Financial “Reptiles” vs. “Mammals”
(Guess which Goldman Sachs is)
American Express’ hastily approved move to turn itself into a bank holding company, like Goldman Sachs and Morgan Stanley before it, appears to be about two things: 1) positioning itself for federal largesse, current and prospective; and 2) insulating itself from the vicissitudes of the short-term credit markets for its ongoing capital needs.
In the latter respect, American Express illustrates the difference between financial “mammals” and “reptiles.”
In this case, oddly enough, the “mammals” are the heretofore plodding (depository) banks, while the “reptiles” are (or were) the high-powered (and higher-leveraged) investment banks. (Sort of vindicates the critics of Bear Stearns, Goldman Sachs, et al who reveled in pointing out all their cold-blooded, reptilian qualities).
Reptiles take their cue from their environment — specifically, the sun. When it’s warm, they’re warm; when it’s cold, they’re cold.
By contrast, mammals are much more autonomous. Their thermostats are internal and self-regulating, maintaining a constant body temperature.
As long as the environment is hospitable — the proverbial sun is shining — reptiles do fine. But should there be a sudden shock, their ability to quickly adapt is limited. Sound familiar?
What’s happened in the credit markets this past year is the financial equivalent of the asteroid that killed off the dinosaurs. Virtually overnight, the credit markets froze, and all the economic entities whose financing relied on it . . perished: Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros, AIG, etc.
By contrast, banks rely on customers’ deposits for their ongoing capital needs. Insured by the government, such deposits represent a vastly more stable source of funds.
Unfortunately for the erstwhile dinosaurs, changing into a mammal isn’t simply a matter of legal semantics. Like tigers, dinosaurs can’t simply change their stripes.