4 ms·

A big part of why big American banks appear financially stable is the ruling class will bail them out with taxpayer money.

eru 3y ago
Bail outs and (quasi) government run deposit insurance are indeed a problem. They misprice risk.
- HWR_14 3y ago
  They don't misprice risk. The shareholders of a bank are wiped out when deposit insurance is used. It's the account holders who are bailed out.
  - AnthonyMouse 3y ago
    That's mispricing risk. Now the depositors have no reason to care whether their bank is creditworthy or well-managed, so the bank has the incentive to gamble with their deposits as much as possible. If they get lucky they get to keep the winnings, if they go belly up the FDIC eats the cost.
    - trepanne 3y ago
      You guys are familiar with how we arrived at this particular regime of mispricing risk, right? It’s preferable to the alternative. This is why banks are tightly (but imperfectly) regulated. Similar observations apply to that more fundamental instrument of mispriced risk - limited liability business entities. The worst possible arrangement, except for all the others. Personally I prefer to tilt at the windmill of the asymmetrical payoff diagram of US CEO compensation structures. While it’s still the case that nobody much cares about my opinions on the subject, this one at least has less of an aspect of battle-tested socioeconomic optimality.
      - eru 3y ago
        You should check your history. Americans didn't arrive at this particular set of institutional arrangements by some rational process that weighed the alternatives properly. Really, have a look at eg https://www.cato.org/blog/there-was-no-place-canada https://www.cato.org/blog/there-was-no-place-canada for a comparison between American finance and Canadian finance. The Canadian arrangements were much superior to the old and new American system. > Similar observations apply to that more fundamental instrument of mispriced risk - limited liability business entities. The worst possible arrangement, except for all the others. I don't see what's wrong with it? In most countries you can form both limited liability business entities as well as unlimited liability business entities. When you do business as a company you (typically) have to clearly declare what kind of business you are, and your counter-parties can decide whether they want to deal with you based on that information. (At least for the most part. If a limited liability contractor paves my driveway, and they damage my neighbour's roses while they are at it, my neighbour never got a choice.) > Personally I prefer to tilt at the windmill of the asymmetrical payoff diagram of US CEO compensation structures. While it’s still the case that nobody much cares about my opinions on the subject, this one at least has less of an aspect of battle-tested socioeconomic optimality. Related: In the years after the big financial crisis of 2008, Credit Suisse paid their bankers' bonuses in the form of 'toxic assets'. See eg https://archive.is/x3GKl https://archive.is/x3GKl That make got the 'toxic assets' off Credit Suisse's balance sheet. It was also popular with the general public. And, the best part, over time those ostensibly toxic assets actually mostly paid off in full, so the bankers got a much better bonus than if they had gotten straight up cash. The windmill I like to tilt at is the different tax treatment of equity vs debt in many tax systems around the world. Both shareholders and creditors demand a return on their capital. But when your business pays creditors, via interest and return of principal, that's usually with money that's less taxed ('pre-tax money') than when they pay dividends or do share buybacks ('post-tax money'). Most people agree that an economy with less leverage, ie less debt and more equity, is more stable and less prone to crises. But then we have tax systems that prefer debt. We should at least treat them equally, or even better, tax debt higher than equity, to nudge company's in the direction of more equity. (And, of course, there's also the big, big windmill of land value taxes being superior to almost every other form of taxation. But almost no one uses them.)
    - HWR_14 3y ago
      Right, the depositors (up to the limit) don't have to care if it is solvent. They also don't get to keep any winnings by the bank. The shareholder both get to keep the winnings and can get wiped out. So they are the ones who set the bank policy. Factually, it seems that retail banks, those covered by the FDIC, don't tend to be poorly managed. There were some recent counterexamples in 2023 with rising interest rates, but in general bank failures are pretty rare. In the heights of the 2008 mess (which was in 2009/2010) around 2.5% banks were failing annually. That's not bad.
      - AnthonyMouse 3y ago
        > The shareholder both get to keep the winnings and can get wiped out. So they are the ones who set the bank policy. But it's the depositors' money they're gambling with. Suppose you can put a million dollars of your money in something that has a 10% chance of netting you 20 million dollars and a 90% chance of losing your million dollars plus 20 million dollars of the depositors' money. That now has a positive expected value for you even though it has a negative expected value overall and results in a 90% chance of triggering a 20 million dollar claim against the FDIC. Meanwhile your counterparty is quite happy because you gave them 21 million dollars in exchange for a 10% chance to less than double "your" money.
    - mrguyorama 3y ago
      The industry eats the cost, not the FDIC, which funds it through industry taxes. If your gamble fails, not only do you lose everything related to your endeavor, but now banking as a whole is more expensive, more people centralize into the big banks, and whatever business you want to start up or run afterwards is going to be more expensive. This is why most banks don't gamble, because gambling like SVB did is really fucking stupid. You can be a boring bank and most likely mint profit for yourself for eternity, while also being seen as a positive actor in your city! The only people who aren't satisfied with such a set up are the same "Gotta grift everyone" silicon valley style assholes who think an economy is an idle game and they have to have the highest number because they are smartest and bestest.
      - AnthonyMouse 3y ago
        > The industry eats the cost, not the FDIC, which funds it through industry taxes. So in other words the FDIC eats the cost but the FDIC is really the taxpayer, or the customers of "banking industry" which is to say basically everybody. > If your gamble fails, not only do you lose everything related to your endeavor, but now banking as a whole is more expensive, more people centralize into the big banks, and whatever business you want to start up or run afterwards is going to be more expensive. But if your gamble succeeds you make an enormous amount of money and if it fails someone else pays most of the cost, so it's more profitable to make the gamble because you have privatized gains and socialized losses. > You can be a boring bank and most likely mint profit for yourself for eternity, while also being seen as a positive actor in your city! Are banks known for their desire to leave money on the table? Isn't "banks will be conservative and responsible" the argument for not having mandatory insurance?
        eru 3y ago
        > Isn't "banks will be conservative and responsible" the argument for not having mandatory insurance? The problem is not so much that the insurance is mandatory, but that it's provided by an entity whose pricing is set by the government, and which also enjoys the (implicit or explicit) backing of the government. Privately and competitively provided insurance, even if mandated by the government, wouldn't be quite as bad. Though I agree that giving banks the choice whether to get insured is a good one. Otherwise, you'd have to write regulation about what counts as 'good enough' insurance. Instead of letting customers of the bank decide what they are ok with.
  - eru 3y ago
    That still misprices risks. Shares in a bank essentially behave like call options on the assets of the bank, where the strike price is the sum of debt and other liabilities of the bank. When you are pricing an option ahead of time, you can still misprice them; even if it turns out that at the end of the day, the option turned out to expire out-of-the-money (ie the bank's shareholders get wiped out). https://news.ycombinator.com/item?id=36953459 https://news.ycombinator.com/item?id=36953459 probably gave a cleaner description.

eru 3y ago

Bail outs and (quasi) government run deposit insurance are indeed a problem. They misprice risk.

HWR_14 3y ago
They don't misprice risk. The shareholders of a bank are wiped out when deposit insurance is used. It's the account holders who are bailed out.
- AnthonyMouse 3y ago
  That's mispricing risk. Now the depositors have no reason to care whether their bank is creditworthy or well-managed, so the bank has the incentive to gamble with their deposits as much as possible. If they get lucky they get to keep the winnings, if they go belly up the FDIC eats the cost.
  - trepanne 3y ago
    You guys are familiar with how we arrived at this particular regime of mispricing risk, right? It’s preferable to the alternative. This is why banks are tightly (but imperfectly) regulated. Similar observations apply to that more fundamental instrument of mispriced risk - limited liability business entities. The worst possible arrangement, except for all the others. Personally I prefer to tilt at the windmill of the asymmetrical payoff diagram of US CEO compensation structures. While it’s still the case that nobody much cares about my opinions on the subject, this one at least has less of an aspect of battle-tested socioeconomic optimality.
    - eru 3y ago
      You should check your history. Americans didn't arrive at this particular set of institutional arrangements by some rational process that weighed the alternatives properly. Really, have a look at eg https://www.cato.org/blog/there-was-no-place-canada https://www.cato.org/blog/there-was-no-place-canada for a comparison between American finance and Canadian finance. The Canadian arrangements were much superior to the old and new American system. > Similar observations apply to that more fundamental instrument of mispriced risk - limited liability business entities. The worst possible arrangement, except for all the others. I don't see what's wrong with it? In most countries you can form both limited liability business entities as well as unlimited liability business entities. When you do business as a company you (typically) have to clearly declare what kind of business you are, and your counter-parties can decide whether they want to deal with you based on that information. (At least for the most part. If a limited liability contractor paves my driveway, and they damage my neighbour's roses while they are at it, my neighbour never got a choice.) > Personally I prefer to tilt at the windmill of the asymmetrical payoff diagram of US CEO compensation structures. While it’s still the case that nobody much cares about my opinions on the subject, this one at least has less of an aspect of battle-tested socioeconomic optimality. Related: In the years after the big financial crisis of 2008, Credit Suisse paid their bankers' bonuses in the form of 'toxic assets'. See eg https://archive.is/x3GKl https://archive.is/x3GKl That make got the 'toxic assets' off Credit Suisse's balance sheet. It was also popular with the general public. And, the best part, over time those ostensibly toxic assets actually mostly paid off in full, so the bankers got a much better bonus than if they had gotten straight up cash. The windmill I like to tilt at is the different tax treatment of equity vs debt in many tax systems around the world. Both shareholders and creditors demand a return on their capital. But when your business pays creditors, via interest and return of principal, that's usually with money that's less taxed ('pre-tax money') than when they pay dividends or do share buybacks ('post-tax money'). Most people agree that an economy with less leverage, ie less debt and more equity, is more stable and less prone to crises. But then we have tax systems that prefer debt. We should at least treat them equally, or even better, tax debt higher than equity, to nudge company's in the direction of more equity. (And, of course, there's also the big, big windmill of land value taxes being superior to almost every other form of taxation. But almost no one uses them.)
  - HWR_14 3y ago
    Right, the depositors (up to the limit) don't have to care if it is solvent. They also don't get to keep any winnings by the bank. The shareholder both get to keep the winnings and can get wiped out. So they are the ones who set the bank policy. Factually, it seems that retail banks, those covered by the FDIC, don't tend to be poorly managed. There were some recent counterexamples in 2023 with rising interest rates, but in general bank failures are pretty rare. In the heights of the 2008 mess (which was in 2009/2010) around 2.5% banks were failing annually. That's not bad.
    - AnthonyMouse 3y ago
      > The shareholder both get to keep the winnings and can get wiped out. So they are the ones who set the bank policy. But it's the depositors' money they're gambling with. Suppose you can put a million dollars of your money in something that has a 10% chance of netting you 20 million dollars and a 90% chance of losing your million dollars plus 20 million dollars of the depositors' money. That now has a positive expected value for you even though it has a negative expected value overall and results in a 90% chance of triggering a 20 million dollar claim against the FDIC. Meanwhile your counterparty is quite happy because you gave them 21 million dollars in exchange for a 10% chance to less than double "your" money.
  - mrguyorama 3y ago
    The industry eats the cost, not the FDIC, which funds it through industry taxes. If your gamble fails, not only do you lose everything related to your endeavor, but now banking as a whole is more expensive, more people centralize into the big banks, and whatever business you want to start up or run afterwards is going to be more expensive. This is why most banks don't gamble, because gambling like SVB did is really fucking stupid. You can be a boring bank and most likely mint profit for yourself for eternity, while also being seen as a positive actor in your city! The only people who aren't satisfied with such a set up are the same "Gotta grift everyone" silicon valley style assholes who think an economy is an idle game and they have to have the highest number because they are smartest and bestest.
    - AnthonyMouse 3y ago
      > The industry eats the cost, not the FDIC, which funds it through industry taxes. So in other words the FDIC eats the cost but the FDIC is really the taxpayer, or the customers of "banking industry" which is to say basically everybody. > If your gamble fails, not only do you lose everything related to your endeavor, but now banking as a whole is more expensive, more people centralize into the big banks, and whatever business you want to start up or run afterwards is going to be more expensive. But if your gamble succeeds you make an enormous amount of money and if it fails someone else pays most of the cost, so it's more profitable to make the gamble because you have privatized gains and socialized losses. > You can be a boring bank and most likely mint profit for yourself for eternity, while also being seen as a positive actor in your city! Are banks known for their desire to leave money on the table? Isn't "banks will be conservative and responsible" the argument for not having mandatory insurance?
      - eru 3y ago
        > Isn't "banks will be conservative and responsible" the argument for not having mandatory insurance? The problem is not so much that the insurance is mandatory, but that it's provided by an entity whose pricing is set by the government, and which also enjoys the (implicit or explicit) backing of the government. Privately and competitively provided insurance, even if mandated by the government, wouldn't be quite as bad. Though I agree that giving banks the choice whether to get insured is a good one. Otherwise, you'd have to write regulation about what counts as 'good enough' insurance. Instead of letting customers of the bank decide what they are ok with.
- eru 3y ago
  That still misprices risks. Shares in a bank essentially behave like call options on the assets of the bank, where the strike price is the sum of debt and other liabilities of the bank. When you are pricing an option ahead of time, you can still misprice them; even if it turns out that at the end of the day, the option turned out to expire out-of-the-money (ie the bank's shareholders get wiped out). https://news.ycombinator.com/item?id=36953459 https://news.ycombinator.com/item?id=36953459 probably gave a cleaner description.