In Garrison Keillor’s Lake Wobegon, all the women are strong, all the men are good looking, and all the children are above average.
Well, now we have Lake Wobegon banking, where all the banks pass the government’s stress test, no matter how poorly capitalized they are. Banking is a funny business: by gathering small deposits and making larger loans, the system places capital where it can be used productively. But when a herd-mentality takes over, the banker’s emphasis on character, capital, and cashflow can get overwhelmed in a tsunami of conditions.
That’s what happened in the early ’90s, and that’s what’s happening now. Seemingly rational lenders, borrowers, and insurers went collectively insane, betting the world’s financial system on NINJA mortgages. Well the bill has come due, and someone has to support the financial system, at least temporarily. There is no alternative, unless we want to see mega bank failures.
The genius of Lake Wobegon was how the honest work of ordinary Americans built a remarkable, welcoming culture. The irony of Lake Wobegon banking is how the greed of a few could threaten this healthy culture for millions.
Douglas R. Tengdin, CFA
Chief Investment Officer
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