QuoteBig Banks Get Break in Rules to Limit Risks
By BEN PROTESS
9:33 p.m. | Updated
Under pressure from Wall Street lobbyists, federal regulators have agreed to soften a rule intended to rein in the banking industry's domination of a risky market.
The changes to the rule, which will be announced on Thursday, could effectively empower a few big banks to continue controlling the derivatives market, a main culprit in the financial crisis.
The $700 trillion market for derivatives — contracts that derive their value from an underlying asset like a bond or an interest rate — allow companies to either speculate in the markets or protect against risk.
It is a lucrative business that, until now, has operated in the shadows of Wall Street rather than in the light of public exchanges. Just five banks hold more than 90 percent of all derivatives contracts.
Yet allowing such a large and important market to operate as a private club came under fire in 2008. Derivatives contracts pushed the insurance giant American International Group to the brink of collapse before it was rescued by the government.
In the aftermath of the crisis, regulators initially planned to force asset managers like Vanguard and Pimco to contact at least five banks when seeking a price for a derivatives contract, a requirement intended to bolster competition among the banks. Now, according to officials briefed on the matter, the Commodity Futures Trading Commission has agreed to lower the standard to two banks.
About 15 months from now, the officials said, the standard will automatically rise to three banks. And under the trading commission's new rule, wide swaths of derivatives trading must shift from privately negotiated deals to regulated trading platforms that resemble exchanges.
But critics worry that the banks gained enough flexibility under the plan that it hews too closely to the "precrisis status."
"The rule is really on the edge of returning to the old, opaque way of doing business," said Marcus Stanley, the policy director of Americans for Financial Reform, a group that supports new rules for Wall Street.
Making such decisions on regulatory standards is a product of the Dodd-Frank Act of 2010, which mandated that federal agencies write hundreds of new rules for Wall Street. Most of that effort is now complete at the trading commission. But across several other agencies, nearly two-thirds of the rules are unfinished, including some major measures like the Volcker Rule, which seeks to prevent banks from trading with their own money.
The deal over derivatives was forged from wrangling at the five-person commission, which was sharply divided. Gary Gensler, the agency's Democratic chairman, championed the stricter proposal. But he met opposition from the Republican members on the commission, as well as Mark Wetjen, a Democratic commissioner who has sided with Wall Street on other rules.
Mr. Wetjen argued that five banks was an arbitrary requirement, according to the officials briefed on the matter. In advocating the two-bank plan, he also noted that the agency would not prevent companies from seeking additional price quotes. Other regulators have proposed weaker standards.
Mr. Gensler, eager to rein in derivatives trading but lacking an elusive third vote, accepted the deal. By his reckoning, the compromise was better than no rule at all.
In an interview on Wednesday, Mr. Gensler said that, even with the compromise, the rule will still push private derivatives trading onto regulated trading platforms, much like stock trading. He also argued that the agency plans to adopt two other rules on Thursday that will subject large swaths of trades to regulatory scrutiny.
"No longer will this be a closed, dark market," Mr. Gensler said. "I think what we're planning to do tomorrow fulfills the Congressional mandate and the president's commitment."
Yet the deal comes at an awkward time for the agency. Mr. Gensler, who was embraced by consumer advocates but scorned by some on Wall Street, is expected to leave the agency later this year now that his term has technically ended.
In preliminary talks about filling the spot, the White House is expected to consider Mr. Wetjen, a former aide to the Senate majority leader, Harry Reid. The administration, according to people briefed on the matter, is also looking at an outsider as a potential successor: Amanda Renteria, a former Goldman Sachs employee and Senate aide.
The prospect of someone other than Mr. Gensler completing the rules provided some momentum for the compromise, officials say. The officials also noted that Mr. Gensler had set a June 30 deadline for completing the plan.
The White House declined to comment. Mr. Gensler, who has not said whether he will seek a second term at the agency, declined to discuss his plans on Wednesday.
While the regulator defended the derivatives rule, consumer advocates say the agency gave up too much ground. To some, the compromise illustrated the financial industry's continued influence in Washington.
"The banks have all these ways to reverse the rules behind the scenes," Mr. Stanley said.
The compromise also alarmed Bart Chilton, a Democratic member of the agency who has called for greater competition in the derivatives market. Still, Mr. Chilton signaled a willingness to vote for the rule.
"At the end of the day, we need a rule and that may mean some have to hold their noses," he said.
The push for competition follows concerns that a handful of select banks — JPMorgan Chase, Citigroup, Bank of America, Morgan Stanley and Goldman Sachs — control the market for derivatives contracts.
That grip, regulators and advocacy groups say, empowers those banks to overcharge some asset managers and companies that buy derivatives. It also raises concerns about the safety of the banks, some of which nearly toppled in 2008.
"It's important to remember that the Wall Street oligopoly brought us the financial crisis," said Dennis Kelleher, a former Senate aide that now runs Better Markets, an advocacy group critical of Wall Street.
With that history in mind, Congress inserted into Dodd-Frank a provision that forces derivatives trading onto regulated trading platforms. The platforms, known as swap execution facilities, were expected to open a window into the secretive world of derivatives trading. But Congress left it to Mr. Gensler's agency to explain how they would actually work.
There was a time when Mr. Gensler envisioned the strictest rule possible. In 2010, he pushed a plan that could, in essence, make all bids for derivatives contracts public. Facing complaints, the agency instead proposed a plan that would require at least five banks to quote a price for derivatives passing through a swap execution facility.
But even that plan prompted a full-court press from Wall Street lobbyists. Banks and other groups that opposed the plan held more than 80 meetings with agency officials over the last three years, an analysis of meeting records shows. Goldman Sachs attended 19 meetings; the Securities Industry and Financial Markets Association, Wall Street's main lobbying group, was there for 11.
The banks also benefited from some unlikely allies, including large asset managers that buy derivatives contracts. While money managers may seem like natural supporters of Mr. Gensler's plan — and some in fact are — the industry's largest players already receive significant discounts from select banks, providing them an incentive to oppose Mr. Gensler's plan.
The companies cautioned that, because Mr. Gensler's plan would involve a broader universe of banks, it could cause leaks of private trading positions. The plan, the companies said, would not necessarily benefit the asset managers.
"If someone told me I needed to shop five different places for a pair of jeans, I don't see how that would help me," said Gabriel D. Rosenberg, a lawyer at Davis Polk, which represents Sifma and the banks.
The banks and asset managers also warned that many derivatives contracts are traded too infrequently to even generate attention from five banks.
Some regulators dispute that point. They point to the industry's own data, which shows that 85 percent of derivatives trading in a recent 10-day span occurred in four products that are arguably quite liquid. (Each traded more than 500 times.)
As such, according to officials briefed on the matter, Mr. Chilton proposed a plan to require quotes to be submitted to at least five banks for the most liquid contracts. Under his plan, contracts that were less liquid could still be subject to at least two.
Mr. Wetjen, who saw the effort as too complicated, continued to favor the two-bank plan. While the requirement jumps to three banks in about 15 months, the agency might also have to produce a study that could undermine that broader standard.
In an interview, Mr. Wetjen explained that he was seeking to grant more flexibility to the markets. "If flexibility means it's more beneficial to the banks, so be it," he said. "But it also means it's more flexible to all market participants and the marketplace as a whole."
Some consumer advocates have raised broader concerns about Mr. Wetjen, who once advocated a wider than expected exemption to part of a derivatives rule. They also complained that Mr. Wetjen has split with Mr. Gensler on aspects of a plan to apply Dodd-Frank to banks trading overseas. He has, however, voted with Mr. Gensler on every rule, unlike the other commissioners.
Mr. Wetjen also noted that his actions often upset the banks. On only a few issues, he happened to agree with them.
"I'm not driven by who wages the argument," he said. "It's about what policy makes sense."
You mean more regulation will enable the big fish to rig the system to their favor even more, in effect doing the opposite of what people think regulation is good for?
I AM SHOCKED I TELL YA
Quote from: Tamas on May 16, 2013, 08:11:19 AM
You mean more regulation will enable the big fish to rig the system to their favor even more, in effect doing the opposite of what people think regulation is good for?
I AM SHOCKED I TELL YA
Especially when the people writing the regulation are supported by the erm...'free speech'...of the people being regulated.
Perhaps somebody can explain this to me. In the oil industry companies usually maintain stricter standards than regulations for quality, health, safety and environment. This is because it is in the companies own interest to do so. Not only to help with clean and safe operations but also to maintain good relations with government, employees and other stakeholders. When selling themselves to employees and when applying for rights QHSE standards are one of the most important factors oil companies use to present their case.
Why is the financial services industry not doing this? Why doesn't anybody in the financial services sector seem to be selling himself to the capital owners (who are ultimately at risk) based on good standards?
"Invest your capital with Acme Bank, we won't blow your life savings in a financial bubble."
What am I not getting here?
Being reckless in a oil company won't make you money, it will in a financial company. High risk high reward and what not. And if you mess up? No worries, too big to fail. There's no down side to it.
Quote from: HVC on May 16, 2013, 08:35:28 AM
Being reckless in a oil company won't make you money, it will in a financial company. High risk high reward and what not. And if you mess up? No worries, too big to fail. There's no down side to it.
Yes. Since "regulation" makes sure their losses are covered by society, they have no reason whatsoever to avoid risks.
There is another problem - what is quality in financial services is not as easily verified or even defined as it is in engineering.
It's the difference between a physical product and a "product" that is constituted in significant part by human perception and behavior.
How much of your own article did you read Seedy? How much of it did you understand?
QuoteIn 2010, he pushed a plan that could, in essence, make all bids for derivatives contracts public.
Great idea, when do we start?
Quote from: Admiral Yi on May 16, 2013, 10:46:57 AM
How much of your own article did you read Seedy? How much of it did you understand?
I'm guessing just the bolded parts.
Quote from: Tamas on May 16, 2013, 09:23:23 AM
Quote from: HVC on May 16, 2013, 08:35:28 AM
Being reckless in a oil company won't make you money, it will in a financial company. High risk high reward and what not. And if you mess up? No worries, too big to fail. There's no down side to it.
Yes. Since "regulation" makes sure their losses are covered by society, they have no reason whatsoever to avoid risks.
I think we might get some mileage out of nationalizing the banks and limiting their function away from very risky investments but then letting hedge funds go hog wild, with the notion that no one would bail them out if they failed because they weren't banks entrusted with the money of "normal" depositors.
Quote from: HVC on May 16, 2013, 08:35:28 AM
Being reckless in a oil company won't make you money, it will in a financial company. High risk high reward and what not. And if you mess up? No worries, too big to fail. There's no down side to it.
:yeahright: I don't know how many times we've been through this already.
Lehman Brothers, wiped out. Bear Stearns, Merryl Lynch, Washington Mutual, Country Wide, bought for pennies on the dollar. AIG shareholders wiped out.
Quote from: Admiral Yi on May 16, 2013, 11:44:07 AM
Lehman Brothers, wiped out. Bear Stearns, Merryl Lynch, Washington Mutual, Country Wide, bought for pennies on the dollar. AIG shareholders wiped out.
But nice to be an unsecured bondholder . . .
Quote from: The Minsky Moment on May 16, 2013, 12:31:28 PM
But nice to be an unsecured bondholder . . .
I don't Hillary had those madcap Wild West bond holders making their 4% coupons in mind when he was talking about no downside risk.
Quote from: Admiral Yi on May 16, 2013, 12:35:55 PM
I don't Hillary had those madcap Wild West bond holders making their 4% coupons in mind when he was talking about no downside risk.
Gee whiz, Yi, you really think the typical corporate debtholder is a middle class house wife cutting the coupon out every quarter? How 1950s of you.
Most financial institution debt is held by other financial institutions. And the motivation isn't just the steady income, it can be making leveraged debts on interest rate outcomes, credit risk, or just taking on the paper as a loss leader to establish a relationship.
Quote from: The Minsky Moment on May 16, 2013, 12:46:44 PM
Gee whiz, Yi, you really think the typical corporate debtholder is a middle class house wife cutting the coupon out every quarter? How 1950s of you.
Most financial institution debt is held by other financial institutions. And the motivation isn't just the steady income, it can be making leveraged debts on interest rate outcomes, credit risk, or just taking on the paper as a loss leader to establish a relationship.
My understanding is the principle holders of corporate bonds are insurance companies and pension funds. What does that have to do with anything?
And of course there are interest rate derivatives. AFAIK you're not required to own a bank bond to purchase interest derivatives.
Quote from: Admiral Yi on May 16, 2013, 01:14:09 PM
My understanding is the principle holders of corporate bonds are insurance companies and pension funds. What does that have to do with anything?
It has to do with incentives which was HVC's point.
Wiping out the equity doesn't really impact incentives because the shareholders don't run the banks. Management does.* And management has incentives to take risks that will boost their comp in the short run, even at the risk of the equity being wiped out year later (and quite possibly after they are long gone).
Bondholders are actually more potentially significant for incentives because they are concentrated in a smaller institutional core, because many financial institutions rely on regular capital market debt financing to operate their business, and because of the possibility of using covenants to control risk (albeit crudely). So to the extent bondholders conclude from the last crisis that they are effectively government guaranteed, there is real potential moral hazard fallout.
*In theory under Board supervision. In practice, management can usually capture/dominate the Board, especially in the US where the dual CEO/Chairmanship is still a norm.
A good point Joan. But are managers too big to fail or are institutions? The CEO of BoA was not too big to fail.
Quote from: Admiral Yi on May 16, 2013, 02:06:50 PM
A good point Joan. But are managers too big to fail or are institutions? The CEO of BoA was not too big to fail.
Didn't Moynihan get a $7.5 million pay package last year?
Quote from: fahdiz on May 16, 2013, 02:09:41 PM
Didn't Moynihan get a $7.5 million pay package last year?
I don't know who that is. That's not the name of the BoA CEO I'm thinking of. The one who bought Merryl and Country Wide.
Quote from: Admiral Yi on May 16, 2013, 02:12:06 PM
Quote from: fahdiz on May 16, 2013, 02:09:41 PM
Didn't Moynihan get a $7.5 million pay package last year?
I don't know who that is. That's not the name of the BoA CEO I'm thinking of. The one who bought Merryl and Country Wide.
My bad, he took over in early 2010.
Anybody know what the other dude's severance package looked like?
Quote
* Tom Montag
If you ever need to negotiate an exit from your current employer and have Tom Montag's number - call him.
First he left Goldman Sachs for Merrill Lynch in May 2008. Merrill Lynch bought out his remaining Goldman compensation package for approximately $10 million.
Then, when Merrill Lynch was acquired by Bank of America in January 2009, BofA bought out all of Montag's Merrill Lynch options, vested and unvested, for a value of $29.9 million.
He stayed at BofA, where he is now co-COO.
A little background on Montag: he was once one of the largest individual taxpayers in Japan and he was the one that called that one deal that totally caused the financial crisis 'shitty.'
*Peter Kraus
Peter and Tom definitely talked this thing over.
Kraus joined Merrill at the same time as Montag, with a similar buyout of his Goldman compensation package.
Kraus, however, did not stay on at Bank of America and collected his $25 million severance package.
It was rumored that his split from BofA was in part related to his 'flashy' behavior, which included brandishing his bright green blackberry in meetings.
He consoled himself by buying at $36.6 million apartment and later becoming CEO of AllianceBernstein.
*Joe Cassano
Technically, the guy who lit the fuse at AIG did decline his severance.
But only after his CEO begged regulators to allow the failed insurer to retain Cassano as a consultant at $1 million per month and public uproar ensued.
The irony of the idea that Cassano was needed for his '20-year knowledge' of credit derivatives after that same knowledge decimated AIG is enough to land him on this list.
*Hank Paulson
Wait, he didn't get a severance package, right? Think again.
When he accepted President George W. Bush's nomination as Treasury Secretary, he was forced to sell his approximately $500 million dollars in Goldman shares.
Nothing wrong with that.
The real severance payment?
Because of a seldom utilized tax loophole, Paulson paid no capital gains taxes on this sale. That's right, not a single cent, saving him an estimated $200 million.
*Martin Sullivan
Not surprisingly, Joseph Cassano's old boss had a bit of an warped view of what constituted acceptable behavior.
When he was fired as CEO of AIG, Sullivan collected $47 million.
Later, he named as one of the 'Worst CEOs Of All Time' by Time Magazine.
*Stanley O'Neal
After leaving Merrill Lynch with an $8 billion write down, O'Neal left the firm with a total of $160 million.
While not technically severance pay, when Merrill claimed that the pay was for performance in previous years as CEO, questions were raised.
The assets that lead to his departure and dragged down Merrill's balance sheet to such an extent that Bank of America was called in to acquire the firm were purchased during those years when O'Neal's performance apparently merited such a massive payout.
*Chuck Prince
While Citigroup claimed in regulatory filings that it was not technically severance pay, when Chuck 'We're Still Dancing' Prince received $29.5 million in stock options, grants and perks when he left as CEO in the wake of billions of dollars in asset write downs.
He also received approximately $13 million in cash for his performance during the same year when those write downs occured.
Read more: http://www.businessinsider.com/7-outrageous-severance-packages-2011-12?op=1#ixzz2TUGeU7hH
Yeah, I wouldn't say any of those guys "failed" at all.
I wouldn't either. Are CEOs of large financial institutions the only ones who recieved large severance packages? I think the answer is no, so it's no longer a discussion of too big to fail.
Quote from: Admiral Yi on May 16, 2013, 02:06:50 PM
A good point Joan. But are managers too big to fail or are institutions? The CEO of BoA was not too big to fail.
I have mixed feelings about the whole TBTF concept. Anyway its not quite what I am getting at. TBTF has nothing to do with why depositors don't discipline banks - that's deposit insurance, which every commercial and savings bank has. And TBTF is tangential to the relunctance to force haircuts on bondholders - the concern is more contagion and contagion can be spread by institutions that in themselves are not that big. Like Lehman.
The larger point is that equity holders can't be relied upon to control bank excesses and so holding the equity at risk doesn't do much. That's true BTW *even if* the stockholders have the ability to to exercise meaningful control over management.
Imagine a bank with 95 million in deposits and bond debt, 5 million in equity.
Management can choose 1 of 2 strategies. Assume at the end of the year, the bank dissolves and pays everyone out according to priority.
Under strategy 1, the bank will make $2 million with certainty. That's a great result BTW - 2% ROA and 40% ROE with no risk.
Under strategy 2, 50% of the time the bank will make $10 million. The other 50%, the bank loses $100 million and is totally wiped out.
Clearly strategy 1 is far superior to 2.
Here's the problem - the stockholders will prefer strategy 2.
Under strategy 2, their expected return is $7.5 million - 50% chance of 0 and a 50% chance of recovering their initial $5 million plus the $10 million gain.
Under strategy 1, they only end up with $7 million.
Keep in mind that the debtholders are indifferent. Even if the bank gets wiped out , Uncle Sam pays them out.
You may object that I have failed to take risk aversion into account. No problem - it is easy to change the numbers and still make the same point.
But even more importantly - you can make the problem go away by further assuming that instead of 1 bank there are 1000 banks.
Now the risk averse stockholders can earn the strategy 2 return risk free by dividing their investment equally among all 1000 banks.
I.e. just like most real ordinary investors do these days.
The divide between management and ownership afflicts every business.
But in the banking business it is compounded by high debt-equity ratios and government guaranteed debtholders that lack usual incentives to monitor.
Quote from: Admiral Yi on May 16, 2013, 03:51:37 PM
Are CEOs of large financial institutions the only ones who recieved large severance packages?
In the end, who paid for those?
EDIT: Honest question, not trying to be leading about it.
Quote from: Admiral Yi on May 16, 2013, 10:46:57 AM
How much of your own article did you read Seedy? How much of it did you understand?
"Derivatives."
Worse than "titty sprinkles".
Quote from: fahdiz on May 16, 2013, 04:16:13 PM
In the end, who paid for those?
EDIT: Honest question, not trying to be leading about it.
Shareholders.
Joan: one problem I see right away is who is going to be willing to be the counterparty to your bank's triple or nothing play? There will always be willing borrowers, but you can't triple your stake by lending at interest. You can only do that making big one way bets.
Quote from: Admiral Yi on May 16, 2013, 04:44:49 PM
Joan: one problem I see right away is who is going to be willing to be the counterparty to your bank's triple or nothing play? There will always be willing borrowers, but you can't triple your stake by lending at interest. You can only do that making big one way bets.
The counterparty risks 10 to get 100 - no problem finding willing parties to take that trade.
And it's not a triple or nothing play - it's a 10% return on assets play.
It just requires an appetite for leverage and some risky investment.
Don't get hung up on the specific numbers - they are exaggerated for effect. The point is that incentives can be perverse when equity calls the shots in a thinly capitalized company.
But numbers matter. You don't get 200% ROE with a lending/borrowing spread and a capital requirement.
Quote from: Admiral Yi on May 16, 2013, 05:10:28 PM
But numbers matter. You don't get 200% ROE with a lending/borrowing spread and a capital requirement.
The capital requirement is built into example. 5 million in common equity which satisfied the Basel II leverage ratio requirement.
Lending/borrowing spreads are a non sequiturs. There are all sorts of things banks can do and did do to make money other than just milk a spread.
That is the whole gist of the hypothetical - strategy 1 is supposed to be a stand in for straight maturity transformation and spread earnings.
Strategy 2 represents all sorts of other kinds of risky things that financial institutions can do.
Right. And the counterparty to strategy 2 knows they either pay off $10 million, or they get paid nothing, because the bet they won just bankrupted the bank.
Quote from: Admiral Yi on May 16, 2013, 06:00:50 PM
Right. And the counterparty to strategy 2 knows they either pay off $10 million, or they get paid nothing, because the bet they won just bankrupted the bank.
:huh: The counterparty gets paid. It is immediately after the payment that the bank assets are wiped out. If the counterparty doesn't get paid in Joan's example, where do those 100 million go? Bonuses?
Quote from: Admiral Yi on May 16, 2013, 06:00:50 PM
Right. And the counterparty to strategy 2 knows they either pay off $10 million, or they get paid nothing, because the bet they won just bankrupted the bank.
First of all, they will get quite a bit, because the bank in my example has $100 million in assets. To what extent they will have to scramble around in bankruptcy to collect some of it is a question.
But you are assuming there would be only one counterparty making one giant bet. If we take the example of AIG and its unhedged CDS underwriting, there could be tens of thousands of counterparties each making much smaller bets and not realizing that the bank is unhedged.
Quote from: The Minsky Moment on May 16, 2013, 06:08:55 PM
But you are assuming there would be only one counterparty making one giant bet. If we take the example of AIG and its unhedged CDS underwriting, there could be tens of thousands of counterparties each making much smaller bets and not realizing that the bank is unhedged.
Fair enough. And you also have the example of LTC, which went under because of massive writing of -20% naked S&P 500 puts. But what you don't have is every single financial institution in the country betting the house on black, which is what you seem to be suggesting they are incentivized to do.
Quote from: The Minsky Moment on May 16, 2013, 04:56:44 PM
Quote from: Admiral Yi on May 16, 2013, 04:44:49 PM
Joan: one problem I see right away is who is going to be willing to be the counterparty to your bank's triple or nothing play? There will always be willing borrowers, but you can't triple your stake by lending at interest. You can only do that making big one way bets.
The counterparty risks 10 to get 100 - no problem finding willing parties to take that trade.
And it's not a triple or nothing play - it's a 10% return on assets play.
It just requires an appetite for leverage and some risky investment.
Don't get hung up on the specific numbers - they are exaggerated for effect. The point is that incentives can be perverse when equity calls the shots in a thinly capitalized company.
So why don't the depositors, given that their capital is being risked, demand and get a larger (or in this ANY) share of the profits? Aren't banks competing for the deposits? Can't the banks increase their own competitiveness by giving the deposit holders a/larger share in the profits their deposits are making?
They're not at risk. They're insured by the FDIC.
As long as you don't put your money in an Icelandic bank. :whistle:
Quote from: Admiral Yi on May 16, 2013, 06:17:43 PM
Quote from: The Minsky Moment on May 16, 2013, 06:08:55 PM
But you are assuming there would be only one counterparty making one giant bet. If we take the example of AIG and its unhedged CDS underwriting, there could be tens of thousands of counterparties each making much smaller bets and not realizing that the bank is unhedged.
Fair enough. And you also have the example of LTC, which went under because of massive writing of -20% naked S&P 500 puts. But what you don't have is every single financial institution in the country betting the house on black, which is what you seem to be suggesting they are incentivized to do.
They were only a year early. :P
Not sure what you're talking about.
Quote from: Admiral Yi on May 16, 2013, 06:17:43 PM
But what you don't have is every single financial institution in the country betting the house on black, which is what you seem to be suggesting they are incentivized to do.
No of course not. My example is exaggerated and there are plenty of institutions whose managers sincerely care about their long term health.
But banking is a tough enough business even if played straight it doesn't take that many bad apples to cause a lot of trouble when the cycle turns down. It can be dangerously easy even for the more honest types to go on the path of least resistance when that is the the path where misaligned incentives lead them. "We're still dancing."
I love Tamas's attitude. He is effectively saying that because people are corrupt and will try to bend and/or evade rules if given an opportunity to do so, we should have no rules at all. This is so refreshing in its stupidity.
Quote from: Martinus on May 17, 2013, 02:18:12 AM
I love Tamas's attitude. He is effectively saying that because people are corrupt and will try to bend and/or evade rules if given an opportunity to do so, we should have no rules at all. This is so refreshing in its stupidity.
It's as refreshing as a stroll through the landfill. Libertardianism on the Internet is a very old and tired phenomenon.
Right, that's what I said. :rolleyes:
There are rules, and there are rules. Just because we need laws and rules, it doesn't mean that anything labelled as a rule regulating something, is automatically good.
I could do Marty's fucked up twist and say he supports the oppression of gays in muslim countries, because he doesn't want to let people question laws and regulations.
Quote from: Tamas on May 17, 2013, 02:47:46 AM
Right, that's what I said. :rolleyes:
There are rules, and there are rules. Just because we need laws and rules, it doesn't mean that anything labelled as a rule regulating something, is automatically good.
I could do Marty's fucked up twist and say he supports the oppression of gays in muslim countries, because he doesn't want to let people question laws and regulations.
No, your argument is as if I was arguing that we should do away with laws against rape and pedophilia because in some countries they are used to persecute gays.
Quote from: DGuller on May 17, 2013, 02:19:46 AM
Quote from: Martinus on May 17, 2013, 02:18:12 AM
I love Tamas's attitude. He is effectively saying that because people are corrupt and will try to bend and/or evade rules if given an opportunity to do so, we should have no rules at all. This is so refreshing in its stupidity.
It's as refreshing as a stroll through the landfill. Libertardianism on the Internet is a very old and tired phenomenon.
This is not about libertarianism, it is about common logic. How should I word this to avoid immediately dismissed as Not Approved By the Democrat's Latest Memo?
Let me give it a try.
It should not be far fetched to assume, that the chief lawmakers, the leaders of the Federal Bank, and the high echelon of the financial sector constitute roughly the same circles, same aristocracy, if you will. One finances the other, the decisions of one group greatly influence the work of the other, and both group (financial regulators, and financial "actors") can put great pressure on the other one.
Common interests, together with the mutual possibility of destroying or at least greatly inconveniencing one another, at least on a personal level.
Why is it impossible to assume that these two groups would meet on a middle ground that would benefit both, possibly at the expense of the other influence groups who are only indirectly attached to these two? (lets call them taxpayers).
Yet we are fine with such a closely knit bunch determining the rules by which they play. In fact, I am getting attacked as a blasphemer for suggesting it might not be the best of ideas.
Why WOULDN'T they "corner the market" in their own advantage? In which other similar situations we know about, especially considering the stakes at play, where selflessness prevailed?
Why should we not strive for rules and regulations which -at the expense of more regular shocks to the financial players- allow the dissolution of the status quo? Ones which punish recklessness not by spending tax money on keeping the reckless ones in business, but by letting them destroy themselves, and yes, maybe everyone else who joined them for their little joyride?
Quote from: Martinus on May 17, 2013, 02:55:30 AM
Quote from: Tamas on May 17, 2013, 02:47:46 AM
Right, that's what I said. :rolleyes:
There are rules, and there are rules. Just because we need laws and rules, it doesn't mean that anything labelled as a rule regulating something, is automatically good.
I could do Marty's fucked up twist and say he supports the oppression of gays in muslim countries, because he doesn't want to let people question laws and regulations.
No, your argument is as if I was arguing that we should do away with laws against rape and pedophilia because in some countries they are used to persecute gays.
No. I am arguing that there can be laws and regulations which despite labelled and advertised as such, are not made to benefit society as a whole, but instead of the power groups able to directly influence their creation.
THAT is what I am saying, everything else is BS made up by you.
So what sort of a plan of action are you suggesting?
Quote from: Razgovory on May 17, 2013, 03:50:23 AM
So what sort of a plan of action are you suggesting?
Regulation should concentrate on punishing misconduct, instead of going several steps further, conserving the status qup. This should be in an effort to create a level playing field, where established big fishes can go bust.
I am fully aware this is not easy, but even having it as a guiding principle would be a step forward compared to the seriously non-level field we have now.
Isn't punishing misconduct preserving the status quo?
Quote from: Admiral Yi on May 16, 2013, 07:02:55 PM
They're not at risk. They're insured by the FDIC.
As long as you don't put your money in an Icelandic bank. :whistle:
All the depositors did get their money.. it just took a while...
So depositors insurance means that depositors get crappy fixed returns while the institution uses their deposit as leverage to make high risk investments giving the institution very high returns, these investments are so risky or of unknown risk and put the entire financial system at hazard.
OK, so it's either get rid of depositors insurance or a strict glass-stiegle type separation of band and hedge-fund?
Quote from: Razgovory on May 17, 2013, 04:00:03 AM
Isn't punishing misconduct preserving the status quo?
Can be quite the contrary, in fact.
Quote from: Tamas on May 17, 2013, 03:57:36 AM
Quote from: Razgovory on May 17, 2013, 03:50:23 AM
So what sort of a plan of action are you suggesting?
Regulation should concentrate on punishing misconduct, instead of going several steps further, conserving the status qup. This should be in an effort to create a level playing field, where established big fishes can go bust.
I am fully aware this is not easy, but even having it as a guiding principle would be a step forward compared to the seriously non-level field we have now.
What does this even mean? This is a collection of platitudes.
Quote from: Tamas on May 17, 2013, 04:04:04 AM
Quote from: Razgovory on May 17, 2013, 04:00:03 AM
Isn't punishing misconduct preserving the status quo?
Can be quite the contrary, in fact.
Can be, but rarely is.
This thread went weird, but minsky agreed with me and that's all that matters :D
I broadly agree with Tamas. Regulation is very often used by big business to stifle competition, which is inevitable given that they have far more input in writing the regulations than smaller companies.
We probably differ in that my view is that we should be far more aggressive in trust busting and break up the big banks, the utility and energy companies, and even tech firms like Google and Amazon.
Basically this:
http://blogs.telegraph.co.uk/news/iainmartin1/100217312/send-for-teddy-roosevelt/
Quote from: Tamas on May 17, 2013, 03:05:03 AM
It should not be far fetched to assume, that the chief lawmakers, the leaders of the Federal Bank, and the high echelon of the financial sector constitute roughly the same circles, same aristocracy, if you will.
That's pretty far fetched.
The head of the Federal Reserve is an ex college professor.
The Speaker of the House is a small business exec from Ohio, the majority leader a former real estate developer from Virigina, the minority leader a life-long politician from San Francisco. The Senate Majority leader is a Morman who used to chair the Nevada Gaming Commission, the minority leader a Kentucky lawyer. The banking committees in the two houses are led by former state's attorney for a rural county in South Dakota and a Texas farmer turned power company executive.
The common thread between these people is that there is no common thread. America is not like France where there is an identifiable elite that all went to the same schools and have similar backgrounds.
Quote from: Viking on May 17, 2013, 04:02:57 AM
So depositors insurance means that depositors get crappy fixed returns ?
Depositors get banking and transactional services as well.
Beyond that there is no compulsion for people to deposit money in a bank. In 2013 America, there are plenty of alternative investment opportunities.
Quote from: The Minsky Moment on May 17, 2013, 09:25:21 AM
Quote from: Viking on May 17, 2013, 04:02:57 AM
So depositors insurance means that depositors get crappy fixed returns ?
Depositors get banking and transactional services as well.
Beyond that there is no compulsion for people to deposit money in a bank. In 2013 America, there are plenty of alternative investment opportunities.
So, why do "casino" (yes I know it is highly pejorative and not very accurate as a term) banks exist then?
Quote from: HVC on May 17, 2013, 08:43:02 AM
This thread went weird, but minsky agreed with me and that's all that matters :D
You didn't pay attention. He rubbished too big to fail. :contract:
Quote from: Tamas on May 17, 2013, 03:57:36 AM
Quote from: Razgovory on May 17, 2013, 03:50:23 AM
So what sort of a plan of action are you suggesting?
Regulation should concentrate on punishing misconduct, instead of going several steps further, conserving the status qup. This should be in an effort to create a level playing field, where established big fishes can go bust.
I am fully aware this is not easy, but even having it as a guiding principle would be a step forward compared to the seriously non-level field we have now.
Before one punishes for misconduct the misconduct needs to be defined and that is, of course, one of the roles of a regulatory regime. But punishment is not the main purpose of regulation. The main purpose is to set out rules by which people should and do conduct themselves.
Quote from: The Minsky Moment on May 17, 2013, 12:57:16 AM
No of course not. My example is exaggerated and there are plenty of institutions whose managers sincerely care about their long term health.
But banking is a tough enough business even if played straight it doesn't take that many bad apples to cause a lot of trouble when the cycle turns down. It can be dangerously easy even for the more honest types to go on the path of least resistance when that is the the path where misaligned incentives lead them. "We're still dancing."
I still think "path of least resistance" is overstating the tendency, but do agree that there is a negative externality with financial institution failure.
The question then is what to do about that externality.
Quote from: Viking on May 17, 2013, 09:37:51 AM
So, why do "casino" (yes I know it is highly pejorative and not very accurate as a term) banks exist then?
In part they exist because depositors are getting a good deal overall. Thus they deposit and don't worry about whether the bank is sound or not.
The casino mentality persists because there is no sufficiently powerful force to counteract it.
JR, check your PMs :)
Quote from: Admiral Yi on May 17, 2013, 11:14:00 AM
Quote from: HVC on May 17, 2013, 08:43:02 AM
This thread went weird, but minsky agreed with me and that's all that matters :D
You didn't pay attention. He rubbished too big to fail. :contract:
Can't you just let me have my moment :( :D
Quote from: HVC on May 17, 2013, 12:11:08 PM
Can't you just let me have my moment :( :D
:console: