking liquidity out of the system and driving up commodity prices through restrictive trading rules
  • closing down funding sources to the private sector
  • eliminating a healthy system comprised of big and small banks in favor of a monoline system we know does not work
  • increasing the size of the unregulated financial system under the guise of increasing regulation
  • advocating a return to nineteenth-century banking standards, which produced extreme financial cycles

This is not right. These actions reduce safety and soundness in the system. They diminish our stature and undermine our potential. They cause us to forget our history of bold moves and bullish financial principles.

I urge us to remember that America is the charging bull, not the trembling victim who cowers in its wake.

Reprinted from GUARDIANS OF PROSPERITY by Richard X. Bove with permission of Portfolio, a member of Penguin Group (USA) LLC, A Penguin Random House Company. Copyright (c) Richard X. Bove, 2013.

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Comments (18)
Current risk weighted capital requirements for banks those which are supposed to cover for unexpected losses, are calculated on the perceived risks of expected losses. And the end result of that is that now banks make higher risk-adjusted returns on equity when lending to the "safe" than when lending to the "risky"... which introduces a serious distortion of the allocation of bank credit in the real economy... a truly crazy and stupid regulatory risk aversion, especially in a land that calls itself "home of the brave".

http://subprimeregulations.blogspot.com/2013/11/america-more-bank-capital-equity.html
Posted by Per Kurowski | Thursday, January 09 2014 at 7:33AM ET
don't agree with micro management of banks, but believe that the only answer to TBTF is to limit thier size, require adequate capital minimums, and split Commercial and Investment Banks, otherwise their put option remains. Let's not forget the principles of the Sherman Anti-trust Act and the associated tangential laws of it. Without them a handful of people would own everything in the country and overall wealth would be stifled. Competition will be better if the big banks are broken up. Agree with your second paragraph.
Posted by TxTim | Wednesday, January 08 2014 at 3:40PM ET
So Tim, you agree with the micromanagement of the banking industry by the federal government, telling them what businesses they can be in and how big they can be. We do not agree at all. Nor are your positions consistent with each other. Either we have economic freedom or we have state dirigisme. As I said before, you can't have it both ways.

If we ended deposit insurance and its attendant millstone of regulations from around the industry's neck, and strictly limited the role of the Fed to providing short-term reserve liquidity and preserving the value of the dollar to a fixed standard, the banks and their customers would figure out how to restructure the industry much more effectively than any bureaucrat, politician, or armchair pundit.
Posted by Bob Newton | Wednesday, January 08 2014 at 12:26PM ET
Bob, I read your first post just now. I agree with everything you said except that I believe in the end Bove uses Free Market arguments to try preserve the TBTF franchise/ status. And I stand by my opinion that the 19 largest banks are NOT guardians of our prosperity. Deregulation, ending FDIC, repealing Dodd Frank--couldn't agree more. That TARP was used is quite litterally the definition of TBTF. Read 13 Bankers. The renound authors recommend splitting the big banks into Commercial and Investment Banks and limiting thier size to 3% of GDP and 2% of GDP respectively. That should be done concurrently with the repeal of Dodd Frank.
Posted by TxTim | Wednesday, January 08 2014 at 10:50AM ET
Bob do some more reading to catch up. TARP is the essence of TBTF. You made the provocations challenging my understanding of Finance and Eco. I simply asked you questions and you folded. BTW, read the WSJ this morning and try to evaluate whether or not TBTF banks are guardians of our nations prosperity. Adios.
Posted by TxTim | Wednesday, January 08 2014 at 10:36AM ET
Tim, stop creating straw men. Where do you get the idea that I think Dodd-Frank ends TBTF? I made my position clear in my original post on this article, and have been consistent on it for years. You are not engaging in honest debate, so I'll not bother with your nonsensical provocations.

But just as one more example of your logical inconsistency, you rail against TARP and then now you say "Paulson and Bernanke knew better..."? You can't have it both ways.
Posted by Bob Newton | Tuesday, January 07 2014 at 5:45PM ET
Bob we agree on Free Markets and I really don't want nationalized banks I only made the statement to say you can't have your cake and eat it too. In other words, you can't be a truly free market enterprise and be bailed out by the government. If a bank has to be so big to compete globally and to do so require a government subsidy it should just as well be a government bank. Your statement that the govt pushed the $800 billion on banks cast much doubt on your understanding as well. Dimon said he didn't need it. But Paulson and Bernanke knew better--they had to. Do you think that Dodd Frank ends TBTF? Do you think that going forward TBTF banks should have the luxury of a government bail out when / if they need it? Is that what you're arguing for?
Posted by TxTim | Tuesday, January 07 2014 at 4:13PM ET
Tim, your last two posts contain a contradiction that casts doubt on your understanding of finance and economics. Either you are for a free market (as I am) and advocate removing government subsidies and regulation from the industry, or you want to nationalize the banks. You can't have it both ways.

Perhaps you can quote a point from Mr. Bove's book where he advocates what you allege. That would help your credibility.

Also, your memory is faulty. The banks didn't ask for $800 billion, the government pushed it on them.
Posted by Bob Newton | Tuesday, January 07 2014 at 2:01PM ET
The whole banking thing is so much BS. It boils down to capital and failure. If you monitor adequate capiital and allow failure all the BS and so called regulatory fixes fade like smoke in the wind.
Posted by TxTim | Tuesday, January 07 2014 at 1:38PM ET
Bob, OK go ahead, buy and read his book. You'll see his bias toward preservation of the TBTF franchise. You can say that big banks are good and necessary all you want and they might be. But when you ask tax payers to pony up for $800billion to save them thats where I draw the line. If they are good and necessary for the economy make them pay back the american people for providing them risk assurance--perhaps nationalize money center banks if they are necessary for an operating free market economy--I don't think they are and I don't thing they are guardians of prosperity in any way shape or form. Bove simply will not lay out the facts about the causes of the crisis. It's propaganda for preservation of the franchise he makes a living from.
Posted by TxTim | Tuesday, January 07 2014 at 1:34PM ET
@TxTim: where exactly in the article do you find Mr. Bove advocating "preserve the TBTF franchise whereby the Big Banks take massive risk and get massive rewards if it works and, a bailout if it fails"?
Posted by Bob Newton | Tuesday, January 07 2014 at 1:07PM ET
"Guardians of Prosperity..." Bwahahaha Really! Sorry Bove lost me at the title. I'm not even going to give him a chance. The guardian here is Bove. His agenda is to preserve the TBTF franchise whereby the Big Banks take massive risk and get massive rewards if it works and, a bailout if it fails. How American is that concept? Let's all get behind that shall we.
Posted by TxTim | Tuesday, January 07 2014 at 11:00AM ET
Mr. Bove is exactly right. His article is not a mere plea for deregulation, it is a correct statement about the freedom to take risk leading to economic, and social, success. Risk is not merely about reaping rewards, it is also about losing one's money if one makes a wrong decision or does a failed job of executing the project.

To restore that balance, we need to get all forms of government "safety nets" and the attendant regulatory powers arrogated by government out of our financial system. This begins with ending deposit insurance, and repealing the Dodd-Frank Act - but those are only the first steps.

It is an insult to the American people to say that they cannot make their own economic decisions without government "protecting" them by limiting their choices and their access to financial services. People don't want to be "protected", they want to be free.
Posted by Bob Newton | Tuesday, January 07 2014 at 10:02AM ET
Taking on risk in order to reap the rewards is a fine practice, so long as the players are willing to accept the consequences when they fail. The drive to divorce the exercise of authority from responsibility and accountability must be reined in. When those risky investments went south in 2008, my employer lost a few billion dollars and laid off all of us externals, irrespective of performance. Then, I had the privilege of sending my tax dollars to Wall Street to float the key players when I could least afford it. Along the way, I lost my home after relocating to start a new job -- and a bank that took on the "risk" of mediating an FHA loan found a way to call a $58,000 return on their investment a "loss." Yes, they kept all of my equity, in addition to their profit, and now they wish to be left alone to take on "risk" and "build" an economy. For themselves, presumably. The author may want to consider alternatives to regulations, such as class action lawsuits that may be required to effect a legal "disgorgement" when it becomes necessary -- see http://www.desolationpress.com/essays/disgorge.html for one such proposal. How shall we dance? With charging bulls and drawn swords, or as a civilized people, with rules understood by all?
Posted by teknoscribe | Monday, January 06 2014 at 9:55PM ET
I have not yet read the book, but will be buying it or at least ordering it from my LOCAL bookstore. My wife is a newly published author and I have learned a great deal through the experience of being her husband.

That stated, the article, although well meaning misses some of the key point in the current debate about how our economy should look. The Banking system is key but some of the assertions don't appear to matter in the "big" picture. I am stating this after running S&Ls, an FSB, and Sr. Officer in a large Comm'l bank.

We did need a more cautious system. The fact that what we had broke, like Humpty Dumpty, was a result of the "Wild West" attitude we allowed to prevail in the investment community.

As far as the President is concerned, the one who is in office now, whose name I believe is OBAMA, wasn't in D.C. when the crisis came to a head. It was a Texan named BUSH. He had been in office for 8 years. We can argue whether the CRA enforced during Clinton years was to blame but that's a stretch.

Congress??? We have one? I thought we had 2. Both have two "parts" but one of them has one of its parts strewn across the western world, or at least strewn about this country. This group will obstruct anything and everything they can, if the President supports it. Why? Because they can and they believe in the very things you find distasteful in the "SYSTEM"

Taking a few of your points:

1."forcing all Americans to pay higher prices so that the misusers of banking services pay less"
ARE THE MISUSERS THE WALL-STREET FOLKS OR THE SMALL BUSINESSES? WHAT PRICES ARE BEING REFERENCED? ATM FEES, CKG ACCT FEES, OD (overdraft not overdose) FEES? OR LOAN FEES

2."pushing bank account holders out of the banking system and into the shadow banking system"
I DON'T THINK PEOPLE HAVE BEEN PUSED OUT AS MUCH AS KEPT OUT. This goes to the pricing issue but also the high unemployment that prevents many from decent credit scores which eliminate them as bank customers except for a possible savings account: BUT THEY HAVE NO MONEY TO PUT INTO IT

3.forcing more Americans to rent rather than buy their homes because they can't get loans
MORE IMPORTNANT WAS THE DRIVING AMERICANS FROM THEIR HOMES B/C OF DERIVATIVE DRIVEN LENDING

4. "discouraging innovation through insurmountable bank rules"
THE RULES ARE NOT INSURMOUNTABLE ONCE BANKS KNOW WHAT THEY ARE. LITTLE SYMPATHY ON THE BANKS THAT TOOK FULL ADANTAGE OF THE NO-RISK LENDING IN HE MID 2000s. THEY NEED TO BE REGULATED- SIMPLE RULES THOUGH

5."taking liquidity out of the system and driving up commodity prices through
TRADERS PLAYED W/ COMMODITY PRICES FOR GAIN. NO CARE ABOUT EFFECTS. JUST PROFIT. THE LIQUIDITY IN THE SYSTEM WAS ABOUT AS HIGH AS IT COULD GO. THE BANKS JUST WOULDN'T LEND IT AS THEY COULD TRADE FOR THEIR ACT

6."closing down funding sources to the private sector"
SEE ABOVE

7."eliminating a healthy system comprised of big and small banks in favor of a monoline system we know does not work"
YOU COULD NOT HAVE SAID IT BETTER. WHAT HAPPENED TO THE 14,000 BANKS WE HAD IN THE 70s?

8."advocating a return to nineteenth-century banking standards, which produced extreme financial cycles"

THE PROBLEM IS THAT NO ONE IS ADVOCATING FOR ANY SYSTEM - 19TH CENTURY OR 21ST CENTURY. IT'S MORE OF A FREE-FOR-ALL. THERE IS NO COGENT COHERENT POLICY

"This is not right. These actions reduce safety and soundness in the system. They diminish our stature and undermine our potential. They cause us to forget our history of bold moves and bullish financial principles."

YOU COULD NOT HAVE SAID IT BETTER, NOR COULD ANYONE ELSE. THANK YOU!!!

Richard Isacoff isacofflaw@msn.com
Posted by riisacoff | Monday, January 06 2014 at 4:19PM ET
The article by Dick Bove clearly is dead-on as far as it goes. But it fails to really understand the end game of this Administration and its supporters in Congress. The goal is a command economy of which the primary mechanism for executing so-called public economic policy is the banking system. The current regulatory climate is driving many banks out of such things as consumer lending and "risk taking" more broadly. That leaves the lender of last resort as the USG - or in this case, banks which are creatures of the Government and are obligated to do the bidding of the "policy makers" in Government. That is the goal - it is not to create an independant banking system managed to the benefit of shareholders, and of course managed to serve the economic interests of maintaining the vibrant economy as described by Mr. Bove. American Banker readers really need to understand that the Administration has a much bigger agenda then merely removing "unreasonable" risk from the banking system.
Posted by rmartin47 | Monday, January 06 2014 at 1:33PM ET
Note I haven't read the rest of the book, so my comments are out of context:

Positioning Wall Street as "those poor overburdened guys who can't get a break" ain't going to work anymore, sorry. You lose most of main street whenever the "woe is the banker" theme is paid.
Granted, regulation is totally out of whack - we're misregulated, not necessarily under or over regulated - although I suspect we're way overregulated
I'll support the author's concepts once Wall Street and Banking in general fully embraces risk by eliminating their safety nets - can't have return going one way, with the risk factor being underrepresented
Further, Wall Street and Banks need to be transparent and make it known to the public and their shareholders the level of risk they're taking on - so people can make informed decisions, and risk/return evaluations can be made. If banks can't explain the risk, they can't offer the product or service - that's likely the only regulation you really need.
Posted by mgklug | Monday, January 06 2014 at 12:44PM ET
Great article from a fine American!
Posted by CMOTIL | Monday, January 06 2014 at 12:39PM ET
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