First Rule Of Banking - Broken

"Only lend money to those who do not need it".

This seemingly senseless maxim has been banking's cardinal rule since time immemorial. Another way to put it is this: borrowing should only be undertaken to improve returns, not to cover basic needs. Optimally, then, borrowing should be a choice, not a necessity and bankers should act accordingly.

However, lending to those who do not need the money is a ho-hum business and not very profitable. Witness the sleepy, two-martini lunch era of banking that lasted until the late 1970's. A comfortable living to be sure, but nothing to set the world on fire - or to buy mega yachts with.

But look at what happened during the last decade: banks increasingly lent to those who really needed it. Households needed to borrow heavily to buy homes and/or to supplement their dwindling income. Portfolio managers were forced to expose themselves to ever increasing leverage via exotic structures (e.g. SIV's) in order to enhance their dwindling returns from conventional securities. Investors, even conservative ones like pension and endowment funds, were forced into hedge and private equity funds because politicians left them few alternatives in a world of rapidly deteriorating demographic and labor conditions.

Well, we know what happens when bankers get greedy, break the cardinal rule and lend money to those who need it - don't we? Just ask Shylock...

The pound of flesh, which I demand of him,
Is dearly bought; 'tis mine and I will have it.
If you deny me, fie upon your law!
There is no force in the decrees of Venice.
I stand for judgment: answer; shall I have it?

May I remind all readers (bankers included) that Shylock does not get his "pound of flesh" in the end..