5 ms·

As one of the "systemically important" (too-big-to-fail) banks, Wells-Fargo can make many bets that, when they lose, will ultimately be covered by taxpayers in

by gojomo 2y ago

As one of the "systemically important" (too-big-to-fail) banks, Wells-Fargo can make many bets that, when they lose, will ultimately be covered by taxpayers in the next round of bailouts, but if they win, will reward insiders & shareholders in the periods between bailouts.

lagniappe 2y ago
As they say, socialize the losses and privatize the profits.
petesergeant 2y ago
> in the next round of bailouts Haven't they only had one so far, that they repaid with interest?
Arrath 2y ago
I'm as pessimistic as anyone else about the Great Recession and our government's response to it, the lack of bankers ending up in jail, no big bank break ups and all that. However, were WF to make a series of bad business decisions and end up in dire straights, can we really confidently say they'll get bailed out yet again? I want to think that a single bank screwing themselves up would face a markedly different response than the global economy melting down.
- borski 2y ago
  Sure, but we did bail out SVB
  - bloppe 2y ago
    Actually, we didn't. It failed and collapsed. What makes you think it was bailed out? To add detail: SVB was a subsidiary of SVB Financial Group, a holding company that owned the bank as well as some other things. SVB still exists, but is no longer a subsidiary of that holding company. It was completely taken over by the FDIC so they could make depositors whole. The former owners lost their biggest business, had to liquidate the rest of their businesses, and filed for bankruptcy a week later. They did not get bailed out. The thing is, they were not exactly behaving badly. Their big mistake was over-investing in "safe" long-term government bonds. These assets are traditionally considered very low-risk, but rapidly rising interest rates made them lose book value, and some stakeholders got a bit jittery. Then SVB's leadership held a disastrous conference call where they basically said "everything will be fine, as long as there is no bank run", which pretty much instantly kicked off a bank run on ~80% of all their deposits. Even the best-managed banks could not withstand that kind of bank run. SVB basically got unlucky. They were not horribly mismanaged like everybody seems to assume.
    - borski 2y ago
      That’s fair. I meant to say the customers were all made whole well above and beyond the FDIC limit. I think that’s a good thing. I’m unconvinced the same wouldn’t happen at WF. [edit] You edited your comment with a significantly larger amount of preamble, so I’m adding: I agree, and I am very well read on SVB. They were simply unlucky, and perhaps made a bad choice in overinvesting in illiquid bonds, plus bad VC behavior leading to the bank run. None of that was my point.
- jtbayly 2y ago
  Remember Silicon Valley Bank?
- packetlost 2y ago
  I think we should let them fail. Not that my opinion matters. Liquidate the business and make sure anyone with savings is made whole, but investors need to take on the losses, that's how it's supposed to work. Yes, I understand that "investors" includes my retirement account, but that's fine. Then maybe we'd see some appropriate consequences for the people in charge. Maybe. Something dramatic needs to happen to shake up the industry, and letting a supermassive bank fail is probably that.
- Bootvis 2y ago
  The given reason for the bail outs was systematic risk to the entire banking sector because they were all exposed to the same risks and those risks were more correlated than people believed. In the case of a big bank making a series of small bad bets it would not really affect others like in this case. Other banks don't care about this product failing. What, IMO, is more likely that just their profitability will suffer till they start making better decisions again and if WF persists with the bad decisions the valuable parts will be acquired.
  - Arrath 2y ago
    Yeah that is what I was trying to get at. In such a case I certainly hope the likes of WF would reap what they sowed.
RandomCitizen12 2y ago
This is a losing bet. The article says it's losing 10 mm/month. Do you think that taxpayers will be covering that loss? Because they won't, because WFC is making more than 10mm/m and is in no danger of going bankrupt.
- gojomo 2y ago
  Yes, because money is fungible, and Wells-Fargo (& its "systemically-important" peers) receives via its privileged positions a de facto non-stop rolling bailout in addition to any occasional "crisis" larger headlingebailouts. This fumble – at "just" $120mm losses per year – is still pretty small compared to its billions in income. A drop in the bucket! But the reason they can take, and survive, any number of such unwise swings at no material risk to their insiders & shareholders is that their overall income is largely a function of their oligopolistic power & bottomless access to cheap federal money. They just have to avoid drawing on it "too much", in a "too unseemly" manner. They can push that advantage a little more when they lose more elsewhere, as long as their coarse risk and overall results look similar to their peers – who are similarly pressing their special advantages around the edges. So there won't be a specific measly transfer from public funds, "this is covering your failed Bilt program", of course. But they can just lean on their advantages a little more, and "keep up with the Joneses" in their peer banks in coarse indicators, with everyone at the trough (executives, politicians, politicians' pet projects, major shareholders) not facing any even marginal negative feedback. And in some next major macro reversal which puts all banks of the same class in danger, it'll all be papered over again – bringing them up to some level of stability without regard to how many extra hundreds of millions leaked through Bilt-style errors or sweetheart deals to favored groups. So de facto, retrospectively, all those leaks were "free" to the insiders.
  - RandomCitizen12 2y ago
    I think you're making mountains out of molehills. If you believe all that then it sounds like you should invest 100% of your assets in systemically important bank stocks. If they have literally zero risk due to unending bailouts then your risk-adjusted returns will be amazing.

by gojomo 2y ago

lagniappe 2y ago

As they say, socialize the losses and privatize the profits.

petesergeant 2y ago

> in the next round of bailouts Haven't they only had one so far, that they repaid with interest?

Arrath 2y ago

I'm as pessimistic as anyone else about the Great Recession and our government's response to it, the lack of bankers ending up in jail, no big bank break ups and all that. However, were WF to make a series of bad business decisions and end up in dire straights, can we really confidently say they'll get bailed out yet again? I want to think that a single bank screwing themselves up would face a markedly different response than the global economy melting down.

borski 2y ago
Sure, but we did bail out SVB
- bloppe 2y ago
  Actually, we didn't. It failed and collapsed. What makes you think it was bailed out? To add detail: SVB was a subsidiary of SVB Financial Group, a holding company that owned the bank as well as some other things. SVB still exists, but is no longer a subsidiary of that holding company. It was completely taken over by the FDIC so they could make depositors whole. The former owners lost their biggest business, had to liquidate the rest of their businesses, and filed for bankruptcy a week later. They did not get bailed out. The thing is, they were not exactly behaving badly. Their big mistake was over-investing in "safe" long-term government bonds. These assets are traditionally considered very low-risk, but rapidly rising interest rates made them lose book value, and some stakeholders got a bit jittery. Then SVB's leadership held a disastrous conference call where they basically said "everything will be fine, as long as there is no bank run", which pretty much instantly kicked off a bank run on ~80% of all their deposits. Even the best-managed banks could not withstand that kind of bank run. SVB basically got unlucky. They were not horribly mismanaged like everybody seems to assume.
  - borski 2y ago
    That’s fair. I meant to say the customers were all made whole well above and beyond the FDIC limit. I think that’s a good thing. I’m unconvinced the same wouldn’t happen at WF. [edit] You edited your comment with a significantly larger amount of preamble, so I’m adding: I agree, and I am very well read on SVB. They were simply unlucky, and perhaps made a bad choice in overinvesting in illiquid bonds, plus bad VC behavior leading to the bank run. None of that was my point.
jtbayly 2y ago
Remember Silicon Valley Bank?
packetlost 2y ago
I think we should let them fail. Not that my opinion matters. Liquidate the business and make sure anyone with savings is made whole, but investors need to take on the losses, that's how it's supposed to work. Yes, I understand that "investors" includes my retirement account, but that's fine. Then maybe we'd see some appropriate consequences for the people in charge. Maybe. Something dramatic needs to happen to shake up the industry, and letting a supermassive bank fail is probably that.
Bootvis 2y ago
The given reason for the bail outs was systematic risk to the entire banking sector because they were all exposed to the same risks and those risks were more correlated than people believed. In the case of a big bank making a series of small bad bets it would not really affect others like in this case. Other banks don't care about this product failing. What, IMO, is more likely that just their profitability will suffer till they start making better decisions again and if WF persists with the bad decisions the valuable parts will be acquired.
- Arrath 2y ago
  Yeah that is what I was trying to get at. In such a case I certainly hope the likes of WF would reap what they sowed.

RandomCitizen12 2y ago

This is a losing bet. The article says it's losing 10 mm/month. Do you think that taxpayers will be covering that loss? Because they won't, because WFC is making more than 10mm/m and is in no danger of going bankrupt.

gojomo 2y ago
Yes, because money is fungible, and Wells-Fargo (& its "systemically-important" peers) receives via its privileged positions a de facto non-stop rolling bailout in addition to any occasional "crisis" larger headlingebailouts. This fumble – at "just" $120mm losses per year – is still pretty small compared to its billions in income. A drop in the bucket! But the reason they can take, and survive, any number of such unwise swings at no material risk to their insiders & shareholders is that their overall income is largely a function of their oligopolistic power & bottomless access to cheap federal money. They just have to avoid drawing on it "too much", in a "too unseemly" manner. They can push that advantage a little more when they lose more elsewhere, as long as their coarse risk and overall results look similar to their peers – who are similarly pressing their special advantages around the edges. So there won't be a specific measly transfer from public funds, "this is covering your failed Bilt program", of course. But they can just lean on their advantages a little more, and "keep up with the Joneses" in their peer banks in coarse indicators, with everyone at the trough (executives, politicians, politicians' pet projects, major shareholders) not facing any even marginal negative feedback. And in some next major macro reversal which puts all banks of the same class in danger, it'll all be papered over again – bringing them up to some level of stability without regard to how many extra hundreds of millions leaked through Bilt-style errors or sweetheart deals to favored groups. So de facto, retrospectively, all those leaks were "free" to the insiders.
- RandomCitizen12 2y ago
  I think you're making mountains out of molehills. If you believe all that then it sounds like you should invest 100% of your assets in systemically important bank stocks. If they have literally zero risk due to unending bailouts then your risk-adjusted returns will be amazing.