[Viewpoint] The good, the bad and the ugly banks

Wall Street is in trouble these days not only because Goldman Sachs is the target of public wrath and under investigation by prosecutors. The Obama administration is also pushing hard for financial reforms to prohibit excessively risky deals in the financial sector.

The general opinion is that Wall Street financial firms have made greed their highest priority and as a result caused the debilitating financial crisis. Editorial cartoons in U.S. newspapers depict those working in the banking industry as unethical and impudent.

In response, there are moves to create financial institutions whose highest ideal is to serve the public good. That’s one purpose of efforts led by the U.S. for international financial reform. Korea cannot escape from this trend.

But then, what makes a financial company altruistic? One that would lend out money easily when it is urgent for customers and one that manage clients’ money well to provide high dividends? Or one that would not get involved in illegal deals, do as the government tells it to do, make a reasonable - but not obscene - amount of profits, and one that cuts excessive bank salaries and bonuses and therefore receives respect from society?

The key question is that whether such a type of bank can exist in reality. Even if it can, will it be desirable and sustainable? Many questions follow when considering inherent characteristics of the financial market.

The financial market is like a boxing ring where the professionals of capitalism fight fiercely without wearing a mouthpiece or any other protective gear. Greedy players stampede to the market with just one aim: to make a fortune. No one is satisfied when they make just as much as others did. That leaves no room to tell the difference between investment and speculation. When there is a chance to make a fortune, no financial worker or institution will step back from the opportunity.

In the end, it is greed that drives innovation and competition. A market where things move in a stable way is not an ideal place to make a fortune. A market where prices change drastically is a good one. When prices are surging or in free fall there are more chances to bet on high profits.

In the novel “Gone with the Wind” by Margaret Mitchell, Rhett Butler, one of the main protagonists, said right after the Civil War that a great deal of money is made when a country is collapsing or a new country is being established. That is an accurate description.

Thus, it is understandable that financial companies make a fortune during a crisis. The problem is that this does not match with the public sentiment. Financial institutions share profits just among themselves when they do well and then seek help from the government when they are in trouble.

They are also good at defending themselves by saying that if they fail, the entire economy will go down. Ultimately, the economy becomes a hostage to the financial sector, especially big financial companies.

When a big financial crunch hits markets, the economy gets in trouble. This causes “double trouble” for taxpayers: They need to pay more taxes to raise public funds while their income shrinks sharply due to the bad economy. This reveals the inconvenient truth about the financial sector: Profits are made only for bankers, but the costs are passed onto the society.

Therefore, financial companies are natural villains.

But if one refuses to accept this unpalatable reality, it creates other problems. A good example is the government’s effort to ensure financial companies give the highest priority to the public interest.

The term “financial corporation” appears frequently in Korea’s various laws and regulations. This expresses the government’s view that financial companies must put the public’s interest before their own, just like any other public corporation.

This creates trouble in reality. As the financial crisis hit in late 2008, the government encouraged banks to raise their Bank for International Settlements capital ratio. The government also urged them to lend out more loans to small and middle-sized companies.

But banks could not do both simultaneously. To increase the BIS capital ratio, they needed to reduce risky loans. If they want to provide more loans, the BIS ratio would decrease. Even though these two aims were clearly at odds, the government pushed banks to do both. Banks must have thought the government was asking for a “mission impossible.”

Some say that the financial market is evil. But it may be better to forget the idea about creating a good guy in the market. As a matter fact, there is no good guy - and there cannot be.

Then it would be much better to accept the reality in which ugly guys become successful, and try to get on good terms with them.

What the government can do is just stop the bad guys who break the rules, conduct fraudulent practices and cause harm to others in the belief that the government will help them out if things go wrong.

All the fuss in the Goldman Sachs case would also probably be solved in this context.

*Translation by the JoongAng Daily staff.
The writer is the business news editor of the JoongAng Ilbo.

By Nam Yoon-ho