QuoteOne Year's Salary : Europe Caps Banker Bonuses
In a bid to address widespread public outrage over greed in the financial sector, European officials have agreed to legislation capping bankers' bonuses at a maximum of a year's salary. Great Britain fought to prevent the measure, but failed to rally enough support.
Starting in 2014, banks in the European Union must limit bonus payments for their employees. After some 10 months of tough negotiations, top European officials agreed late on Wednesday in Brussels to cap bonuses at a maximum of one year's base salary.
"For the first time in the history of EU financial market regulation, we will cap bankers' bonuses," said the European Parliament's head negotiator, Austria's Othmar Karas, in a statement. "The essence is that from 2014, European banks will have to set aside more money to be more stable and concentrate on their core business, namely financing the real economy, that of small and medium-sized enterprises and jobs."
The bonus cap was part of a package of financial laws hammered out between EU officials, the European Commission and representatives of the 27 member states in negotiations led by Ireland's Finance Minister Michael Noonan. The goal is to prevent bankers from taking excessive risks, which can shake the financial industry.
"This overhaul of EU banking rules will make sure that banks in the future have enough capital, both in terms of quality and quantity, to withstand shocks," Noonan said. "This will ensure that taxpayers across Europe are protected into the future."
Fierce Resistance from London
European Parliament and member states must still formally approve the compromise, which would allow banks to grant bonuses of twice employees' fixed salary only if the majority of their shareholders approved. The legislation is part of the far-reaching "Basel III" financial reform package aimed at increasing capital requirements to shore up the banking industry.
Wednesday's agreement to implement what will be the world's strictest pay cap was hard-won after months of resistance from member states. Chief among them was Great Britain, which boasts Europe's largest financial sector. London argued that the bonus cap would hobble industry growth, but failed to attract backing from other countries to prevent the measure.
The new rules will apply to all EU financial institutions and their foreign subsidiaries. It will also apply to the subsidiaries of American or Asian bank with branches in the EU.
Top bankers can currently earn performance-based bonuses of up to several times their salary. But this practice has angered the public, particularly after banks doling out such bonuses accepted government bailouts in the financial crisis. It remains to be seen just how banks will react to the new legislation, but some experts predict that they will simply circumvent it by creating more complicated pay structures.
The UK government is still furious about this and want an opt out. It's the first time a financial regulation from the EU has gone contrary to the British goal. Be interesting to see how it plays out with Eurosceptics and the referendum.
Also Switzerland's had a referendum:
QuoteSwiss Voters Approve a Plan to Severely Limit Executive Compensation
By RAPHAEL MINDER
GENEVA — Swiss citizens voted Sunday to impose some of the world's most severe restrictions on executive compensation, ignoring a warning from the business lobby that such curbs would undermine the country's investor-friendly image.
The vote gives shareholders of companies listed in Switzerland a binding say on the overall pay packages for executives and directors. Pension funds holding shares in a company would be obligated to take part in votes on compensation packages.
In addition, companies would no longer be allowed to give bonuses to executives joining or leaving the business, or to executives when their company was taken over. Violations could result in fines equal to up to six years of salary and a prison sentence of up to three years.
The outcome of the referendum was a triumph for Thomas Minder, an entrepreneur and member of the Swiss Parliament (no relation to the reporter), who turned a personal fight against the management of Swissair, the flagship airline that collapsed in 2001, into a nationwide referendum against "rip-off merchants."
Almost 68 percent of Swiss voters backed Mr. Minder's proposals, according to results announced late Sunday.
"I am very proud of the Swiss people who have sent a very strong signal to the establishment," Mr. Minder told Swiss television. Despite the fact that his referendum had been opposed by Switzerland's main political parties, Mr. Minder, who is an independent member of the Swiss Parliament, called on all lawmakers to cooperate in swiftly enacting the law.
Nonbinding shareholder votes on executive pay have also been introduced in countries like the United States and Germany in response to Occupy Wall Street and other movements that have attacked the corporate excesses and abuses that fueled the world financial crisis. On Thursday, the European Parliament agreed to limit bonuses of bankers to two times their salaries.
In the case of Switzerland, however, Mr. Minder called for a much broader and tougher clampdown, striking a chord among citizens after the world financial crisis exposed major management failures at the financial giant UBS and other Swiss institutions.
Mr. Minder's case was unexpectedly bolstered last month when Novartis, the pharmaceutical company, agreed to a $78 million severance payout for its departing chairman, Daniel Vasella. That set off a political storm and intense criticism from some investors, forcing Novartis to scrap the payout and prompting Mr. Vasella to tell shareholders that it had been a mistake.
Cristina Gaggini, an official from EconomieSuisse, the Swiss business federation, said Sunday that the business lobby had made some "major errors" in its efforts to stop Mr. Minder's decade-long crusade, adding that the Novartis payout plan had amounted to a turning point in the referendum campaign.
After that, Ms. Gaggini said on Swiss national television, "It became impossible to return to a reasonable debate."
Ahead of the vote, EconomieSuisse and Mr. Minder's other opponents warned of dire consequences if the referendum passed, notably in terms of keeping Switzerland attractive to foreign companies and investors.
But Mr. Minder argued that Switzerland would benefit if it gave shareholders control over the companies in which they invested. Well over half the shares in many of the country's largest companies are already held outside the country. "Investors put their money where they have the most to say, and that will clearly then be Switzerland," Mr. Minder said ahead of the referendum.
Robin Ferracone, chief executive of Farient Advisors, an American advisory firm that specializes in executive compensation issues, said that even though the referendum would add "more burden to corporate processes, I do not predict an exodus from Switzerland," because the tax and other benefits of being based in the country would still outweigh "the inconvenience" of having to adjust to stricter executive compensation rules.
Mr. Minder started his campaign after his family-owned business came close to bankruptcy because it had been a supplier of toothpaste and other body care products to Swissair, the airline that was grounded in October 2001.
While Swissair had run out of money, it still managed to pay an advance earlier that year of 12 million Swiss francs (about $9.6 million at the time) to a chief executive, Mario Corti, who then left shortly after the airline's collapse.
Mr. Minder then broadened his campaign, accusing several bankers and other prominent executives of receiving "rip-off" pay packages. His campaign gained such momentum in recent months that relatively few such executives confronted him publicly, in this neutral and compromise-seeking country.
How are they defining "bonus"
Somehow I think that after all is said and done Europe won't lose many bankers over this, but will just gain a bunch more comp lawyers.
:lol: No doubt. I'm not sure how they define 'bonus' but it's only of senior managers or 'risk-takers'. I believe they estimate around 500 people would be affected in a big bank, or 5000 in the City as a whole. So that's an area that I'm sure lawyers'll be looking at.
Wouldn't they get better results by threatening bankers' families?
+1.
Quote from: Ideologue on March 04, 2013, 09:46:26 PM
Wouldn't they get better results by threatening bankers' families?
a.k.a. 'The Italian Plan'
Love that swiss decision.
Fuck the Bankers.
The Times had an excellent cartoon. "Smith, afraid we can't give you a bonus this year. However, the bank would like to buy your tie for £3 million"
Quote from: Warspite on March 05, 2013, 10:10:44 AM
The Times had an excellent cartoon. "Smith, afraid we can't give you a bonus this year. However, the bank would like to buy your tie for £3 million"
Does "excellent" mean ignorant and not based in reality whatsoever? Because I can think of at least two reasons why this would not be feasible under the new system.
Quote from: Martinus on March 05, 2013, 11:33:21 AM
Quote from: Warspite on March 05, 2013, 10:10:44 AM
The Times had an excellent cartoon. "Smith, afraid we can't give you a bonus this year. However, the bank would like to buy your tie for £3 million"
Does "excellent" mean ignorant and not based in reality whatsoever? Because I can think of at least two reasons why this would not be feasible under the new system.
You're right, there are definitely no loopholes to be exploited when it comes to private sector remuneration.
Quote from: Grey Fox on March 05, 2013, 07:42:17 AM
Love that swiss decision.
Fuck the Bankers.
The Swiss fucking with bankers? Talk about self-loathing. Are the Germans about to outlaw sausage?
I feel like the Swiss reforms are actually quite good.
Quote from: Martinus on March 05, 2013, 11:33:21 AM
Quote from: Warspite on March 05, 2013, 10:10:44 AM
The Times had an excellent cartoon. "Smith, afraid we can't give you a bonus this year. However, the bank would like to buy your tie for £3 million"
Does "excellent" mean ignorant and not based in reality whatsoever? Because I can think of at least two reasons why this would not be feasible under the new system.
Wild guess: The Times cartoonist was not actually giving legal advice that purchasing a tie for 3 million would be permitted under the new regulation.
:lol:
I would expect more regulation like the Swiss one in the future. Europeans do not trust the free market to deliver the desired results for society at large.
Quote from: Zanza on March 05, 2013, 12:40:45 PM
Europeans do not trust the free market to deliver the desired results for society at large.
Yes, oddly, with a lack of regulation banks seem to want to risk peoples' savings to increase profit.
Not that we Americans would know anything about that.
I don't get your point.
Quote from: Zanza on March 05, 2013, 12:40:45 PM
I would expect more regulation like the Swiss one in the future. Europeans do not trust the free market to deliver the desired results for society at large.
Definitely a wise view when it comes to financial sector casinos.
Quote from: fahdiz on March 05, 2013, 12:43:56 PM
Yes, oddly, with a lack of regulation banks seem to want to risk peoples' savings to increase profit.
Not that we Americans would know anything about that.
Well they do that because they know the savings are insured and they will probably be bailed out if they really screw up. Banks historically are very conservative, but they cannot afford to be these days. The other banks will take those risks and make lots of money and get lots of capital and will not suffer the consequences. I also was not aware that we lived in an era with a lack of banking regulations.
Quote from: DGuller on March 05, 2013, 12:50:52 PM
Quote from: Zanza on March 05, 2013, 12:40:45 PM
I would expect more regulation like the Swiss one in the future. Europeans do not trust the free market to deliver the desired results for society at large.
Definitely a wise view when it comes to financial sector casinos.
Finance is always the trouble maker isn't it? Somehow our regulations have consistently failed to tame it though.
Let a thousand flowers bloom, let a thousand schools of thought contend.
It will be an interesting experiment. If the Swiss can still attract world-class executives, their policy will have been proven successful. Or perhaps they can make do with less than world class executives.
Quote from: Valmy on March 05, 2013, 12:52:27 PM
Well they do that because they know the savings are insured and they will probably be bailed out if they really screw up.
History does not support this statement. Plenty of banks have gone under.
Quote from: Valmy on March 05, 2013, 12:53:32 PM
Finance is always the trouble maker isn't it? Somehow our regulations have consistently failed to tame it though.
Disagree about the last part. I think we've had it tamed for 4-5 decades since the Great Depression. Unfortunately, greed made us forget the ultimate consequences of greed run amok.
Quote from: DGuller on March 05, 2013, 12:56:18 PM
Quote from: Valmy on March 05, 2013, 12:53:32 PM
Finance is always the trouble maker isn't it? Somehow our regulations have consistently failed to tame it though.
Disagree about the last part. I think we've had it tamed for 4-5 decades since the Great Depression. Unfortunately, greed made us forget the ultimate consequences of greed run amok.
Well it not a question of greed, I mean they are banks their entire reason to exist is to make money, but rather the behavior they feel like they have to participate in to be competitive.
Quote from: Admiral Yi on March 05, 2013, 12:55:27 PM
Quote from: Valmy on March 05, 2013, 12:52:27 PM
Well they do that because they know the savings are insured and they will probably be bailed out if they really screw up.
History does not support this statement. Plenty of banks have gone under.
Plenty of others did not. Maybe you are right but my perception is they were expecting to be saved if they messed up.
Quote from: Zanza on March 05, 2013, 12:40:45 PM
Europeans do not trust the free market to deliver the desired results for society at large.
Well I guess my question is what exactly are they requesting it deliver? The only way for the free market to punish large salaries would be for those institutions to lose out to banks with smaller salaries.
Quote from: Admiral Yi on March 05, 2013, 12:54:01 PM
It will be an interesting experiment. If the Swiss can still attract world-class executives, their policy will have been proven successful. Or perhaps they can make do with less than world class executives.
Switzerland is one of the best places on Earth to live. I doubt they'll run out of excellent managers anytime soon, no matter if they pay 5 or 10 million per year.
Quote from: Valmy on March 05, 2013, 01:09:52 PM
Quote from: Zanza on March 05, 2013, 12:40:45 PM
Europeans do not trust the free market to deliver the desired results for society at large.
Well I guess my question is what exactly are they requesting it deliver? The only way for the free market to punish large salaries would be for those institutions to lose out to banks with smaller salaries.
And as that's unlikely to happen, the democratic sovereigns of Europe will eventually shape society in a way they desire through laws like the Swiss one.
Why do they go after bonuses for executives instead of after the profits of the banks themselves? Seems like a token gesture and nothing else.
G.
We'll go back to the days of company cars, housing provided, expense accounts, etc.
Quote from: Grallon on March 05, 2013, 01:42:09 PM
Why do they go after bonuses for executives instead of after the profits of the banks themselves? Seems like a token gesture and nothing else.
G.
Profits of the banks do get returned to the larger community though - through dividends, share purchases and the like. And bank stocks are amongst the most widely held in the world.
Bonuses however do not get distributed to the wider community.
Quote from: Zanza on March 05, 2013, 01:18:40 PM
Switzerland is one of the best places on Earth to live.
Never been there but it's in my top 3 places if I had to leave the US for some reason.
Quote from: derspiess on March 05, 2013, 01:55:15 PM
Quote from: Zanza on March 05, 2013, 01:18:40 PM
Switzerland is one of the best places on Earth to live.
Never been there but it's in my top 3 places if I had to leave the US for some reason.
On the plus side it has nice mountains.
On the minus it's super-expensive and not much actually happens there.
Quote from: MadImmortalMan on March 05, 2013, 01:50:27 PM
We'll go back to the days of company cars, housing provided, expense accounts, etc.
Under tax law here, those are very similar to actual salary. Why would it be different for laws on remuneration?
Quote from: Zanza on March 05, 2013, 01:18:40 PM
Quote from: Admiral Yi on March 05, 2013, 12:54:01 PM
It will be an interesting experiment. If the Swiss can still attract world-class executives, their policy will have been proven successful. Or perhaps they can make do with less than world class executives.
Switzerland is one of the best places on Earth to live. I doubt they'll run out of excellent managers anytime soon, no matter if they pay 5 or 10 million per year.
The problem with Switzerland would be that it's one of the dullest and most boring places in the world to live. Maybe bankers are ok with that, though.
Dull can be a good thing. Besides, it's just a home base. Switzerland is close to plenty of places with awesome stuff to do.
Quote from: Zanza on March 05, 2013, 02:11:53 PM
Quote from: MadImmortalMan on March 05, 2013, 01:50:27 PM
We'll go back to the days of company cars, housing provided, expense accounts, etc.
Under tax law here, those are very similar to actual salary. Why would it be different for laws on remuneration?
They are all taxable benefits but whether they will be caught by the new regulation is the question.
Quote from: MadImmortalMan on March 05, 2013, 01:50:27 PM
We'll go back to the days of company cars, housing provided, expense accounts, etc.
I'm not sure those days ever left...
But in terms of the bonus caps, I don't see why it is a big deal...the people in question can just get bigger salaries. In the US that would cause tax issues, and it might in other countries too, but even so that is a surmountable problem.
In terms of the Swiss shareholder veto on pay requirement, I also don't see it as a very big deal. There is quite a bit of experience on shareholder votes for executive compensation (generally non binding), and they almost invariably approve of the pay packages. Shareholders aren't analogous to the general public.
Quote from: Valmy on March 05, 2013, 01:02:48 PM
they are banks their entire reason to exist is to make money
Banks exist to protect the deposits of their clients and to *conservatively* loan money. Turning a profit keeps the lights on, so it allows them to engage in their reason-for-existing. Turning a profit by refusing to protect client holdings and loaning money to exceptionally risky ventures is most certainly greed. I can't imagine you've lived through the 2000s and aren't picking that up for some reason.
Quote from: fahdiz on March 05, 2013, 02:41:34 PM
Quote from: Valmy on March 05, 2013, 01:02:48 PM
they are banks their entire reason to exist is to make money
Banks exist to protect the deposits of their clients and to *conservatively* loan money. Turning a profit keeps the lights on, so it allows them to engage in their reason-for-existing. Turning a profit by refusing to protect client holdings and loaning money to exceptionally risky ventures is most certainly greed. I can't imagine you've lived through the 2000s and aren't picking that up for some reason.
ummm, no.
Banks are for-profit corporations and do in fact exist to turn a profit.
Perhaps you are confusing banks with credit unions / savings & Loans?
Lol.
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.
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.
Arguably the problem is not risk per se, but rather mis-priced risk and/or highly correlated risk.
Quote from: Zanza on March 05, 2013, 01:19:44 PM
And as that's unlikely to happen, the democratic sovereigns of Europe will eventually shape society in a way they desire through laws like the Swiss one.
Eventually? Haven't the sovereigns of Europe been shaping society for centuries? I guess I missed the era of anarchy.
Quote from: Admiral Yi on March 05, 2013, 03:10:41 PM
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.
Quote from: Malthus on March 05, 2013, 02:54:39 PM
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.
Yeah, that's always annoyed me a bit.
Quote from: fahdiz on March 05, 2013, 02:41:34 PM
Banks exist to protect the deposits of their clients and to *conservatively* loan money. Turning a profit keeps the lights on, so it allows them to engage in their reason-for-existing. Turning a profit by refusing to protect client holdings and loaning money to exceptionally risky ventures is most certainly greed. I can't imagine you've lived through the 2000s and aren't picking that up for some reason.
Well from what I heard from bankers, people who did not do those things were left in the dust. If other banks are getting higher returns, you better find a way to make your bank get those returns or you will lose capital to your competitors...not to mention your job.
Quote from: Barrister on March 05, 2013, 03:34:16 PM
Quote from: Admiral Yi on March 05, 2013, 03:10:41 PM
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.
True, but that's not the whole story. Another problem is that you have initially very unlikely, but catastrophic risks with derivatives. Hedging against them is pointless, because that's like buying insurance against a nuclear war. Therefore all individual actors rationally discount the remote catastrophic risks in their decision-making, and by doing that increase the likelihood of such catastrophe.
Quote from: DGuller on March 05, 2013, 03:40:18 PM
True, but that's not the whole story. Another problem is that you have initially very unlikely, but catastrophic risks with derivatives. Hedging against them is pointless, because that's like buying insurance against a nuclear war. Therefore all individual actors rationally discount the remote catastrophic risks in their decision-making, and by doing that increase the likelihood of such catastrophe.
This is the main thing that makes finance so dangerous...it is nigh incomprehensible.
Quote from: The Larch on March 05, 2013, 02:30:44 PMThe problem with Switzerland would be that it's one of the dullest and most boring places in the world to live. Maybe bankers are ok with that, though.
I guess they can always move to Luxembourg if Switzerland is too dull and boring. Oh, wait...
Quote from: Barrister on March 05, 2013, 03:34:16 PM
Quote from: Admiral Yi on March 05, 2013, 03:10:41 PM
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.
The main thing I got from the Swiss is they were bonechillingly rude, never felt more unwelcome anywhere I went. And I am a fan of France so it is not like I was expecting them to kiss my ass or anything.
But living among all those mountains looks anything but boring, I cannot imagine not being able to entertain myself there.
Quote from: fahdiz on March 05, 2013, 03:45:09 PM
Because of the virtual impossibility of predicting black swan events, banks would have done well to stay out of derivatives altogether.
Well this goes back to my point. Could a bank have done this? Wouldn't the bank management have been fired in the ensuing stock holder revolt?
Quote from: fahdiz on March 05, 2013, 03:45:09 PM
Because of the virtual impossibility of predicting black swan events, banks would have done well to stay out of derivatives altogether.
If (investment) banks stayed out of derivatives, there would be no derivatives. One of their main lines of business is making markets in interest rate and currency swaps.
Quote from: Valmy on March 05, 2013, 03:53:23 PM
Quote from: fahdiz on March 05, 2013, 03:45:09 PM
Because of the virtual impossibility of predicting black swan events, banks would have done well to stay out of derivatives altogether.
Well this goes back to my point. Could a bank have done this? Wouldn't the bank management have been fired in the ensuing stock holder revolt?
The issue is that retail banking used to be firewalled from investment banking. With the repeal of Glass-Steagall, this firewall (which had been crumbling for some time) was taken all the way back down. My point is that we never should have breached the firewall.
Quote from: fahdiz on March 05, 2013, 03:56:47 PM
The issue is that retail banking used to be firewalled from investment banking. With the repeal of Glass-Steagall, this firewall (which had been crumbling for some time) was taken all the way back down. My point is that we never should have breached the firewall.
The problem with this argument is that there is not one example of a full service bank who's retail bank arm's solvency was threatened by the activities of its investment banking arm.
What about B of A/Merrill Lynch?
The too-big-to-fail banks' solvencies were never very seriously endangered, but this was because of the bailout. As I understand it, in essence the taxpayer absorbed the risks engendered by the investment arms of the banks. That's hardly an argument in favor of continued combination of investment/retail banking.
Quote from: fahdiz on March 05, 2013, 04:53:47 PM
What about B of A/Merrill Lynch?
BoA bought Merrill after the shit hit the fan. And since the acquisition I have never read about losses by Merrill's derivatives desk (or any other part of Merrill for that matter) imperilling BoA's solvency.
BoA's biggest ongoing headache has been the litigation over toxic assets picked up when they acquired Country Wide.
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
Quote from: Valmy on March 05, 2013, 01:02:48 PM
Well it not a question of greed, I mean they are banks their entire reason to exist is to make money, but rather the behavior they feel like they have to participate in to be competitive.
Society's greed. We wanted gluts of cheap credit, increasingly it offset stagnating wages.
QuoteI would expect more regulation like the Swiss one in the future. Europeans do not trust the free market to deliver the desired results for society at large.
Regulation's one thing. Pay is something the EU shouldn't be regulating and might not be able to under the treaties.
QuoteNever been there but it's in my top 3 places if I had to leave the US for some reason.
It's the worst place I've ever been. Expensive, priggish and joyless. Although skiing and raclette are wonderful.
QuoteThe problem with Switzerland would be that it's one of the dullest and most boring places in the world to live. Maybe bankers are ok with that, though.
The Economist did a piece on bankers who fled London to Zurich after the 50p tax rate (which never actually came into effect). Apparently the overwhelming majority wanted to transfer back in under a year :lol:
QuoteThe 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.
This is partly what Martin Wolf's column, an imaginary conversation between three implausibly well-informed MPs, discusses:
http://www.ft.com/cms/s/0/f1972a7a-81cb-11e2-b050-00144feabdc0.html#axzz2MiZaWSNS
Quote"Not so fast," responds the Liberal Democrat. "We, too, support the recommendations of the Vickers Commission. But the problem of bonuses is not so easily dealt with. Banks tend to earn attractive returns almost all the time, offset by infrequent catastrophic losses. For someone earning performance-related bonuses, it pays to follow strategies like these. They then have a good chance of being rewarded for playing the odds successfully, rather than for true skill. Their upside is huge, while, if they are unlucky, they lose outstanding bonuses or maybe their jobs. Naturally, they bet the bank."
"It is the job of shareholders to stop that," responds the Tory.
"That's absurd," answers his colleague. "Shareholders don't have a clue. Also, with leverage of 30 to one, the equity needed to shield the public from the 'tail risks' is just not there. Management have the same upside-slanted returns as subordinate bonus recipients. So the public has a right to intervene. I do sympathise with the European Parliament."
And of course when banks fail the problem is huge. They either need to be bailed out, or, if not, still have a disproportionate effect on the rest of the economy by reducing credit supply etc.
QuoteThe too-big-to-fail banks' solvencies were never very seriously endangered, but this was because of the bailout. As I understand it, in essence the taxpayer absorbed the risks engendered by the investment arms of the banks. That's hardly an argument in favor of continued combination of investment/retail banking.
Even without actual bailouts there's the implicit bailout - that the government would step in to save a universal bank (and they did). One of the BofE's members of the new Financial Sector regulator made a speech that discussed estimates of how big the implicit subsidy is and it's huge:
http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech615.pdf (and the same guy on whether we've solved 'too big to fail': http://www.voxeu.org/article/have-we-solved-too-big-fail )
Again Wolf had a bit on this:
Quote"Keep this up and we will be back, instead," interjects the Labour member. "Andy Haldane, the Bank of England's executive director for financial stability, estimated the average annual subsidy for the top five UK banks at more than £50bn between 2007 and 2009 – which is roughly equal to UK banks' annual profits before the crisis. If something is subsidised, too much of it will be provided. That is fine market logic. So regulation must offset it. What is the realistic alternative?"
Quote from: fahdiz on March 05, 2013, 05:04:45 PM
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.
Quote from: fahdiz on March 05, 2013, 03:45:09 PM
Quote from: Barrister on March 05, 2013, 03:34:16 PM
Quote from: Admiral Yi on March 05, 2013, 03:10:41 PM
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.
Quote from: Malthus on March 05, 2013, 02:54:39 PM
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.
QuoteOne 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.
I don't think it's wrong to call an inevitable event a black swan as long as it occurs rarely enough.
Quote from: Ideologue on March 05, 2013, 09:22:53 PM
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. :mellow:
I'm not a left-winger, really, but banks are just different from other kinds of for-profit ventures.
Quote from: MadImmortalMan on March 05, 2013, 09:24:38 PM
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.
Quote from: Ideologue on March 05, 2013, 09:22:53 PM
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.
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.
I must have missed the chapter on Akkadian mortgages and credit cards.
Unsecured and secured loans are in the Bible.
Quote from: MadImmortalMan on March 05, 2013, 09:24:38 PM
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?
Quote from: Sheilbh on March 05, 2013, 08:22:00 PM
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.
Quote from: Sheilbh on March 05, 2013, 10:05:41 PM
Quote from: MadImmortalMan on March 05, 2013, 09:24:38 PM
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.
Quote from: fahdiz on March 05, 2013, 10:18:09 PM
Quote from: Sheilbh on March 05, 2013, 10:05:41 PM
Quote from: MadImmortalMan on March 05, 2013, 09:24:38 PM
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.
Well it's certainly true that it was more and more clear that it was going to happen the closer it came.
Quote from: MadImmortalMan on March 05, 2013, 10:36:37 PM
Well it's certainly true that it was more and more clear that it was going to happen the closer it came.
Yeah we were talking about it on Languish a few years before it happened. I would link to the threads but...sadly all that is gone now :weep:
Quote from: fahdiz on March 05, 2013, 10:18:09 PM
A bubble that severe is pretty rare.
Nota bene: I never said the housing bubble was a black swan event.
I think the bubble was predictable and allowed to get too big. There was a failure I think of central banks that allowed that to happen.
But was it itself huge or was it that the risk and damage of that bubble was made systemic that made it so severe?
It was repackaged and resold all across the financial system so that it became like the grain of the wood. I know bankers and regulators now say that they didn't and couldn't foresee it. But that just makes me wonder what they're there for? What justifies that pay? And whether they should be allowed to innovate so freely?
Quote from: Valmy on March 05, 2013, 10:37:24 PM
Yeah we were talking about it on Languish a few years before it happened. I would link to the threads but...sadly all that is gone now :weep:
I remember them. As I say I think a lot of people saw the bubble and realised it was a bubble. Perilous few realised how much it riddled the system.
I'm perilous. :pirate:
Quote from: Sheilbh on March 05, 2013, 10:43:04 PM
Quote from: Valmy on March 05, 2013, 10:37:24 PM
Yeah we were talking about it on Languish a few years before it happened. I would link to the threads but...sadly all that is gone now :weep:
I remember them. As I say I think a lot of people saw the bubble and realised it was a bubble. Perilous few realised how much it riddled the system.
Yeah the bubble was not a surprise....the derivatives on the other hand...
Quote from: Ideologue on March 05, 2013, 10:45:03 PM
I'm perilous. :pirate:
Well, yes. Predict enough doom and eventually you'll be right. :P
Quote from: Admiral Yi on March 05, 2013, 08:37:44 PM
Quote from: fahdiz on March 05, 2013, 05:04:45 PM
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.
The notional value of an interest rate swap is the theoretical principal amount used to calculate interest payments.
Take an interest rate swap for one period with a net settlement feature where I pay you 5% and you pay me LIBOR + 3%. The notional value is $1 billion.
In this case, lets say LIBOR comes in at 1%. So I owe you 5%, you owe me 4% (1+3), and when we net that together, I owe you 1%.
Our transaction is settled with me paying you $10 million ($1 billion * 1%).
Quote from: fahdiz on March 05, 2013, 10:46:23 PM
Quote from: Ideologue on March 05, 2013, 10:45:03 PM
I'm perilous. :pirate:
Well, yes. Predict enough doom and eventually you'll be right. :P
If my personal choices involved as much foresight as my appreciation of global economic forces I'd be a lot better off.
I will say that even I expected that the economy would have more robustly recovered by now (well, recovered temporarily, until it succumbs to the ultimate end of the fiction of the free market around 2025).
Now, far moreso than the crisis, the rise of hillbilly anarchism as a political movement
was very much a black swan event; it could not have been reasonably predicted that the popular reaction in so many areas to an ongoing depression and a decades-in-the-making failure of unrestrained capitalism to generate prosperity would have been a blind hatred of any program still propping up what was left of our aggregate demand and radical enthusiasm for even less restrained capitalism.
Quote from: fahdiz on March 05, 2013, 10:46:23 PM
Quote from: Ideologue on March 05, 2013, 10:45:03 PM
I'm perilous. :pirate:
Well, yes. Predict enough doom and eventually you'll be right. :P
Ide has successfully predicted 12 of the last 3 recessions.
Quote from: Valmy on March 05, 2013, 10:46:04 PM
Quote from: Sheilbh on March 05, 2013, 10:43:04 PM
Quote from: Valmy on March 05, 2013, 10:37:24 PM
Yeah we were talking about it on Languish a few years before it happened. I would link to the threads but...sadly all that is gone now :weep:
I remember them. As I say I think a lot of people saw the bubble and realised it was a bubble. Perilous few realised how much it riddled the system.
Yeah the bubble was not a surprise....the derivatives on the other hand...
I predicted the leverage and derivative chain reaction as the biggest danger of the bubble. :smarty: :contract:
Quote from: Habbaku on March 05, 2013, 11:21:53 PM
Quote from: fahdiz on March 05, 2013, 10:46:23 PM
Quote from: Ideologue on March 05, 2013, 10:45:03 PM
I'm perilous. :pirate:
Well, yes. Predict enough doom and eventually you'll be right. :P
Ide has successfully predicted 12 of the last 3 recessions.
I predicted one and there was one. Sour grapes.
We had a bubble c. 2004, at which point I was predicting recession :lol:
Instead the governments carried on inflating the bubble and the banks worked with them, inventing all sorts of innovative financial products and fixes that helped keep the show on the road. So, instead of a mild standard recession c2004 we got the mother of all recessions a few years later.
The banks gave electorates and governments what they wanted, the likes of Gordon Brown and Greenspan were feted for getting rid of "boom and bust" :P
Quote from: Valmy on March 05, 2013, 03:33:06 PM
Quote from: Zanza on March 05, 2013, 01:19:44 PM
And as that's unlikely to happen, the democratic sovereigns of Europe will eventually shape society in a way they desire through laws like the Swiss one.
Eventually? Haven't the sovereigns of Europe been shaping society for centuries? I guess I missed the era of anarchy.
Badly phrased by me. What I wanted to say is that I feel that the pendulum is swinging back at the moment and liberalization and deregulation are no longer accepted by many people. The concept of markets to regulate just about everything (and not just economic activity - just look where that kind of vocabulary is used nowadays) that shaped a lot of aspects of our societies over the last three decades or so has lost its luster and promise. So I wouldn't be surprised if stronger regulation of markets and no longer using market mechanisms in some other aspects of life is what awaits us in the future. Politicians are slow to realize that though or they are so entwined with the elites that benefitted from the deregulation that they are just not interested in deregulation.
The current social democrat candidate for chancellorship in Germany is a millionaire, liberal economist who doesn't understand what his own constituents want for example.
Quote from: Sheilbh on March 05, 2013, 08:22:00 PM
QuoteNever been there but it's in my top 3 places if I had to leave the US for some reason.
It's the worst place I've ever been. Expensive, priggish and joyless. Although skiing and raclette are wonderful.
QuoteThe problem with Switzerland would be that it's one of the dullest and most boring places in the world to live. Maybe bankers are ok with that, though.
The Economist did a piece on bankers who fled London to Zurich after the 50p tax rate (which never actually came into effect). Apparently the overwhelming majority wanted to transfer back in under a year :lol:
It's a nation of petty judgemental smallminded busybodies outside of the big cities. A bit like the dark version of the place in the Simpsons when Flanders moves out of Springfield to somewhere more of his liking but ends up being to edgy for it.
Nature is gorgeous, though.
It is taken as received wisdom that there was a general bubble in US financial markets, but I think the evidence is coming in that there wasn't...
Four years ago today the world appeared to be coming apart at the seams. Today the US equity markets are at an all time high, and bonds have gone through the stratosphere.
Quote from: alfred russel on March 06, 2013, 07:56:10 AM
It is taken as received wisdom that there was a general bubble in US financial markets, but I think the evidence is coming in that there wasn't...
Four years ago today the world appeared to be coming apart at the seams. Today the US equity markets are at an all time high, and bonds have gone through the stratosphere.
Maybe this is The Bubble ? :unsure:
Quote from: alfred russel on March 06, 2013, 07:56:10 AM
It is taken as received wisdom that there was a general bubble in US financial markets, but I think the evidence is coming in that there wasn't...
Four years ago today the world appeared to be coming apart at the seams. Today the US equity markets are at an all time high, and bonds have gone through the stratosphere.
Not sure about that. S&P 500 is back to where it was 6 years ago. I think what that tells us is that there wasn't a catastrophic Japan-style bubble, but 6 years of flat performance implies that 2007 market caps were considerably inflated, and there are still serious questions about today's valuations. Of course it's a very simplistic analysis, I realize.
In fact, S&P 500 is back at the level it was 13 years ago.
Quote from: Zanza on March 06, 2013, 02:52:38 AM
Badly phrased by me. What I wanted to say is that I feel that the pendulum is swinging back at the moment and liberalization and deregulation are no longer accepted by many people.
I have my doubts they were ever that popular, maybe tolerated as a necessary evil. Even in the heydays of the 90s I remember 'Neo-Liberal' being an insult in Euroland.
Quote from: Valmy on March 06, 2013, 09:05:19 AM
Quote from: Zanza on March 06, 2013, 02:52:38 AM
Badly phrased by me. What I wanted to say is that I feel that the pendulum is swinging back at the moment and liberalization and deregulation are no longer accepted by many people.
I have my doubts they were ever that popular, maybe tolerated as a necessary evil. Even in the heydays of the 90s I remember 'Neo-Liberal' being an insult in Euroland.
Neo liberal is an insult for fringe lefties. The internet is not a faithful sample for the real world.
Quote from: DGuller on March 06, 2013, 08:46:45 AM
Not sure about that. S&P 500 is back to where it was 6 years ago. I think what that tells us is that there wasn't a catastrophic Japan-style bubble, but 6 years of flat performance implies that 2007 market caps were considerably inflated, and there are still serious questions about today's valuations. Of course it's a very simplistic analysis, I realize.
Flat performance over 6 years in an era of historically low inflation rates doesn't imply to me that there was a bubble of such magnitude to imperil the global economy. The S&P500--and stocks in general--are supposed to be fairly risky investments. It seems more like a period of below normal returns.
Quote from: alfred russel on March 05, 2013, 10:50:47 PM
The notional value of an interest rate swap is the theoretical principal amount used to calculate interest payments.
Take an interest rate swap for one period with a net settlement feature where I pay you 5% and you pay me LIBOR + 3%. The notional value is $1 billion.
In this case, lets say LIBOR comes in at 1%. So I owe you 5%, you owe me 4% (1+3), and when we net that together, I owe you 1%.
Our transaction is settled with me paying you $10 million ($1 billion * 1%).
Thanks Fredo.
Confirms my suspicion that the author is a propagandist.
Quote from: Ideologue on March 05, 2013, 09:22:53 PM
Nationalize the banks.
That doesn't work either. Pretty much all the institutions going down in Spain were dominated by regional/local politicians (CAM, CajaMadrid). Those that are still sound were either private (Santander, BBVA) or maintained independence from (and influenced) regional governments (Caixa, Ibercaja).
I don't think the issue is whether the bank is private or nationalized, but the extent to which it can obfuscate its financial situation. If you have a bank that's making risky moves (or in the case of nationalized banks corrupt/cronified loans) without it being externally visible or internally auditable it's bound to cause trouble eventually.