Four Reactions to the Election

Four quick thoughts now that the elections are over, from a recovering banker.

1. The equity indexes fell immediately at the open today, and remain down over 2% on the day.  Do not let any talking head from the financial-industrial-infotainment industry try to suggest that this is in response to Obama’s election.  Every trader on the planet knew that Obama had a 60% chance of winning as of last month, a 75% chance of winning as of last week, and a 90% chance of winning as of the final 48 hours.[1]  Nobody who manages capital for a living was caught off-guard by the Obama victory, so nobody suddenly had to reposition their portfolio as a result this morning.  Markets and the people with real capital who participate in them are forward-looking and probabilistic; equity markets  already reflected widespread expectations of an Obama victory.

2. The next Treasury Secretary matters tremendously for the biggest financial-regulatory issue of the day – the unaddressed problem of Too Big To Fail banks.  Secretary Geithner pre-announced that he would not serve in a second Obama administration[2] so the hunt for a new Treasury Secretary is now underway.  Geithner’s utterly failed to address the TBTF problem and pushed the Obama administration into a business-as-usual, same-guys-in-charge approach to Wall Street reform.  Secretary Paulson’s background as the former Goldman chief who grew up professionally with the rest of Wall Street’s heads played an inordinate role in selecting the winners and losers of the Credit Crunch of 2008, along with in providing the ultimate government backstop for the country’s biggest financial firms.  Had Paulson come from any other industry – instead of finance – he would have seen what the rest of us saw: It’s unconscionable to allow firms to pay executive bonuses[3] in the same year that the firms were bailed out by taxpayers.  Geithner continued Paulson’s protective approach to Wall Street banks, rather than seizing the opportunity to extract real concessions or reform when the industry needed the government to survive.

I’m not suggesting we put someone like Elizabeth Warren[4] in charge, but we need someone who can independently evaluate what parts of Wall Street need supporting and which parts need curbing.  Somebody, in other words, who didn’t spend his or her entire life working on the Street.

3. The “Fiscal Cliff” and fiscal responsibility.

Obviously the FC now becomes the next hot topic for overheated punditry, at least until we pass the January deadline.

I’m not optimistic about the tone of the discussion nor about the possible results of fiscal compromise, but I do have my wishes.

I wish that, with elections for Congress now two years away, can we have less complete bullshit when it comes to fiscal policy positions?  Would that be too much to ask?

One party’s leader says the solution lies in tax cuts.  The other party’s leader says the solution lies in more generous social spending.  One party’s leader says military spending is untouchable.  The other party’s leader says transfer payments and social safety net spending is untouchable.  All those proposals leave us in a worse fiscal position as a nation.

Hey guys?  Can you treat us like grown-ups?  We can handle a bit more truth than you’re giving us credit for.  We know budget deficits have a terrible trajectory and only a combination of tax hikes and spending cuts will correct the course.

Say what you will about the 2016 Republican nominee, Gov. Chris Christie, he’s proved that refreshingly blunt and seemingly unpopular – but honest talk – can appeal to both sides of the political aisle.  Let’s have some more of that as we drive, full throttle, toward the Fiscal Cliff.

4. Tax policy

I’ll have more to write about this shortly, but one of interesting lessons of Mitt Romney’s candidacy is how little the US electorate understands, or cares to understand, about our income tax policies.

By releasing only his 2010 and 2011 income tax returns, Romney effectively obfuscated his financial background.  He signaled (albeit quietly) that his tax-planning strategies were so aggressive that their release would explode his electoral chances.  And yet, I don’t think this cost him anything real in the end in terms of votes.  He calculated – correctly! – that the electorate’s ignorance of current tax policies, and popular tax-planning strategies of the wealthy would protect him.

Despite heightened resentment toward the wealthy, I observe the “99%,” for the most part, has no idea what they don’t know.  They can’t even conceive of the many ways someone like Romney avoids paying his proportionate share of taxes.  Romney knew that, and he was not about to wake that ignorant, sleeping giant by revealing his methods in the unreleased tax returns.



[1] Because professional traders pay attention to data and evidence, not pundits trying to hype a competitive race.  Which is why Nate Silver is a the mutherflipping P.I.M.P. of the moment.

[3] Bonuses are for success.  Bonuses are optional.  Bonuses should reflect private profit and should never be paid by borrowing from taxpayers.  Only a deeply embedded executive like Paulson could have missed the implications of this.

[4] I know I may sound strident when it comes to Wall Street reform, but I actually admire the industry very much and I want it to thrive.  Warren, by contrast, strikes me as overly ideological when it comes to Wall Street, incapable of seeing the positive.

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Interview Part I: Pawn Shop Owner on the Unbanked

Where can you still find great customer service in financial services?  The Pawn Shop!

Michael:  Hello, my name is Mike, and I used to be a banker.

Shirley:  My name is Shirley, and I’m a long-time pawn-shop owner.

One of the themes of the Post-2008 Crisis world is how much people don’t like their banks.

I had a conversation with my friend Shirley who runs a financial services company whose practices are older than traditional banking – she runs a pawn shop.

While I was a banker, I never stepped inside a pawn shop – but I wanted to learn what their role is in the financial services business for the anti-banking crowd as well as the un-banked crowd.  I found out that business is quite good in the niche her pawn shop fills.  In addition she relayed an ironic an illustrative experience she had with her own business’ bank.

But first off, business has been really booming during the Great Recession.

Shirley:  One thing that has really transformed our business is the high gold prices. But that’s one of the reasons we’ve seen such great success over the last few years, is those high gold prices.

A little gold ring that maybe at one time was worth thirty dollars is now worth a hundred dollars, so that really has transformed it for us. The other thing is the technology and the way that our business is run is really different than what it used to be, because we’re all run on the cloud. It’s very fast, and we can store a lot of information.

Shirley explained to me the advantage her pawn shop holds over traditional banks, including clarity of service, personal touch, and the ability to do small scale lending.

Michael:  Do you think banks are missing something that they ought to be doing to get the customers or they just — they’re in a different sort of business, that they wouldn’t want your customers? It sounds like they can’t do what you can do.

Shirley:  The banks — to do a loan like we do, it’s very labor intensive. We have to have storage space. We have to have customers entering all of the data of every single loan that’s being done. So for example we do almost a hundred loans a day, which the average loan being around ninety dollars, so it’s a very expensive loan to do in terms of labor. So certainly the banks can’t handle that. They wouldn’t have anywhere to put the items. You wouldn’t want one of your bank tellers lifting and moving and taking things through a warehouse. Definitely, we have a niche market. But I also think the banks are not interested in doing such short-term, small loans for that reason; it’s just too expensive.

Michael: I don’t know if you listened to a radio program of not that long ago, maybe six months ago, and I think it was a design program. But it basically talked about if you were an alien and you showed up and walked into a bank lobby where there’s no signage, there’s no menu, there’s no description of what they’re doing there, and you don’t know that they give loans. You don’t know what they do; it’s a very mysterious thing the way a traditional bank lobby is set up.

I’ve often thought about that. This radio show was about why in fact check cashing and payday lenders tell you, are a more inviting place for certain types of customers who don’t want to walk into a place where everybody is sitting behind a desk and there’s no menu, there’s no signage, there’s no description of what they do; whereas in contrast, your average check-cashing place, and there may be an analogy to what you all do at the pawnshop, it’s kind of clear. This is what we do and here’s how you engage in our financial service; whereas at the bank it’s totally unclear and off-putting, almost by either purposeful design of by mistaken design. This show is saying this is a terrible way for people to design it. I wonder if you have any comment about that, when you think about contrasting what you do versus what a bank does?

Shirley: That’s interesting. I haven’t really thought of that, but I think that’s exactly right. It is confusing when you go to a bank. It’s even confusing for somebody like me who’s been a traditional bank customer for a long time. If you have a question, even just about products they offer, you don’t really know who to ask. I had not thought of that before.

Yes, I think it’s much more clear in our industry. A person walks in and first of all they’re approached right away by an employee, at least in our store they are: “How can I help you?”

And the person says, “I need a loan.” “Okay, well let me help you with that.” It’s much easier, I think, than to walk into a place and you don’t know if you’re supposed to stand in line or do you go to the teller and say, “I need a loan”? Like “Oh, that’s not how it works.”

Michael:  You can’t just walk up to the teller and say, “I want a loan, give me money.” They’ll just look at you like you’re an alien.

Shirley: Of course, and I hadn’t really thought about that, but that’s exactly right. Usually the person says, “I just need money to make this bill,” or “I just need enough money for gas until the end of the week.” So the customer usually comes in and tells you fairly specifically what it is that their needs are.

At a bank, of course you wouldn’t offer that service if a person came in and said, “I just need this small thing.” A bank can’t provide that. They’re not designed to provide that.

We are, more than any other industry, I think highly customer-service related because every time a person comes in the store they have to interact with an employee. That’s not true of most of the places that you go. Even when you shop at H.E.B, you don’t even have to see a teller anymore. You can scan your stuff and walk out. You never talk to anybody.

Shirley sees the pawn shop as a friendlier place to get financial services, but recently got a severe brush-off from her own bank.  Her family has run this business for fifty years, but her big bank, (Ahem, Wells Farg0) neither valued her deposits, nor responded when she needed a loan to expand.

 

Shirley:  Yes, and not only did they not necessarily want to lend to us, but they also didn’t want to take our deposits. I went through that a couple of years ago, when they wouldn’t even take our deposits. I said, “We don’t do check cashing, so really we just need a place to hold the money while we then turn it around and lend it to the customers.” They didn’t even want to serve us in that regard because there was such a negative connotation about the things that we do.

In my situation I often felt like the banks were — first of all they don’t really like to lend to us because we’re a pawnshop, just in general.  I don’t think they necessarily, not because we compete with them, but either they throw us in there with the bail bondsman.

In fact, the unfortunate thing is these large banks they come into the community and they sort of give the impression they’re going to help the customers or they’re going to service the customers. But when it really comes down to it, they don’t have the authority to do anything. Then it really delays the process a lot because they have to send it to somebody in Tennessee to approve. Even a small loan, when I tried to buy a house in the neighborhood, it was a sixty-eight thousand dollar loan. It took ninety days and had to get approved from somewhere in Tennessee.

You’re right here across the street from me.

Michael:  Right, “Come walk with me to what I’m buying.”  “No we can’t do that. Tennessee has to weigh in here.”

In the end Shirley resolved her deposit and lending problem with a local bank, who actually took the time to understand her business.

Shirley:  We did ultimately go to a local banker. We had tried the larger banks: Wells Fargo, BBVA/Compass and those where we had deposits for many years. But ultimately, it’s only the local bankers that do take the time to build a relationship to understand what we’re doing, and really to work in a way that you understand exactly how much this is going to cost, and what the fees are, and how this is going to be mutually beneficial for everybody. We did go through a local bank. Do you want me to say who the bank is?

Michael: No, it’s up to you.  Or, whatever you want to say.

Shirley:  Because, it’s has been, it’s actually been a very positive relationship once we got in touch with Broadway Bank, and they were the ones who really took the time. It’s been two years that we’ve been working on this project, and Broadway Bank has sort of held my hand along the way, reminding me to get the documents in, and ultimately we go with a small-business loan.

I’ve been saying for years that banks don’t really lend to small businesses – with the exception of real estate developers – because they’re not willing to take the time to understand individual businesses.  They’re not normally willing to actually do what Shirley says her pawn shop does with her customers: figure out their need, and offer customized solutions.  I was pleased to hear Shirley got something she’s been offering to her customers for fifty years.

Shirley:  I think people are really still dying for human interaction, in most transactions. So, that’s where I think the pawn industry is still very customer-service oriented. It’s still very friendly. That’s what I would like for people to know.

Please Also See Interview Part II: Pawn Shop Owner Fights The Good Fight

Please also see subsequent Video: Pawn Shop owner turns Politico!

 

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