Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, September 5, 1993 TAG: 9309010307
SECTION: BUSINESS PAGE: D-1 EDITION: METRO
SOURCE: STEVEN PEARLSTEIN AND JERRY KNIGHT THE WASHINGTON POST
DATELINE: WASHINGTON LENGTH: Long
"I want to retire, and I cannot retire unless I get more income," said Sandage, a program manager for the National Organization on Disability, a Washington-based advocacy group. Now, by putting her money in mutual funds that will invest it in stocks, bonds and a host of newfangled securities, she expects to earn several times the 3 percent return now offered on bank certificates of deposits.
Sandage has abandoned the conventional banking system as a borrower as well as a depositor. The mortgage on her house is held by an insurance company. Her MasterCard comes from a "bank" that has no depositors and exists simply to issue credit cards.
And a final twist: The insurer and the credit card firm each get some of their capital from Sandage's three new mutual funds, an example of how money is recycled through the economy without ever passing through a traditional bank.
Every day, millions of Americans are making similar choices, bypassing banks in favor of a highly computerized financial network that offers lower costs to borrowers and higher returns to savers. Their decisions rob banks of money and power, making them increasingly irrelevant to the lives of many Americans.
Banks and savings and loan associations hold one-third of the nation's financial assets, compared with about half at the beginning of the 1980s. On the business lending side, banks have seen their share of the credit market drop to 44 percent from 68 percent over the same period.
Several developments lie behind this shift of power and money:
The rise of the mutual funds, which now manage $1.7 trillion and are growing at the rate of $25 billion or more each month. At various times over the last two years, money-market-accounts mutual funds - which buy IOUs from blue-chip companies that need to borrow money for a few months - have had as much money in them as all the checking accounts in all U.S. banks. Stock mutual funds now account for 30 percent of the trading on the New York Stock Exchange.
The emergence of specialized finance companies that are so efficient they can write loans cheaper than most banks. The second-largest lender in the country is not a bank at all, but a division of General Electric Co. that runs the credit card operation at Montgomery Ward & Co., finances credit purchases of Apple computers and owns the nation's largest fleet of cargo ships, rail cars and trucks.
The country's biggest mortgage lender is a California firm that gets its money from Wall Street rather than depositors and relies on independent brokers to solicit most of its customers.
The spread of what Wall Street calls "securitization," a process by which lenders bundle mortgages and other loans and sell them as a group to investors who receive the monthly loan payments.
Eighty percent of all mortgages, 50 percent of college loans and 15 percent of car loans are sold in this fashion, helping to transform banks from providers of money to middlemen and brokers. "Securitization" also has created a new genre of financial giants from once-sleepy intermediaries such as the Federal National Mortgage Association, known as Fannie Mae, which last year earned more money and had more assets under its control than any U.S. bank.
Each of these developments has been driven by new technology that allows almost anyone to move money around the economy at the touch of a button.
Automated teller machines, toll-free telephone numbers and computers that can approve simple consumer loans threaten to make the corner branch bank obsolete. And sophisticated computer systems make it possible to pool and sell loans in ways that would have been unthinkable in an era of paper records and calculators.
"The technology of information and money is breaking up the old arrangements," said Frank Raines, Fannie Mae vice chairman.
Providing the energy for this financial revolution has been a new, entrepreneurial breed of money managers, working through highly specialized firms, who have picked off one piece of the banking business after another, leaving the stodgier bankers in the dust.
Lewis Ranieri, the Wall Street bond trader who helped create the "securitized" mortgage market, began a recent interview by noting the flow of funds out of banks and ticking off the various loan businesses that those institutions no longer dominate: big corporate lending, mortgages, real estate loans, college loans, auto loans, credit card, installment loans, equipment leasing.
"One of these days, the banks will wake up and wonder, `What business is left?' " Ranieri said.
"Banks are dinosaurs," said David Gladstone, chairman of Allied Capital Advisors Inc., a Washington finance company. "But like the dinosaurs, it may take a long time for them to die out."
There are many in the industry, however, who say reports of banking's demise are greatly exaggerated. After all, bank profits last year were the highest in the industry's history, thanks largely to low interest rates.
And when demand for loans finally picks up, they argue, all they will have to do to attract deposits back from mutual funds is to raise interest rates again to competitive levels.
But Brookings Institution banking analyst Robert Litan warns that history does not support such optimism. The same predictions were made a dozen years ago when the money-market boom first began. But when rates went back up, he said, most of the money did not return.
"A lot of the money going out today is never coming back," Litan said.
"Banks will still exist," he said. "They just won't be as important."
by CNB