The beautiful and the damned

[darkhorse]

Quote from Ash1972:

There are two fundamental flaws with your obesity analogy. Firstly, it is possible for a bank to be very large and also very well managed, i.e. highly solvent...

Eh, you missed the key point of the reference. There was no intent to compare obese people to obese banks. Instead the point was that "obvious" solutions (i.e. get everyone to eat less and exercise) are not actually solutions, they are desired end states.

As for controlling how much people eat and exercise, talk to Japan: http://www.nytimes.com/2008/06/13/w...c6f2623fbee96495&ex=1213502400&pagewanted=all

Few things are really "impossible" when one is simply talking incentives. (Not that I am endorsing the Japanese route.)

And by the way, re large banks, there is a point where complexity levels become too large and unwieldy to be managed competently by anyone. Case in point Citigroup, which got so big that even Bob Rubin -- no hayseed he -- didn't know what the hell was going on.

Quote from Ash1972:


Simple question: had Glass Steagal NOT been abolished, would we be looking at the sort of disaster we saw in 2008? My guess is we would be seeing something like the 1998 LTCM debacle, but that's about it.

Yes, and why was Glass Steagal abolished? Because the connected players with an eye for fatter profits, through keen and assiduous lobbying, brought that result about.

Whenever someone implies the simple answer to the financial oligarchy problem is "better laws" or "more enforcement" or "reining in banker behavior," they overlook the consideration that Washington's inability to do these precise things -- running along the same lines as why the Italian government cannot control the Sicilian mob, and in reality does not WANT to -- is at the core of the problem in the first place.

The parasitic nature of the system has become so entrenched that Tim Geithner, Hank Paulson et al can reference the fact that they were giving and taking phone calls from top i-bankers on a minute by minute basis all during and after the crisis, having staffed Washington to the hilt with men from Goldman Sachs and the incestuous NY Fed, and not feel the least hint of shame about it.

 

[Ash1972]

No matter how complex a large bank's affairs are, if it's not risking depositors' money, the complexity is purely academic. It'll be up to the shareholders to work out whether or not they're being conned a la Enron (it's quite amusing how seriously we took a tadpole like Enron back then.. a board of directors pulling the wool over shareholders' eyes? Egads!)

Glass Steagal was both a very simple and very effective law. Of course, at the time it was passed, New York and London were pretty much the world's only financial centres - nowadays you'd need to get the whole world to agree to separate retail and investment banking. Yes, the laws we need are indeed simple. The people who have a vested interest in keeping the system weak will put up a lot of complex objections.

 

[darkhorse]

Quote from Ash1972:

No matter how complex a large bank's affairs are, if it's not risking depositors' money, the complexity is purely academic.

Not true -- it's about leverage and systemic risk, independent of initial capital source. Remember LTCM?

p.s. Not to mention counterparty risk, which via Lehman nearly brought down the entire system. If you can leverage your assets 30 to 1, you can do serious collateral damage.

 

[Ash1972]

There is always going to be some kind of liquidity/systemic risk when a large player in the markets suddenly disappears. What happened at LTCM was certainly unfortunate, but let's face it, its bailout had far more to do with the people it owed money to.

So suppose Lehman, AIG and LTCM had all gone bust all at the same time? There would have been some turmoil in the markets and the structured products business would have dried up for a year or two, BUT.. apart from that, no biggie.

Your point about counterparty risk is valid, but Lehman was in bad shape a week, 6 months and 1 year before it collapsed. It was the responsibility of counterparties dealing with them to work out how much exposure they really wanted. If you're getting favourable terms on OTC deals with a player who's losing big on a whole load of trades at 30:1 leverage, you might want to think carefully about just how much business you want to do with them. Of course if you're a deposit taking bank it should simply be illegal to do any such business.

 

[darkhorse]

Quote from Ash1972:

So suppose Lehman, AIG and LTCM had all gone bust all at the same time? There would have been some turmoil in the markets and the structured products business would have dried up for a year or two, BUT.. apart from that, no biggie.

No, the system would have completely collapsed. It almost did anyway.

Quote from Ash1972:


Your point about counterparty risk is valid, but Lehman was in bad shape a week, 6 months and 1 year before it collapsed. It was the responsibility of counterparties dealing with them to work out how much exposure they really wanted.

Lehman's frailty as an institution didn't threaten the system. The inability to unwind at the point of collapse did, combined with a frozen assets snafu in London.

Also, responsibility at the problem point doesn't matter when it comes to systemic risk. The idea is protecting the system from irresponsible gamblers who are not respectful of systemic risk in the first place.

Or, if you are one of the bigger gamblers yourself, the idea is to guarantee rescue by making your bets too big to fail. To say what "obviously" should have happened, or what "simple" solutions should be implemented, is once again to overlook the nature of the problem.

Feels like we're going in a circle here... how 'bout we stop.