QuoteThese two points are always forgotton by people when they are going off on one against the banks.Originally Posted by Stuttgart88
Yep, it was hard to argue with his findings. It was a very good series.
The root of the financial crisis in my humble opinion was that money became increasingly cheap and increasingly hard to lose, mainly due to the Fed looking to prop up asset values at every hint of trouble. When something becomes cheap people lose respect for it: banks lent it too carelessly and borrowers borrowed it too carelessly.
I'm not convinced that the individual bankers themselves are too blame. I work in the industry and have seen the sheer greed and lack of humility of several involved but for every such wnaker I've come across dozens just doing a job because it's a decent career and it's the natural thing to do if you have some sort of a business or financial training.
Like in sport or any walk of life the rules were there to be gamed. I'm sure playing the offside trap was never in the rulemakers' minds when they drew up the rule to prevent goalhanging. I'm sure we all speed up between motorway speed cameras before seeing one and slowing down for a bit and then speeding up again.
Companies in the non-financial sector game the accounting rules. I'm not talking about Enron or Worldcom-like cheating, I'm talking about playing right on the edge of the rules. Bankers did this with the regulatory capital rules. You'd be disappointed with them for not doing so - both from a "cleverness" perspective and also as a shareholder (not in hindsight maybe). However, you have to be just as disappointed with the regulators for allowing both the sheer scale of regulatory gaming that went on, as well as the really simple stuff: the outright fraudulent and in my opinion criminal lending practices at grass root level.
In the south east UK this weekend the weather was simply amazing. Shorts and T-shirt weather and it was mid-October. The thought struck me: if bankers were weathermen they would have allocated no probability of such weather in October and would have bet ridiculously large sums against such a probability. The rating agencies would have gone out to the garden, taken the temperature and declared with AAA certainty that it was summer, and walked away with USD 300k from everyone that asked. Those that asked would have taken their word for it and have to throw away their lilo's on Monday when the clouds returned, wondering why on earth they wasted money their money on something with such little use.
Last edited by Stuttgart88; 13/10/2008 at 7:53 PM.
These two points are always forgotton by people when they are going off on one against the banks.
Don't think anyone blames ordinary staff of banks. most anger/vitriol I hear/read is aimed at top brass (i.e. policy makers)
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Have been thinking about this a lot over the last week.
What happened was absolutely unavoidable in the absence of stronger government regulation. That isn't a banker simply pushing the blame around, its reality. Here's why.
Imagine we had a bank, lets call it Bank of Responsibility (BoRe). Say 2-3 years ago, BoRe had a "road to Damascus" moment and decided that property prices were unsustainable, its loan to deposit ratio was too high and generally it needed to act more conservatively. It therefore decided it would buck the trends of its peers and would not offer high LTV mortgages or speculative property development financing.
In a very short amount of time BoRe's share price would have been savaged by the market, thats right, the same "market" thats now complaining to high heavens about the behaviour of the banks. In short order it would've been taken over by another bank and its management replaced. This isn't a guess or a leap of faith, there are plenty of examples in the last 10 years of conservative banks whose share price got hammered and were taken over by more "enlightened" competitors.
So, we have identified that the system was broken and all the lemmings were running to the edge of the cliff. Who was responsible for stopping them?
If you are a true libertarian or free marketeer, the answer is no-one. We will only learn that its stupid to jump off the cliff after we see all the lemmings die doing it.
If you believe in having a framework of rules and regulations to save society from itself, then Government failed. And thats Government in its widest sense including, but not limited to, IMF, G7, BIS, EU, CEBS......
I must say that is a well written, easy to follow and illustrative post!!Have been thinking about this a lot over the last week.
What happened was absolutely unavoidable in the absence of stronger government regulation. That isn't a banker simply pushing the blame around, its reality. Here's why.
Imagine we had a bank, lets call it Bank of Responsibility (BoRe
In a very short amount of time BoRe's share price would have been savaged by the market, thats right, the same "market" thats now complaining to high heavens about the behaviour of the banks. In short order it would've been taken over by another bank and its management replaced. This isn't a guess or a leap of faith, there are plenty of examples in the last 10 years of conservative banks whose share price got hammered and were taken over by more "enlightened" competitors.
So, we have identified that the system was broken and all the lemmings were running to the edge of the cliff. Who was responsible for stopping them?
If you are a true libertarian or free marketeer, the answer is no-one. We will only learn that its stupid to jump off the cliff after we see all the lemmings die doing it.
If you believe in having a framework of rules and regulations to save society from itself, then Government failed. And thats Government in its widest sense including, but not limited to, IMF, G7, BIS, EU, CEBS......
If only we could swap lemmings for some of the fat-cat bankers!
p.s. I would like to open an account at BoRe, and also arrange a mortgage!
Last edited by Sligo Hornet; 14/10/2008 at 12:29 PM.
Tact is for people who are not witty enough to be sarcastic
Very good ORA.
And understanding that would make you pessimistic that present plans for shoring up International Banking, as it currently operates, is doomed.
The bailouts are support props for a crumbling ediface.
Stutts,I think it's the absence of rules thats a big part of the problem. To use your traffic analogy, 99% of people can accept the need for traffic regulations, without such regulations would be a recipe for chaos but with such regulations the traffic code structure can cope with the impulsive code breaker.Like in sport or any walk of life the rules were there to be gamed. I'm sure playing the offside trap was never in the rulemakers' minds when they drew up the rule to prevent goalhanging. I'm sure we all speed up between motorway speed cameras before seeing one and slowing down for a bit and then speeding up again.
ORA, 9 years ago Washington Mutual's share price was attached because they decided to reduce exposure to US mortgage-backed bonds!
Edit:
From the FT's Long View in September:
WaMu on Friday became the biggest bank failure in US history (a title it will hopefully keep for a while). Its decline, as has been amply documented, lay in its huge portfolio of mortgages and mortgage-backed bonds.
A decade ago, assumptions were different. The last WaMu story I wrote covered a day when its share price fell 5 per cent in June 1999. It fell because investors were worried that it was retreating from its policy of levering up by buying mortgage-backed securities.
Last edited by Stuttgart88; 14/10/2008 at 2:55 PM.
The absence of rules - or the inability to apply them - in the "shadow banking sector" allowed a massive amount of leverage to be built up. I heard last week that the so-called shadow banking sector at its peak actually exceeded the actual banking sector by assets though I'm not sure this is true.
However, within the actual banking sector i.e., the global regulated banking system, it can't really be argued that the rules weren't there. They were gamed to the nth degree and in hindsight they were poor rules. Here's an example: take a standby commitment from a bank to its customers (i.e., they don't actually lend money on day 1, they merely say if you need the money at some point in the future we'll give it to you. An overdraft for all intents and purposes). The regulatory rules say that if the commitment period is less than a year then that commitment warrants zero capital otherwise it's a full capital charge in line with the type of borrower it is. If the commitment is drawn upon then the resulting loan attracts a capital allocation in line with the type of borrower it is.
So: if the commitment is for 364 days it's zero capital and if it's 365 days it's full capital. Does 1 day make that much economic difference? The banking system subsequently set up vehicles with hundreds of billions of such liquidity commitments for 364 days (zero capital). They bought long term AAA securities in these vehicles and these vehicles issued short term debt in the US money markets and month after month, year after year this debt was simply rolled over. The banks just kept amending the maturity date of the commitment perios, but always within 364 days.
The result: the banking system effectively owned hundreds of billions of risk with no capital supporting it. At one point in time it didn't even have to report the existence of these hidden assets or contingent liabilities.
A German bank with a substantial Dublin operation failed last year because the size of its off balance sheet asset book, and corresponding commitment to finance the vehicle holding these assets if for whatever reason the US money markets stopped wanting to roll over its short term debt. I can't recall the exact numbers but this bank made liquidity commitments multiple times the maximum amount it could ever realistically expect to have available in cash or liquid assets. How the rating agencies allowed this to happen is beyond me. How the regulators allowed this to happen is beyond me. How management allowed it to happen is beyond me.
These vehicles were an early part of this "shadow banking system" and what happened in Q3 last year was a run on these vehicles, no different to a run on conventional banks.
Last edited by Stuttgart88; 14/10/2008 at 3:31 PM.
Given this is a Current Affairs forum can we stick to some level of facts rather than wildly spectlating what level of interest rate cuts are passed on if any & which banks act?
I understand that rules are there. I am more referring to the bigger picture of tried and trusted regulations which were wound down to allow deregulation (in the UK called Better Regulation Task/Commission)
An environment for all sorts of skullduggery.
Eg. the minimum cash reserve that a UK bank was reduced from 20.5% in 1968 down to 3.1% in 1998, at present it is a voluntary%.
The situation in Iceland has got infinitely more serious.
The Banking law requires that saving deposits are first taken care off when a Bank collapses.
The Brits were ready with pen in hand to sign an agreement that Icesave assets (Landsbanki UK) be sold in order to cover the savers deposits. The assets would cover the Icesave deposits, easy enough to a £30k limit for each saver account. Then the Brits backed off at the 12th hour and want the Landsbanki assets to be used to pay other debts in the UK.
No mention yet what these other debts are. I'm suspicious.
The Icelandic PM refused to agree. The IMF & Russians won't loan until there is an agreement. The Brits know that.
Are you sure?
AFAIK its broadly 8% of risk weight assets (loans) in capital (cash and cash equivalents [liquid securities]). So depends hugely on the riskiness and composition of the individual bank's loan book.
And thats an EU Directive, not an FSA-specific regulation.
As an aside, if Ireland hadn't joined the Euro (if me granny... etc.), we'd be Iceland Mark II. Thankful for small mercies etc...
I got to
/Reserve requirement
from this
Fractional reserve banking
I was trying to understand the hows and the whys a Central bank prints more money.
http://ec.europa.eu/internal_market/...l/index_en.htm
This is what governs how much capital European banks hold. Look for the Capital Requirements Directive.
The relationship to the amount of printed money is circulation is as remote as to be irrelevant IMHO.
I presume by this you mean the punt would be monopoly money?
I think I heard that Icelandic currency is worthless outside the country which is making it difficult to import any goods including food. I guess everyone is on a fish only diet...
Yeah, punt would be worthless as it would've been hugely devalued.
A quick look at individual and macro leverage (indebtedness/loans to deposits) measures show us as being next worst to the Icelandics, with the Brits also up there as well.
I think the Danes had an even bigger real estate bubble than we had & some of their banks have Baltic and other EM exposures.
My dad has some money on deposit with National Irish which is protected under the Danish scheme, not the Irish one, beacuse they're owned by Danske Bank. I'm going to tell him to move it. The Kroner is getting hit and today they've put rates UP in Denmark to try and protect the currency.
Total capitulation again in the markets today. Rumours that GM will file for Ch11 today. Currencies are all over the place. Credit markets getting hammered. The great deleveraging (i.e., selling of assets financed by debt because the lenders want their money back) is gathering pace. There will be massive hedge fund casualties.
Credit getting hit particularly hard. This really could be a vicious death spiral: fundamentally solid and cash generative companies may go to the wall because their banks won't refinance their loans and the bond markets are closed. Bankruptcies and credit downgrades will therefore gather pace. This'll make banks even less likely to lend and so on.
There were many bad stats out this morning but this one stood out for me: Vovlo sold 41,000 trucks in Q3 2007. In Q3 2008 they sold 115!
The 30 year swap is trading through US treasuries - ok, this is a technical thing - but though it can be explained it was previously thought not just highly unlikely but "impossible"!
Nouriel Roubini's speech in London yesterday is worth watching. The gloomy war prophecies we touched on here 2 weeks ago were even mentioned!
http://www.rgemonitor.com/blog/roubi...arket_shutdown
The world economy is getting worse by the day now. Don't know where it is but the sooner we hit the bottom the better as can't plan recovery until we get there.
It seems one the problems with coming off property bubble into recession is that won't be another property bubble to back the boom days. I wonder what the next bubble will be caused by. We have just had IT & Building. Maybe renewable energies?
I was only giving an example of one regulation that was changed, re cash reserves.
You asked was I sure.
I pointed out the link to you.
No one ever says thanks
Premiership football?
What happens if BSKY or Setanta can't refinance their debt, or the football clubs themselves?
Why would Renewable energies be regarded as a bubble to burst?
Is it subsidised to make the Kw price competitive?
On the surface it ticks some important boxes, it is local based, creates labour, less imports.
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