In a lengthy and quite remarkable article, two authors at The Atlantic explain why people’s trust in banks is so low: they lie. Their introduction to the article says all you need to know:
Some four years after the 2008 financial crisis, public trust in banks is as low as ever. Sophisticated investors describe big banks as “black boxes” that may still be concealing enormous risks – the sort that could again take down the economy.
Part of the reason is the labyrinthine accounting rules that regulators have mandated – all in the interest of the consumer, of course – but have made lawyers and accountants rich as they devise “work-arounds” in order to keep worthless assets on their books from being valued at their true value: zero. Here’s what happened:
Clever bankers, aided by their lawyers and accountants, can find ways around the intentions of the regulations while remaining within the letter of the law. What’s more, because these rules have grown ever more detailed and lawyerly—while still failing to cover every possible circumstance—they have had the perverse effect of allowing banks to avoid giving investors the information needed to gauge the value and risk of a bank’s portfolio.
The plan to deceive is deliberate:
At one point during Young’s tenure, some members of the Financial Accounting Standards Board wanted to make banks account for loans in the same way they do for securities, by recording them at current market values, a method known as “fair value.” Banks were instead recording the value of their loans at the initial loan amount, and setting aside a reserve based on their assumptions about how likely they were to get paid back… [As a result] many accounting experts believed that the reported numbers did not give investors an accurate or reliable picture of a bank’s health.
So the efforts to deceive have failed.
After bitter battles, turnover on the board, worries about acting in the middle of the financial crisis, and aggressive bank lobbying, the accounting mandarins preserved the existing approach instead of switching to fair-value accounting for loans. Young believes that the numbers are even less reliable now. “It’s gotten worse,” he says. When we asked another former board member, Ed Trott, whether he trusted bank accounting, he said, simply, “Absolutely not.”
Isn’t that sweet? The banks want to look better to investors so their stock prices will be healthy and they can borrow at lower costs. But their efforts have failed, and they’re worse off than if they had come clean in the first place.
Here’s a wonderful quote from Henry A. Wallace, Roosevelt’s VP, that I’ve modified slightly to fit:
With a [banker] the problem is never how best to present the truth to the public but how best to use the news to deceive the public into giving the [banker] and his group more money or more power.
That’s why trust in banks is so low.