9 ms·

I don't mean to detract from your point, but you have to keep in mind the fact that those were loans, and the government actually made money on those loans (AFA

by tomp 12y ago

I don't mean to detract from your point, but you have to keep in mind the fact that those were loans, and the government actually made money on those loans (AFAIK). Also, if the damage to the economy would be greater than the taxpayer loss of the bail-outs, they still make sense, as long as they are accompanied by legislation that makes hem less likely in the future (which, sadly, hasn't happened yet). > Also I clearly need a job in banking... If you want to become a good cook, get a cooking job. If you want to earn good money, get a money (banking) job :)

crdoconnor 12y ago
>the government actually made money on those loans (AFAIK). Nope. Explanation here: http://www.interfluidity.com/v2/2587.html http://www.interfluidity.com/v2/2587.html Cash is not king in financial markets. Risk is. The government bailed out major banks by assuming the downside risk of major banks when those risks were very large, for minimal compensation. In particular, the government 1) offered regulatory forbearance and tolerated generous valuations; 2) lent to financial institutions at or near risk-free interest rates against sketchy collateral (directly or via guarantee); 3) purchased preferred shares at modest dividend rates under TARP; 4) publicly certified the banks with stress tests and stated “no new Lehmans”. By these actions, the state assumed substantially all of the downside risk of the banking system. The market value of this risk-assumption by the government was more than the entire value of the major banks to their “private shareholders”. On commercial terms, the government paid for and ought to have owned several large banks lock, stock, and barrel. Instead, officials carefully engineered deals to avoid ownership and control. ... After assuming the banking system’s downside risk, the US government engineered a wide variety of favorable circumstances that helped banks “earn” their way back to quasi-health. The government provided famous and obvious transfers like unwinding AIG swaps at 100¢ on the dollar. It forced short-term yields to zero and created an environment in which medium-term interest rates would be capped for several years, granting banks a near-risk-free arbitrage for a while. It emitted trillions in excess reserves on which it continues to pay interest. It forewent investigations and prosecutions that by law it should actively pursue, and settled what enforcement it could not avoid for token fees. Then there are the things conspiracy theorists and cranks like me suspect but cannot prove: that the government and the Fed have been less than aggressive in minimizing their costs when they or entities they control (AIG, Fannie, Freddie) transact with large banks, that they have left money on the table where doing so could be hidden in arcane accounts or justified as ordinary transaction expenses and trading losses. Large banks have enjoyed some rather extraordinary results for allegedly efficient markets, quarters with large trading profits and no or very few losing days. Government housing policy is pretty overtly subject to a constraint that interventions must not provoke loss realizations for banks carrying bad loans at inflated values, or interfere with servicing revenues. (If you think I am overconspiratorial, I’m still waiting for an innocent explanation of this, from 1991.)
- thanksgiving 12y ago
  Exactly! I'm sure I can find a place to park the money with a semi-decent growth rate for a few years if the US Government gave me a few billion dollars and told me to come up with a modest return at my leisure...
  - crdoconnor 12y ago
    Especially if I could use them to make a tails-they-lose-heads-I-win bet.
- tomp 12y ago
  While it's true that banks continue to receive better-than-usual rates from the government, I don't entirely buy this reasoning. Firstly, the liquidity (i.e. "risk") is essentially free for the government/FED (printing money etc.). Secondly, I believe that if the government failed to act to prevent another depression, the loss would be far greater - if nothing else, there would be a huge loss associated with covering of the insured deposits if a commercial bank failed (which would be very likely if any big financial institution failed, because they are so intertwined). I do think, however, that after having been "bailed out", a business should have a very high tax rate on profits (90 - 99%) for a number of years/decades.
- srj 12y ago
  I don't believe making a profit was the government's intention. Stopping a credit freeze was. Would you have the US government behave as a payday loan lender? If not then what's your point?
  - tormeh 12y ago
    Why couldn't the government offer those loans directly to main street until the credit freeze subsided? Just take one of the worst banks, nationalize it when it goes bankrupt, sell everything except the lending branch and use it to lend to main street with printed QE money. Divide it into bits and sell it when economy looks good again.
  - crdoconnor 12y ago
javiramos 12y ago
Yeah, but when the bank needs loans to stay in business it shouldn't be paying out bonuses. Particularly so if the government (i.e. taxpayers/us) went through giant efforts and took a significant amount of risk to hand out these 'loans'. EDIT: I believe that the bailout was needed and it did (IMO) prevent significant negative ripples from flowing through our financial system. What I really despise is the lack of discipline and regulatory oversight during the bailout process. This left a very sour taste in many struggling Americans and demonstrated that our political structures are incapable of focused, regulated, and disciplined action.
- Fuxy 12y ago
  Not to mention the unquantifiable damage taxpayers took because the economy went bye bye and they were unable to pay their loans and mortgages. You can make a heck of a lot of money if you kill the economy, get bailed out and get to keep the properties and houses of the little guys that don't get the same benefits. If you really wanted the economy to recover quickly you would be bailing out taxpayers not big corporations.
- pdpi 12y ago
  Notice that you're effectively saying "the bailed out banks should renege on contracts". If nothing else, there's enough money on the table that the affected people are likely to litigate, and there's a fair chance you'll just end up paying the bonuses just the same, but now topped off with the expenses of a lawsuit.
  - aidos 12y ago
    Are the bonuses often contractual and not discretionary? If so, they're not really bonuses.
    - growse 12y ago
      Contractual doesn't mean guaranteed. You could have a bonus that's contractually tied to a certain set of conditions being met (e.g. personal objectives). If the employee meets those objectives and the company doesn't pay out, they could be in breach, regardless of their financial situation.
MichaelApproved 12y ago
Also, the payment of "bonuses" in the banking industry are essentially an extension of salary. It's not what you'd typically think of as a bonus for hard work during the year. Bonuses are often pre-negotiated and pre-determined, just like a salary is.
- javiramos 12y ago
  Are you referring to investment banking/trading/PE or what? This is definitely not true in IB or trading. Your bonus is a direct function of what you make. This is particularly true for even more senior partners in IB/trading firms. The rainmakers make significantly more money than 'operating' or 'non-money-making' partners.
  - tomp 12y ago
    Right... but if you "punish" a very successful trader by giving him/her a lower-than-agreed-to bonus (for traders, the bonus should be a percentage of their realized PnL) because of actions of some higher-level executives, the only effect that will have is that the trader will go to a different company that will pay him what he is worth.
  - randomsearch 12y ago
    > Your bonus is a direct function of what you make Isn't the point of the article that this is demonstrably untrue?
    - czinck 12y ago
      You're assuming that their performance is directly proportional to the performance of the market as a whole. My understanding is it's tied to how they perform against an index like the S&P 500. The S&P 500 lost something like 50% over 2008, so even if a trader lost 25%, they outperformed the market by a lot and deserve (according to their contract) the bonus.
    - yummyfajitas 12y ago
      A bank might make a $20M loss on trader A's strategy but a $10M gain on trader B's strategy, for a net loss of $10M. Then trader B gets a bonus and the company that lost money is giving out bonuses.
fnordfnordfnord 12y ago
>Also, if the damage to the economy would be greater than the taxpayer loss of the bail-outs, they still make sense This is short-term thinking; it gets you out of the mess you're in today, but it encourages more of the behavior that caused the mess to begin with.
- mrec 12y ago
  Exactly. That was a perfect textbook example of moral hazard. http://en.wikipedia.org/wiki/Moral_hazard http://en.wikipedia.org/wiki/Moral_hazard
marcusgarvey 12y ago
On the fallacy that the U.S. taxpayers made money on the bailouts, note that in finance deals get judged by how much money they make given the risk that had to be assumed to make it. In the case of the bailouts: $614 billion was disbursed $667 billion was recouped For a difference of $53.1 billion, i.e. 8.6%. [1] 8.6% is insultingly low compensation to use taxpayer money that, by the way, could have been spent on more beneficial investments (infrastructure, education, healthcare) to bail out private companies who were the victims of their own greed and poor governance. FWIW the average junk bond yield in 2009 was above 20% [2]. [1] http://projects.propublica.org/bailout/ http://projects.propublica.org/bailout/ [2] http://money.cnn.com/2011/02/18/markets/bondcenter/junk_bonds/ http://money.cnn.com/2011/02/18/markets/bondcenter/junk_bond...
- jimktrains2 12y ago
  > On the fallacy that the U.S. taxpayers made money on the bailouts > 8.6% is insultingly low compensation to use taxpayer money So, money was made? > could have been spent on more beneficial investments (infrastructure, education, healthcare) to bail out private companies who were the victims of their own greed and poor governance. Why couldn't it still be used on infrastructure, education, or healthcare?
  - ThomPete 12y ago
    Money were made but not enough compared to the risk involved with lending them out. Thats the point.
    - tomp 12y ago
      Bot possibly, even probably, enough compared to the risk involved with not lending them out (i.e. another depression).
      - ThomPete 12y ago
        Thats irrelevant to how you calculate what the return should be compared to the risk involved.

by tomp 12y ago

crdoconnor 12y ago

>the government actually made money on those loans (AFAIK). Nope. Explanation here: http://www.interfluidity.com/v2/2587.html http://www.interfluidity.com/v2/2587.html Cash is not king in financial markets. Risk is. The government bailed out major banks by assuming the downside risk of major banks when those risks were very large, for minimal compensation. In particular, the government 1) offered regulatory forbearance and tolerated generous valuations; 2) lent to financial institutions at or near risk-free interest rates against sketchy collateral (directly or via guarantee); 3) purchased preferred shares at modest dividend rates under TARP; 4) publicly certified the banks with stress tests and stated “no new Lehmans”. By these actions, the state assumed substantially all of the downside risk of the banking system. The market value of this risk-assumption by the government was more than the entire value of the major banks to their “private shareholders”. On commercial terms, the government paid for and ought to have owned several large banks lock, stock, and barrel. Instead, officials carefully engineered deals to avoid ownership and control. ... After assuming the banking system’s downside risk, the US government engineered a wide variety of favorable circumstances that helped banks “earn” their way back to quasi-health. The government provided famous and obvious transfers like unwinding AIG swaps at 100¢ on the dollar. It forced short-term yields to zero and created an environment in which medium-term interest rates would be capped for several years, granting banks a near-risk-free arbitrage for a while. It emitted trillions in excess reserves on which it continues to pay interest. It forewent investigations and prosecutions that by law it should actively pursue, and settled what enforcement it could not avoid for token fees. Then there are the things conspiracy theorists and cranks like me suspect but cannot prove: that the government and the Fed have been less than aggressive in minimizing their costs when they or entities they control (AIG, Fannie, Freddie) transact with large banks, that they have left money on the table where doing so could be hidden in arcane accounts or justified as ordinary transaction expenses and trading losses. Large banks have enjoyed some rather extraordinary results for allegedly efficient markets, quarters with large trading profits and no or very few losing days. Government housing policy is pretty overtly subject to a constraint that interventions must not provoke loss realizations for banks carrying bad loans at inflated values, or interfere with servicing revenues. (If you think I am overconspiratorial, I’m still waiting for an innocent explanation of this, from 1991.)

thanksgiving 12y ago
Exactly! I'm sure I can find a place to park the money with a semi-decent growth rate for a few years if the US Government gave me a few billion dollars and told me to come up with a modest return at my leisure...
- crdoconnor 12y ago
  Especially if I could use them to make a tails-they-lose-heads-I-win bet.
tomp 12y ago
While it's true that banks continue to receive better-than-usual rates from the government, I don't entirely buy this reasoning. Firstly, the liquidity (i.e. "risk") is essentially free for the government/FED (printing money etc.). Secondly, I believe that if the government failed to act to prevent another depression, the loss would be far greater - if nothing else, there would be a huge loss associated with covering of the insured deposits if a commercial bank failed (which would be very likely if any big financial institution failed, because they are so intertwined). I do think, however, that after having been "bailed out", a business should have a very high tax rate on profits (90 - 99%) for a number of years/decades.
srj 12y ago
I don't believe making a profit was the government's intention. Stopping a credit freeze was. Would you have the US government behave as a payday loan lender? If not then what's your point?
- tormeh 12y ago
  Why couldn't the government offer those loans directly to main street until the credit freeze subsided? Just take one of the worst banks, nationalize it when it goes bankrupt, sell everything except the lending branch and use it to lend to main street with printed QE money. Divide it into bits and sell it when economy looks good again.
- crdoconnor 12y ago

javiramos 12y ago

Yeah, but when the bank needs loans to stay in business it shouldn't be paying out bonuses. Particularly so if the government (i.e. taxpayers/us) went through giant efforts and took a significant amount of risk to hand out these 'loans'. EDIT: I believe that the bailout was needed and it did (IMO) prevent significant negative ripples from flowing through our financial system. What I really despise is the lack of discipline and regulatory oversight during the bailout process. This left a very sour taste in many struggling Americans and demonstrated that our political structures are incapable of focused, regulated, and disciplined action.

Fuxy 12y ago
Not to mention the unquantifiable damage taxpayers took because the economy went bye bye and they were unable to pay their loans and mortgages. You can make a heck of a lot of money if you kill the economy, get bailed out and get to keep the properties and houses of the little guys that don't get the same benefits. If you really wanted the economy to recover quickly you would be bailing out taxpayers not big corporations.
pdpi 12y ago
Notice that you're effectively saying "the bailed out banks should renege on contracts". If nothing else, there's enough money on the table that the affected people are likely to litigate, and there's a fair chance you'll just end up paying the bonuses just the same, but now topped off with the expenses of a lawsuit.
- aidos 12y ago
  Are the bonuses often contractual and not discretionary? If so, they're not really bonuses.
  - growse 12y ago
    Contractual doesn't mean guaranteed. You could have a bonus that's contractually tied to a certain set of conditions being met (e.g. personal objectives). If the employee meets those objectives and the company doesn't pay out, they could be in breach, regardless of their financial situation.

MichaelApproved 12y ago

Also, the payment of "bonuses" in the banking industry are essentially an extension of salary. It's not what you'd typically think of as a bonus for hard work during the year. Bonuses are often pre-negotiated and pre-determined, just like a salary is.

javiramos 12y ago
Are you referring to investment banking/trading/PE or what? This is definitely not true in IB or trading. Your bonus is a direct function of what you make. This is particularly true for even more senior partners in IB/trading firms. The rainmakers make significantly more money than 'operating' or 'non-money-making' partners.
- tomp 12y ago
  Right... but if you "punish" a very successful trader by giving him/her a lower-than-agreed-to bonus (for traders, the bonus should be a percentage of their realized PnL) because of actions of some higher-level executives, the only effect that will have is that the trader will go to a different company that will pay him what he is worth.
- randomsearch 12y ago
  > Your bonus is a direct function of what you make Isn't the point of the article that this is demonstrably untrue?
  - czinck 12y ago
    You're assuming that their performance is directly proportional to the performance of the market as a whole. My understanding is it's tied to how they perform against an index like the S&P 500. The S&P 500 lost something like 50% over 2008, so even if a trader lost 25%, they outperformed the market by a lot and deserve (according to their contract) the bonus.
  - yummyfajitas 12y ago
    A bank might make a $20M loss on trader A's strategy but a $10M gain on trader B's strategy, for a net loss of $10M. Then trader B gets a bonus and the company that lost money is giving out bonuses.

fnordfnordfnord 12y ago

>Also, if the damage to the economy would be greater than the taxpayer loss of the bail-outs, they still make sense This is short-term thinking; it gets you out of the mess you're in today, but it encourages more of the behavior that caused the mess to begin with.

mrec 12y ago
Exactly. That was a perfect textbook example of moral hazard. http://en.wikipedia.org/wiki/Moral_hazard http://en.wikipedia.org/wiki/Moral_hazard

marcusgarvey 12y ago

On the fallacy that the U.S. taxpayers made money on the bailouts, note that in finance deals get judged by how much money they make given the risk that had to be assumed to make it. In the case of the bailouts: $614 billion was disbursed $667 billion was recouped For a difference of $53.1 billion, i.e. 8.6%. [1] 8.6% is insultingly low compensation to use taxpayer money that, by the way, could have been spent on more beneficial investments (infrastructure, education, healthcare) to bail out private companies who were the victims of their own greed and poor governance. FWIW the average junk bond yield in 2009 was above 20% [2]. [1] http://projects.propublica.org/bailout/ http://projects.propublica.org/bailout/ [2] http://money.cnn.com/2011/02/18/markets/bondcenter/junk_bonds/ http://money.cnn.com/2011/02/18/markets/bondcenter/junk_bond...

jimktrains2 12y ago
> On the fallacy that the U.S. taxpayers made money on the bailouts > 8.6% is insultingly low compensation to use taxpayer money So, money was made? > could have been spent on more beneficial investments (infrastructure, education, healthcare) to bail out private companies who were the victims of their own greed and poor governance. Why couldn't it still be used on infrastructure, education, or healthcare?
- ThomPete 12y ago
  Money were made but not enough compared to the risk involved with lending them out. Thats the point.
  - tomp 12y ago
    Bot possibly, even probably, enough compared to the risk involved with not lending them out (i.e. another depression).
    - ThomPete 12y ago
      Thats irrelevant to how you calculate what the return should be compared to the risk involved.