It's a difficult time to be a banker in America, thanks to the Wells Fargo scandal. It's a trying time to be a central banker here, thanks to the Federal Reserve Bank's unwanted involvement in the presidential campaign. And it's a terrible time to be plying the bankers' trade in Europe. There are compensations: In the U.S. private sector, multi-million dollar pay packages and golden goodbyes; at the Fed, unlimited access to the business news channels, where you are treated with the deference reserved for the consequential and the powerful; and in Europe—well, it beats job-hunting in countries in which double-digit unemployment has become the old norm.
Start here in the U.S. The Wells Fargo cross-selling scandal has produced a new television star—its president, John Stumpf, who serves as piñata to congressional committees. Mr. Stumpf became America's highest paid banker at $22.9 million in the same year (2012) that his employees' creation of fictitious accounts and loading of unwanted products on existing customers' accounts reached their peaks. That was a year after he first learned of the mis-selling. The bad news for other banks is that Wells Fargo has the simplest business model—no complicated financial products or wild trading, just good old plain vanilla retail banking from its more than 6,000 "stores". If Wells can't be managed, surely its complicated brethren, JPMorgan Chase, Bank of America, Citi Group, Goldman Sachs need closer watching. Or breaking up. Or, if Massachusetts senator and bank-basher Elizabeth Warren has her, way example-setting by having Stumpf visit one of those low security prisons known as Club Fed. At minimum, the corporate arrangement that has CEO Stumpf reporting to Chairman Stumpf, and JPMorgan Chase CEO Jamie Dimon reporting to Chairman Jamie Dimon might be consigned to the ashcan of history to which the AAA ratings of some mortgage-backed securities have been consigned.
Federal Reserve chair Janet Yellen has her own problems. Donald Trump went off message during the first presidential debate and accused the Fed of being the tool of the Clinton campaign. The Donald says that Yellen is storing up a future recession by refusing to raise interest rates so as to help Clinton by keeping the economy moving ahead. Cries of outrage from those who contend that the Fed is independent of political pressure. Sort of. The Fed is relying on Democrats in congress to vote down Republican efforts to audit the Fed's activities and policies, and would not want to lose their support by throwing a spanner into the Clinton campaign. It is no criticism of an institution in a democratic society to say that it keeps a weather eye on the political climate.
Alas for the Yellen, the Fed's claims of independence took two hits just before she testified. First, Paul Singer, a widely respected billionaire anti-Trump Republican, declared that Fed independence is "a myth." Then it was revealed that Lael Brainard, appointed to the Fed's governing board in 2014 by President Obama, contributed the maximum allowed by law ($2,700) to the Clinton campaign, a highly unusual step for someone in her position, especially one believed to be angling for the post as Secretary of the Treasury in a Clinton administration. Brainard, who I am told is talented and brings international insights to the board, also gave a speech arguing that new conditions in the economy "require prudence in the removal of policy accommodation," Fedspeak for "don't raise interest rates and risk slowing the economy." Just what the Obama administration and the Clinton campaign want to hear. Brainard's position is not necessarily dictated by the political needs of the politician she is financially supporting—many economists agree with her—and does not represent a conflict of interest according to Yellen. Bill Clinton, who says he knows Brainard, is sure that she and Yellen "will do what they think is right," which doesn't exactly add bipartisan support to the Fed's claim of independence. Difficult week for Stumpf and his big-bank counterparts, trying week for the Fed, in part because Yellen was surprisingly caught by surprise when the "independence" issue was raised.
None of this quite compares with the problems faced by bankers in Europe. Tidjane Thiam, CEO of Credit Suisse, warns that the banking sector is "not really investable … [it is in] a very fragile situation", and might not have a viable business model. John Cryan, the Briton who runs Deutsche Bank, says his bank is "fundamentally strong" and that he will not ask Angela Merkel for a bail out to enable him to pay the $14 billion (or whatever penalty it can negotiate) levied by US authorities for mis-selling mortgage bonds. Merkel, who has railed against tax-payer funded bail outs in other EU countries, has let it be known Cryan would be turned down if he did ask. But Deutsche Bank's market value has fallen approximately in half this year, to $16 billion, a level rather like that of a regional U.S. bank. On Thursday, about ten US hedge funds announced that they are reducing their exposure to Deutsche Bank by pulling billions of dollars in cash and securities from the bank and reducing their trading activities with it. Although these withdrawals are tiny in relation to the size of the bank's assets, they may trigger others to follow suit, unless, or perhaps even if Deutsche quickly settles the Department of Justice suit for something like $5 billion. This is not good news for the bank and Merkel, who knows that a failure of Deutsche Bank could bring down her economy and its banking system. Including Nord LB, the leading universal bank in the North of German: It postponed a bond issue earlier this week. And Commerzbank. Martin Zielke, its chief executive, announced earlier this week that he will be cutting 9,600 jobs, 20 percent of the bank's workforce, as part of a reorganization aimed at restoring profitability and capital adequacy by 2020. Meanwhile, Monte dei Paschi di Siena, Italy's third largest lender and Europe's worst performer in the stress tests, its stock down 90 percent in the past year, is on life support provided by government arm-twisting of pension funds and other investors.
There is worse to come for Europe's banks in a few weeks when EU regulators require the regions' top 32 banks to issue loss-absorbing debt so that they can better absorb a downturn. Estimates of the amount of debt to be sold vary widely—somewhere between €376 billion and €3 trillion—so it is too early to tell just how high a mountain the regulators are creating for banks such as Santander, which yesterday cut its profit and growth targets for 2018, and BNP Paribas to climb. But this sector is not in the best of health to attempt a new exertion.
All of which makes any problems of America's banking system seem trivial by comparison, with the possible exception of emerging worries that Deutsche Bank might prove to be a latter-day Lehman Brothers. The eight largest U.S. banks more than doubled their common equity capital since 2008, increased their holdings of high-quality liquid assets by over $1 trillion in the past five years, and reduced their reliance on run-prone sources of funding.
For which America's bankers give only a muted hooray. Their total pay, including bonuses, is expected to decline this year by 12 percent for investment bankers and a bit less for traders. Their European counterparts would gladly live with that if they could also share the better nights' sleep enjoyed by American bankers—Wells Fargo's John Stumpf excepted.