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“What is needed is a culture that induces bankers to do the right thing even if nobody is watching,” Lagarde said in her prepared remarks. Do bankers now get p

“What is needed is a culture that induces bankers to do the right thing even if nobody is watching,” Lagarde said in her prepared remarks. Do bankers now get paid for doing the right thing? Because if they don't, it's not going to happen.

spot 11y ago
how about we fine them if they do the wrong thing (and even throw them in jail if its bad enough).
- altcognito 11y ago
  It's really too late by then, and you're counting on enforcement which we really lack right now.
  - spot 11y ago
    "how about" means i am proposing enforcement. i am well aware that it is lacking.
adaml_623 11y ago
It would be a good intermediate step to define 'the right thing'. And then to pay them for doing the right thing.
- toomuchtodo 11y ago
  Or perhaps put a framework into place that prevents them from doing anything other than the right thing?
  - saryant 11y ago
    But what is the right thing? Fannie and Freddie shoved mortgages through the pipeline to both increase their profits and fulfill their stated goal of increasing American home ownership. The latter is what most considered to be "the right thing" including their regulators. But then the law of unintended consequences reared its ugly head, housing prices started to fall and we all realized how tied together that securitization pipeline had become. Investors bought credit swaps on their mortgage bonds to protect their downside and move the assets off their balance sheets in order to buy more mortgage bonds—also allowing retail banks to create more mortgages, further increasing home ownership. The companies who sold those swaps (AIG) assumed that housing prices would never fall and default rates would never rise. They were wrong. As soon as that black swan event happened and Bear, Lehman et al had to start marking losses on those MBS products, the market pounced. Then AIG had to start paying those swaps but couldn't (hence the nationalization). While there were definitely bad actors (those handing out liar loans and so forth), at any individual stage in that massive, trillion-dollar pipeline, most actors were behaving in a way that rationally made sense. Banks sought to hedge their downside by buying CDSs against their MBS products. Insurers trusted the ratings agencies. The ratings agencies were too weak to do anything despite internal misgivings about those MBS products (and of course the incentive structure there is all sorts of stupid). The investment banks definitely twisted arms at the ratings agencies to get investment-grade ratings on what were truly junk bonds and that was bad on their part and arguably fraud, so yes, someone should probably be liable for that. But what could've been done differently at the macro level to ensure that every actor in that pipeline acted in the interest of the "greater good" when we can't even define what that is? Yes, we could have tighter controls on mortgage underwriting standards but will that prevent the next crash? How do we hold someone liable for not avoiding a crash? We can't even tell when a crash is coming, are we honestly going to blame someone for not being able to do the impossible?
    - toomuchtodo 11y ago
      I've bookmarked this to come back and respond. My father was a mortgage underwriter who attempted to blow the whistle at a major lender (to no avail). I'm very familiar with the various complications faced in properly regulating the MBS marketplace.
      - saryant 11y ago
        Plenty of people tried to blow the whistle. The SEC and Fed were warned but were unable to comprehend the overarching microeconomic problems brewing within each firm. And that doesn't change the overarching problem of defining the right thing at every level. Was AIG acting unethically by failing to properly assess the risk of their CDSs? Or were they just incompetent?
- ArkyBeagle 11y ago
  There is a strong possibility that nobody actually knows what the right thing is. There is a story that says the mortgage mess was done largely for reasons of "for the social good" and that people believed that. There may be somebody, but they aren't known, don't get listened to or otherwise don't exist for purposes of this sentence. The existence of a Micheal Burry* does not keep a bubble from forming. *A "The Big Short" person of interest. But yeah - I'd expect a drop in stock prices once interest rates hike a bit. We have in effect a generation (perhaps two) that has known nothing but very low rates.
- eghri 11y ago
  Defining the "right thing" to do is the crux of the issue. If it was easy, we wouldn't need the stock market, banks, VC funds, or any of these things because we could just have our committee of experts make the optimal investments. As people on this site should know, sometimes the best long term decisions seem like wild long-shots at the time (like investing in a start-up). It might be easier to define the "wrong thing" to do, but even that is usually short for the "wrong thing to do yesterday". Most people don't go and make the exact same mistake again unless they believe there is a convincing reason why This Time Is Different™. Common sense "wrong things" also bring tradeoffs or don't have clear policy mechanisms. Even if we all agreed the stock market was overinflated, how can we deflate it without restricting valid investment and hurting the broader economy?
mahyarm 11y ago
In any large enough group of people, you will statistically get bad actors. It's like trying to get rid of all memory corruption bugs in C++ with a culture of good programing. It's still going to happen. You need _infrastructure_ in place to make the bad actors irrelevant.
- snowwrestler 11y ago
  Agreed. At some point it becomes too expensive--either in direct costs or in opportunity costs--to engineer away every possible bad thing that can happen. The most productive systems are those that efficiently balance prevention against mitigation and recovery. As we look at regulation of the financial system, I would argue that we should not lose sight of the systems we already have for mitigation and recovery. When they were most needed, they worked well. The nature of a market economy is that people are free to make decisions, including accidentally bad and purposefully bad decisions. I don't think it's possible to eliminate the bad without also unintentionally limiting some of the future good.
- NoMoreNicksLeft 11y ago
  Memory bugs aren't intelligent. You never find one changing it's nature or behavior to avoid debugging (even if it feels that way sometimes). Bankers are humans, the most intelligent species we know of. They want to be bad actors, and they're constantly dreaming up ways to do it better. Any infrastructure or regulations will eventually (and probably soon) be co-opted. Furthermore, given the nature of regulations (that 1% are in control of them, and the other 99% are beholden), once co-opted they will be impossible to modify to repeal. Now they help the bad guys do bad things, and they're not going to let you take them away. It gets worse, because humans are intelligent. If they spent all that effort co-opting these regulations, might it not be better to write the regulations in the first place? Much less effort for something even more adapted for them to do bad things. And since the nature of legislatures is that 0.01% are on control of them, and the other 99.99% are beholden to them, once co-opted it's impossible to repair the damage. So no, we don't need infrastructure. We need that like we need a hole in the head.
  - nitrogen 11y ago

spot 11y ago

how about we fine them if they do the wrong thing (and even throw them in jail if its bad enough).

altcognito 11y ago
It's really too late by then, and you're counting on enforcement which we really lack right now.
- spot 11y ago
  "how about" means i am proposing enforcement. i am well aware that it is lacking.

adaml_623 11y ago

It would be a good intermediate step to define 'the right thing'. And then to pay them for doing the right thing.

toomuchtodo 11y ago
Or perhaps put a framework into place that prevents them from doing anything other than the right thing?
- saryant 11y ago
  But what is the right thing? Fannie and Freddie shoved mortgages through the pipeline to both increase their profits and fulfill their stated goal of increasing American home ownership. The latter is what most considered to be "the right thing" including their regulators. But then the law of unintended consequences reared its ugly head, housing prices started to fall and we all realized how tied together that securitization pipeline had become. Investors bought credit swaps on their mortgage bonds to protect their downside and move the assets off their balance sheets in order to buy more mortgage bonds—also allowing retail banks to create more mortgages, further increasing home ownership. The companies who sold those swaps (AIG) assumed that housing prices would never fall and default rates would never rise. They were wrong. As soon as that black swan event happened and Bear, Lehman et al had to start marking losses on those MBS products, the market pounced. Then AIG had to start paying those swaps but couldn't (hence the nationalization). While there were definitely bad actors (those handing out liar loans and so forth), at any individual stage in that massive, trillion-dollar pipeline, most actors were behaving in a way that rationally made sense. Banks sought to hedge their downside by buying CDSs against their MBS products. Insurers trusted the ratings agencies. The ratings agencies were too weak to do anything despite internal misgivings about those MBS products (and of course the incentive structure there is all sorts of stupid). The investment banks definitely twisted arms at the ratings agencies to get investment-grade ratings on what were truly junk bonds and that was bad on their part and arguably fraud, so yes, someone should probably be liable for that. But what could've been done differently at the macro level to ensure that every actor in that pipeline acted in the interest of the "greater good" when we can't even define what that is? Yes, we could have tighter controls on mortgage underwriting standards but will that prevent the next crash? How do we hold someone liable for not avoiding a crash? We can't even tell when a crash is coming, are we honestly going to blame someone for not being able to do the impossible?
  - toomuchtodo 11y ago
    I've bookmarked this to come back and respond. My father was a mortgage underwriter who attempted to blow the whistle at a major lender (to no avail). I'm very familiar with the various complications faced in properly regulating the MBS marketplace.
    - saryant 11y ago
      Plenty of people tried to blow the whistle. The SEC and Fed were warned but were unable to comprehend the overarching microeconomic problems brewing within each firm. And that doesn't change the overarching problem of defining the right thing at every level. Was AIG acting unethically by failing to properly assess the risk of their CDSs? Or were they just incompetent?
ArkyBeagle 11y ago
There is a strong possibility that nobody actually knows what the right thing is. There is a story that says the mortgage mess was done largely for reasons of "for the social good" and that people believed that. There may be somebody, but they aren't known, don't get listened to or otherwise don't exist for purposes of this sentence. The existence of a Micheal Burry* does not keep a bubble from forming. *A "The Big Short" person of interest. But yeah - I'd expect a drop in stock prices once interest rates hike a bit. We have in effect a generation (perhaps two) that has known nothing but very low rates.
eghri 11y ago
Defining the "right thing" to do is the crux of the issue. If it was easy, we wouldn't need the stock market, banks, VC funds, or any of these things because we could just have our committee of experts make the optimal investments. As people on this site should know, sometimes the best long term decisions seem like wild long-shots at the time (like investing in a start-up). It might be easier to define the "wrong thing" to do, but even that is usually short for the "wrong thing to do yesterday". Most people don't go and make the exact same mistake again unless they believe there is a convincing reason why This Time Is Different™. Common sense "wrong things" also bring tradeoffs or don't have clear policy mechanisms. Even if we all agreed the stock market was overinflated, how can we deflate it without restricting valid investment and hurting the broader economy?

mahyarm 11y ago

In any large enough group of people, you will statistically get bad actors. It's like trying to get rid of all memory corruption bugs in C++ with a culture of good programing. It's still going to happen. You need _infrastructure_ in place to make the bad actors irrelevant.

snowwrestler 11y ago
Agreed. At some point it becomes too expensive--either in direct costs or in opportunity costs--to engineer away every possible bad thing that can happen. The most productive systems are those that efficiently balance prevention against mitigation and recovery. As we look at regulation of the financial system, I would argue that we should not lose sight of the systems we already have for mitigation and recovery. When they were most needed, they worked well. The nature of a market economy is that people are free to make decisions, including accidentally bad and purposefully bad decisions. I don't think it's possible to eliminate the bad without also unintentionally limiting some of the future good.
NoMoreNicksLeft 11y ago
Memory bugs aren't intelligent. You never find one changing it's nature or behavior to avoid debugging (even if it feels that way sometimes). Bankers are humans, the most intelligent species we know of. They want to be bad actors, and they're constantly dreaming up ways to do it better. Any infrastructure or regulations will eventually (and probably soon) be co-opted. Furthermore, given the nature of regulations (that 1% are in control of them, and the other 99% are beholden), once co-opted they will be impossible to modify to repeal. Now they help the bad guys do bad things, and they're not going to let you take them away. It gets worse, because humans are intelligent. If they spent all that effort co-opting these regulations, might it not be better to write the regulations in the first place? Much less effort for something even more adapted for them to do bad things. And since the nature of legislatures is that 0.01% are on control of them, and the other 99.99% are beholden to them, once co-opted it's impossible to repair the damage. So no, we don't need infrastructure. We need that like we need a hole in the head.
- nitrogen 11y ago