Appleseed Screens Out All Big Banks - Why?
The Appleseed Fund, a mutual fund that seeks toÂ invest in sustainable, undervalued equities, has decided that too big to fail banks are not sustainable, and will be excluded from the fund's portfolio.
Adam Strauss, one of the Fund's co-portfolio managers, explained the change in a populist statement that seems to jumble several related causes and effects.Â The relevant paragraphs from the release appear in full below, but let's do some unjumbling and take a look at those reasons one at a time.
Why does Appleseed believe all of the too big banks not sustainable?Â Â Because the financial system needed to be bailed out?Â True, but some of the big banks didn't need much help and paid it back quickly.Â
Because Congress and the regulators have not done a good job changing the system to avoid future crashes?Â Possibly true.Â Much of the financial reform package will play out through regulation, so it's probably premature to make the call here.Â Even if it's true, excluding your investors from an entire industry as a way to send a message to Congress seems an unusual approach.Â When a fund targeting sustainable investments refuses to buy tobacco companies they are sending a message to Big Tobacco, not Congress.Â Deciding no big bank can be sustainable until Congress changes the system is a whole new ball game.
Because the too big banks pay their execs extremely well, then run to the taxpayer when they flop?Â Well, it happened at least once.Â But we've already talked about Congress and regulatory change on the flop side.Â If we focus just on pay, then why not develop a sustainability screen based on pay and see if some of the banks can avoid exclusion instead of declaring an outright ban on all big banks?
Because the too big banks aren't lending in the community?Â Not completely true.Â Even if this were true, why not a screen based on extent of local lending activity instead of a categorical ban?
The Appleseed approach is drawing kudos in the blogosphere, but so does the Tea Party.Â For my money I'd like to see sustainability screens that target specific behaviors and processes, not a block ban that's directed at much as Congress as the companies that comprise potential investments.Â Â The Appleseed rationale appears below, decide for yourself.
: "The cost of bailing out Wall Street since 2008 is over $3 trillion, or more than $20,000 per taxpayer, and that cost is increasing daily.Â The financial burden of that bailout will be felt for a generation and will be paid by children, some not yet born.Â Instead of an industry structure where the largest banks are serving the economy by lending capital, U.S. policies and regulations favor the largest banks, which have proven themselves incapable of fiscal rectitude.
"The banking system's current industry incentives are misaligned since employees keep a disproportionate amount of the profits while taxpayers subsidize the losses; this unhealthy imbalance is unsustainable and encourages excessive financial speculation.Â In the financial reform bill which recently passed the House of Representatives, Congress failed to break up or limit the size and scope of the largest banks that have destabilized the financial system and destroyed so much value over the past five years.Â We were disappointed lawmakers did not stand up to the banking lobby in order to avoid future bailouts.Â Without meaningful reform, we fear the next crisis will be larger and more devastating than the last.
"Given the failure of regulators to prevent the previous credit crisis and the subsequent failure of legislators to break up the massive and very much interconnected banks that helped to create the crisis, it is incumbent on depositors and investors to vote with their wallets.Â Until the financial system is truly restructured, the Appleseed Fund will avoid investments in too-big-to-fail banks, choosing instead to invest in regional banks, community banks, and credit unions which lend money to families and businesses that operate in the productive sectors of our economy."