Wall Street protesters: We're in for the long haul

[DGuller]

Seems like the general feeling is that little people are allowed to sink, while financial types are bailed out, and then allowed to prosper without any paying back.

I haven't read the whole thread yet.  Can I safely assume someone has already savaged this statement?

No.  Take your shot.  And by not paying back I don't mean not returning the loan principal.

[Admiral Yi]

No.  Take your shot.  And by not paying back I don't mean not returning the loan principal.

How about the interest?  And the warrant premiums? 

If by not paying back then you didn't mean paying back any of those things then obviously I withdraw my criticism.

[DGuller]

How about the interest?  And the warrant premiums? 

If by not paying back then you didn't mean paying back any of those things then obviously I withdraw my criticism.

The government may have nominally made money on the loans they made, but they still provided a bailout.  The reason is that if you lend someone a million dollars at 5% for a year, with 25% chance of not getting the money back, you may still wind up making a profit, but that doesn't mean that you didn't just gift a default premium to the guy you loaned to. 

Of course, another big way they didn't pay back was to block the legislative efforts to make sure that this kind of lemon socialism wouldn't happen again.  Yet another way they were gifted money was with the nearly interest-free loans that were provided by the Fed, after which the loan money was invested in interest-bearing government instruments.

[Admiral Yi]

The government may have nominally made money on the loans they made, but they still provided a bailout.  The reason is that if you lend someone a million dollars at 5% for a year, with 25% chance of not getting the money back, you may still wind up making a profit, but that doesn't mean that you didn't just gift a default premium to the guy you loaned to. 

Your argument is sound, not sure your premise is.  First, none of the TARP recipients that I'm aware of, and definitely none of the big name recipients, defaulted.  Second, it was explicitly mentioned several times that TARP was an *involuntary* program--that healthy banks that felt they didn't need the money were required to borrow the money so as to avoid stygmatyizng the weaker banks.

Of course, another big way they didn't pay back was to block the legislative efforts to make sure that this kind of lemon socialism wouldn't happen again.

I return to my previous argument with Razzberry.  The whole bundle of "consumer protection" regulations that were tossed into the Frank-Dodd bill had absolutely nothing to do with reducing the risks of future bank insolvency.  Quite the opposite.  Banks were told to increase capital.  They increase capital by retaining earnings (or floating new issues and diluting existing shares).  Decreasing bank profitability by limiting debit card fees or overdrafts or whatever does not help to increase earnings.

[/quote]  Yet another way they were gifted money was with the nearly interest-free loans that were provided by the Fed, after which the loan money was invested in interest-bearing government instruments.
[/quote]

Whenever I hear this line it makes me think that people don't understand the nature of monetary policy.  Loose monetary policy is not a gift targetted exclusively at the millionaires and billionaires who run evil Wall Street.  If you want to argue that banks are getting free money from low interest rates then you also have to argue that people who are buying new cars at 3% or refinancing their homes at 4% are getting free money, and presumably they should be required to "pay it back" too.

[DGuller]

Your argument is sound, not sure your premise is.  First, none of the TARP recipients that I'm aware of, and definitely none of the big name recipients, defaulted.  Second, it was explicitly mentioned several times that TARP was an *involuntary* program--that healthy banks that felt they didn't need the money were required to borrow the money so as to avoid stygmatyizng the weaker banks.

So what if none of them defaulted?  Like everything in modern finance, defaults aren't exactly independent events.  In case of TARP, either no one would default, or damn near everyone would.

I return to my previous argument with Razzberry.  The whole bundle of "consumer protection" regulations that were tossed into the Frank-Dodd bill had absolutely nothing to do with reducing the risks of future bank insolvency.  Quite the opposite.  Banks were told to increase capital.  They increase capital by retaining earnings (or floating new issues and diluting existing shares).  Decreasing bank profitability by limiting debit card fees or overdrafts or whatever does not help to increase earnings.

The real issues that made Wall Street a casino were not addressed, which means that next meltdown is inevitable, and it would once again lead to forced bailouts.

Whenever I hear this line it makes me think that people don't understand the nature of monetary policy.  Loose monetary policy is not a gift targetted exclusively at the millionaires and billionaires who run evil Wall Street.  If you want to argue that banks are getting free money from low interest rates then you also have to argue that people who are buying new cars at 3% or refinancing their homes at 4% are getting free money, and presumably they should be required to "pay it back" too.

Not exclusively, but extremely disproportionately.  It's almost like the way Federal Reserve prints money is by paying Wall Street to run the press and distribute the product.

[Admiral Yi]

So what if none of them defaulted?  Like everything in modern finance, defaults aren't exactly independent events.  In case of TARP, either no one would default, or damn near everyone would.

OK, I'd be interested to hear your arguments for the huge implicit risk premium that the Treasury granted on TARP loans.

The real issues that made Wall Street a casino were not addressed, which means that next meltdown is inevitable, and it would once again lead to forced bailouts.

By my reading capital requirements were explicitly addressed.  So were subsidiary hedge funds and proprietary trading, neither of which were actually factors in the crisis. 

So exactly which causes of the crisis do you think were not addressed because of bank lobbying?  I think there were exactly two principle causes of the crisis: crazy ass underpricing of subprime risk and crazy ass overexposure by AIG through subprime related CDS.  Maybe three if you include Freddie and Fannie's crazy ass appetite for subprime related securities.  What did legislators want to do that would have reduced those risks in the future *and* that were blocked by bank lobbying?

Not exclusively, but extremely disproportionately.  It's almost like the way Federal Reserve prints money is by paying Wall Street to run the press and distribute the product.

How is it disproportionate?

[DGuller]

To answer the only question of yours that was designed to elicit a response, I think that you miss the real cause of the crisis.  The real cause is the derivatives trading, which is always a financial WMD waiting to go off. 

AFAIK, regulations on derivatives trading have not been toughened in any meaingful way.  The subprime thing was just a detonator, the actual subprime losses have been a small percentage of the total losses from the financial system crash.

[Admiral Yi]

To answer the only question of yours that was designed to elicit a response, I think that you miss the real cause of the crisis.  The real cause is the derivatives trading, which is always a financial WMD waiting to go off. 

AFAIK, regulations on derivatives trading have not been toughened in any meaingful way.  The subprime thing was just a detonator, the actual subprime losses have been a small percentage of the total losses from the financial system crash.

Sweet duck.

I agree that derivaties played a large part (as I mentioned in regards to AIG).  What I don't see is how Frank and Dodd were fighting tooth and nail to reduce the possibility of another AIG and were thwarted by bank lobbying.

[Martinus]

Since you yourself said that everyone cheats, it's pretty obvious that the EU can't enforce it's own laws.

As I said the Commission took a political view not to enforce these particular rules. That does not mean it couldn't.

If a state gets sued, but just doesn't pay or do anything then what?

The amounts of fines can be deducted from whatever money they get from the EU. Their assets can be frozen and the fine satisfied from their sale. In addition, all member states are obliged to have in their legal systems the means of enforcing such fines. 

There is no mechanism for you to kick them out.

There is. And before they are kicked out, their rights in the EU can be suspended as a punitive measure.

Hell, since they will often be tried in a national court a country could simply always find that the state is not violation of EU law.

The Commission sues the states before the ECJ, not national courts. When private individuals sue the states, all EU countries have independent judiciary that cannot be influenced by the executive and very often finds against national governments. And in all such cases, the ECJ is the ultimate instance which can be presented with questions on the matter of law and national courts are bound by whatever ECJ tells them to do in a specific case. Again, these rules are on national books of member states, and failure to have such rules implemented or enforced can result in punitive measures.

[DGuller]

Sweet duck.

I agree that derivaties played a large part (as I mentioned in regards to AIG).  What I don't see is how Frank and Dodd were fighting tooth and nail to reduce the possibility of another AIG and were thwarted by bank lobbying.

You mentioned AIG exclusively, but AIG was just part of it, and far from the first domino to fall.  Keep in mind that AIG didn't pop until Lehman popped, and before Lehman there was already a great deal of carnage.

As for the banks lobbying, obviously I'm not privvy to the details.  No one is, except the bankers and the politicians.  However, the financial reform bill that passed was not close to the bill that was originally proposed, and the story at the time was that the financial sector was actively lobbying to take the teeth away from it.

[Admiral Yi]

You mentioned AIG exclusively, but AIG was just part of it, and far from the first domino to fall.  Keep in mind that AIG didn't pop until Lehman popped, and before Lehman there was already a great deal of carnage.

As for the banks lobbying, obviously I'm not privvy to the details.  No one is, except the bankers and the politicians.  However, the financial reform bill that passed was not close to the bill that was originally proposed, and the story at the time was that the financial sector was actively lobbying to take the teeth away from it.

My understanding is that Lehman went belly up because they poured lots of money into commercial real estate loans.  A loan is not a derivative.

There were several times when bank CEOs went public with their objections to some or all of the so-called consumer protection aspects of Frank-Dodd.

Or you could approach it from another angle: name a proposed reform that didn't make it into the final bill, and which in your mind would have reduced the likelihood of another crisis.

[Martinus]

My understanding is that Lehman went belly up because they poured lots of money into commercial real estate loans.  A loan is not a derivative.

I thought these were GDRs? 

[Admiral Yi]

I thought these were GDRs? 

Gross Deutchland Regiments?  I don't know what you mean.

[Martinus]

I thought these were GDRs? 

Gross Deutchland Regiments?  I don't know what you mean.

Global Depository Receipts. Share-based derivatives.

In addition, they were also investing in mortgage-based derivatives, which were based on whole portfolios/bundles of mortgage loans, effectively making them inscrutable and impossible to assess, according to critics. The usual shorthand is that the big investment banks were investing in "mortgage loans" but that's an oversimplification - they were investing in this type of derivatives.

[Razgovory]

There is no mechanism for you to kick them out.

What mechanism?  I read a set of ideas on how this might work, but the conclusion was that there was no satisfactory answer.  My reading of the EU laws seemed to indicate that it goes through National Court systems most of the time.

http://www.eurofound.europa.eu/areas/industrialrelations/dictionary/definitions/enforcementofeulaw.htm

I will also point out a political unwillingness to enforce the law makes the law de facto unenforceable.