Yesterday I was interviewed on MarketPlace radio regarding Citigroup's (C) decision to raise bankers' pay by 50 percent. My view is that bankers should not get a bonus or a salary boost if their business loses money. This got me thinking that banks operate under economic rules that make no sense -- like paying millions of dollars to people who lose billions.

And that made me wonder why we even have banks in the first place. When I think about American history's frequent banks failures, it becomes clear that they do a lousy job of meeting the need for a safe place to store money.

The reason they fail is that the service of providing safety for people's money is not profitable as a stand-alone business. We've set up banks so the profit comes from taking people's savings and putting it at risk by lending it out.

This is a fundamentally terrible idea. How so? People who want a safe place to store their money should not have to worry about whether it will be there when they go to take it out. Instead, that money should be invested in the safest possible securities and should be available to consumers wherever and whenever they want it. By giving deposits to bankers who lend it out or invest it in risky deals, consumers are placing a bet over which they have absolutely no control.

And by guaranteeing deposits, the FDIC is providing consumers with limited protection over those bad bets. But that FDIC guarantee is also legitimizing bankers' risky behavior because the government is implicitly saying that it will be the insurer of last resort as the bankers take risks with deposits in order to justify their multi-million dollar bonuses.

It makes no economic sense to me that shareholders and -- in the event of failure -- taxpayers are paying so much money to individual bankers. People trying to save their money are worse off because bankers are putting those deposits at risk. Moreover, a computer could easily be programmed to sweep consumer deposits into safe government securities -- and that computer would not demand a $20 million bonus for a house in the Hamptons.

To make safe banks, we ought to fire all the lenders who work in them. We could give consumers a safe place for their deposits which they could access via ATMs, bank branches, and the Internet. We might even start to use cell phones as a means of paying for items in stores.

How could such safe banks generate revenues? I see two ways: First, advertisers could pay to get the attention of consumers as they deposit, withdraw, or spend their money. Second, consumers who did not want to see any advertising could pay an annual fee.

By taking the risky lending function away from banks, we would avoid little problems like the current economic catastrophe which has cost the U.S. $12.8 trillion to clean up so far. And corporations seeking capital could access the corporate bond market instead of using consumer deposits.

We can make safe banks. But it will require a shift in who we reward -- away from bankers and towards consumers.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citigroup shares.


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