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According to Cooper Union’s president, Jamshed Bharucha, it currently operates at a $12 million annual deficit. The number reflects several factors: ... most s

According to Cooper Union’s president, Jamshed Bharucha, it currently operates at a $12 million annual deficit. The number reflects several factors: ... most significantly, $10 million a year in payments on a $175 million loan the school took out a few years ago, in part so that it could invest money in the stock market. And this, ladies and gentlemen, is why meaningful bank regulation is long overdue. The signs of the present crisis were there to see for anyone with eyes in 2005: in that year my ex-landlady, who was from Bushwick, one of the poorest parts in New York, bought five rental properties with no-money-down loans. Let's have this again: Bank of America found nowhere better to invest than in this clueless lady that perceptibly could not run her rental empire successfully, and they loaned her the funds anyway.

eru 14y ago
And the problem is not so much that the bank made a mistake, but that those mistakes affect the rest of the world so much. If a normal company makes a bunch of mistakes, they go bankrupt, and competition takes over.
- MaysonL 14y ago
  The problem was that, for the guy making the loan, and his superiors all the way up, this was not a mistake, but rather the whole foundation of their bonuses. The loan was almost certainly at a higher than normal interest rate, and thus when bundled with other such loans, could be sold at a substantally higher price, thus generating higher profits. This, even though everyone making these loans knew (or should have known) that there was no way they were going to be repaid. The trouble was that the bank regulators, unlike those in the 80's during the savings and loan crisis, let this go on unchecked, and have not prosecuted anyone for the massive frauds that took place. Note, of course, that the profits booked for such loans, were temporary and delusional. The bonuses paid, however, were real, and permanent - never clawed back.
  - speeder 14y ago
    I believe that if actually bank were left to run unchecked, specially having no help from government, more of them would fail... Yes, it would be quite painful in short term, but long term that sort of crap would stop. The regulation that exist right now, and that people keep trying to expand, has the end result that ties the government too tighly with banks, and bailouts and other help from government become a necessity.
    - ekianjo 14y ago
      well governments de facto need the banks to lend them money, which is used to finance their welfare policies (and their wars), which in turn gets them elected. So politicians make it easy on the bank and ask everyone to pay up. I am making things sound simple on purpose, but it's not too far from the reality.
    - ars 14y ago
      > but long term that sort of crap would stop. No it wouldn't. People would start banks, make lots of money personally, loose tons of money for the bank, and then do it again happily. The person who ultimately holds the bag will be far far far removed from those who caused the losses.
      - dantheman 14y ago
        Removing FDIC and letting banks fail would mean that individuals would only deposit money when banks had high equity %. i.e. the bank owners/shareholders invest 30 cents of their own money for every 70 cents of the customers that is loaned out. That way if loans start to fail the customer is protected by the owners share.
        thatswrong0 14y ago
        Exactly. Banks take higher risks these days precisely because they can thanks to government interference.
      - icebraining 14y ago
        The short free banking era doesn't seem to corroborate that. In fact, bank owners used to invest a lot of personal money into them.
- rodgerd 14y ago
  The problem is the bank isn't allowed to go, well, bankrupt. Why do sane risk assessment when the taxpayer will underwrite investors' mistakes?
examancer 14y ago
If she had been able to run a business, now would be a good time to own property in Bushwick. Seems to be quickly gentrifying and rents are increasing.
prostoalex 14y ago
They would probably then get a loan from a credit union or a sovereign fund, or bond buyers with appetite for junk, or one of those fancy Silicon Valley social lending sites. It's not like Cooper Union is the paragon of financial prudence here, borrowing money to play the stock market. At least BofA could repo your landlady's estate, rent it out, and have it bounce back by now.
rrrrtttt 14y ago
I don't see how your conclusion follows from the data. It appears to have been a very wise decision by the bank, given that even though Copper Union's investments have gone bad they're still paying the loan back. If I were a bank I would jump at an opportunity to own a loan that's backed by the land under the Chrysler building.
- leoh 14y ago
  I agree with his conclusion. Another way to put this: you should absolutely never invest money you can't afford to loose.
  - deleted 14y ago
    [deleted]
  - argonaut 14y ago
    And the bank could afford to lose that $175 million. And then the bank would gladly take the Chrysler land or whatever other collateral it was promised.
fusiongyro 14y ago
I find the whole idea of borrowing money for investment purposes a little strange. Isn't that basically just gambling?
- fijal 14y ago
  It's a gamble along the lines of "I bet I can invest money better than the bank". Often turns out the bank can invest money better. I wonder who convinced them to invest, er, gamble.
  - fusiongyro 14y ago
    In the short term I'm sure it's true. But in the long term, banks have a major advantage over us mortals: they get bailed out. So I'd imagine they tend to win in the end.
  - EliRivers 14y ago
    If the bank's so smart at investing, why did they give the money to someone who was going to lose it all on the stockmarket? :)
    - ptaipale 14y ago
      Because the borrower had good collateral, and this was good business for the bank. It is what banks are supposed to do. Bottom line: I think this is not a good case why you need more regulation of banks. It may be a case why you need more regulation of universities.
      - Gormo 14y ago
        Before we discuss more regulation of either banks or universities, perhaps we should first consider the extent to which we need more regulation of regulation.
        ptaipale 14y ago
        Indeed. That is perhaps the first priority. Too often the approach "this didn't work out, so we need more of it".
nohuck13 14y ago
What would bank regulation would have done to stop Cooper Union's getting a loan and blowing it? If you own the land under the Chrysler building, someone is going to be willing to lend you money. It seems to me this is the bank functioning pretty well.
- scotty79 14y ago
  Regulation that would requie borrower to declare what the loan would be used for and force lender to get all the money back if the borrower spends it on something else. I'm not saing that this would be good regulation or if this regulation would prevent this exact case. Just giving an example.
  - Gormo 14y ago
    So not really "bank regulation" as much as "legally-enforced risk aversion", then? And what unintended consequences would that have? Maybe a better idea is for those who actually need to be risk-averse to carefully consider the full chain of risks associated with their investments, and not merely put their full faith in abstract systems - especially regulatory systems, which fail quite often. The financial crisis wasn't the result of banks conning the public; it was the result of essentially everyone at every level buying into too-good-to-be-true presumptions about the real estate market.
    - scotty79 14y ago
      Legal enforcement of how much gambling bank can do with the money, people with accounts there entrusted them. Noone considers full chain of risks. Most people feel they are immortal, feel that they are forever winners as soon as they won 3 times in a row. Besides there really no risk taken by decission makers. They often don't even loose their jobs. The only thing we can do is set up barriers to curb the risky behavior. Some risks are worth to be taken but by hedgefund not a bank. As for the financial crisis no catastrophy can be traced to a single cause but it often turns out that not failing at single point could have averted the catastrophy.
patio11 14y ago
And this, ladies and gentlemen, is why meaningful bank regulation is long overdue. This would sound a little less popular as: "Even if your college owns the land under the Chrystler building and has entirely predictable cash flow for loan service, you should be unable to construct a new academic building which you sincerely, but perhaps unwisely, believe to be your most important priority, unless you can come up with $160 million in cold hard cash." I'm just finding it hard to square the narrative of sophisticated Wall Street operators conning low-sophistication average Americans into making wildly leveraged bets on real estate with the facts of this case, where (presumably) highly educated New Yorkers who own a lease with NPV of several hundred million dollars are assumed to be incapable of making a judgement call like "Do we want to build out facilities to support our core operations or not."
arethuza 14y ago
I must admit that I don't spend a lot of time on HN defending banks, but I'm not sure what they are supposed to have done wrong in this case. A commercial entity wants to borrow money and they have plenty of assets to cover the loan if it goes bad - not the bank's fault they were bad at investing.
- robryan 14y ago
  Well the bank would normally be on the hook for making the bank loans. Unless it bought insurance then it would only be on the hook if the insurer failed. Luckily they had buddies at the fed/ government to ensure this insurance was paid out at the full 100 cents on the dollar.
  - arethuza 14y ago
    The borrower has plenty of assets - I presume these were used as collateral?
signalsignal 14y ago
Bank regulation isn't worth the paper it's printed on. The contracts reflect the culture, and if the culture is rotten the benefits will be the same.

eru 14y ago

And the problem is not so much that the bank made a mistake, but that those mistakes affect the rest of the world so much. If a normal company makes a bunch of mistakes, they go bankrupt, and competition takes over.

MaysonL 14y ago
The problem was that, for the guy making the loan, and his superiors all the way up, this was not a mistake, but rather the whole foundation of their bonuses. The loan was almost certainly at a higher than normal interest rate, and thus when bundled with other such loans, could be sold at a substantally higher price, thus generating higher profits. This, even though everyone making these loans knew (or should have known) that there was no way they were going to be repaid. The trouble was that the bank regulators, unlike those in the 80's during the savings and loan crisis, let this go on unchecked, and have not prosecuted anyone for the massive frauds that took place. Note, of course, that the profits booked for such loans, were temporary and delusional. The bonuses paid, however, were real, and permanent - never clawed back.
- speeder 14y ago
  I believe that if actually bank were left to run unchecked, specially having no help from government, more of them would fail... Yes, it would be quite painful in short term, but long term that sort of crap would stop. The regulation that exist right now, and that people keep trying to expand, has the end result that ties the government too tighly with banks, and bailouts and other help from government become a necessity.
  - ekianjo 14y ago
    well governments de facto need the banks to lend them money, which is used to finance their welfare policies (and their wars), which in turn gets them elected. So politicians make it easy on the bank and ask everyone to pay up. I am making things sound simple on purpose, but it's not too far from the reality.
  - ars 14y ago
    > but long term that sort of crap would stop. No it wouldn't. People would start banks, make lots of money personally, loose tons of money for the bank, and then do it again happily. The person who ultimately holds the bag will be far far far removed from those who caused the losses.
    - dantheman 14y ago
      Removing FDIC and letting banks fail would mean that individuals would only deposit money when banks had high equity %. i.e. the bank owners/shareholders invest 30 cents of their own money for every 70 cents of the customers that is loaned out. That way if loans start to fail the customer is protected by the owners share.
      - thatswrong0 14y ago
        Exactly. Banks take higher risks these days precisely because they can thanks to government interference.
    - icebraining 14y ago
      The short free banking era doesn't seem to corroborate that. In fact, bank owners used to invest a lot of personal money into them.
rodgerd 14y ago
The problem is the bank isn't allowed to go, well, bankrupt. Why do sane risk assessment when the taxpayer will underwrite investors' mistakes?

examancer 14y ago

If she had been able to run a business, now would be a good time to own property in Bushwick. Seems to be quickly gentrifying and rents are increasing.

prostoalex 14y ago

They would probably then get a loan from a credit union or a sovereign fund, or bond buyers with appetite for junk, or one of those fancy Silicon Valley social lending sites. It's not like Cooper Union is the paragon of financial prudence here, borrowing money to play the stock market. At least BofA could repo your landlady's estate, rent it out, and have it bounce back by now.

rrrrtttt 14y ago

I don't see how your conclusion follows from the data. It appears to have been a very wise decision by the bank, given that even though Copper Union's investments have gone bad they're still paying the loan back. If I were a bank I would jump at an opportunity to own a loan that's backed by the land under the Chrysler building.

leoh 14y ago
I agree with his conclusion. Another way to put this: you should absolutely never invest money you can't afford to loose.
- deleted 14y ago
  [deleted]
- argonaut 14y ago
  And the bank could afford to lose that $175 million. And then the bank would gladly take the Chrysler land or whatever other collateral it was promised.

fusiongyro 14y ago

I find the whole idea of borrowing money for investment purposes a little strange. Isn't that basically just gambling?

fijal 14y ago
It's a gamble along the lines of "I bet I can invest money better than the bank". Often turns out the bank can invest money better. I wonder who convinced them to invest, er, gamble.
- fusiongyro 14y ago
  In the short term I'm sure it's true. But in the long term, banks have a major advantage over us mortals: they get bailed out. So I'd imagine they tend to win in the end.
- EliRivers 14y ago
  If the bank's so smart at investing, why did they give the money to someone who was going to lose it all on the stockmarket? :)
  - ptaipale 14y ago
    Because the borrower had good collateral, and this was good business for the bank. It is what banks are supposed to do. Bottom line: I think this is not a good case why you need more regulation of banks. It may be a case why you need more regulation of universities.
    - Gormo 14y ago
      Before we discuss more regulation of either banks or universities, perhaps we should first consider the extent to which we need more regulation of regulation.
      - ptaipale 14y ago
        Indeed. That is perhaps the first priority. Too often the approach "this didn't work out, so we need more of it".

nohuck13 14y ago

What would bank regulation would have done to stop Cooper Union's getting a loan and blowing it? If you own the land under the Chrysler building, someone is going to be willing to lend you money. It seems to me this is the bank functioning pretty well.

scotty79 14y ago
Regulation that would requie borrower to declare what the loan would be used for and force lender to get all the money back if the borrower spends it on something else. I'm not saing that this would be good regulation or if this regulation would prevent this exact case. Just giving an example.
- Gormo 14y ago
  So not really "bank regulation" as much as "legally-enforced risk aversion", then? And what unintended consequences would that have? Maybe a better idea is for those who actually need to be risk-averse to carefully consider the full chain of risks associated with their investments, and not merely put their full faith in abstract systems - especially regulatory systems, which fail quite often. The financial crisis wasn't the result of banks conning the public; it was the result of essentially everyone at every level buying into too-good-to-be-true presumptions about the real estate market.
  - scotty79 14y ago
    Legal enforcement of how much gambling bank can do with the money, people with accounts there entrusted them. Noone considers full chain of risks. Most people feel they are immortal, feel that they are forever winners as soon as they won 3 times in a row. Besides there really no risk taken by decission makers. They often don't even loose their jobs. The only thing we can do is set up barriers to curb the risky behavior. Some risks are worth to be taken but by hedgefund not a bank. As for the financial crisis no catastrophy can be traced to a single cause but it often turns out that not failing at single point could have averted the catastrophy.

patio11 14y ago

And this, ladies and gentlemen, is why meaningful bank regulation is long overdue. This would sound a little less popular as: "Even if your college owns the land under the Chrystler building and has entirely predictable cash flow for loan service, you should be unable to construct a new academic building which you sincerely, but perhaps unwisely, believe to be your most important priority, unless you can come up with $160 million in cold hard cash." I'm just finding it hard to square the narrative of sophisticated Wall Street operators conning low-sophistication average Americans into making wildly leveraged bets on real estate with the facts of this case, where (presumably) highly educated New Yorkers who own a lease with NPV of several hundred million dollars are assumed to be incapable of making a judgement call like "Do we want to build out facilities to support our core operations or not."

arethuza 14y ago

I must admit that I don't spend a lot of time on HN defending banks, but I'm not sure what they are supposed to have done wrong in this case. A commercial entity wants to borrow money and they have plenty of assets to cover the loan if it goes bad - not the bank's fault they were bad at investing.

robryan 14y ago
Well the bank would normally be on the hook for making the bank loans. Unless it bought insurance then it would only be on the hook if the insurer failed. Luckily they had buddies at the fed/ government to ensure this insurance was paid out at the full 100 cents on the dollar.
- arethuza 14y ago
  The borrower has plenty of assets - I presume these were used as collateral?

signalsignal 14y ago

Bank regulation isn't worth the paper it's printed on. The contracts reflect the culture, and if the culture is rotten the benefits will be the same.