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> If a bank's assets ever drop below its liabilities, it is immediately liquidated, the shareholders lose everything, and insurance steps in to fix any gaps.

> If a bank's assets ever drop below its liabilities, it is immediately liquidated, the shareholders lose everything, and insurance steps in to fix any gaps. That's how it's supposed to work. We've all found out in 2008 that's no longer the case. The FDIC took over and sold or liquidated a few hundred small banks and a handful of medium sized banks. The big ones were considered to be too big to fail and were bailed out. The shareholders of these bing banks did not lose everything, and even the subordinated debt was payed (e.g. Citi).

vkou 4y ago
> That's how it's supposed to work. We've all found out in 2008 that's no longer the case. 1. Not every bank that became insolvent had a hole on their balance sheet that required all of their equity to be wiped out to fill. The shareholders got a haircut proportionate to how big those holes were. 2. The rot would have gone far deeper, and the holes could not have been covered if those bank balance sheets looked anything like FTX's did. Banks, for the most part, faced a liquidity crisis, not an insolvency crisis, and the owners of the ones that faced the latter were, for all intents and purposes, wiped out. 3. The FDIC is funded by banks, not by taxpayers. The FDIC only cares about customer deposits, it doesn't give two figs about investments. The controversial, taxpayer bailouts were not for retail banks (The FDIC was designed a very long ago to handle this case, and handled it well, without dipping into the public purse), they were for shit like AIG. And speaking of shareholder equity, that didn't do so hot. Their public valuation went down 98% from 2007 to 2008, and is, as of today, down 75% from their peak. I wouldn't have wanted to have been a shareholder.
arcticbull 4y ago
So bail-outs weren't grants, they were loans, and the loans have been repaid netting a massive windfall to the government over over $100B with many more billions to come, a ton of jobs were saved and it's hard to argue that they were at all a bad thing. [1] This is coming from someone who at the time thought the bailouts were a bad idea. [1] https://projects.propublica.org/bailout/ https://projects.propublica.org/bailout/
- oldgradstudent 4y ago
  You're describing just a small fraction of the unprecedented Citi bailout. They decided that Citi must not be allowed to fail. https://www.nytimes.com/2018/08/06/books/review/james-freeman-vern-mckinley-borrowed-time.html https://www.nytimes.com/2018/08/06/books/review/james-freema... This was a massive intervention in saving a failed bank.
  - arcticbull 4y ago
    Yes, massive interventions took place - but if that's not a sign that you should be confident the US government will stand by the dollar I don't know what will. The bank was saved, nobody lost deposits. Regulations prevent this from happening in the future. However I stand by my argument that the US will be repaid in full for its 2008 bail-outs. There's already been $109B in profit, and still $191B in principal left from Fannie and Freddie alone - and they continue to pay massive dividends of about $20B/yr. They US will come out ahead on this and faith in the dollar was restored. Jobs and the economy were saved. And a known good path forward (restoring Glass-Steagall for instance) exists. I'm not defending Citi. However equating Citi within the economic system with FTX is nonsense. One's a bank which made poor, legal decisions and was saved because of its role in the broader ecosystem. The other is a shady off-shore bucket shop run by a CEO (and his 9 closest bone-bros) who allegedly fraudulently gambled away everyone's money and is on a plane to Argentina. tl;dr: Even with the Citi bailouts from your article at face value the government will recoup far more than it spent on 2008. This whole post feels like the dril tweet about the wise man explaining there's actually no difference between good things and bad things. [1] https://twitter.com/dril/status/473265809079693312 https://twitter.com/dril/status/473265809079693312
    - oldgradstudent 4y ago
      My argument is not that the financial system as a whole needed no saving, but rather that it was done in a way which encourages massive and perverse systemic risks. A failed bank like Citi should have been handled like smaller banks at the same situation were handled - taken over by the government, shareholders wiped out, new honest management installed, and criminal referrals made as appropriate. In addition, they should've broken up the bank to smaller units that will not be too big to fail. The way it was done, most of the management layer remained and had a vested interest in covering up problems and their own complicity. Worse, it made it clear to other institutions that the bigger they become, the less likely they are to be allowed to fail. The incentives are perverse. Edit: fairness is also important. A large, politically connected, bank benefited from bailouts that smaller, less well-connected banks and regular people did not get.

vkou 4y ago

> That's how it's supposed to work. We've all found out in 2008 that's no longer the case. 1. Not every bank that became insolvent had a hole on their balance sheet that required all of their equity to be wiped out to fill. The shareholders got a haircut proportionate to how big those holes were. 2. The rot would have gone far deeper, and the holes could not have been covered if those bank balance sheets looked anything like FTX's did. Banks, for the most part, faced a liquidity crisis, not an insolvency crisis, and the owners of the ones that faced the latter were, for all intents and purposes, wiped out. 3. The FDIC is funded by banks, not by taxpayers. The FDIC only cares about customer deposits, it doesn't give two figs about investments. The controversial, taxpayer bailouts were not for retail banks (The FDIC was designed a very long ago to handle this case, and handled it well, without dipping into the public purse), they were for shit like AIG. And speaking of shareholder equity, that didn't do so hot. Their public valuation went down 98% from 2007 to 2008, and is, as of today, down 75% from their peak. I wouldn't have wanted to have been a shareholder.

arcticbull 4y ago

So bail-outs weren't grants, they were loans, and the loans have been repaid netting a massive windfall to the government over over $100B with many more billions to come, a ton of jobs were saved and it's hard to argue that they were at all a bad thing. [1] This is coming from someone who at the time thought the bailouts were a bad idea. [1] https://projects.propublica.org/bailout/ https://projects.propublica.org/bailout/

oldgradstudent 4y ago
You're describing just a small fraction of the unprecedented Citi bailout. They decided that Citi must not be allowed to fail. https://www.nytimes.com/2018/08/06/books/review/james-freeman-vern-mckinley-borrowed-time.html https://www.nytimes.com/2018/08/06/books/review/james-freema... This was a massive intervention in saving a failed bank.
- arcticbull 4y ago
  Yes, massive interventions took place - but if that's not a sign that you should be confident the US government will stand by the dollar I don't know what will. The bank was saved, nobody lost deposits. Regulations prevent this from happening in the future. However I stand by my argument that the US will be repaid in full for its 2008 bail-outs. There's already been $109B in profit, and still $191B in principal left from Fannie and Freddie alone - and they continue to pay massive dividends of about $20B/yr. They US will come out ahead on this and faith in the dollar was restored. Jobs and the economy were saved. And a known good path forward (restoring Glass-Steagall for instance) exists. I'm not defending Citi. However equating Citi within the economic system with FTX is nonsense. One's a bank which made poor, legal decisions and was saved because of its role in the broader ecosystem. The other is a shady off-shore bucket shop run by a CEO (and his 9 closest bone-bros) who allegedly fraudulently gambled away everyone's money and is on a plane to Argentina. tl;dr: Even with the Citi bailouts from your article at face value the government will recoup far more than it spent on 2008. This whole post feels like the dril tweet about the wise man explaining there's actually no difference between good things and bad things. [1] https://twitter.com/dril/status/473265809079693312 https://twitter.com/dril/status/473265809079693312
  - oldgradstudent 4y ago
    My argument is not that the financial system as a whole needed no saving, but rather that it was done in a way which encourages massive and perverse systemic risks. A failed bank like Citi should have been handled like smaller banks at the same situation were handled - taken over by the government, shareholders wiped out, new honest management installed, and criminal referrals made as appropriate. In addition, they should've broken up the bank to smaller units that will not be too big to fail. The way it was done, most of the management layer remained and had a vested interest in covering up problems and their own complicity. Worse, it made it clear to other institutions that the bigger they become, the less likely they are to be allowed to fail. The incentives are perverse. Edit: fairness is also important. A large, politically connected, bank benefited from bailouts that smaller, less well-connected banks and regular people did not get.