The legal cost problem of American banks

Bank of America reported its earnings today. Their profit for the last quarter was $2.5 billion, up from $340 million during the same period last year. That came on the back of a drop in legal expenses from $1.6 billion to $1.1 billion. Yes, you read that right. One single bank spends more than a billion freaking dollars on just litigation costs every single quarter!

JPMorgan reported its earnings last week and the story behind its legal costs was even worse. They reported their first loss under the current CEO because they incurred $7.2 billion in legal expenses last quarter. They have set aside $20 billion since January 2010 towards legal and regulatory costs!

These numbers are simply ridiculous and indicates the extent of the waste of resources. We are spending billions of dollars every year in litigation because of the banks; the talent and money spent on which could otherwise have been put to productive use.

There are serious problems with the banking industry and its practices. Else, why would these banks need to spend billions of dollars in litigation every year? There is a need for a B-Corp type bank with fundamentally different vision and business model than traditional ones. However, computer programmers using lean startup technique by building incremental features is not going to solve the problem. (The result is a company like Simple, which does nothing more than add a layer on top of the existing model, strengthening it.) You will also need to work regularly with the regulators to solve the problems. The anti-government rhetoric of most people involved in tech will simply not work.

The billions of dollars saved every year by having a sound business model is a great opportunity for a new bank, built from the ground up. The rise of Bitcoin and crypto-currencies is very interesting since it is building a parallel model to the way traditional banks operate (think Clayton Christensen’s theory of disruption, or an analogy similar to MOOCs in education). I admit it is very early in the Bitcoin space to predict anything. Nonetheless, I cannot help but be excited about the potential in terms of the efficiency a banking model built around crypto-currencies could bring!

The changing paradigm of education

“We need agility for the unknown unknown.” – Donald Rumsfeld

Vinod Khosla shared an anecdote during an interview at The Innovator’s Forum:

About 18 months ago I was invited to speak by the Secretary of the Navy to talk to 150 Navy Admirals. Energy is a global issue, energy is a major global driver of the Navy on what they can and can’t do in the middle of an ocean. They were having meeting for planning Navy in 2040 and they asked me to open the conference. Think about the problem. You have to plan the Navy because you cannot build an aircraft carrier in less than 15 years. So what do you do? I started by asking (this was year 2011): In the year 2000, what was the Navy’s mission? Top 3 missions? Turned out China didn’t figure in the mission! We forget China was not considered politically important. Japan was the other economic powerhouse not that long ago. If your mission had changed; there was no 9/11, no Al Qaeda – there was a very different world for the Navy. I said, if you didn’t know what your mission was in 2000 for what would be important in 2011-2012, how can you plan 2040? And now, they have a new set of missions.

Our current model of education was built for the purposes to meet the needs of industrialization. A way to think about this is educational institutions spewing out batches of graduates who would then go into the work force and work for corporations in exchange for wages. As a result of the rapid pace at which the world is changing, the structures of old corporations were not built to handle that and thus need to lay off employees at every economic downturn. However, recently new problem has cropped up as many of these jobs will never come back and the people who are in their 40s or 50s and got laid off are in big big trouble because they will have to find a new, different job. However, this will put them at a severe disadvantage as they will have to work for much less than what they earned before, which is further worsened by their difficulty with retraining as you get older.

I am amazed to hear people who have not even started college tell me that they have their entire life figured out. They know what they are going to study and what job they want to get. Just because your mom and dad had the same job for their entire life does not mean that the situation is going to be the same for you too! We do not have the ability to predict what jobs will be available in the future, especially due to the change in the demand for skills as dictated by the rapid technological change. I thought that the job of at least someone like a doctor will probably still be safe until I heard Vinod Khosla talk about consumerization of health care as the only way to upend healthcare. He went on to talk about AliveCor Heart Monitor – ECG screening on an iPhone which will cost you $199 only. Currently you need 12 leads, 15 minutes and a skilled technician every single time for the same measurement! Even though the current model of the Heart Monitor is not meant to replace a traditional monitor, it eventually will. That means visits to a doctor will be less frequent. When you have other wearable devices analyzed/powered by your smartphone, this will significantly decrease your need to visit a doctor. As Khosla claims, up to 80% of the job of a doctor will be done by such devices. By using simple supply and demand analysis, think what will happen to thousands of doctors who would have spent a lot of time, effort and money to become one?

Sophia Amoruso, the founder of NastyGal, talks about how she would like to go to college sometime later, now that she knows how to make use of it properly and that is the feeling I have about college education too. I think students should start figuring out what they want to learn when they go to college and just not to take courses to prepare them for what job they want to apply for. Preparing for a single career is the worst thing you can do, especially with the amount of money that you will be spending on college education. Students should be educating to prepare themselves to deal with unknown unknowns of the future. Since everyone is different, they will have to figure out how they will deal with it themselves.

I am not presenting a doomsday scenario. I am not saying that if you do not prepare yourself to be flexible, you are going to be jobless. You might very well be able to navigate the challenges as they come. However, there is a distinct possibility that you might as well. I recently met an alumni of Saint Peters who had worked at UBS in operations for 26 years and got laid off. He had not found any job for the last year and he told me that there are no jobs left for the skills that he has. I am writing this post in the hopes that you will not be in the same situation in the future.

So what are you to do? My suggestion is take a gap year to explore yourself and get to know yourself really well. Then you will be able to decide what you want to study and use that opportunity to improve yourself. If you are already in college, rethink if you really want to prepare for a single career. Or, if you are really worried and cannot think of what to do, get in touch with me 🙂