Are Banks Worthless [to invest equity in]?

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skepticalobserver
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Are Banks Worthless [to invest equity in]?

Post by skepticalobserver » Wed Feb 07, 2018 1:02 pm

According to a Harvard study a medium-term US treasury portfolio outperformed unlevered bank assets from 1960 to 2015. What’s more it's asserted that banks are charities, as costs of deposits exceed the cost of debt.

Bloomberg, “Are Banks Worthless?” https://www.bloomberg.com/view/articles ... -worthless

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DaftInvestor
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Re: Are Banks Worthless?

Post by DaftInvestor » Wed Feb 07, 2018 1:12 pm

Of course my bank is more focused on trying to get me to take a credit card or loan from them; or get me to use my debit card - than they are in trying to get me to increase my savings account deposits.

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Pajamas
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Re: Are Banks Worthless?

Post by Pajamas » Wed Feb 07, 2018 1:12 pm

That entire column is depressing.

What I took from the section on banks is that they perform needed services inefficiently but the services are needed. Perhaps there is opportunity for some of the services to be performed by others more efficiently using a different model. To some degree, that is already happening. That competition may force banks to re-evaluate what they do and how they do it. To some degree, that has already happened, and now they rely more heavily on fees than they used to.

Bacchus01
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Re: Are Banks Worthless?

Post by Bacchus01 » Wed Feb 07, 2018 1:14 pm

I don't know if they are worthless from an investment standpoint, but from a consumer standpoint, I don't know why they really exist any more.

It used to be that you had a main bank and you did everything there: deposits, checking, credit card, home loan, car loan, etc.

Now? The only reason I have a BMO account is so that I can walk in and take large sums of cash if I need it. This happens about once every 5 years, so I'm still not sure why. I keep the absolute minimum in there that I can. I would never use their consumer services (loans) as they are expensive.

I have 3 mortgages with 3 different companies. 2 car loans with two different companies. An online bank for all my bill-pay services. Three credit cards that I rotate but pay off every month.

If Vanguard offered competitive loans, competitive CC, and competitive bill-pay services, I would move 100% of my business there. But no one entity has figured out how to do that any more.

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samsoes
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Re: Are Banks Worthless?

Post by samsoes » Wed Feb 07, 2018 1:21 pm

Bacchus01 wrote:
Wed Feb 07, 2018 1:14 pm
The only reason I have a BMO account is so that I can walk in and take large sums of cash if I need it.
What's a BMO account?

Non-intuitive acronyms are ubiquitous on this forum.
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Ethelred
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Re: Are Banks Worthless?

Post by Ethelred » Wed Feb 07, 2018 1:26 pm

samsoes wrote:
Wed Feb 07, 2018 1:21 pm
What's a BMO account?

Non-intuitive acronyms are ubiquitous on this forum.
BMO are a regional US bank. Not exactly sure in which states they're active.

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samsoes
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Re: Are Banks Worthless?

Post by samsoes » Wed Feb 07, 2018 1:29 pm

Ethelred wrote:
Wed Feb 07, 2018 1:26 pm
samsoes wrote:
Wed Feb 07, 2018 1:21 pm
What's a BMO account?

Non-intuitive acronyms are ubiquitous on this forum.
BMO are a regional US bank. Not exactly sure in which states they're active.
Ah, thanks. Professor Google says it's the Bank of Montreal.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren at Little Round Top @ Gettysburg National Military Park.)

Grt2bOutdoors
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Re: Are Banks Worthless?

Post by Grt2bOutdoors » Wed Feb 07, 2018 1:52 pm

Ethelred wrote:
Wed Feb 07, 2018 1:26 pm
samsoes wrote:
Wed Feb 07, 2018 1:21 pm
What's a BMO account?

Non-intuitive acronyms are ubiquitous on this forum.
BMO are a regional US bank. Not exactly sure in which states they're active.
Bank of Montreal acquired Harris Bank of Chicago years ago and rebranded Harris to BMO (corporate brand). Harris was active in midwest states besides Illinois.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

jalbert
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Re: Are Banks Worthless?

Post by jalbert » Wed Feb 07, 2018 1:56 pm

skepticalobserver wrote:
Wed Feb 07, 2018 1:02 pm
According to a Harvard study a medium-term US treasury portfolio outperformed unlevered bank assets from 1960 to 2015. What’s more it's asserted that banks are charities, as costs of deposits exceed the cost of debt.

Bloomberg, “Are Banks Worthless?” https://www.bloomberg.com/view/articles ... -worthless
There's nothing like cherry-picking the start date to drive the conclusion. Deposit accounts are variable rate leverage. In the inflation of the 70's deposit rates hit double digits while banks were sitting on assumable, long-term fixed rate mortgages that were held to maturity because they were assumed by the new homeowner when a home was sold.
Index fund investor since 1987.

AlwaysBeClimbing
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Re: Are Banks Worthless?

Post by AlwaysBeClimbing » Wed Feb 07, 2018 2:01 pm

The only purpose they serve for me is providing a safe deposit box. Sure there's the occasional service like medallion signature guarantee letter, otherwise zip...

Dottie57
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Re: Are Banks Worthless?

Post by Dottie57 » Wed Feb 07, 2018 2:17 pm

Ethelred wrote:
Wed Feb 07, 2018 1:26 pm
samsoes wrote:
Wed Feb 07, 2018 1:21 pm
What's a BMO account?

Non-intuitive acronyms are ubiquitous on this forum.
BMO are a regional US bank. Not exactly sure in which states they're active.

BMO Harris Bank, mother company is in Canada. They bought out Marshal and Illseley. Years ago. I am in Minnesota.

Banks are good for FDIC insuanceon accounts.

bberris
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Re: Are Banks Worthless?

Post by bberris » Wed Feb 07, 2018 2:28 pm

"Unlevered" bank assets? There is no unlevered bank I know of. Banks are a great business, that is why there are so many and they spring up like weeds. No other business literally creates money.

miles monroe
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Re: Are Banks Worthless?

Post by miles monroe » Wed Feb 07, 2018 3:08 pm

the ONLY reason i have a brick and mortar bank account is for the safe deposit box.

Valuethinker
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Re: Are Banks Worthless?

Post by Valuethinker » Wed Feb 07, 2018 3:25 pm

bberris wrote:
Wed Feb 07, 2018 2:28 pm
"Unlevered" bank assets? There is no unlevered bank I know of. Banks are a great business, that is why there are so many and they spring up like weeds. No other business literally creates money.
A peer to peer lender is in principle unlevered.

Also there are now some business lending vehicles (mostly in the institutional space I think) that do not take balance sheet risk themselves, but simply lend investors' money. Akin to fund managers- a form of alternative asset class in fact.

Njm8845
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Re: Are Banks Worthless?

Post by Njm8845 » Wed Feb 07, 2018 3:27 pm

The only reason I have a bank is because I can't set up credit card autopayments out of vangd MM.

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nisiprius
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Re: Are Banks Worthless?

Post by nisiprius » Wed Feb 07, 2018 3:30 pm

1) Watch the people bragging about only having an online account come complaining when they need a medallion signature guarantee. The medallion signature guarantee has always seemed to me to be a bit of a racket, but it is what it is, and when you need one, you need one.

2) (At face value, as reported) nobody is saying banks are worthless to consumers. They're valuable to the consumer. Intermediate-term Treasuries jink up and down, bank accounts only go up--slowly, but only up. There's nothing stopping you from opening a Vanguard account, putting your money in the Vanguard Intermediate-Term Treasury Fund, VFITX, and opting for checkwriting access on it, and only knowing what their balance is give or take ±4% or so, and you can make out a case for doing it--but not very many people do it.

Image
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LiterallyIronic
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Re: Are Banks Worthless?

Post by LiterallyIronic » Wed Feb 07, 2018 3:33 pm

I bank all the time. At a brick-and-mortar. I don't do anything financial online. Time to pay my utility bills? I drive to the bank, get a money order, and then drive it to the city's utility office and hand-deliver it. Time to pay my mortgage? I drive to the bank and tell them to transfer money from my checking account to my mortgage. I try to go to the bank at least four times per month.

Unfortunately, my place of employment forced me to get direct deposit - I was the only person still getting paper checks. So there went two opportunities to go the bank per month.

I got my mortgage at my bank because I know they don't sell the servicing to someone else. Probably cost me at least $1,000 in closing costs in order to keep my mortgage with them.

Unfortunately, Vanguard doesn't have an office I can walk into, so I do everything with them over the phone.

Pretty weird for a 34-year-old software developer, but I eschew technology as much as possible.

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triceratop
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Re: Are Banks Worthless?

Post by triceratop » Wed Feb 07, 2018 3:34 pm

nisiprius wrote:
Wed Feb 07, 2018 3:30 pm
2) (At face value, as reported) nobody is saying banks are worthless to consumers. They're valuable to the consumer. Intermediate-term Treasuries jink up and down, bank accounts only go up--slowly, but only up. There's nothing stopping you from opening a Vanguard account, putting your money in the Vanguard Intermediate-Term Treasury Fund, VFITX, and opting for checkwriting access on it, and only knowing what their balance is give or take ±4% or so, and you can make out a case for doing it--but not very many people do it.

Image
The reporter is not comparing bank deposit returns to treasury returns. The reporter is comparing being an investor in Treasuries to being an investor in (nb: not a depositor of) a bank, as in owning literal bank equity.

It's worth mentioning that the reporter's audience is not exactly geeky DIY investors but instead those who enjoy geeking out over finance. The two are different circles so it might affect the context and perspective needed when reading his stuff (I am an avid long-time reader, and I suspect my favorite Bogleheads are also in that venn diagram intersection).

A lot of people are missing what this article is about. (I decided to edit the title of the thread to make this clearer)
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

gtd98765
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Re: Are Banks Worthless?

Post by gtd98765 » Wed Feb 07, 2018 3:37 pm

From a consumer standpoint, I do think banks are pretty worthless. I have had a credit union account only for decades, and not once have they changed the rules, upped their own ATM fees, or whatever to extort a few more pennies from me, unlike my former bank.

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AllieTB1323
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Re: Are Banks Worthless?

Post by AllieTB1323 » Wed Feb 07, 2018 3:39 pm

miles monroe wrote:
Wed Feb 07, 2018 3:08 pm
the ONLY reason i have a brick and mortar bank account is for the safe deposit box.

+1 and even then we use a credit union. We closed our Washington Mutual/Chase bank after we finished paying off our mortgage.

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steadyeddy
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Re: Are Banks Worthless?

Post by steadyeddy » Wed Feb 07, 2018 3:40 pm

The argument about all jobs boiling down to a large passive function and a tiny active function not worth the [salary] expense is fascinating to me. Perhaps most of us are just relics of a bygone era when the active function of our jobs was larger than the passive. Eventually, artificial intelligence will do it all.

Bacchus01
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Re: Are Banks Worthless?

Post by Bacchus01 » Wed Feb 07, 2018 7:29 pm

LiterallyIronic wrote:
Wed Feb 07, 2018 3:33 pm
I bank all the time. At a brick-and-mortar. I don't do anything financial online. Time to pay my utility bills? I drive to the bank, get a money order, and then drive it to the city's utility office and hand-deliver it. Time to pay my mortgage? I drive to the bank and tell them to transfer money from my checking account to my mortgage. I try to go to the bank at least four times per month.

Unfortunately, my place of employment forced me to get direct deposit - I was the only person still getting paper checks. So there went two opportunities to go the bank per month.

I got my mortgage at my bank because I know they don't sell the servicing to someone else. Probably cost me at least $1,000 in closing costs in order to keep my mortgage with them.

Unfortunately, Vanguard doesn't have an office I can walk into, so I do everything with them over the phone.

Pretty weird for a 34-year-old software developer, but I eschew technology as much as possible.

Wow. What a waste of time

LiterallyIronic
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Re: Are Banks Worthless?

Post by LiterallyIronic » Wed Feb 07, 2018 11:45 pm

Bacchus01 wrote:
Wed Feb 07, 2018 7:29 pm
LiterallyIronic wrote:
Wed Feb 07, 2018 3:33 pm
I bank all the time. At a brick-and-mortar. I don't do anything financial online. Time to pay my utility bills? I drive to the bank, get a money order, and then drive it to the city's utility office and hand-deliver it. Time to pay my mortgage? I drive to the bank and tell them to transfer money from my checking account to my mortgage. I try to go to the bank at least four times per month.

Unfortunately, my place of employment forced me to get direct deposit - I was the only person still getting paper checks. So there went two opportunities to go the bank per month.

I got my mortgage at my bank because I know they don't sell the servicing to someone else. Probably cost me at least $1,000 in closing costs in order to keep my mortgage with them.

Unfortunately, Vanguard doesn't have an office I can walk into, so I do everything with them over the phone.

Pretty weird for a 34-year-old software developer, but I eschew technology as much as possible.

Wow. What a waste of time
I'm sure you do fun things in your spare time. Work out? Movie theater? Bar? My hobby is chillin' at the bank. If hobbies are a "waste of time," then so be it.

jcavana1
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Re: Are Banks Worthless [to invest equity in]?

Post by jcavana1 » Thu Feb 08, 2018 3:46 am

This Buffett quote about sums up banks IMO: "Banking, if you can just stay away from following the fads and making bad loans, has been a remarkably good business. Since WW II, ROE for banks that have stayed out of trouble has been good. Some large well-run banks earn 20% ROE."

Banking as a whole may not be profitable over periods because of poor risk management, but done well can be very profitable.

Maverick3320
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Re: Are Banks Worthless [to invest equity in]?

Post by Maverick3320 » Thu Feb 08, 2018 8:14 am

jcavana1 wrote:
Thu Feb 08, 2018 3:46 am
This Buffett quote about sums up banks IMO: "Banking, if you can just stay away from following the fads and making bad loans, has been a remarkably good business. Since WW II, ROE for banks that have stayed out of trouble has been good. Some large well-run banks earn 20% ROE."

Banking as a whole may not be profitable over periods because of poor risk management, but done well can be very profitable.
Not to be a naysayer, but couldn't this be said about any economic sector? "The companies that stayed out of trouble did well!"...Well, yeah.

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Ged
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Re: Are Banks Worthless?

Post by Ged » Thu Feb 08, 2018 8:52 am

AlwaysBeClimbing wrote:
Wed Feb 07, 2018 2:01 pm
The only purpose they serve for me is providing a safe deposit box. Sure there's the occasional service like medallion signature guarantee letter, otherwise zip...
Yes. Except for those purposes I have not directly used a bank in the last decade. Indirectly I believe that my cash holdings at Fidelity are fobbed off on a bank in order to get FDIC coverage.

bberris
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Re: Are Banks Worthless [to invest equity in]?

Post by bberris » Thu Feb 08, 2018 11:04 am

Maverick3320 wrote:
Thu Feb 08, 2018 8:14 am
jcavana1 wrote:
Thu Feb 08, 2018 3:46 am
This Buffett quote about sums up banks IMO: "Banking, if you can just stay away from following the fads and making bad loans, has been a remarkably good business. Since WW II, ROE for banks that have stayed out of trouble has been good. Some large well-run banks earn 20% ROE."

Banking as a whole may not be profitable over periods because of poor risk management, but done well can be very profitable.
Not to be a naysayer, but couldn't this be said about any economic sector? "The companies that stayed out of trouble did well!"...Well, yeah.
Banking attracts a certain type of fraud by insiders. They lend money to unsound businesses that they are involved in, or their relatives or their friends. There is also a heads I win, tails is a tie aspect to this. Bankers get big bonuses for expanding loans. The defaulting loans cost the bank money long after the CEO is gone or has pocketed the bonus. So there are good banks and bad banks in a way that is distinct from say a good pharma or a bad pharma company.

nolesrule
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Re: Are Banks Worthless?

Post by nolesrule » Thu Feb 08, 2018 11:45 am

nisiprius wrote:
Wed Feb 07, 2018 3:30 pm
1) Watch the people bragging about only having an online account come complaining when they need a medallion signature guarantee. The medallion signature guarantee has always seemed to me to be a bit of a racket, but it is what it is, and when you need one, you need one.

The one time I needed the medallion signature guarantee, I walked into a B&M bank with my checkbook, opened an account, deposited the check and walked out with a medallion signature guarantee. Two weeks later once the asset transfer that required the guarantee was completed I returned and closed the account.

Although now I am considering a safety deposit box.

kosomoto
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Re: Are Banks Worthless [to invest equity in]?

Post by kosomoto » Thu Feb 08, 2018 2:01 pm

14 year return on the vanguard financial fund is under 5%.

not4me
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Re: Are Banks Worthless [to invest equity in]?

Post by not4me » Thu Feb 08, 2018 4:52 pm

I didn't read word for word, but pretty much had the take others upthread mentioned. Cherry pick a time span, exclude banks that use leverage (that is, pretty much the bulk), etc & you can get the results you want. Why would they want that result? Perhaps commissioned to generate fodder to justify regulation?? Not a conspiracy theorist here, but I fail to see the usefulness...Maybe I'm just missing something

schwank
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Re: Are Banks Worthless?

Post by schwank » Thu Feb 08, 2018 8:45 pm

nolesrule wrote:
Thu Feb 08, 2018 11:45 am
nisiprius wrote:
Wed Feb 07, 2018 3:30 pm
1) Watch the people bragging about only having an online account come complaining when they need a medallion signature guarantee. The medallion signature guarantee has always seemed to me to be a bit of a racket, but it is what it is, and when you need one, you need one.

The one time I needed the medallion signature guarantee, I walked into a B&M bank with my checkbook, opened an account, deposited the check and walked out with a medallion signature guarantee. Two weeks later once the asset transfer that required the guarantee was completed I returned and closed the account.

Although now I am considering a safety deposit box.
The local Fidelity office does medallion signature guarantees as well. :D

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telemark
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Re: Are Banks Worthless [to invest equity in]?

Post by telemark » Thu Feb 08, 2018 9:28 pm

It seems possible that there may be any number of businesses that perform socially useful or even necessary functions without being particularly good investments.

nolesrule
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Re: Are Banks Worthless?

Post by nolesrule » Thu Feb 08, 2018 9:53 pm

schwank wrote:
Thu Feb 08, 2018 8:45 pm
nolesrule wrote:
Thu Feb 08, 2018 11:45 am
nisiprius wrote:
Wed Feb 07, 2018 3:30 pm
1) Watch the people bragging about only having an online account come complaining when they need a medallion signature guarantee. The medallion signature guarantee has always seemed to me to be a bit of a racket, but it is what it is, and when you need one, you need one.

The one time I needed the medallion signature guarantee, I walked into a B&M bank with my checkbook, opened an account, deposited the check and walked out with a medallion signature guarantee. Two weeks later once the asset transfer that required the guarantee was completed I returned and closed the account.

Although now I am considering a safety deposit box.
The local Fidelity office does medallion signature guarantees as well. :D
The local Fidelity office isn't very close, but that's good to know. I have a Solo 401k with them.

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