It was a typical business meeting held by a bank. The CEO had reviewed the bank's performance, then introduced me, after which I gave my usual 45 minutes -- mixing my views on the economy with the tired jokes that have supported me through the years.
Then came what is always the most fun to me: the question period. Here I can show that I have not just memorized a talk (and, yes, the jokes).
A Touchy Point
But this time, the first question hit a hot button with me, and I gave it to the questioner with both barrels -- but I hope tactfully enough so that he didn't pull his account from Schmidlapp National.
"What's happening to our country?" he asked.
"I have a new venture that I want financed. I walk into the bank, and despite their reputation for service, they don't give me the time of day. Instead, they wave me out of their bank and over to the venture capitalist.
"I go to him, and he wants half the company for putting any equity into it. How can we get new ventures financed to help the economy grow with a financial structure like this?" he complained.
I showed him no sympathy.
"Look," I said, (or more likely I shouted), "you want the bank to finance your venture and take all the risk if it fails. Look at it from the banker's point of view.
"If the venture succeeds, the bank gets back its principal and maybe 2 or at most 3 percent above the prime rate in interest. If the venture fails, the bank loses everything it has placed into the project. Those are not very good odds.
"This bank is a beautiful earner, I explained, generating almost 2 percent on assets, which is about double what most banks earn today.
"But even with this record, the bank needs to have 50 good loans for each one that goes bad to just break even. What's the track record of new ventures succeeding? It's more like one in 50 than 49 in 50.
Ticket to the Poorhouse
"So if this bank were to finance new ventures like yours, we would undoubtedly be having a cash bar and no food instead of a hosted reception tonight -- if the bank were lucky enough to still be alive.
"What about the venture capitalist? He wants half of the project for providing finance.
"Should he get this?
"After all he is taking the risk of losing everything he invests. Shouldn't he get his share of the gain if the project succeeds?
"Does he demand too great a share? Probably," I said. "But there are two factors in defense of his position.
"First, you are running the venture, taking a salary from it, and determining by your actions whether the venture succeeds or fails.
"The lender is taking a passive risk or loss, a risk he can do nothing to prevent once his money is in the hopper. Why shouldn't he be paid for this?
"Second, look at supply and demand. The number of potential entrepreneurs ready, willing and able to spend someone else's money vastly exceeds the number of venture capitalists ready to put up the money for these ventures. So why not set a price for money that reflects this?" I concluded.
This particular encounter had a happy ending. The questioner was satisfied, feeling he now understood a little better what a bank's function is and isn't.
Too Much Asked of Banks
And several officers of the bank came up to me during the reception to thank me for stating their case in terms that they could not use since they did not have the position of tenured professor that I have.
But on reflection it seems to me that the banking industry has a big job ahead of it in explaining what a bank is and does and what it is not. Today everyone feels the bank should be all things to all people -- providing banking service at low or no cost, rebuilding the community, and at the same time providing would-be entrepreneurs with a full wallet of borrowed funds.
Yet much of the money that these same people have available to deposit goes into thrift institutions, brokerage firms, and money funds.
For example, it is only now that politicians are first considering making Community Reinvestment Act provisions apply to nonbank lenders, like brokerage firms and finance companies.
Sure, banks have special responsibilities. They have to pay in some way for their deposit insurance and for the governmental limits on entry that prevent cutthroat competition.
But this does not mean that the banker has to give away the shop by financing ventures proposed by people who follow the philosophy "Heads I win, tails you lose."
The more banks do to get this point across, the better off the industry will be in the eyes of the public and its lawmakers.
Mr. Nadler is a contributing editor of American Banker and professor of finance at the Rutgers University Graduate School of Management.