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Holy crap - this is the most succinct explanation I've seen of the economic crisis: "The opponents of the measure gloomily predicted that by unshackling banks

by alabut 18y ago

Holy crap - this is the most succinct explanation I've seen of the economic crisis: "The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly."

byrneseyeview 18y ago
What does that explain? Does anyone actually claim that the main cause of the current crisis is that the same bank can make a loan or underwrite one?
- alabut 18y ago
  Yes, that's definitely a big part of it - the fact that the same company can both provide a loan and then insure that same loan creates an ethical conflict of interest that calls into question their ability to objectively quantify risk, as well as creating an illusion of stability with these risky assets through false claims of insurance. The article gave an example of a company at the time (Citigroup) that would have had to split their insurance underwriting by law, which arguably would've created a more accountable and less entangled situation than having it all under one roof. So what did the less ethical banks do with these troubled assets, since I'm sure somebody in the top ranks had to know what they were getting into? Bundle them up with a bunch of their other more reputable financial products and resell them to others. That's the part that's been getting a lot of the attention lately but it's only a symptom, not the root cause of the problem.
  - byrneseyeview 18y ago
    that the same company can both provide a loan and then insure that same loan Give me a source, please. That isn't legal -- when Enron did it, after Glass-Steagal was ended, they got in a lot of trouble. In fact, Enron and the monolines are the only example I can think of where this applies. Which other companies were doing it? But the problem is when they don't market the insurance to market (or when they mark different kinds of insurance to different market prices). Work it out with an example: let's say a bank owns a $100 loan. The borrower gets into trouble, and the loan must be written down to $90. So the bank reports a $10 loss. Whereas, if the bank insures the loan, and it gets written down to $90 -- their insurance liability gets written up to $10, leading to the same loss. The only thing that would make a difference would be fraud, which I don't believe has been legalized. The article gave an example of a company at the time (Citigroup) that would have had to split their insurance underwriting by law, which arguably would've created a more accountable and less entangled situation than having it all under one roof. Now you're just getting tautological: Glass-Steagal creates accountability and reduces entanglement because repealing Glass-Steagal reduces accountability and increases entangelemnt. So what did the less ethical banks do with these troubled assets, since I'm sure somebody in the top ranks had to know what they were getting into? So they, um, sold things? That is the super serious criminal accusation? That they bought stuff, and they sold it to people who overpaid? Pretty sure investment banks could already do that. And that's only possible if people are overpaying for assets. Your argument appears to consist of 1) fallacies, 2) fabrications, and 3) statements that can only be true if you accept my argument from elsewhere in the thread -- that this bubble was made possible only by government regulations.
  - anamax 18y ago
    > Yes, that's definitely a big part of it - the fact that the same company can both provide a loan and then insure that same loan creates an ethical conflict of interest that calls into question their ability to objectively quantify risk > So what did the less ethical banks do with these troubled assets, since I'm sure somebody in the top ranks had to know what they were getting into? Bundle them up with a bunch of their other more reputable financial products and resell them to others. The combination of those two sentences doesn't make any sense. The inability of an insitution to objectively quantify risk wrt a given entity doesn't matter if said institution doesn't own or insure said entity. In other words, it doesn't matter how bad Citigroup is at estimating the risk of assets that it sells.
    - Retric 18y ago
      The problem is they sold the "good slices of the pie" and nobody would buy the bad slices. So they had a lot high risk assets on the books. Which was fine until the market decline wiped their value out.
      - anamax 18y ago
        The claim was that Citi can't distinguish good from bad. If that's true, they can't have preferentially sold either group. Note that we now have two stories on what they sold. One story is that they "unethically" sold the bad. Now we're told that they sold the good.
        alabut 18y ago
        "The claim was that Citi can't distinguish good from bad." That's not the claim at all - it's that they had a sliding scale of how bad a loan they were willing to make because of incentive to have lax ethical standards, then they hid the "badness" of those loans by bundling them up with other financial vehicles that they resold to others.
        anamax 18y ago
        Actually that is the claim - "fact that the same company can both provide a loan and then insure that same loan creates an ethical conflict of interest that calls into question their ability to objectively quantify risk" Of course, the insurance that we're talking about wasn't for individual mortgages but for loan portfolios and tranches of loan portfolios. (The "insurance" wrt the effect of individual loans comes from the portfolio - instead of "loan fails or not", you get "fraction of loans that fail".) > it's that they had a sliding scale of how bad a loan they were willing to make because of incentive to have lax ethical standards That's completely incorrect. The "how bad a loan" stuff came from loan orignators as pushed by CRA, govt officials, and fannie and freddie. Ethics had nothing to do with it. Or rather, the "ethic" of "folks should get a loan regardless of whether they can repay" overrode the financial reality of "loans made to people who are unlikely to be able to repay are likely fail". Citigroup wasn't big in loan origination. They did their "magic" on portfolios that they bought from other magicians and from folks who originated loans.
  - anamax 18y ago
    > the fact that the same company can both provide a loan and then insure that same loan creates an ethical conflict of interest that calls into question their ability to objectively quantify risk That doesn't make sense. If I sell you a car, how does selling you insurance against repair costs bring my ability to objectively qualify the risk of it needing repair? In pricing that insurance, there are three possibilities. If I price it too low, I'm saying that it is less risky than it actually is, so if you buy,insurance, you get a deal and I take the loss. If I price it accurately, it doesn't matter whether you buy it. If I price it too high, that price tells you that I think that the car is riskier than you might have thought. Buying the insurance is a bad idea, but if you got a bargain by buying "risk" that you're not actually incurring, you're ahead. In short, pricing insurance incorrectly hurts Citicorp.

by alabut 18y ago

byrneseyeview 18y ago

What does that explain? Does anyone actually claim that the main cause of the current crisis is that the same bank can make a loan or underwrite one?

alabut 18y ago
Yes, that's definitely a big part of it - the fact that the same company can both provide a loan and then insure that same loan creates an ethical conflict of interest that calls into question their ability to objectively quantify risk, as well as creating an illusion of stability with these risky assets through false claims of insurance. The article gave an example of a company at the time (Citigroup) that would have had to split their insurance underwriting by law, which arguably would've created a more accountable and less entangled situation than having it all under one roof. So what did the less ethical banks do with these troubled assets, since I'm sure somebody in the top ranks had to know what they were getting into? Bundle them up with a bunch of their other more reputable financial products and resell them to others. That's the part that's been getting a lot of the attention lately but it's only a symptom, not the root cause of the problem.
- byrneseyeview 18y ago
  that the same company can both provide a loan and then insure that same loan Give me a source, please. That isn't legal -- when Enron did it, after Glass-Steagal was ended, they got in a lot of trouble. In fact, Enron and the monolines are the only example I can think of where this applies. Which other companies were doing it? But the problem is when they don't market the insurance to market (or when they mark different kinds of insurance to different market prices). Work it out with an example: let's say a bank owns a $100 loan. The borrower gets into trouble, and the loan must be written down to $90. So the bank reports a $10 loss. Whereas, if the bank insures the loan, and it gets written down to $90 -- their insurance liability gets written up to $10, leading to the same loss. The only thing that would make a difference would be fraud, which I don't believe has been legalized. The article gave an example of a company at the time (Citigroup) that would have had to split their insurance underwriting by law, which arguably would've created a more accountable and less entangled situation than having it all under one roof. Now you're just getting tautological: Glass-Steagal creates accountability and reduces entanglement because repealing Glass-Steagal reduces accountability and increases entangelemnt. So what did the less ethical banks do with these troubled assets, since I'm sure somebody in the top ranks had to know what they were getting into? So they, um, sold things? That is the super serious criminal accusation? That they bought stuff, and they sold it to people who overpaid? Pretty sure investment banks could already do that. And that's only possible if people are overpaying for assets. Your argument appears to consist of 1) fallacies, 2) fabrications, and 3) statements that can only be true if you accept my argument from elsewhere in the thread -- that this bubble was made possible only by government regulations.
- anamax 18y ago
  > Yes, that's definitely a big part of it - the fact that the same company can both provide a loan and then insure that same loan creates an ethical conflict of interest that calls into question their ability to objectively quantify risk > So what did the less ethical banks do with these troubled assets, since I'm sure somebody in the top ranks had to know what they were getting into? Bundle them up with a bunch of their other more reputable financial products and resell them to others. The combination of those two sentences doesn't make any sense. The inability of an insitution to objectively quantify risk wrt a given entity doesn't matter if said institution doesn't own or insure said entity. In other words, it doesn't matter how bad Citigroup is at estimating the risk of assets that it sells.
  - Retric 18y ago
    The problem is they sold the "good slices of the pie" and nobody would buy the bad slices. So they had a lot high risk assets on the books. Which was fine until the market decline wiped their value out.
    - anamax 18y ago
      The claim was that Citi can't distinguish good from bad. If that's true, they can't have preferentially sold either group. Note that we now have two stories on what they sold. One story is that they "unethically" sold the bad. Now we're told that they sold the good.
      - alabut 18y ago
        "The claim was that Citi can't distinguish good from bad." That's not the claim at all - it's that they had a sliding scale of how bad a loan they were willing to make because of incentive to have lax ethical standards, then they hid the "badness" of those loans by bundling them up with other financial vehicles that they resold to others.
        anamax 18y ago
        Actually that is the claim - "fact that the same company can both provide a loan and then insure that same loan creates an ethical conflict of interest that calls into question their ability to objectively quantify risk" Of course, the insurance that we're talking about wasn't for individual mortgages but for loan portfolios and tranches of loan portfolios. (The "insurance" wrt the effect of individual loans comes from the portfolio - instead of "loan fails or not", you get "fraction of loans that fail".) > it's that they had a sliding scale of how bad a loan they were willing to make because of incentive to have lax ethical standards That's completely incorrect. The "how bad a loan" stuff came from loan orignators as pushed by CRA, govt officials, and fannie and freddie. Ethics had nothing to do with it. Or rather, the "ethic" of "folks should get a loan regardless of whether they can repay" overrode the financial reality of "loans made to people who are unlikely to be able to repay are likely fail". Citigroup wasn't big in loan origination. They did their "magic" on portfolios that they bought from other magicians and from folks who originated loans.
- anamax 18y ago
  > the fact that the same company can both provide a loan and then insure that same loan creates an ethical conflict of interest that calls into question their ability to objectively quantify risk That doesn't make sense. If I sell you a car, how does selling you insurance against repair costs bring my ability to objectively qualify the risk of it needing repair? In pricing that insurance, there are three possibilities. If I price it too low, I'm saying that it is less risky than it actually is, so if you buy,insurance, you get a deal and I take the loss. If I price it accurately, it doesn't matter whether you buy it. If I price it too high, that price tells you that I think that the car is riskier than you might have thought. Buying the insurance is a bad idea, but if you got a bargain by buying "risk" that you're not actually incurring, you're ahead. In short, pricing insurance incorrectly hurts Citicorp.