Europe threatens bankers' bonuses

[Admiral Yi]

Is this article's assessment (as of October 2011) of the situation incorrect? It's one of many I've seen with a similar bent.

http://seekingalpha.com/article/301260-bank-of-america-dumps-75-trillion-in-derivatives-on-u-s-taxpayers-with-federal-approval

Dude is certainly talking out of the side of his mouth a bit.  For example, deposits at retail banks are insured up to $200 K, that doesn't mean derivatives are insured too.  And I'm curious about his "notional value" calculations.  How do you calculate the notional value on, for example, an interest rate swap?

There was a thread about this way back.  While I agree that it looks a little hinky for BoA to shift Merrill's derivatives to BoA's books, we're still not talking about losses in derivative positions that threaten a bank's solvency.

[Ideologue]

Arguably the problem is not risk per se, but rather mis-priced risk and/or highly correlated risk.

True enough.  It's not that the banks took inappropriate risks, it's that they didn't properly assess how risky some of their moves were.

An improperly-assessed risk is an inappropriately-taken risk.

Because of the virtual impossibility of predicting black swan events, banks would have done well to stay out of derivatives altogether.

Lol.  In what universe was the housing crisis a black swan event?  Maybe the home universe of all the people who told me the market would not catastrophically collapse: Earth-Stupid.

[Ideologue]

The key is to align incentives to reward steady wealth- creation by banks and other corporations, and not spectacularly risky boom-or-bust endeavours. The difficulty lies in how to do that without stifling growth and innovation.

Nationalize the banks.  P.S. "innovation" is not strongly needed in the field of finance qua finance.  Bank lends money for basically sound reason, bank usually gets repaid with interest which makes up for its administrative costs, occasionally bank eats a loss.  THE END.  There is nothing in the real economy (houses, restaurants, comic books, nuclear weapons, &c) that relies upon complex financial instruments.  Only parasites that feed upon the real economy of goods and services rely upon them.  Indeed, there is nothing in the real economy that requires banks to earn a profit whatsoever, only to avoid a loss, i.e. allocate resources efficiently--which private sector banks are clearly incapable of doing.  None of the arguments aganst state ownership of technological firms or retailers applies to banks.  So nationalize the banks--and all bank-like entities.

I guess credit unions can remain in situ.

One theory I have read is that the widespread use of stock options as incentives is counterproductive in this respect, as it encourages excessive short-sighted risk-taking - managers reap the benefits of risk (they exercise their options if the stock goes up) but not the downside.

Outlaw it.

[MadImmortalMan]

I don't think it's wrong to call an inevitable event a black swan as long as it occurs rarely enough.

[fhdz]

Nationalize the banks.  P.S. "innovation" is not strongly needed in the field of finance qua finance.  Bank lends money for basically sound reason, bank usually gets repaid with interest which makes up for its administrative costs, occasionally bank eats a loss.  THE END.  There is nothing in the real economy (houses, restaurants, comic books, nuclear weapons, &c) that relies upon complex financial instruments.  Only parasites that feed upon the real economy of goods and services rely upon them.  Indeed, there is nothing in the real economy that requires banks to earn a profit whatsoever, only to avoid a loss, i.e. allocate resources efficiently--which private sector banks are clearly incapable of doing.  None of the arguments aganst state ownership of technological firms or retailers applies to banks.  So nationalize the banks--and all bank-like entities.

I actually agree with this.

I'm not a left-winger, really, but banks are just different from other kinds of for-profit ventures.

[Ideologue]

I don't think it's wrong to call an inevitable event a black swan as long as it occurs rarely enough.

I don't think it's rarity that matters, but rather a reasonable belief held widely that the event cannot or is very unlikely to happen.  So, a meteor strike would be a black swan event; the firebombing of Japan would be an ordinary event.  The use of nuclear weapons could be argued either way.

That housing prices would not continue to rise despite an obvious asset bubble situation, coupled with an inability to ultimately pay for their value on the part of their purchasers, shouldn't really be classed with black swan events, as I think an element of reasonableness is necessary.

[Admiral Yi]

Nationalize the banks.  P.S. "innovation" is not strongly needed in the field of finance qua finance.  Bank lends money for basically sound reason, bank usually gets repaid with interest which makes up for its administrative costs, occasionally bank eats a loss.  THE END.  There is nothing in the real economy (houses, restaurants, comic books, nuclear weapons, &c) that relies upon complex financial instruments.  Only parasites that feed upon the real economy of goods and services rely upon them.  Indeed, there is nothing in the real economy that requires banks to earn a profit whatsoever, only to avoid a loss, i.e. allocate resources efficiently--which private sector banks are clearly incapable of doing.  None of the arguments aganst state ownership of technological firms or retailers applies to banks.  So nationalize the banks--and all bank-like entities.

I guess credit unions can remain in situ.

Mortgages were once an innovation, as were car loans, credit cards, annuities, ETFs, mutual funds, and a host of other financial products.

There are plenty of things in the real economy that rely on complex financial products.  Farmers use futures to hedge against falls in agricultural prices.  Food producers use them to hedge against spikes in food prices.  Any company operating in more than one country uses currency swaps to hedge against exchange rate risk.  Users of petroleum and electricity hedge against spikes.  The list goes on and on.

BTW I agree that it's stupid to call the popping of the housing bubble a black swan event.

[Ideologue]

I might grant you mutual funds and ETFs, but mortgages, car loans, credit cards, and annuities?  I'm pretty sure loans secured by an interest in property, cash forwarded based on personal creditworthiness, and periodic payments in exchange for the conveyance of a piece of property or an interest in property are not innovations, except in the same manner planting food grasses or attaching wheels to carts are innovations.

[Admiral Yi]

I must have missed the chapter on Akkadian mortgages and credit cards.

[Ideologue]

Unsecured and secured loans are in the Bible.

[Sheilbh]

I don't think it's wrong to call an inevitable event a black swan as long as it occurs rarely enough.

Is a housing bubble really that rare?

[Valmy]

Expensive, priggish and joyless.

Yeah that is actually a good description.  I do not know how you can live in such an amazing place and be so...well that.

[fhdz]

I don't think it's wrong to call an inevitable event a black swan as long as it occurs rarely enough.

Is a housing bubble really that rare?

A bubble that severe is pretty rare.

Nota bene: I never said the housing bubble was a black swan event.

[Razgovory]

I don't think it's wrong to call an inevitable event a black swan as long as it occurs rarely enough.

Is a housing bubble really that rare?

A bubble that severe is pretty rare.

Nota bene: I never said the housing bubble was a black swan event.

China's been trying to tame a much, much bigger one.

[MadImmortalMan]

Well it's certainly true that it was more and more clear that it was going to happen the closer it came.