Recommended from Buttonwood's blog at the Economist:
QuoteReforming banks
The wrong numbers
Oct 25th 2011, 10:07 by Buttonwood
ANDREW Haldane, the executive director for financial stability of the Bank of England, has given many excellent speeches but his latest effort is a must-read for anyone who wants to know how we got into this current financial mess.
The speech deals with "the flaw" that so confounded Alan Greenspan, how private sector investors failed to control risks in the banking sector. The problem was not that bank executives had no skin in the game; in 2006, the managers with the largest bank stakes were Dick Fuld of Lehman Brothers, Jimmy Cayne at Bear Stearns, Stan O'Neal at Merrill Lynch, John Mack at Morgan Stanley and Angelo Mozilo at Countywide. All lost substantial chunks of their wealth as share prices collapsed.
The fundamental problem is that tax rules (the deductibility of interest) and regulations encouraged banks to gear up their balance sheets. Effective control of the banks, however, rested with the shareholders. As Haldane puts it
Quote
Ownership and control rights are vested in agents comprising less than 5% of the balance sheet.
Thanks to limited liability, the losses of these shareholders are also constrained. In the early 19th century, liability was unlimited, prompting banks to run with much more conservative balance sheets. But that was deemed to deprive industry of much-needed capital so limited liability was brought in.
That transferred the responsibility for monitoring bank managers from shareholders to depositors. Haldane points out that, in the 19th century
Quote
Depositor flight and bank runs came thick and fast, operating as an effective disciplining device on managers and shareholders
The Great Depression illustrated the economic damage that could be caused by widespread bank runs, so deposit insurance was brought in. With the liability of shareholders and depositors now limited, the disciplinary role fell on the holders of debt. But they proved hopeless in the task. In the run-up to the crisis, Haldane points out that
Quote
Credit default swap premia for all banks fell dramatically between 2002 and 2007, on average by around three-quarters. Market perceptions of risk were falling at precisely the time risk in the system was building.
The problem seems to be that while, in theory, creditors would bear the pain if banks collapsed, in practice creditors doubted that they would.
Quote
Having debtors assume pain on paper is fine in practice. But crisis wars are not fought on paper. And if debtors recognise that risks in contracts will not be enforced, they will no longer have incentives to price risk and exercise discipline themselves. So it has been for well over a century.
So that left bank executives to their own devices. As is well known, they were incentivised by share options, a process that in theory aligned their interests with equityholders. Again, this did not work well in practice. Those investors who bought bank shares in the early 1990s have lost money in real terms. But investors are not long-term holders any more. The average holding period for US and UK bank shares fell from 3 years in 1998 to around three months by 2008.
Those short-term investors were hoping to ride the ups and downs of the market, and thus welcome volatility. They thus allowed a system to develop where bank executives used return on equity as their target measure. The easiest way to increase return on equity is to take on more debt; you have more capital to pursue profitable opportunities for the same amount of equity.
That brings in the killer statistics of Haldane's speech.
Quote
Imagine that in 1990 bank CEO pay had been indexed to bank ROE. By 2007, CEO compensation would have reached $26 million. That is precisely in line with their actual payouts. If you believed ROE were a reliable performance metric, US bank CEOs would have had a watertight defence back in 2007.
Instead, of course, we had ludicrously leveraged banks that were too big to fail and brought the economy down with them.
But there is an alternative measure, return on assets (ROA), which allows for both debt and equity. As Haldane notes
Quote
Imagine if the CEOs of the seven largest US banks had in 1989 agreed to index their salaries not to ROE, but to ROA. By 2007, their compensation would not have grown tenfold. Instead, it would have risen from $2.8 million to $3.4 million. Rather than rising to 500 times median household income, it would have fallen to around 68 times.
In other words, if we had used the right risk measure, the worst of the recent mess might have been avoided, and bankers would not have grown so obscenely rich.
On that note, I am off to New York for the Buttonwood conference. Hope to report back on Friday.
http://www.bankofengland.co.uk/publications/speeches/2011/speech525.pdf
There's lots more of interest in the speech (including charts!), but I'm still chundling through it to be honest. But it does seem very interesting.
Interesting assessment, and it does answer a lot of my questions about how executives could have acted so irresponsibly.
It seems like it would take a regulatory regime to enforce responsibility, since the market has failed to do so (and, indeed, if Haldane is correct, could not do so).
But I wonder how he accounts for the fact that investment banking essentially merged with retail banking, at least in the US (as I read the history, anyway). That, in my mind, was a key contributor to the crisis, since investment bakers were then able to gamble with insured money.
He omits my favorite explanation for the crisis (along with easy money and high leverage): everybody getting the risk on subprimes wrong.
Aren't those more causes of the crisis than explanations?
Quote from: Sheilbh on November 06, 2011, 12:29:52 PM
Aren't those more causes of the crisis than explanations?
You've lost me.
Quote from: grumbler on November 06, 2011, 11:03:02 AM
That, in my mind, was a key contributor to the crisis, since investment bakers were then able to gamble with insured money.
I don't think you can do that, at least not since the S&L crisis.
Quote from: Admiral Yi on November 06, 2011, 11:26:02 AM
He omits my favorite explanation for the crisis (along with easy money and high leverage): everybody getting the risk on subprimes wrong.
He is 100% correct to do that, though, because subprime crisis was to the financial meltdown what Archduke's assassination was to WW1. The only people who keep harping on subprime mortgages in these days and age are hopeless Republican hacks.
:lol:
And to the extent that subprime mortgages did cause the meltdown, the causes are pretty much the same as the ones already enumerated. Subprime mortgage risk wasn't mispriced because of stupidity, or because of government mandates ( :lmfao:). It was mispriced because all kinds of risk was mispriced or ignored.
Quote from: DGuller on November 06, 2011, 12:59:10 PM
And to the extent that subprime mortgages did cause the meltdown, the causes are pretty much the same as the ones already enumerated. Subprime mortgage risk wasn't mispriced because of stupidity, or because of government mandates ( :lmfao:). It was mispriced because all kinds of risk was mispriced or ignored.
Credit cards? Car loans? Small business loans? US Treasuries? Muni bonds? Commercial paper? Corporate bonds? Emerging market sovereigns? Prime mortagages?
I think this is flawed for a lot of reasons. Among them, executive comp is usually filled with incentives which are linked to measures relating to equity, but achieving previously unmet incentive targets hasn't led to the explosion in financial executive pay. Boards have simply decided to pay more for executives, presumably because they think that is needed to attract and retain top talent. This is not a phenomena limited to financial companies, and has been a general trend over the last few decades which has produced a lot of literature and commentary. Basically:
QuoteImagine that in 1990 bank CEO pay had been indexed to bank ROE. By 2007, CEO compensation would have reached $26 million. That is precisely in line with their actual payouts. If you believed ROE were a reliable performance metric, US bank CEOs would have had a watertight defence back in 2007.
doesn't make much sense because bank CEOs did not agree in 1990 to index pay to ROE, and there was turnover at most positions, when Boards presumably sought out top candidates not based on an ROE formula but what consultants told them was the "market" rate. And the market rate was largely determined by surveys of what everyone else was doing, and again not a formula involving ROE.
Plus, incentives based on equity tend to make much more sense than for assets. Incentives are set (presumably) by equity owners looking to increase their own profitability. Yes that produces incentives for owners to increase leverage and risk to generate returns, but there are methods to take that into account and the board is also supposed to be overseeing risk management. Equity is by nature a higher risk investment, and equity owners of a firm are not likely to be so concerned with systematic risk their decisions put into the economy if such is the price of increasing their own profit opportunity. That conflict of interest needs to be moderated by regulators.
Also, I didn't read the entire article, or even most of it, but it sounds as though the author is referring to book numbers for equity. If that is true, I think that is somewhat bizarre, as those numbers have very little connection to reality.
Quote from: Admiral Yi on November 06, 2011, 12:30:48 PM
You've lost me.
I think DGuller's comparison is pretty apt. It's like blaming WW1 on the Black Hand. That may be strictly true but I don't think it really explains anything.
QuoteIncentives are set (presumably) by equity owners looking to increase their own profitability. Yes that produces incentives for owners to increase leverage and risk to generate returns, but there are methods to take that into account and the board is also supposed to be overseeing risk management. Equity is by nature a higher risk investment, and equity owners of a firm are not likely to be so concerned with systematic risk their decisions put into the economy if such is the price of increasing their own profit opportunity. That conflict of interest needs to be moderated by regulators.
I think he sort of addresses this - I'm still reading through to be honest:
QuoteThe story so far. Ownership and control rights for banks are vested in agents comprising less than 5% of the balance sheet. To boost equity returns, there are strong incentives for owners to increase volatility. Those risk-taking flames have been fanned by tax and state aid. As stories go, this one sounds grim.
But this story also contains a puzzle. Long-term shareholders in banks have not obviously reaped the benefits of these distortions. The purchaser of a portfolio of global banking stocks in the early 1990s is today sitting on a real loss. So who exactly is it extracting value from these incentive distortions? The answer is twofold: shorter-term investors and bank management.
It is not difficult to see why shorter-term investors in bank equities stand to gain from volatility. Institutional investors in equities are typically structurally long. They gain and lose symmetrically as returns rise and fall. Many shorter-term investors face no such restrictions. If their timing is right, they can win on both the upswings (when long) and the downswings (when short). For them, the road to riches is a bumpy one – and the bigger the bumps the better. As in Merton's model, all volatility is good volatility.
Perhaps reflecting that, there is evidence of the balance of shareholding having become increasingly short-term over recent years. Chart 8 shows the average duration of holdings of US, UK and European bank shares. Average holding periods for US and UK banks fell from around 3 years in 1998 to around 3 months by 2008. Banking became, quite literally, quarterly capitalism. Today, the average bank is owned by an investor with a time-horizon considerably less than a year.
A second piece of evidence on equity short-termism, which is specific to banks, comes from trends in banks' capital planning. Since the late 1990s, there has been increasing focus on return on equity (ROE) as a performance target. Indeed, major banks have recently set explicit numerical targets for ROE as a guidepost for shareholders and managers. These targets are revealing about investor and managerial incentives.
ROE is an entirely equity-focussed concept. As such, ROE targets provide strong incentives for banks to increase equity returns, either by boosting asset volatility or gearing up their balance sheet. ROE targets hard-wire in the North-Easterly drift evident in Chart 5. Instead of adjusting for risk, ROE is flattered by it. This is fine for short-term investors who thrive on the bumps. But for longer-term investors they are a road to nowhere, as recent experience has shown.
What we have, then, is a set of mutually-reinforcing risk incentives. Investors shorten their horizons. They set ROE targets for management to boost their short-term stake. These targets in turn encourage short-term risk-taking behaviour. That benefits the short-term investor at the expense of the long-term, generating incentives to shorten further horizons. And so the myopia loop continues.
These incentive problems do not stop with owners. Under joint stock banking, ownership and control are divorced. This generates what economists call a principal-agent problem: managers (agents) may not do what owners (principals) wish. In an attempt to solve it, shareholders have sought over recent years to align managerial incentives with their own. That has meant remunerating managers in equity or using equity-based metrics such as ROE.
These trends were all too apparent in the pre-crisis data. The wealth of the average US bank CEO increased by $24 for every $1000 created for shareholders in 2006 (Fahlenbrach and Stulz (2011)). The typical bank CEO pocketed over $1 million for every 1% increase the value of their firm. These are rather potent pecuniary incentives on bank managers to keep shareholders sweet.
These facts also help explain the evolution of large US banks' CEO pay between 1990 and 2007. Imagine that in 1990 bank CEO pay had been indexed to bank ROE. By 2007, CEO compensation would have reached $26 million. That is precisely in line with their actual payouts.
If you believed ROE were a reliable performance metric, US bank CEOs would have had a watertight defence back in 2007. Indeed, it was the L'Oreal defence: because we're worth it. But experience since suggests this performance was cosmetic. ROE flattered returns, and hence compensation, in the upswing.
That is hardly surprising since it puts risk ahead of return and short-term ahead of long-term performance. When the downswing came, the volatility of equity returns sent many banks to the wall. Equity-based incentive contracts helped propel them there. Firm-level evidence could not be clearer. In 2006, the top 5 equity stakes of US bank CEOs ran as follows: Dick Fuld (Lehman Brothers), James Cayne (Bear Stearns), Stan O'Neal (Merrill Lynch), John Mack (Morgan Stanley) and Angelo Mozilo (Countrywide) (Fahlenbrach and Stulz (2011)). We know how these disaster movies ended.
So having been divorced for almost two hundred years, ownership and control have been reunited. But they are an odd couple. Their marriage contract encourages both partners to behave in a volatile, short-term fashion. The marriage itself is destined to last less than a year. In the mid-19th century, unlimited liability was said to be deterring investors of "fortune, intelligence and respectability". For very different reasons, today's governance arrangements might be suffering the same fate.
Worth saying that I think as well as doing research for the BofE (for example he's previously tried to estimate the implicity subsidy received by the banks) he is one of the members of the Financial Policy Committee which, I think, is meant to be our main financial sector regulator. I think so anyway - I'm not sure what's happening with that but it was certainly the government's intention.
Quote from: alfred russel on November 06, 2011, 01:15:12 PM
(snip) Basically:
QuoteImagine that in 1990 bank CEO pay had been indexed to bank ROE. By 2007, CEO compensation would have reached $26 million. That is precisely in line with their actual payouts. If you believed ROE were a reliable performance metric, US bank CEOs would have had a watertight defence back in 2007.
doesn't make much sense because bank CEOs did not agree in 1990 to index pay to ROE...
I don't understand your objection. A hypothetical is proposed, and the conclusion drawn that, had the hypothetical been true, "US bank CEOs would have had a watertight defence back in 2007." That makes perfect sense to me.
The problem comes, of course, when equity value and asset and revenue value get out of whack. That's called a bubble, and when executives get rewarded for creating bubbles, they create them.
I just found the FT Alphaville's description of the lecture here which is better than the Economist blog:
http://ftalphaville.ft.com/blog/2011/10/25/711856/the-history-and-future-of-banking-according-to-andy-haldane/
QuoteThe history and future of banking, according to Andy Haldane
Posted by John McDermott on Oct 25 21:42.
Andy Haldane's latest speech is a coherent, logically argued history of modern banking that ends with four intriguing policy ideas. The Bank of England's Executive Director, Financial Stability, is always worth reading but his Wincott Annual Memorial Lecture, delivered on Monday evening, is the best introduction to his views on banks.
The FT's Martin Wolf includes a cogent summary of Haldane's proposals as part of his formal response to the speech, highlights of which are available on his blog.
In essence, the speech is a history of the development of what Haldane calls "wonky risk incentives": the market failures that have led to the imbalance between privatised gains and socialised losses. We've tried to summarise the main points below (all quotes from the speech):
1. In the early 1800s, control rights over banks were in the hands of those "whose personal wealth was literally on the line". Most banks were unlimited liability partnerships. Equity capital was often half of banks' liabilities while cash and liquid securities accounted for nearly one-third of assets. "Banking was a low-concentration, low-leverage, high-liquidity" business.
2. But by the second half of the 19th century, "shareholder discipline was proving rather too effective as a brake on risk-taking". There were bridges to build, railways to lay, and countries to invade; parliamentarians lobbied to free bank capital and credit. About the same time, the City of Glasgow bank collapsed and some shareholders were left destitute. There seemed to be too much risk held by capitalists. Thus, the UK (following the US) moved to a limited liability model of bank governance.
3. Unfortunately (there is no blame attached anywhere in Haldane's speeches), it soon became apparent that the calls on reserve capital heightened rather than mitigated panic. Shareholders became too dispersed. "Their upside payoffs remained unlimited, but their downside risks were now capped." In the late 1990s, many banks ended their partnerships and went public, compounding the problem.
4. These governance changes created an asymmetric risk profile. As Robert Merton explained, the equity of an LLC "can be valued as a call option on its assets, with a strike price equal to the value of its liabilities". And "because volatility increases the upside return without affecting the downside risk. If banks seek to maximise shareholder value, they will seek bigger and riskier bets."
5. As well as creating "volatility junkies", the changes encouraged banks to gear-up their balance sheets. "As unlimited liability was phased out, leverage rose from around 3-4 in the middle of the 19th century to around 5-6 at its close. As extended liability was removed, leverage continued its upward trend into the 20th century, by its close reaching over 20. Seven years into the 21st century, at its high-water mark, leverage hit 30 or more."
6. The "largely silent" changes to the relative treatment of debt and equity catalysed the growth of leverage. From the early 20th century debt interest costs became deductible from profits, unlike — at least in most countries — the cost of equity financing. New evidence suggests there's an empirical relationship between this and leverage: "a fall in the tax shield by 10 percentage points would lower the debt-to-asset ratio of a typical firm by 2.8 percentage points."
7. Debt doesn't have the disciplinary effects commonly assumed. Plus, there is a time-consistency problem in crises. "As much as bank management and the authorities may pre-commit to debtor's bearing risk ex-ante, they may be tempted to capitulate ex-post." Creditors realise this, and price and lend accordingly.
8. The time-consistency problem has in turn been made worse by the emergence of too-big-to-fail banks: creditors know that governments have to cover the risk of any one of these failing. "That is doubly unfortunate, as it means debtor discipline will be weakest among institutions for whom society would wish it to be strongest."
9. On top of all this, long-term bank shareholders haven't received the benefits from these flaws — it's all gone to short-term investors and bank management. "The purchaser of a portfolio of global banking stocks in the early 1990s is today sitting on a real loss." Average holding period for US and UK bank stocks fell to 3 months in 2008 from 3 years in 1998. ("Banking became, quite literally, quarterly capitalism.")
10. In the late 1990s return on equity (ROE) became more important as a bank's performance target. This creates a "myopia loop": investors become more short-termist, a focus on ROE encourages short-term risky behaviour, which further incentivises short-term investment. By the eve of the last financial crisis the principal-agent problem was writ large: "In 2006, the top 5 equity stakes of US bank CEOs ran as follows: Dick Fuld (Lehman Brothers), James Cayne (Bear Stearns), Stan O'Neal (Merrill Lynch), John Mack (Morgan Stanley) and Angelo Mozilo (Countrywide) (Fahlenbrach and Stulz (2011)). We know how these disaster movies ended."
Haldane is that rare beast: an economist that also makes specific policy recommendations. Based on the above, he has four sets of ideas, neatly summarised by Wolf (emphasis ours):
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The first is to raise equity requirements substantially. There has been some progress in this direction. But it probably does not go far enough. David Miles, a member of the Bank of England's monetary policy committee, with two co-authors, suggests that the optimal capital ratio would be 20 per cent of risk-weighted assets. Such a shift would impose private costs, because of the favourable tax treatment of debt. The answer is to change that tax treatment, by making a normal return on equity tax deductible or, alternatively, withdrawing the tax deductibility of debt.
The second approach is make debt more equity-like. Mr Haldane argues that so-called bail-in debt would prove too costly, because of the damage done by bankruptcy. US experience suggests that this need not be the case. But I agree that the point of bail-in should be determined by market-based measures of capital adequacy. More broadly, bail-in debt can be accepted only if regulators believe they can carry out the conversion into equity, in a crisis. Otherwise, equity ratios should be raised.
A third possible reform is via changes in control rights. It is possible to envisage radical changes to voting rights, for example, that might give some votes to some creditors. Mr Haldane describes this as a hybrid of the mutual and joint-stock models.
A fourth possible reform, suggests Mr Haldane, is to change the target return from one on equity to one on assets. That would certainly have a powerful and attractive impact on incentives.
Wolf adds, as he did via the Independent Commission on Banking, that he'd like the separation of retail and investment banking. This is a good idea but it still seems one step removed from the actual incentives bankers and shareholders are faced with, which is why Haldane's ideas are especially appealing, even if you don't agree with his precise recommendations.
Wolf's point about the omission of shadow banking is an important one. In some ways, Haldane's description of early 1800s banking could refer to the hedge funds and PE funds of today, and it would be interesting if he could incorporate some of the FPC's early ideas into the account above, especially to explain the rise of leverage and maturity mismatch. (Some chat about derivatives wouldn't go amiss either.)
Another thing to consider is the incentives for a group not discussed this time by Haldane: politicians. Presuming you agree with the thrust of Haldane's argument (which you may not) there are still problems with (political) feasibility. Strangely enough, given how unpopular "bankers" (loosely defined) are these days, there's still a reluctance to do anything radical to realign incentives along the lines Haldane suggests.
Any argument about the time-consistency problem should ideally include the one faced by those trying to get elected in a few years time. This means providing answers to, for example, what happens to bank lending, what happens to a source of UK comparative advantage, and so on. For although these ideas may be of huge long-term benefit, most politicians inhabit their own myopic system: the electoral calendar.
Martin Wolf's shorter reply is here:
http://blogs.ft.com/martin-wolf-exchange/2011/10/24/the-threat-of-the-volatility-junkie/#axzz1bhyOVSyd
It's also quite interesting and worth reading.
Quote from: Sheilbh on November 06, 2011, 03:30:15 PM
I think he sort of addresses this - I'm still reading through to be honest:
There are a few things there that bother me:
QuoteOwnership and control rights for banks are vested in agents comprising less than 5% of the balance sheet.
Ownership and control rights are the equity portion of the balance sheet. There are a few problems with looking at the equity section of the balance sheet, especially for financial firms. A balance sheet has a mathematical relationship: assets = liabilities + equity.
For a financial firm, a deposit is both an asset and a liability. Suppose you give me $100 to hold while you travel. In the first scenario, I put the money in a safe place and wait for your return. If I was to account for this as a bank, I have a $100 asset (the cash) and a $100 liability (the money I owe you) and no equity at all. I am infinitely leveraged, you would think that is very high risk, even though this is a very safe arrangement! Now lets suppose another scenario. Instead of holding the money in a safe place, I bet the money on a coin toss. Before the toss, I would show $100 in assets (my ticket giving me a 50% probability of winning $200 would be worth that much) and a $100 liability. I am no more leveraged than the very safe previous arrangement, but there is only a 50% chance you will be paid when you get back. The point here is that leverage alone is not a good way to judge risk--you need to look at the profile of the firm.
Very generally speaking, liabilities are based on the value of what is owed at the point in time the balance sheet is dated. However, many assets are not. Some assets are not valued at all, some are valued at some point in time previous, and some are only valued based on whether they were transacted. Two firms with identical assets could show very different asset values. This is a big problem with using ROA. Because assets = liabilities + equity, and liabilities are relatively consistently measured and equity relatively small, the variations in how to measure assets are amplified in how equity is measured. Book equity is even more problematic to use in any type of analysis. Very often in analysis, book equity will be tossed out, and market equity used. The problem there being that in a bubble economy a firm may have a large equity value and not look leveraged, only to be seen as vunerable once its equity value plummets.
QuoteBut this story also contains a puzzle. Long-term shareholders in banks have not obviously reaped the benefits of these distortions. The purchaser of a portfolio of global banking stocks in the early 1990s is today sitting on a real loss. So who exactly is it extracting value from these incentive distortions? The answer is twofold: shorter-term investors and bank management.
I'm interested in the phrase a "real loss". The use of the word "real" implies inflation adjusted, I wonder if there was also a nominal loss? I had seen post crash analysis that investors in US public investment banks did okay since they went public (small gains), even though 3 of the 5 no longer independently operate. Regardless, I don't think any diversified losses were too bad, and certainly not when you consider this is seen as the worst financial crisis since the Great Depression. You could argue that the behavior of firms caused the crisis, but firms act independently. In a properly aligned governance model between shareholders and management, firms will do what is in their best interest even if when universally applied could harm the economy. To moderate this problem, you need regulators.
Quote from: Sheilbh on November 06, 2011, 03:30:15 PM
I think DGuller's comparison is pretty apt. It's like blaming WW1 on the Black Hand. That may be strictly true but I don't think it really explains anything.
Where are all the other financial dominoes that came crashing down once the subprime bubble popped? You've essentially got one: commercial real estate lending. And I'm not even sure how widespread that one was.
Quote from: Admiral Yi on November 06, 2011, 04:39:54 PMWhere are all the other financial dominoes that came crashing down once the subprime bubble popped? You've essentially got one: commercial real estate lending. And I'm not even sure how widespread that one was.
What do you mean by financial dominoes? Also how are you definign crashing down?
For what it's worth I see the current problem in Europe as part of the same global credit crisis that started with the subprime bubble.
Quote from: Sheilbh on November 06, 2011, 07:50:24 PM
For what it's worth I see the current problem in Europe as part of the same global credit crisis that started with the subprime bubble.
Why? The subprime bubble brought forward the sovereign crisis due to risk-nationalization, but they are two different things. The first didn't create the second. The sovereign problem would have been here eventually, even without the subprime stuff.
And highlit poor tax policy in the U.S., and brought about our penchant for embracing anarchism masquerading as conservative values, exposing our instability/ineptitude, which--as I understand it--helped make us less creditworthy.
Quote from: MadImmortalMan on November 06, 2011, 09:53:43 PM
Quote from: Sheilbh on November 06, 2011, 07:50:24 PM
For what it's worth I see the current problem in Europe as part of the same global credit crisis that started with the subprime bubble.
Why? The subprime bubble brought forward the sovereign crisis due to risk-nationalization, but they are two different things. The first didn't create the second. The sovereign problem would have been here eventually, even without the subprime stuff.
The subprime mortgage default (I understand that's what you mean by "subprime bubble"?) was just a tip of the iceberg and the most visible aspect of the general tendency to take risks beyond what is reasonable. This was to a large extent caused by wrong incentivisation of decision makers, who were rewarded for excessive risk taking. From that perspective, lending tons of cash to Greece falls in the same basket and lending excessive mortgage loans to the populace.
Quote from: MadImmortalMan on November 06, 2011, 09:53:43 PMWhy? The subprime bubble brought forward the sovereign crisis due to risk-nationalization, but they are two different things. The first didn't create the second. The sovereign problem would have been here eventually, even without the subprime stuff.
My read on it all is that we're still in the same debt crisis that was made dangerous due to very global capital imbalances and systemic failure by the banking sector to properly measure risk. The subprime bubble was the canary in the coal mine. Even taking the subprime problem it was clearly something rather more than that given that, from what I remember, its first casualty was a British bank - in fact we had a run on that bank until the government stepped in.
Were the banks so wrong in taking these "stupid risks" though? I don't think so.
They took them because they counted with state intervention to save their asses in case of the thing turning against them, and what do you know, apart from a couple of cases which went too far, they were right.
"too big to fail" must go. We WILL repeat this over and over and over again, while we have an unremovable aristocracy posing as investment bankers. And you cannot remove that untouchable upper class while the public is screaming for more regulations. "Regulation" was what these guys counted on when they gambled with subprime, "regulation" was what saved their ass.
I agree we need 'too big to fail' to end. I don't understand the blanket anti-regulation thing though. It seems almost impossible to see how you could end 'too big to fail' without changing banking regulations.
Quote from: Tamas on November 07, 2011, 05:31:53 AM
Were the banks so wrong in taking these "stupid risks" though? I don't think so.
They took them because they counted with state intervention to save their asses in case of the thing turning against them, and what do you know, apart from a couple of cases which went too far, they were right.
"too big to fail" must go. We WILL repeat this over and over and over again, while we have an unremovable aristocracy posing as investment bankers. And you cannot remove that untouchable upper class while the public is screaming for more regulations. "Regulation" was what these guys counted on when they gambled with subprime, "regulation" was what saved their ass.
You are wrong. Banks and corporations (contrary to what Mitt Romney would tell you) are not "people". They do not think in terms of their wellbeing or interest - people who manage them and take decisions think in terms of their own wellbeing and interest. That is why you need to have proper incentives, because otherwise these people will take decisions that will benefit them, not the institutions they are running (or shareholders or deposit owners or investors) - unless they have to or it's in their interest to do so.
I have had contact with a lot of people who were involved more or less directly in the risk taking I am talking about - and a lot of these decision makers genuinely thought the markets are going to increase forever (or at least "forever", from their perspective, i.e. for the next 10-20 years). Until Lehman, noone was thinking in terms of "if we fail, they will bail out". The possibility of failing simply wasn't even considered.
Quote from: Sheilbh on November 07, 2011, 05:43:40 AM
I agree we need 'too big to fail' to end. I don't understand the blanket anti-regulation thing though. It seems almost impossible to see how you could end 'too big to fail' without changing banking regulations.
Precisely.
"Too big too fall" is not some pro-banker invention - it's a reflection of reality, where unregulated bankers gambled with money of people who were not to blame in the slightest, even in terms of an error of judgement. In the world of Tamas's cretinous idiocy of deregulation everyone would keep their money inside a hole dug in the backyard - because there would be no way to prevent it from being gambled on if you as much as put it on a bank account.
One may just as well argue that if we abolished criminal law, there would be no murderers and thieves, since law would no longer define the concept of a murder or theft. Jeez. Why do Hungarian IT technicians think they are suddenly experts on international finance?
Quote from: Sheilbh on November 06, 2011, 07:50:24 PM
What do you mean by financial dominoes? Also how are you definign crashing down?
For what it's worth I see the current problem in Europe as part of the same global credit crisis that started with the subprime bubble.
Take a look at the asset classes I posted on the first page in response to DGuller. If you and he are correct all of those should have seen risk significantly underpriced.
Quote from: Admiral Yi on November 07, 2011, 06:21:37 AMTake a look at the asset classes I posted on the first page in response to DGuller. If you and he are correct all of those should have seen risk significantly underpriced.
The risk on commercial property's been pretty seriously underpriced - and I think that's global. The US Treasury had to set up a few schemes to buy commercial paper during the crisis and loan to the market to keep liquidity going.
I'd also say there was anunderappreciating of the potential damage the risk could cause. So we underpriced the risk of subprime mortgages, but I think because of the CDSs and the like there was a failure to appreciate how much damage that initial underpricing could cause.
I think a number of recent banking crises in different countries have been caused by declines in the property market. I read that some economists think property's effectively replaced innovation (generally) as the cause of overexuberant bubbles. It seems like an interesting idea.
Quote from: Sheilbh on November 07, 2011, 07:09:27 AM
The risk on commercial property's been pretty seriously underpriced - and I think that's global.
I think that's Ireland.
QuoteThe US Treasury had to set up a few schemes to buy commercial paper during the crisis and loan to the market to keep liquidity going.
They did that because a number of credit markets froze in the wake of the crisis. Commercial paper was one, interbank lending was another. But if you've read somewhere that the riskiness of commercial paper was significantly underpriced, please share it with me.
Quote from: Martinus on November 07, 2011, 05:52:53 AM
Quote from: Tamas on November 07, 2011, 05:31:53 AM
Were the banks so wrong in taking these "stupid risks" though? I don't think so.
They took them because they counted with state intervention to save their asses in case of the thing turning against them, and what do you know, apart from a couple of cases which went too far, they were right.
"too big to fail" must go. We WILL repeat this over and over and over again, while we have an unremovable aristocracy posing as investment bankers. And you cannot remove that untouchable upper class while the public is screaming for more regulations. "Regulation" was what these guys counted on when they gambled with subprime, "regulation" was what saved their ass.
You are wrong. Banks and corporations (contrary to what Mitt Romney would tell you) are not "people". They do not think in terms of their wellbeing or interest - people who manage them and take decisions think in terms of their own wellbeing and interest. That is why you need to have proper incentives, because otherwise these people will take decisions that will benefit them, not the institutions they are running (or shareholders or deposit owners or investors) - unless they have to or it's in their interest to do so.
I have had contact with a lot of people who were involved more or less directly in the risk taking I am talking about - and a lot of these decision makers genuinely thought the markets are going to increase forever (or at least "forever", from their perspective, i.e. for the next 10-20 years). Until Lehman, noone was thinking in terms of "if we fail, they will bail out". The possibility of failing simply wasn't even considered.
Weird. I'm agreeing with Marty here. If a guy at a company can make 5 dollars today and lose 10 tomorrow he'll do it so long as he's not working there tomorrow morning and he doesn't have to suffer the longer term consequences. You can't expect a company to be rationally self-interested because the running and working at the company have different and often conflicting self-interests.
Quote from: Admiral Yi on November 07, 2011, 07:18:43 AM
I think that's Ireland.
It's far more than Ireland, it's in at least the UK too. But I believe there's worries worldwide because loans to commercial property overall more-or-less doubled in a number of countries during the 2000-07 period. Around about half of that matures over the next 4-5 years. The price of commercial property's fallen a lot, so far the banks have sort-of maintained the sector through forebearance and agreements. In the UK the largest lender's had to write down over a third of their commercial property debt. How much of the spirit of those agreements can continue isn't clear when there's still slack demand, the banks need to raise their capital and there's still a lot of negative equity isn't clear.
Quote from: Razgovory on November 07, 2011, 07:18:50 AM
Weird. I'm agreeing with Marty here. If a guy at a company can make 5 dollars today and lose 10 tomorrow he'll do it so long as he's not working there tomorrow morning and he doesn't have to suffer the longer term consequences. You can't expect a company to be rationally self-interested because the running and working at the company have different and often conflicting self-interests.
Yes. In a big enough company you have the actual management of risks completely detached from ownership of the company (and thus from responsibility).
That is a challenge, but making regulations more complex is not the answer. If there is a rule, there is a way around it.
And I am not advocating (notice how I am hinting a reference on "The Advocate", Marty's chief source of world knowledge, to score good points with him) the de-criminalization of, well, criminal neglect and misinformation of clients/customers. Quite the contrary. You had scumbags deliberately fooling people by packagings toxic assets in a way as to hide their risk, and the "punishment" was an insanely huge check from the government to keep them afloat.
What we need is personal accountability and responsibility upheld by law. This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.
What do you suggest we do?
Quote from: Tamas on November 07, 2011, 07:58:10 AM
This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.
That's a terrible idea.
Criminal law is all about punishing someone after something happens. It has no ability (or extremely limited ability) to prevent something from happening.
The only proper solution is to kill all the lawyers.
Quote from: Barrister on November 07, 2011, 09:25:43 AM
Quote from: Tamas on November 07, 2011, 07:58:10 AM
This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.
That's a terrible idea.
Criminal law is all about punishing someone after something happens. It has no ability (or extremely limited ability) to prevent something from happening.
Yet we punish those who comitted crimes. We do not consider a few decades of prison for a murder a terrible idea just because the sentence did not come in time to save the victim - the point would be the same as with any other criminal activity - make it not worth it.
Quote from: Tamas on November 07, 2011, 09:52:40 AM
Quote from: Barrister on November 07, 2011, 09:25:43 AM
Quote from: Tamas on November 07, 2011, 07:58:10 AM
This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.
That's a terrible idea.
Criminal law is all about punishing someone after something happens. It has no ability (or extremely limited ability) to prevent something from happening.
Yet we punish those who comitted crimes. We do not consider a few decades of prison for a murder a terrible idea just because the sentence did not come in time to save the victim - the point would be the same as with any other criminal activity - make it not worth it.
I'm not saying that the criminal law should not have some part to play in regulating economic activity. Punishment plays a part of it.
But to say that
only criminal law should be involved? So there is no room for banking or securities regulations in your mind? That is so foolish I hardnly no where to begin.
It seems from this the problem is a sort of vicious circle of over-valuing risk. Shareholders of financial institutions are willing to pay top dollar for business leaders that have a track record of getting higher than average returns. Those leaders (and presumably the shareholders) attribute the higher returns to some sort of manegerial genius, when in reality it could be a simple willingness to (successfully, for a time) tolerate a higher-than-wise level of risk ... the result can (and arguably has) been skyrocketing compensation combined with busted bubbles, when those risks turn out badly.
Quote from: alfred russel on November 06, 2011, 04:24:37 PM
Ownership and control rights are the equity portion of the balance sheet. There are a few problems with looking at the equity section of the balance sheet, especially for financial firms. . . Very generally speaking, liabilities are based on the value of what is owed at the point in time the balance sheet is dated. However, many assets are not. Some assets are not valued at all, some are valued at some point in time previous, and some are only valued based on whether they were transacted. Two firms with identical assets could show very different asset values. This is a big problem with using ROA. Because assets = liabilities + equity, and liabilities are relatively consistently measured and equity relatively small, the variations in how to measure assets are amplified in how equity is measured. Book equity is even more problematic to use in any type of analysis.. . .
Agreed with all of this.
I would also add that is misleading to posit the simple proposition that all "control" is vested in equity. The equity is conferred with voting rights, nothing more, and sometimes even not that (depending on class). Thus the equity holders with full voting rights may be able to exercise control as a collective, but the reality is that they are rarely able to act that way. More typical is that either a small group of big shareholders exercise effective control (even if collectively a minority), or - if shareholding is particuarly diffuse - the CEO and allied board members can exercise effective control with little check from equity holders.
On the other side, holder of debt interest can exercise very significant control through use of strong covenants, that e.g., require bondholder consent before certain kinds of transactions can take place, or that give bondholders various powers if certain convenanted ratios are breached. A big part of the credit crisis which is not mentioned in the article was the erosion of tough covenants and the rise of "covenant-lite" instruments prior to the crash.
Finally, as AR points out, a big part of the liability structure for commercial banks are bank deposits. Depositors are insured by the government and thus exercise no effective control over bank actions. But the FDIC, the Fed and the OCC among others do have extensive powers to investigate and inspect covered banks and to a certain extent exercise control. That is another part of the story.
Quote from: grumbler on November 06, 2011, 03:42:03 PM
I don't understand your objection. A hypothetical is proposed, and the conclusion drawn that, had the hypothetical been true, "US bank CEOs would have had a watertight defence back in 2007." That makes perfect sense to me.
It's easy to pick start and end points and show a correlation - leaping from that correlation to a suggestion of some linkage is what is questionable. And if there is no linkage being suggested, it is just a non sequitur.
Quote from: PDH on November 07, 2011, 09:35:42 AM
The only proper solution is to kill all the bankers and lawyers.
FYP
Quote from: Barrister on November 07, 2011, 09:25:43 AM
Quote from: Tamas on November 07, 2011, 07:58:10 AM
This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.
That's a terrible idea.
Criminal law is all about punishing someone after something happens. It has no ability (or extremely limited ability) to prevent something from happening.
Yes and no. It can't prevent crimes that are already committed. It can intimidate people into not committing crimes by setting example on people who have.
Quote from: Barrister on November 07, 2011, 09:55:27 AM
Quote from: Tamas on November 07, 2011, 09:52:40 AM
Quote from: Barrister on November 07, 2011, 09:25:43 AM
Quote from: Tamas on November 07, 2011, 07:58:10 AM
This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.
That's a terrible idea.
Criminal law is all about punishing someone after something happens. It has no ability (or extremely limited ability) to prevent something from happening.
Yet we punish those who comitted crimes. We do not consider a few decades of prison for a murder a terrible idea just because the sentence did not come in time to save the victim - the point would be the same as with any other criminal activity - make it not worth it.
I'm not saying that the criminal law should not have some part to play in regulating economic activity. Punishment plays a part of it.
But to say that only criminal law should be involved? So there is no room for banking or securities regulations in your mind? That is so foolish I hardnly no where to begin.
I am taking an extreme position, yes. Consider it a direction. In general, in my view, society should find the point of minimum necessary government involvement in life as a whole (and that may be quite far from no involvement at all), and not, like it seems to be nowadays, seek more direct steering to every issue (financial crooks, children being children, etc). Because that is bound to fail.
Quote from: DGuller on November 07, 2011, 10:26:37 AM
Quote from: Barrister on November 07, 2011, 09:25:43 AM
Quote from: Tamas on November 07, 2011, 07:58:10 AM
This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.
That's a terrible idea.
Criminal law is all about punishing someone after something happens. It has no ability (or extremely limited ability) to prevent something from happening.
Yes and no. It can't prevent crimes that are already committed. It can intimidate people into not committing crimes by setting example on people who have.
Criminals never think they're going to get caught, or they wouldn't be doing the crime. While a long prison sentence makes us feel all warm and nice, it won' stop financial fraudsters. Regulations won't either, completely, but it makes it harder to do and easier to catch. Canada has a highly regulated bank sector, and while there has been arguments that Canada coming through relatively unscaved was coincidental to these regulations i personally think they helped greatly.
Quote from: HVC on November 07, 2011, 11:01:16 AM
Criminals never think they're going to get caught, or they wouldn't be doing the crime. While a long prison sentence makes us feel all warm and nice, it won' stop financial fraudsters. Regulations won't either, completely, but it makes it harder to do and easier to catch. Canada has a highly regulated bank sector, and while there has been arguments that Canada coming through relatively unscaved was coincidental to these regulations i personally think they helped greatly.
I don't buy into the idea that there are two classes of people: criminals and non-criminals. I think a lot of people can be criminals in one country, and non-criminals in other countries. It all depends on the legitimacy and authority of the legal system, and how well it rewards legal behavior and punishes illegal behavior.
Quote from: DGuller on November 07, 2011, 11:24:33 AM
Quote from: HVC on November 07, 2011, 11:01:16 AM
Criminals never think they're going to get caught, or they wouldn't be doing the crime. While a long prison sentence makes us feel all warm and nice, it won' stop financial fraudsters. Regulations won't either, completely, but it makes it harder to do and easier to catch. Canada has a highly regulated bank sector, and while there has been arguments that Canada coming through relatively unscaved was coincidental to these regulations i personally think they helped greatly.
I don't buy into the idea that there are two classes of people: criminals and non-criminals. I think a lot of people can be criminals in one country, and non-criminals in other countries. It all depends on the legitimacy and authority of the legal system, and how well it rewards legal behavior and punishes illegal behavior.
:yes:
plus, there are people who, for example, don't commit petty crimes because they consider it immoral. And there are others who don't commit petty crimes because they are afraid of getting caught. ALL of the latter are stopped from stealing via the punishment system.
Quote from: DGuller on November 07, 2011, 11:24:33 AM
Quote from: HVC on November 07, 2011, 11:01:16 AM
Criminals never think they're going to get caught, or they wouldn't be doing the crime. While a long prison sentence makes us feel all warm and nice, it won' stop financial fraudsters. Regulations won't either, completely, but it makes it harder to do and easier to catch. Canada has a highly regulated bank sector, and while there has been arguments that Canada coming through relatively unscaved was coincidental to these regulations i personally think they helped greatly.
I don't buy into the idea that there are two classes of people: criminals and non-criminals. I think a lot of people can be criminals in one country, and non-criminals in other countries. It all depends on the legitimacy and authority of the legal system, and how well it rewards legal behavior and punishes illegal behavior.
what seperates a criminal from a non-criminal, i think, is the ease of commiting a crime. Not the prospect of getting caught. It's a lot harder to bribe in, say canada, then elsewhere. That's not becasue bribing isn't illegal elsewhere, just that we have more safe guards that make it harder here and thus more liekly to get caught. Adding years to sentences wouldn't stem the bribing anymore, i don't believe.
Besides, i'm not sure what's being proposed. No (or deminished) regualtions, but if you do something bad you go to jail. What's described as a punishable offense? and if you're codifying it as a ppunishable defense why not just codify it as a regulation?
Quote from: Tamas on November 07, 2011, 09:52:40 AM
Quote from: Barrister on November 07, 2011, 09:25:43 AM
Quote from: Tamas on November 07, 2011, 07:58:10 AM
This whole problem area should be approached from a purely criminal point of view, not as some ideo-economical system.
That's a terrible idea.
Criminal law is all about punishing someone after something happens. It has no ability (or extremely limited ability) to prevent something from happening.
Yet we punish those who comitted crimes. We do not consider a few decades of prison for a murder a terrible idea just because the sentence did not come in time to save the victim - the point would be the same as with any other criminal activity - make it not worth it.
So you are in fact proposing regulation, only you advocate that any breach of regulation should carry a prison sentence. That's silly on several levels.
It's like saying that we don't need medical profession regulations, but doctors who do not prevent a patient from dieing should be charged with murder.
Quote from: HVC on November 07, 2011, 11:49:23 AM
Besides, i'm not sure what's being proposed. No (or deminished) regualtions, but if you do something bad you go to jail. What's described as a punishable offense? and if you're codifying it as a ppunishable defense why not just codify it as a regulation?
Yeah. This is an idiotic idea on a number of levels:
1) There is a "moral" component to criminal law, i.e. that in order for something to be a crime, there needs to be, ideally, a general consensus that it's an evil act. A lot of banking regulations do not work that way - contrary to what Tamas seems to believe, a lot of it is not really "cheating" - it's much more complex than that. So if we penalize all of it as crimes, we end up with a system that is perceived as unjust.
2) Criminal law usually carries penalties for individuals not corporations. So we let organizations get away with it just so some poor schmuck could go to jail.
3) Criminal law sets the bar much higher for a succesful conviction than a regulation for e.g. a fine/corrective measure. By making a regulatory breach a crime, we are effectively raising the penalty (but not on the right people/entities, necessarily) - see 2) above, but we are decreasing the conviction rate. That's a rather poor trade off in the system where we want people to behave well and self-police.
Quote from: Tamas on November 07, 2011, 10:33:02 AM
I am taking an extreme position, yes. Consider it a direction. In general, in my view, society should find the point of minimum necessary government involvement in life as a whole (and that may be quite far from no involvement at all), and not, like it seems to be nowadays, seek more direct steering to every issue (financial crooks, children being children, etc). Because that is bound to fail.
Don't you understand that a lot of the problems with the financial crisis do not stem from the fact that these people were "crooks"? Taking excessive risk is not a swindle per se - there is nothing evil in increasing your debt to equity leverage ratio - it may be unwise, but it is not unethical as such. And you cannot get into an ex-post-facto analysis and punish people for taking an excessive risk after their funds collapse because (1) it does not meet the clarity criterion that is expected of criminal law in modern Western civilization, (2) it will excessively curb risk taking (which is also bad).
IMO Martinus is right.
:o
If anything, financial misdeeds have become over-criminalized in the US in recent deeds.
Quote from: The Minsky Moment on November 07, 2011, 12:50:50 PM
IMO Martinus is right.
:o
If anything, financial misdeeds have become over-criminalized in the US in recent deeds.
Agreed. When our government made sure that Wall Street execs who sank our economy lost most of their wealth that it turned out they didn't earn anyway, that was still acceptable. But when they sent a whole lot of them to prison? That was over the top.
It's difficult to see how dropping regulation and enforcing through criminalization would in any way be a step forward. Considering most white collar criminals are found precisely because they violated regulations, it would make finding lawbreakers of this type a great deal more difficult. I think you'd have to have a DEA/BATF level of organization in the US to even begin to attempt enforcement. I'm not sure even that would be enough, since there's a great deal more financial activity in the US than drug trafficking.
The thing with criminal prosecution is that it's extremely hard to prosecute someone on this type of thing. You need a lot of experts shifting through the data to prove it and it takes years. Many of those experts would find that they would make much more money working for a business rather then the government.
Quote from: The Minsky Moment on November 07, 2011, 12:50:50 PM
IMO Martinus is right.
:o
If anything, financial misdeeds have become over-criminalized in the US in recent deeds.
If he had gotten this one wrong we would have known for sure his claim to being a lawyer was more than merely dubious.
Regarding the non-criminal part: well, I do maintain that most of these players would not had gone that far if they were not sure to count on state intervention in case of a bust - remember there were plenty of past examples. Plus, those excessive risk takers should have been flushed out of the system, not maintained in it. It's all fine (I guess, given the situation at the time) to spend all those hundreds of billions of dollars to stop the disease from spreading, but color me skeptical it couldn't be done without the major players involved in it being over and out.
Anyways, what is YOUR opinion on how to break the cycle of the "blind run on loans - panic and bust" which we seem to have encoded in the current system? Or we should just accept that every couple of decades, the common people's tax money must be burned away to maintain the aristocracy's status quo?
Why would you expect the people who took excessive risks would be flushed out of the system? Even if their companies went belly up it's not like they were going to be left with only the shirts on their backs. They typically get a cozy golden parachute. And lots of risk takers jumped off the merry go round before it stopped and caught on fire. Most in fact. This was something that was building for years. Someone could be making insane risks, for years and then retire long before the whole thing blew up. Most people think they will.
Iirc the main problem with the mortgage backed securities wasnt the people who were taking the risks in the first instance. The people who gave out the loans packaged the risk into something that looked less risky although the people who packaged the risk in the first instance knew what they were selling was crap. But hey the market for MBSs was hot so the pressure to give more and more questionable mortgages was on. And why would the original lenders care - those loans would be off their books and put into a MBS and sold for a profit quickly.
The people buying the MBS often had no idea what they were holding and that the paper was worse then worthless.
Quote from: Tamas on November 07, 2011, 02:33:11 PM
Anyways, what is YOUR opinion on how to break the cycle of the "blind run on loans - panic and bust" which we seem to have encoded in the current system? Or we should just accept that every couple of decades, the common people's tax money must be burned away to maintain the aristocracy's status quo?
It comes down to breaking the ability to take large risks with federally insured assets. That was never the goal in insuring them, and letting it perpetuate even now is continuing the problem. Restoring the separation of investment from savings banks would help enormously.
Quote from: frunk on November 07, 2011, 03:19:50 PM
It comes down to breaking the ability to take large risks with federally insured assets. That was never the goal in insuring them, and letting it perpetuate even now is continuing the problem. Restoring the separation of investment from savings banks would help enormously.
Yes. Glass-Steagall never should have been repealed.
Yi disagrees.
Quote from: The Minsky Moment on November 07, 2011, 12:50:50 PM
IMO Martinus is right.
:o
I know. It's weird.
QuoteIf anything, financial misdeeds have become over-criminalized in the US in recent deeds.
How about extrajudicial methods? :)
Just kidding...
Quote from: Razgovory on November 07, 2011, 03:38:19 PM
Yi disagrees.
Has he hired you to dispense opinions on his behalf, like a personal assistant?
Quote from: fahdiz on November 07, 2011, 03:46:33 PM
Quote from: Razgovory on November 07, 2011, 03:38:19 PM
Yi disagrees.
Has he hired you to dispense opinions on his behalf, like a personal assistant?
No, he hired me to post silly shit to make him look good.
Quote from: Razgovory on November 07, 2011, 04:29:51 PM
No, he hired me to post silly shit to make him look good.
That sounds like a pretty fun job, honestly.
Quote from: fahdiz on November 07, 2011, 04:33:21 PM
Quote from: Razgovory on November 07, 2011, 04:29:51 PM
No, he hired me to post silly shit to make him look good.
That sounds like a pretty fun job, honestly.
Seedy cuts a check to Tim every month for that.
Quote from: DGuller on November 06, 2011, 12:39:26 PM
I don't think you can do that, at least not since the S&L crisis.
You can. The law prohibiting it was repealed in 1999 by the passage of the Gramm-Leach-Bliley Act.
Quote from: fahdiz on November 07, 2011, 04:38:36 PM
Quote from: DGuller on November 06, 2011, 12:39:26 PM
I don't think you can do that, at least not since the S&L crisis.
You can. The law prohibiting it was repealed in 1999 by the passage of the Gramm-Leach-Bliley Act.
Not exactly.
GLBA allowed the holding companies of deposit-taking banks to do investment banking through non-bank affiliates. It also permitted national banks to conduct investment banking-type activities through separately capitalized subs. So technically speaking, depositor money is still walled off in separate entities, and depositor cash cannot be used to fund investment banking activities directly, although the commercial bank can be used as a kind of reverse source of strength to bolster the investment bank affiliates.
Key thing to keep in mind is that Glass-Steagall did not prevent deposit taking banks from engaging in the securitized mortgage business or invested in mortgage backed securities. It is also true that Glass-Steagall repeal cannot be blamed for the collapses of Bear Stearns, Lehman, or Merril Lynch (all dedicated investment banks) or AIG (an insurance company). A feature of the latest crisis is that old-style bank runs were not a serious problem and although the FDIC fund went into significant deficit at the height of the crisis, it was later replenished by the banks.
Yeah, that's what I thought as well, though I wasn't very sure, so I just waited for JR to chime in. Letting banks invest speculatively with federally insured money is a concept so stupid that even Republicans wouldn't allow it. Again. At least for now.
Quote from: DGuller on November 07, 2011, 07:29:08 PM
Yeah, that's what I thought as well, though I wasn't very sure, so I just waited for JR to chime in. Letting banks invest speculatively with federally insured money is a concept so stupid that even Republicans wouldn't allow it. Again. At least for now.
But they still want to put Social Security in the Wall Street Casinos.
Quote from: Razgovory on November 07, 2011, 07:36:18 PM
But they still want to put Social Security in the Wall Street Casinos.
Yup. Put everybody's money into options and futures.
Quote from: Razgovory on November 07, 2011, 07:36:18 PM
Quote from: DGuller on November 07, 2011, 07:29:08 PM
Yeah, that's what I thought as well, though I wasn't very sure, so I just waited for JR to chime in. Letting banks invest speculatively with federally insured money is a concept so stupid that even Republicans wouldn't allow it. Again. At least for now.
But they still want to put Social Security in the Wall Street Casinos.
Well, Republicans aren't 100% against socialism. They're more like 99% against socialism.
Quote from: Razgovory on November 07, 2011, 07:36:18 PM
But they still want to put Social Security in the Wall Street Casinos.
Out of curiosity, Raz, what's your plan for making Social Security solvent?
Quote from: fahdiz on November 07, 2011, 07:54:12 PM
Quote from: Razgovory on November 07, 2011, 07:36:18 PM
But they still want to put Social Security in the Wall Street Casinos.
Out of curiosity, Raz, what's your plan for making Social Security solvent?
Would you like to hear my plan for making Social Security solvent? :)
Quote from: Ideologue on November 07, 2011, 08:13:52 PM
Would you like to hear my plan for making Social Security solvent? :)
Yes. Does it involve killing a bunch of elderly people?
Quote from: fahdiz on November 07, 2011, 08:37:32 PM
Quote from: Ideologue on November 07, 2011, 08:13:52 PM
Would you like to hear my plan for making Social Security solvent? :)
Yes. Does it involve killing a bunch of elderly people?
Not all of them are elderly.
Quote from: fahdiz on November 07, 2011, 07:54:12 PM
Quote from: Razgovory on November 07, 2011, 07:36:18 PM
But they still want to put Social Security in the Wall Street Casinos.
Out of curiosity, Raz, what's your plan for making Social Security solvent?
Raise taxes. Also stop taking money out of it for other stuff.
Quote from: Razgovory on November 07, 2011, 07:36:18 PM
Quote from: DGuller on November 07, 2011, 07:29:08 PM
Yeah, that's what I thought as well, though I wasn't very sure, so I just waited for JR to chime in. Letting banks invest speculatively with federally insured money is a concept so stupid that even Republicans wouldn't allow it. Again. At least for now.
But they still want to put Social Security in the Wall Street Casinos.
:lmfao:
"stock market casinos" was the chief propaganda line for nationalizing the pension funds here. Good going Raz, you have the makings of a populist!
Quote from: crazy canuck on November 07, 2011, 02:30:20 PM
Quote from: The Minsky Moment on November 07, 2011, 12:50:50 PM
IMO Martinus is right.
:o
If anything, financial misdeeds have become over-criminalized in the US in recent deeds.
If he had gotten this one wrong we would have known for sure his claim to being a lawyer was more than merely dubious.
And now you can't know for sure again.
I'm a Schroedinger's lawyer.
Quote from: The Minsky Moment on November 07, 2011, 07:00:46 PM
GLBA allowed the holding companies of deposit-taking banks to do investment banking through non-bank affiliates.
So it's the gays' fault? :(
Quote from: Martinus on November 08, 2011, 04:41:53 AM
So it's the gays' fault? :(
They made banking too fabulous.