Europe strikes deal to push cost of bank failure on investors

People should face trial and be punished imo for the gross incompetence shown by politicians and others. The guilty should lose most of their assets to help pay for their negligence.

Of course it's not likely but an ineffectual fuss was made. The general message is the guilty are getting away with it and the majority should shut up and stop complaining !!

Future generations of politicians etc.will have little incentive to push them in the RIGHT direction. Hang a few of the worst offendors and the message might get through.
 
Quote from piezoe:

This remark by George Soros might be of interest to some of you:

"I passionately disagreed with Treasury Secretary Hank Paulson's plan to bail out the banks by using a public fund called TARP to take toxic assets off their balance sheets. I argued that it would be much better to put the money where the hole was and replenish the equity of the banks. I worked closely with the democratic leadership in Congress to modify the TARP Act so as to allow the money to be used for the purpose of equity interests. I had many other ideas I hoped to put into practice when Obama became President, including a fundamental reform of the mortgage system, but that did not happen. I published a series of articles in the 'Financial Times' but got little response from the Obama administration. I had many more discussions with Larry Summers before he became the president's economic adviser than after. My greatest disappointment was that I was unable to establish any kind of personal contact with President Obama himself."

[from pages 48-9 of Chuck Sudetic, "The Philanthropy of George Soros," Public Affairs, New York (2011).]
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Perhaps DC wasn't willing to listen to Soro's because one of their favorite cronies is an "American Legend." Politics first and foremost.

The close personal relationship between President Barack Obama and financier Warren Buffett is no secret.

Though he already awarded Mr Buffett with a Presidential Medal of Freedom, which is the highest civilian honor in the country, and a tax policy bearing his name, Mr Obama went a step further and personally wrote an ode to the 81-year-old investment advisor in Time Magazine's top 100.

The list of the world's most influential newsmakers, Mr Obama wrote a three paragraph dedication extolling Mr Buffett's moral values in addition to his economic prowess.

Read more: http://www.dailymail.co.uk/news/art...uffetts-Time-100-tribute-written-Barack-Obama
 
VISA, Mastercard and banks had been given warnings about processing payments for porn/sex websites and use of credit cards/debit cards by prostitutes, sex maniacs and criminals.
 
Quote from Martinghoul:

Again, with all due respect, I have to disagree with you. Obviously, perfection is impossible, but traditional insurance companies exhibit a failure rate that is several orders of magnitude below that of financial institutions. Consider that between 1970 and 2000 there were around 700 insurance company failures across the developed world. How many financial institutions failed during the same period? And do you really believe that the actuaries in the traditional insurance companies face less uncertainty and fewer "black swans" than the financial mkt participants? As to the govt standing behind these insurers, that's not really true. AIG got bailed out because it was really, for all effects and purposes, a large levered bank.

IMHO, the key contrast is not the different "unknown unknowns" risks that the two industries face. It's simply that the leverage in the insurance industry is tightly regulated, not just by the govt, but by the industry itself. Tradional insurance companies are required to reserve conservatively, because everyone knows that leverage is what kills, rather than "black swans". Consider that, according to the results of the best study on ins co failure (A M Best, 1999), of the 640 or so failures between 1960 and 1998 in the US, only 8% occurred as a result of heavy losses following large catastrophe payouts. the largest proportion of failures (34%) was a result of "underreserving", aka excess leverage.

Now, obviously, the insurance co's can't completely resist the lure of leverage, so every chance they get to work around the rules, they use it. For instance, the "side letter" mini-scandal comes to mind. But, again, such creativity is orders of magnitude behind what banks have done and continue to do.

Finally, who would sell 20y expiry puts? I can think of one very wealthy guy who seems to love doing that. Lives in Omaha, I think. As to the mkt price of risk being wrong, how can we possibly know what the "right" price is? In my mind, the mkt price, in the medium to long run, is always the right price. And like I said above, it's almost never the trade or the price that kills you, it's the size and the leverage.
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The reason insurance companies are not bailed out (much) and banks are, is simple - when banks get wiped out people lose their life savings, then vote in a different government (and bring forward elections/regime change by street protests etc). When insurance companies fail, the loss is far less, because insurance premiums are typically a small fraction of the sum insured. Policies can quickly be transferred to another provider, and in the worst case the insurance customer simply loses the annual premium, a relatively small sum.

Remember the Albania pyramid scheme collapses in the 1990s? That toppled the government. Nothing to do with banks, pure scam and stupidity. The public generally think that the government has a responsibility to stop mass wipeout of private savings - even if it was entirely the public's stupidity that caused their own losses. That applies whether it is dishwashers and taxi drivers losing their life savings to pyramid schemes, or the middle class losing their deposits to banking collapses, or the upper class elite losing their capital in a market crash. There will be special pleading in each case. And the fact is, 99.9% of people lack the specialist knowledge and experience to understand and anticipate financial collapses - they trust the professionals to do that for them. When this doesn't happen, they expect the government to step in and make things right.

AIG was not bailed out because it had 'become a bank' (it hadn't - where was the large base of depositors?). It was bailed out because of the political connections of its main customers, and paranoia about market repercussions from its trading desk - so similar reasons to LTCM, which was rightly rejected. AIG was bailed out because 2008 was more scary than 1998 and government lost their nerve after seeing the post-Lehman carnage. If it had been left to hang, the market would have been volatile for a bit and then would return to normal.

The reason banks are more leveraged is simple - their culture is more aggressive relative to insurance companies. Banks pay more and so they attract higher IQ, more ambitious, more socially adept, and less ethical/more money-focused people. Insurance companies tend to attract more conservative, less ambitious, more steady eddie types. Banks are usually located in the biggest/most money-driven metropolitan centre in a country; insurance companies are often in mid-size provincial cities. So insurance companies by nature are more risk averse and less go-getting. Why this is the case, I'm not 100% sure, but it seems a durable rule of thumb.

P.S. Buffett's 20 year put sale was one of the worst trades of all time - he sold them at historically low vol right before the worst market crash since the Great Depression.

P.P.S. the market price is sometimes hopelessly wrong at forecasting the future e.g. speculative manias. There is no such thing as the 'right' price for an asset because people have purely subjective risk preferences and discount rates. However, it is undeniable that human psychology causes predictably impermanent gross distortions of pricing, that revert back to the normal every single time. There has never been a bubble in financial history that has not eventually burst.
 
Quote from StarDust9182:


My point on 20 year exposure is not which particular greater fool will buy them (although your example is excellent), but how can they be properly priced by a competitive market for the unknown multi-sigma risks that will come. I don't think that is really possible, but that is simply my opinion. Pricing is bid to the average risk each day and not to the limit conditions. The market would IMO, push prices to the lower more typical risk price. In the long run, I believe that all traders and all risk takers will meet their waterloo. It is money management that will keep them in the game at that time.
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There is not even any such thing as 'properly priced' on a value basis, even if the future is perfectly knowable, because people have different time value of money, different utility functions etc. Add in the unpredictability of the future as well, and it is hopeless. So, there is no such thing as a stable 'anchor' value in the markets. The only proper price is the one right now based on pure supply and demand, and clearly the limits of how far supply and demand can push things are quite extreme (and certainly way beyond 'fair value' for normal times and expectations).

However, why does that matter? You seem to be assuming that it is necessary to be able to estimate the 'proper price' (whatever that is) in order to trade something. But it is not necessary at all to know the proper price of something. You can trade it either on a pure supply & demand basis, or simply trade only when the odds of it being substantially undervalued or overvalued are enormous, and where the chance of being squeezed out are minimal. No knowledge of the 'proper price' is needed.

The closes thing to actual investing is fully paid purchases made unleveraged, with no regard to the ongoing secondary market price or liquidity, where the return is coming purely from the internal returns (dividends, spinoff/distribution payouts, takeovers etc) of the business. Everything other than that is to some extent a pure gamble on price fluctuations, which are only very loosely tied to underlying 'value'. And that value itself is subject to very wide fluctuations based on the unpredictability of the future - business cycles, obsolescence, mismanagement, fickle consumer sentiment, political conditions etc. Investors simply gamble on business, consumer, worker, and political conditions; whereas speculators gamble on investor sentiment about those conditions (i.e. a 'derivative' gamble a la Keynes' beauty contest).
 
Quote from Humpy:

People should face trial and be punished imo for the gross incompetence shown by politicians and others. The guilty should lose most of their assets to help pay for their negligence.

Of course it's not likely but an ineffectual fuss was made. The general message is the guilty are getting away with it and the majority should shut up and stop complaining !!

Future generations of politicians etc.will have little incentive to push them in the RIGHT direction. Hang a few of the worst offendors and the message might get through.
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What about the gross incompetence of the people in society who either voted for these politicians, or didn't do anything about if beforehand, or didn't apply sufficient political pressure for action afterwards, or never got involved in the political process themselves. Where were the slew of reformist candidates, and who voted for them?

It's easy to blame others, harder to actually do something about it yourself.

Also, just punishing one section of society will just mean that less able people get into it next time. Imagine being an honest banker for the last 30 years, and your clients didn't get hosed in 2008 - now even 5 years later your name is still mud just because a minority in your profession acted incompetently or unethically. Imagine an honest person thinking of entering politics - must be rather offputting to know you will be hated just for your job even if you succeed and do nothing wrong. Then the people doing the hating will turn around and moan about the low standard of bankers and politicians. Well duh.

The Public - a group of people who will shoot themselves in the foot then complain about the gun maker and their marksmanship instructor.
 
Quote from Martinghoul:

I am not sure I agree with this... The traditional insurance industry seems to have done OK, black swans or no black swans. Sure, you hear about the large payouts that insurance companies have to make, but they mostly seem to take the unexpected in stride. I don't see why this can't work in finance.
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Leverage. When was the last time a full reserve bank went broke?
 
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