Moneybeat: Holding banks accountable

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen.

He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

DAVID BAHNSEN: Well, good morning, Nick, good to be with you.

EICHER: Okay, David, I’d like to start with a story you called my attention to last week: It has to do with the issue of political de-banking, a bank’s practice of denying payments or canceling accounts for religious or ideological reasons. And it has specifically to do with JPMorgan Chase. You, David, proposed a resolution to the board of Chase asking for an evaluation and report on the trend of what you called “politicized debanking.” Chase tried to exclude even consideration of your resolution, and the Securities and Exchange Commission ruled against Chase and said it had to consider your resolution.

Could you talk about what led to the need for this resolution in your view and what you expect to happen next?

BAHNSEN: Well, absolutely, what caused me to bring this was this podcast, it was brought up on this very conversation, that there was some question as to what JP was doing. I've been personally a shareholder in JP Morgan, but particularly, we have a significantly large position with clients and the money that we manage at my firm. And it was certainly news to me. And there was some ambiguity about it. JP Morgan certainly doesn't admit that they do this. And so there were some stories that were a little more clean than others. But in the course of researching what exactly was going on and wanting to push back, it became clear to me that there were some areas that required explanation. And I decided that it was best to go forward, putting it on a shareholder ballot, which is something I just want to continue to emphasize, for Christians who believe the right thing to do when they get upset at a company doing something or potentially doing something that they don't like, they can always just sell or boycott or walk away. Or they can decide to actually engage the fight, and you have rights as a shareholder. So I look at saying, I don't want to own a company, because they're doing things that bother me, as akin to surrender. If one is bothered by it, I have every right as a shareholder to express that. And I don't know that I'll get what I want out of it. But all we've asked for is, as a shareholder, and I brought this proposal forward. On behalf of myself and my own interest. I'm not representing all of the many, many clients that we have, this wasn't done. From the vantage point of being an investment advisor, it was done as a shareholder. And initially, JP Morgan, it's important to note they denied my request to put it on as a resolution. But they did so not on the basis of they thought it was okay what they're doing, but denying that they were doing it, saying we don't need to put this forward because this isn't happening. We, then with legal counsel, thought back went straight to the SEC and the SEC ruled, quite surprisingly, I think to JP Morgan, that they do have to now have this on the upcoming shareholder meeting ballot. And so it is a resolution to essentially ensure equal treatment for the bank's customers that they cannot discriminate based on religious or political beliefs and and we'll see where it goes.

EICHER: Well, on that note, let’s jump to listener questions. And I wonder if you haven’t opened up a whole new vein of listener questions with your responsiveness, David.

BAHNSEN: Well, I'll get in front of that. I'll get in front of that, Nick by saying I assure you we have plenty of things in the works with other companies in my portfolio.

EICHER: Excellent, well, as I say, on to listener questions: I received an email from Victor Chen in Southern California who says he “studied finance in college” so “he’s interested in financial issues.” He writes:

“I enjoy listening to your segment in the WORLD podcast during the week. After listening to the podcast this morning, I had two questions to ask concerning bank failures.

1. When a bank’s CEO has to publicly state that the bank is solvent, is that a clear indication that the bank is facing financial difficulties?

2. You mentioned that the acquisition of Credit Suisse by UBS made the bank too big to fail. Is this term a myth? If I remember, this term was coined during the 2008 bank failure.”

BAHNSEN: Well, first of all, when the CEOs bank has to publicly state that the bank is solvent, it's not a clear indication that they're facing financial difficulties necessarily, it's certainly an indication that the bank may create financial difficulties. In other words, the whole nature of fractional reserve banking is confidence. And so if there is a competence problem that is requiring a CEO to say something like that, that vicious cycle may already be in the works. And the CEO of the bank having to say it very likely makes that confidence problem worse. And so there becomes a self fulfilling prophecy, which makes banking PR by definition very difficult. Now, as we've seen that there was not a slew of bank failures in the last three weeks after the two that went down, and the FDIC announcing depositor protection for those two, which was largely taken to mean that they weren't going to let others go down either. There were a lot of deposits withdrawn from other banks, but it seems to have calmed the waters. And fundamentally, it is true, that things that some of these banks can be okay not insolvent, until the point at which people start believing something's wrong, and then it creates the insolvency because the funding mechanism for most banks is itself the depositor capital. So it's the sort of circular nature of banking that can be very concerning.

The second question about ‘too big to fail,’ it's really important people understand what the expression means there is no question in the world UBS is too big to fail now, and that Credit Suisse was too big to fail three weeks ago, but too big to fail doesn't mean that they're so big they can't fail. It means they're so big that the regulators won't let them fail. That's all ‘too big to fail’ ever meant. And we already know this is true, we don't have to speculate they UBS was bailed out and given a lifeline by the Swiss National Bank at the financial crisis. UBS was the largest banking institution in the world, and it was dead and gone, it was insolvent as a result of the hole in its balance sheet from the bad mortgage investments of 2008. And the Swiss National Bank, the equivalent of the Fed and Switzerland kept them alive, because the downward spiral effect would have been so brutal to Switzerland, they wouldn't let it happen.

Now, with Credit Suisse circling the drain, 15 years later, they orchestrated the UBS purchase, so as to avoid letting a $530 billion bank like Credit Suisse go down the drain, providing $100 billion loan guarantee, and bypassing a shareholder vote and other things that were impediments and enabling UBS to take over Credit Suisse. Now, UBS was already a trillion dollar asset bank, They've now taken on Credit Suisse, which is 500. Both of those banks individually have already been deemed too big to fail. And I can assure you, both of them now put together as one will never be allowed to go down. But that doesn't mean that the stockholders can't be wiped out or the bondholders can't face trouble. It simply means that as an ongoing, transactional institution, regardless of the value of the equity, that collateral damage to a bank of that size failing is too substantial. There's more I can say about what this means to US banks, but I'll leave it there.

EICHER: Our next question comes from the mission field.

MICHAEL WALTERS: Hi Nick and David. My name is Michael Walters, currently serving as a missionary in Nairobi, Kenya. My question is what happens to the U.S. debt held by China if a conflict with China were to occur? What leverage does each country have over the other, and how might that play out? Thank you.

BAHNSEN: Well, there's an old expression, the air for you owe a bank a million dollars and you can't pay it back, you're in trouble. And if you owe a bank a billion dollars, and you can't pay it back the banks in trouble. And the reality on this with China has always been so comically misunderstood by people who have thought Well, boy, China sure has a lot of leverage on us because they Oh, they hold a fair amount of our debt. It's less than 10% of the total outstanding debt but it's it was a bit Big chunk has gone down by a couple 100 billion dollars. But the US in my opinion would not default on its debt to China and contractually cannot if they were to default to China, it would be a default to other parties as well. And the damage to us would be much worse. But if there is any leverage, I think the person who owes the money has the leverage, not the person who is owed the money. And so I think the US would have the upper hand there.

Now the argument is, yeah, but what if the US were dependent upon China to keep buying the debt, and China were to weaponize their lack of buying our debt going forward? We already have seen with Japan over the years where people used to make that argument about Japan. China is not a big enough marginal purchaser of our debt that we are dependent on them. And so the reality is that I don't think China has a significant amount of leverage. Then the other argument to get in front of it that some people could make as well. What if China went to the world to dump US debt? And it could cause a downward price of it? Well, I think that would be outstanding if they did that. Because if all of a sudden debt that trades at $1, par value $1, were trading at 90 cents on the dollar, I would love for the US to buy back its own data at 90 cents on the dollar and save 10% .So there's there's not a lot that the person owed the money can do here - it's just a fact. And because they're the ones holding it to try to tank the value of the debt would hurt their value in foreign exchange reserves. So I simply don't believe that China has leverage there.

EICHER: Alright, send your questions to us. If you can record your question in your voice on your phone’s voice memo app and attach the file, we'll, we’d be grateful for that. The email address is feedback-at-world-and-everything-dot-com.

Thanks this week to Victor Chen and Michael Walters and, looked this up in the meantime, Morgan Buchek of Fairview, Texas, for raising the issue of JPMorgan Chase back in November of last year. That prompted David to take action. We’ll be following to see how that all pans out.

David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group.

David, thanks for your work.

BAHNSEN: Thanks so much, Nick.

WORLD Radio transcripts are created on a rush deadline. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of WORLD Radio programming is the audio record.