4 ms·

> If banks are rescued from this, the only logical conclusion is that all banks should just cease to exist. Why should they get to play with what is effectively

by em500 4y ago

> If banks are rescued from this, the only logical conclusion is that all banks should just cease to exist. Why should they get to play with what is effectively taxpayer's money, since that is where the risk will be paid from if they lose? How it usually works is, when a bank fails and is "rescued", the shareholders (owners) who "get to play" with the money get nothing. The ones who are "rescued" are usually some/most of the debt holders. Letting debt holders also shoulder some of the costs is worth considering, but the authorities generally believe it's too risky (the risk being a huge amount of debt holders pulling their money and/or demanding much higher interests which raises general borrowing costs).

kevinventullo 4y ago
But isn’t resetting the shareholders to zero exactly the problem? If we’re keeping score, the shareholders should owe the government exactly how much money was used to make the debt holders whole, right?
- em500 4y ago
  We're not keeping negative scores, that's the whole point of the invention of limited liability corporations. It's has large upsides (democratization of capitalism, ability to participate in larger and riskier ventures). Like most powerful tools, it can be abused, but it's such a powerful force multiplier that giving it up is just too costly.
  - TheOtherHobbes 4y ago
    No need to give it up. Just narrow its application to banks. Or even just certain bank transactions. If elements in the finance industry keep acting irresponsibly - clearly true - why should they get a pass on personal consequences?
  - machina_ex_deus 4y ago
    Normally if I have contract with somebody of borrowing money, and I don't pay, the other side lost money. Because it was my responsibility who I do business with. So we both get to play until we reach zero. That's fair game. Now we're saying, actually, banks effectively don't impose counterparty risk on their clients. So the government is actually who's taking the counterparty risk. If that's the government and not the customers, why did they get that privilege? Why is the government only there when the risk is fulfilled? Limited liability is fine. It's not fine when who's really liable is the government, while the original deal was between the bank and its customer. Student loans are also not fine either, since you don't get to set them to zero. Revoke Banks privilege of handling money. Let them play the game like the rest. Even the government itself needs to raise money using Treasury bonds. I want a fair game. This game is rigged. One player has the privilege of effectively using the government as an insurer for it's counterparty risk. It has repeatedly blown and abused that privilege. Revoke it. Let me hold my account at the Fed if I have positive balance, just like the rest of the banks. Call it CDBC or whatever. Let me get the Fed interest rates just like banks do. The banks are free to do business as they have always done, to loan money. They are free to deal with the trench of people who need loans. Not with my money. My money is only there because they forced me to. That's not a fair system. I don't approve their usage of it for their margins but I literally don't have a choice. Which is why they also get to give me zero interest rates while the Fed gives them much higher rates.
    - erik_seaberg 4y ago
      The Fed really wants the discount window to back loans, and they’re fighting at least one bank that wants to operate with a 100% reserve ratio. https://news.ycombinator.com/item?id=32235721 https://news.ycombinator.com/item?id=32235721
  - kilotaras 4y ago
    > We're not keeping negative score And that's problematic for banking. Thought experiment: for bank functionaries a strategy that has an equal chances of +10% and -40% is better than guaranteed +4% (for them EV is +5%). As a result, they are able to attract more depositors by providing higher rates that bank that went with option (2). Depositors will (rationally) chase highest rates knowing that worst case scenario - government bails them out completely. Everyone behaves according to incentives, with the result being that money is used on ventures with -15% expected value instead of +4%.
    - em500 4y ago
      I don't see your example works. Shareholders could lose 100% of their investment, their EV is not +5%. Bank employees could get higher bonusses, but also run higher risk of 0% bonus and losing their job, not sure how you get to 5% EV or that some strategy is obviously better.
      - kilotaras 4y ago
        > Shareholders could lose 100% of their investment, their EV is not +5%. Converting from (EV on bank accounts) to return for shareholders is non-trivial, but as long as shareholders get > 100% RoI in successful case their EV is positive. > Bank employees could get higher bonuses, but also run higher risk of 0% bonus and losing their job. Losing job aside, equal chances of 100% and 0% bonus is better than guaranteed 30% bonus. Depending on premium you put on having the same job, it may be better even with risk of losing job. This scenario will not work for investments, as people understand that if startup X fails - you loose money. In "government bails out depositors completely" scenario: you invest money in bank, bank loans it to startup X, startup X fails - you get your money back (from government and ultimately taxpayers).
        em500 4y ago
        I still don't get what you're trying to say. If a startup fails, equity holders lose everything, same as in bank failures. But startups don't have depositors. Bank depositors always get 100% up to the FDIC limit, but depositors are not equity investors, they're (very senior) debt holders. The price they pay for the safety is generally lower interest rates than junior creditors or preferred shares. For the other parties involved (employers, shareholders, other creditors) their risks and rewards aren't all that different from any other large company. AFAICT the only special stakeholders in banks are depositors. Are you trying to say that depositors should run a lot more risk (i.e. not always made whole in case of illiquidity/insolvency)?
machina_ex_deus 4y ago
Where do I sign up to play with these levels of leverage of other people's money too? Where even getting margin called on extremely big margins compared to my initial investment, the government would sweep in because that margin wasn't even mine to play with? Where I get absolutely ridiculous interest rates from the Fed which I don't need to pass on to my meat shield clients, I just get literally free money from the central bank? All these privileges for no responsibility. This has to end. If we all admit it's other people's money, and we all admit that in failure, the government will also cover for them, and they get to play these completely absurd investments with leverage of 20 to 1, their privilege is just unjustified. When the broker fucks up and let you blow your margins, the broker pays the bills. But banks get to blow the margins with everyone's money and somehow the government only comes in when they blew it, but wasn't responsible to keep tabs on their margin in the first place? And there's barely any margins, the leverage ratios are insane. Of course debt holders would require much higher interests. The whole thing is just a sad scheme where the government is letting privileged entities a monopoly of using leverage on other people money, while the government holds the tail risk. I would love to get 20 to 1 margin with the government taking all the tail risk to zero and allowing me to dip below zero by design. If I blew it I could start again just like Lehman CFO which moved over to SVB. If you take their responsibility, you have to take their privileges too.
- em500 4y ago
  Treating your question as non-rhetorical, you get to play with the money if you work at a bank (most bank have a standard career webpage where you can sign up). But most normal employees don't profit all that much unless they make it to upper management. As for the shareholders whose money get leveraged, most large banks are public and you're free to buy stocks. If you money in index funds or other diversified stock funds, you likely already have invested substantial amounts.
- Linosaurus 4y ago
  You seem to be saying, that bank owners can take big risks and make enough money that it’s worth it to occasionally lose all equity. But if we make sure depositors also lose money from this, you think depositors will be more careful - they’ll demand higher interest or choose banks with a lower risk profile? I don’t think that is practical at all. Not enough of people are going to be doing their due diligence on bank risk profiles, 20 years later. Making excessive risk illegal through regulations seems more practical, but maybe your point was also that these failed.

by em500 4y ago

kevinventullo 4y ago

But isn’t resetting the shareholders to zero exactly the problem? If we’re keeping score, the shareholders should owe the government exactly how much money was used to make the debt holders whole, right?

em500 4y ago
We're not keeping negative scores, that's the whole point of the invention of limited liability corporations. It's has large upsides (democratization of capitalism, ability to participate in larger and riskier ventures). Like most powerful tools, it can be abused, but it's such a powerful force multiplier that giving it up is just too costly.
- TheOtherHobbes 4y ago
  No need to give it up. Just narrow its application to banks. Or even just certain bank transactions. If elements in the finance industry keep acting irresponsibly - clearly true - why should they get a pass on personal consequences?
- machina_ex_deus 4y ago
  Normally if I have contract with somebody of borrowing money, and I don't pay, the other side lost money. Because it was my responsibility who I do business with. So we both get to play until we reach zero. That's fair game. Now we're saying, actually, banks effectively don't impose counterparty risk on their clients. So the government is actually who's taking the counterparty risk. If that's the government and not the customers, why did they get that privilege? Why is the government only there when the risk is fulfilled? Limited liability is fine. It's not fine when who's really liable is the government, while the original deal was between the bank and its customer. Student loans are also not fine either, since you don't get to set them to zero. Revoke Banks privilege of handling money. Let them play the game like the rest. Even the government itself needs to raise money using Treasury bonds. I want a fair game. This game is rigged. One player has the privilege of effectively using the government as an insurer for it's counterparty risk. It has repeatedly blown and abused that privilege. Revoke it. Let me hold my account at the Fed if I have positive balance, just like the rest of the banks. Call it CDBC or whatever. Let me get the Fed interest rates just like banks do. The banks are free to do business as they have always done, to loan money. They are free to deal with the trench of people who need loans. Not with my money. My money is only there because they forced me to. That's not a fair system. I don't approve their usage of it for their margins but I literally don't have a choice. Which is why they also get to give me zero interest rates while the Fed gives them much higher rates.
  - erik_seaberg 4y ago
    The Fed really wants the discount window to back loans, and they’re fighting at least one bank that wants to operate with a 100% reserve ratio. https://news.ycombinator.com/item?id=32235721 https://news.ycombinator.com/item?id=32235721
- kilotaras 4y ago
  > We're not keeping negative score And that's problematic for banking. Thought experiment: for bank functionaries a strategy that has an equal chances of +10% and -40% is better than guaranteed +4% (for them EV is +5%). As a result, they are able to attract more depositors by providing higher rates that bank that went with option (2). Depositors will (rationally) chase highest rates knowing that worst case scenario - government bails them out completely. Everyone behaves according to incentives, with the result being that money is used on ventures with -15% expected value instead of +4%.
  - em500 4y ago
    I don't see your example works. Shareholders could lose 100% of their investment, their EV is not +5%. Bank employees could get higher bonusses, but also run higher risk of 0% bonus and losing their job, not sure how you get to 5% EV or that some strategy is obviously better.
    - kilotaras 4y ago
      > Shareholders could lose 100% of their investment, their EV is not +5%. Converting from (EV on bank accounts) to return for shareholders is non-trivial, but as long as shareholders get > 100% RoI in successful case their EV is positive. > Bank employees could get higher bonuses, but also run higher risk of 0% bonus and losing their job. Losing job aside, equal chances of 100% and 0% bonus is better than guaranteed 30% bonus. Depending on premium you put on having the same job, it may be better even with risk of losing job. This scenario will not work for investments, as people understand that if startup X fails - you loose money. In "government bails out depositors completely" scenario: you invest money in bank, bank loans it to startup X, startup X fails - you get your money back (from government and ultimately taxpayers).
      - em500 4y ago
        I still don't get what you're trying to say. If a startup fails, equity holders lose everything, same as in bank failures. But startups don't have depositors. Bank depositors always get 100% up to the FDIC limit, but depositors are not equity investors, they're (very senior) debt holders. The price they pay for the safety is generally lower interest rates than junior creditors or preferred shares. For the other parties involved (employers, shareholders, other creditors) their risks and rewards aren't all that different from any other large company. AFAICT the only special stakeholders in banks are depositors. Are you trying to say that depositors should run a lot more risk (i.e. not always made whole in case of illiquidity/insolvency)?

machina_ex_deus 4y ago

Where do I sign up to play with these levels of leverage of other people's money too? Where even getting margin called on extremely big margins compared to my initial investment, the government would sweep in because that margin wasn't even mine to play with? Where I get absolutely ridiculous interest rates from the Fed which I don't need to pass on to my meat shield clients, I just get literally free money from the central bank? All these privileges for no responsibility. This has to end. If we all admit it's other people's money, and we all admit that in failure, the government will also cover for them, and they get to play these completely absurd investments with leverage of 20 to 1, their privilege is just unjustified. When the broker fucks up and let you blow your margins, the broker pays the bills. But banks get to blow the margins with everyone's money and somehow the government only comes in when they blew it, but wasn't responsible to keep tabs on their margin in the first place? And there's barely any margins, the leverage ratios are insane. Of course debt holders would require much higher interests. The whole thing is just a sad scheme where the government is letting privileged entities a monopoly of using leverage on other people money, while the government holds the tail risk. I would love to get 20 to 1 margin with the government taking all the tail risk to zero and allowing me to dip below zero by design. If I blew it I could start again just like Lehman CFO which moved over to SVB. If you take their responsibility, you have to take their privileges too.

em500 4y ago
Treating your question as non-rhetorical, you get to play with the money if you work at a bank (most bank have a standard career webpage where you can sign up). But most normal employees don't profit all that much unless they make it to upper management. As for the shareholders whose money get leveraged, most large banks are public and you're free to buy stocks. If you money in index funds or other diversified stock funds, you likely already have invested substantial amounts.
Linosaurus 4y ago
You seem to be saying, that bank owners can take big risks and make enough money that it’s worth it to occasionally lose all equity. But if we make sure depositors also lose money from this, you think depositors will be more careful - they’ll demand higher interest or choose banks with a lower risk profile? I don’t think that is practical at all. Not enough of people are going to be doing their due diligence on bank risk profiles, 20 years later. Making excessive risk illegal through regulations seems more practical, but maybe your point was also that these failed.