On Risk (Part II of mid-2025 Trilogy)
Banks are Doing the SAFE Thing
Summer 2025 TrilogyPart I: “On Banks”
Part II: “On Risk” (this post)
Part III: “On Equity” (coming soon)
The impetus for this “trilogy” came when I realized that the piece I published on banks in August 2024 had concluded just when the discussion was getting interesting. I ended there with the idea that stability/risk is not a binary and never a choice, but rather a dialectical relation. Stability is itself an effect of risky banking practices. It’s only after that point has been established that it becomes possible to engage some of the thorniest questions of money, power, finance, and capitalism. This short post on risk will serve as the bridge to a final, upcoming piece, on equity.
Risk
We have to be careful about how we read the word “risky” here. On the one hand, “risky” can be a sharp, critical modifier, because banks can obviously do really stupid things with depositors’ money, and there is no harm in rightly calling those out as “too risky” (though “stupid” seems more apt). On the other hand, “risky banking practices” can be a pleonasm, since banks make loans – an inherently risky practice because it is, by definition, dependent upon an uncertain future. People might not pay you back. Interest rates might change in unfavorable ways.
Grasping the centrality of risk to the business of banking can also be a first step to thinking through the question of risk more broadly, because banks are not just any type of capitalist firm. They are the type of capitalist firm that almost all other capitalist firms depend upon in order to do business.
This is a point on which Matt Levine has again been perspicacious. He has a pet peeve about the standard news story blaming banks for doing risky things. In particular, he notes the tendency for journalists and pundits to pin the fault on the banks for risks that are really being taken on by other firms:
this is a standard story that you see about banking. A company does A Risky Thing. A bank lends the company money to do The Risky Thing. The headline is "Banks Find a Back Door to Do The Risky Thing." But that's not the back door. That's the front door. That's the whole thing banks do. They lend money to people to do risky things. And they take a senior claim: Lending to someone to do the risky thing is less risky than doing the risky thing yourself. When a bank lends money to your local hardware store, that's not the bank getting into the hardware business; that's the bank being in the banking business. (And if the hardware store fails, the bank gets paid back first.) When a bank lends you money to buy a house, that's not the bank moving into your house; that's a mortgage. (And if your house goes down in value, you lose all your equity before the bank loses any of its loan.)
Contrary to common conception, banking is not the locus of all of capitalism’s worst excesses. Banking is boring! (Sometimes bankers’ main goal is to prove to you what they do is boring.) People get into banking so they can still take plenty of profit while taking on less risk. The cliche about “bankers’ hours” tells us more than we realize.
One can make the same point in a very different language, that of Marx. Marx’s broad, structural account of capitalist society shows that profits from rent and interest are always secondary cuts from a larger – indeed global – fund of surplus value generated by capitalist production. Bankers and landlords surely make lots of money, but they produce almost no surplus value; they are therefore parasitically dependent (hence the vampire metaphors) on the generation of surplus value in other sectors of the global economy. And the fact that bankers’ interest is a slice from a larger pie of surplus value means that the return to bankers must, by definition, be limited by the overall rate of surplus value generated outside the banking sector.1 To return to Levine: opening the hardware store and buying a house are both riskier than making a business loan or mortgage.
I am building out this logic because I take it to be a powerful tool with which we might unravel a number of mysteries related to money and capitalism. Above I said that banking is not the domain where all the bad stuff goes on in capitalism, but that does not mean it’s not the key site of capitalist circulation, the point of passage for capital. We can start to unpack this argument with a fundamental claim: serious capitalist production requires financing.
Why? Because the only alternative to borrowing the capital is to use your own capital – the money you’ve previously earned and then saved up. And that alternative really only exists as a plot device within the children’s stories that classical political economy (especially Smith) likes to tell – the same story that capitalist apologists love to fall back on even today. Everyone knows how this story goes: these entrepreneurs worked hard, sacrificed to earn their capital, and now they are risking it.
Rubbish.
It’s true that some people take more pleasure from taking risks than others. And viewed from the perspective of someone who is not rich, it can appear as though rich people are taking huge gambles with their money. He bet $10,000 on a golf match! She invested $5 million in a startup that will probably fail!
But risk cannot be viewed in terms of absolute dollars; it has to be relative to how much you have and how much you need. If you have $5 billion dollars, you can buy Treasuries with $4 billion of it, and then sleep soundly at night knowing you’ll have a lifelong income stream of $200 million per year. You still have another $1 billion left over, and if you do really crazy stuff with it that doesn’t prove you to be a daring risk-taker. It just proves you are bored. This is the most obvious explanation for why successful startup founders so often feel compelled to try it again – not because they are world transforming innovators but because…what else are they going to do?
Well, there is another option. If we return to the mythical bootstrapping entrepreneur we observe a clear logic: the thing to do next, after you’ve successfully earned your first millions through daring disruption?2 Become a banker! Continue making profit while taking less risk. Don’t do the risky thing, just fund the risky thing. Take the senior claims on any profit from the risky thing, but leave the junior claims to the junk bond buyers, the stockholders, and the company founders.
Of course, the practical truth is that entrepreneurial risk is always being shared with bankers, right from the start. This insight might help clear up a very common confusion about Elon Musk’s purchase and subsequent destruction of Twitter. Almost every journalistic account of Musk’s comical purchase of the company has sequenced the narrative as follows: first, “Musk bought Twitter”; second, he “loaded it up with debt.” The temporal order in this story makes it appear as though Musk first did a good, or at least unobjectionable thing (bought a public company, thereby taking it private), and then subsequently he did a really bad thing: forced the otherwise untainted company to take on ugly debt.3
But that’s not what happened at all. Musk talked a bunch of bankers into buying Twitter with him. Musk offered $44 billion to buy Twitter, and then he figured out how he could spend less than $20 billion of his own cash (which itself came mainly from selling Tesla stock). He accomplished that goal by getting $13 billion in loans (to Twitter, not Musk) from Morgan Stanley, Bank of America, and Barclays.4 It was less a case of Musk forcing something bad on Twitter, than it was of forcing those bankers to take on a ton of risk, if and when Musk burned Twitter to the ground. And indeed, less than a year later those bankers had already lost billions, and were forced to write down their investments massively.
My point is that capitalism is a game that cannot be played without borrowing: a capitalist firm is not just an entity that produces widgets to sell for profit; it’s an entity that borrows money to buy the necessities to produce widgets to sell for profit.
Therefore, there can be no model, no real understanding of capitalism that does not centrally include banks, bankers, and banking practices. This is why you cannot separate “industrial capitalism” from “financial capitalism,” why you cannot sharply distinguish the “real economy” from a putatively distinct realm of monetary fiction and fraud. Capitalist societies are always monetary societies, and money is primarily bank money. We will never be rid of the bankers, so perhaps we should learn how best to live with them.
And to do that, we cannot allow them to obfuscate their practices. I think this justifies one more, deeper dive into the anatomy of a bank. In particular, I’d like to try to make some sense of one of the most confusing aspects not just of banks as capitalist institutions, but of capitalism itself. In Part III we will therefore explore the mysteries of “equity.”
I say “limited by” not “less than”: financial accounting profits can be quite high, well in excess of the global rate of surplus value. However, the total profits for global capitalism cannot be higher than the total surplus value, so any increase in profit rates for one sector will imply much lower profit rates for other sectors, and most importantly, if the rate of surplus value decreases it will have a limiting effect on all those rates of profit – in a decline or a crisis we will eventually reach a point where bankers’ profit rates are incompatible with the survival of capitalist firms, incompatible with people being able to feed, clothe, and shelter themselves.
A glib way to describe the problem with capitalism today is to emphasize that the lucky/successful entrepreneur doesn’t earn his “first million” any more, he earns his “first billions.” At that scale, being a banker or taking on other conservative roles within society no longer seems like much fun.
The idea of a company having “too much” debt, of debt being a bad thing, assumes that we are viewing the company as a prospective stockholder. If a company has too high a debt load, you might not want to buy its stock. But the whole point of Musk’s takeover of Twitter was to take it private, that is, transform it from a publicly held company (that anyone can buy stock in) to a privately held one (that basically no one can buy stock in). It is also true, of course, that a private company with a lot of debt may be closer to bankruptcy because of the burden of the interest payments on their debt. However, every capitalist firm is more or less “close to bankruptcy.” Tesla has the largest market cap of any car company – currently double the size of #2 on the list (Toyota) – yet here’s an interesting case for how quickly Tesla could go bankrupt. There might be all sorts of things morally wrong with Elon Musk, including his actions at Twitter, but getting Morgan Stanley to buy Twitter with him does not make the list.
He also borrowed another $12.5 billion personally (a margin loan secured by a portion of his Tesla stock) from the same banks.