
How the banks ignored the lessons of the crash - alexandere
http://www.theguardian.com/business/2015/sep/30/how-the-banks-ignored-lessons-of-crash
======
Animats
From the article: _" The problem with today’s banks is that those who accept
the risks are no longer those who get stuck with the bill._"

Much of the trouble comes from financial deregulation. There used to be laws
in the US which forced considerable isolation between different parts of the
financial system. There was the Glass-Stegall Act (1933-1999), which kept
banks and brokerages separate. There used to be a separation between savings
and loan companies and commercial banks. Savings and loan companies used to
have to lend locally, and actually send people to building sites to see how
construction was coming along before advancing more money. There was the
Utility Holding Company Act, which limited public utilities to a tree depth of
3 in stock ownership, just so they could be regulated more easily.

With all that separation, parts of the economy could get into trouble without
cascading. A stock market crash didn't affect banks much. The savings and loan
mess of the 1980s didn't clobber the stock market.

2008 might have played out very differently if the former head of Goldman
Sachs, Henry Paulson, hadn't been Secretary of the Treasury. President Bush
was prepared to let banks and brokerages go bust, in keeping with his
conservative principles of letting the market decide. Paulson was the one who
pushed for a bailout. At the point Lehman went bust, Goldman Sachs was about a
month from going bust, too.

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HighPlainsDrftr
I've thought for a long time - it doesn't matter if these banks broke the law
- they tried to fly to high and broke a lot of citizens. I'm not a fan of
government bailouts. But if it happens, they should split the bank up into
smaller pieces; ban the management from working in the industry as management
again, and give the new remaining company a bit of support to get going again.

Bailouts shouldn't come without a price to pay to the people involved.

~~~
crdoconnor
That's basically how Sweden responded to their banking crisis.

~~~
knight17
"This Scandinavian nation of 9 million people has accomplished what the United
States, Britain and Japan can only dream of: Growing rapidly, creating jobs
and gaining a competitive edge. The banks are lending, the housing market
booming. The budget is balanced."
[http://www.washingtonpost.com/business/economy/five-
economic...](http://www.washingtonpost.com/business/economy/five-economic-
lessons-from-sweden-the-rock-star-of-the-
recovery/2011/06/21/AGyuJ3iH_story.html)

Do you have any other suggested reading on how Sweden go about doing this?

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PythonicAlpha
The last sentence practically says it all:

> The big banks have surely drawn a lesson from the crash and its aftermath:
> that in the end there is very little they will not get away with.

and it tells the story of our societies failure and the total failure of our
political systems.

Maybe in the history books of the future, it will be written as the beginning
of the downfall of our societies.

But one thing is sure, the next crash will not leave us behind with a blue eye
only, because the western countries have nothing left, to back-up the gambling
losses of the banks.

The wealth of our nations already have been wasted to those, which did not
earn it and either a total crash will follow, or revolution or they (those
that we let gamble with our money) will be the new aristocrats (or
"oligarchs") of a new era of slavery.

~~~
retrogradeorbit
And when the big crash comes, there will be enough time between the 2008
crisis and the next one for the general public to have no understanding of the
context and causes. They will be unable to connect the dots. And in their
confusion they will give the politicians carte blanche to solve it. The
politicians will turn to those who gave them the most money, the banks and
their lobbyists, the very people who are behind the crisis, and give them
complete power. Then these people will squeeze even more wealth from the
system to line their pockets. Rinse and repeat.

~~~
PythonicAlpha
Exactly. After the 2ndWW the system had a chance to reboot and the previous
governments have turned the rudder to more equality for all people -- thus we
had two or three decades of wealth. But than the problems came and the
politicians turned to the same old solutions and to the big money for advice.

Today, the money has the power and the politicians are mere puppets of the
money. And we are all busy to survive ourselves and don't see how humanity and
the whole planet is killed by greed.

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cm2187
The article doesn't mention a single time the word bail-in, which is the
single most important change in banking regulation and what is likely to make
bail out (i.e. tax payers recapitalizing a bank) unlikely.

A bail in is the power of the regulator to declare a bank non viable and to
force losses on debt holders over a week end. This effectively auto-
recapitalizes a bank without having the messy consequences of a bankruptcy, by
forcing losses on creditors in the same fashion as a bankruptcy.

The article doesn't mention either that banks have more twice the amount of
capital they held before the crisis and are required to hold massive amounts
of liquid assets.

------
liamconnell
Great article. At the risk of fear mongering, the point about supermarkets was
very powerful. "Greed is good" is fine until the money controls the entire
infrastructure of society.

I live in Argentina, where so many factories were abandoned in our 2001 crisis
that workers decided to re-open many of them. Would American workers have it
in them if there were a serious liquidity crisis?

~~~
anigbrowl
The problem with this is that a factory making stuff is useless if people
don't want or can't afford the product. The Marxist labor theory of value
asserts that value s created when something is made rather than sold, but 1000
pairs of shoes sitting in a warehouse miles away from any consumers who might
want to wear them aren't making anyone better off.

~~~
digi_owl
More accurately its that the value is set by the labor required.

Beyond that for most people in a capitalist system, the basic process was one
of commodity > money > commodity. Meaning that people made stuff to earn
money, to buy more stuff.

But for the capitalists instead it was money > commodity > money+. Putting
money into the production of stuff so as to earn even more money on sales.

Now where Marx went off the rails was with factory machines. He was sadly
working under the preconception that workers were being exploited, and so
ended up badly muddling the impact machinery has on the value definition.

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duncan_bayne
Ignored? The lesson was pretty clear: fuck up on a grand scale, and we'll soak
the tax slaves to bail you out. I'd say they learned that lesson well.

~~~
rhino369
It's a mistake to treat banks like a monolith. The banks making the worst
choices really did pay the price. Three of the five biggest investment banks
in the USA either went bankrupt or were sold off for pennies on their previous
value. Fannie and Freddie were essentially bankrupted.

These companies share holders were wiped out. That's exactly what happens with
other businesses in bankruptcy. Well, other than Bear and Merrill stockholders
getting a small percent instead of zero. That was a necessity because an
investment bank really can't operate through a traditional Chaper 11
bankruptcy.

So if you own a bank, you can't be confident that you'll get bailed out when
you fuck up on a grand scale.

But there is an issue of industry wide fuck ups and their effect on everyone
else. Banks have a very unique feature in that when their competitors falter,
they falter with them. In 2008, you have banks with no exposure to the toxic
assets having huge issues with liquidity.

The bail outs may cause moral hazard for that sort of counter-party risk. For
example, if you are Goldman Sachs maybe you don't ask too many questions about
AIG insurance because you figure the government will make good on it either
way.

This is a very complicated issue.

~~~
nugget
Who went to jail for breaking the law?

~~~
cynicalkane
In general, banks that break regulations don't result in people going to jail
because individuals take action to avoid personal responsibility for anything.
There are literally hundreds of thousands of pagers of them, nobody really
understands them, and regulators decide which ones to take seriously according
to the political winds of the day.

At top banks a major purpose of the regulatory department is to make sure
nobody can be blamed for anything. Banks would rather pay billions of fines
because no executive is going into engage in a more coherent compliance regime
if it means risking jail for something nobody understands. It is common at
certain commercial banks to deliberately engage in ignorance, at the risk of
being find very large sums, simply to avoid the discovery risk--of regulators
being able to pin blame on someone who raised some concern.

Recently the regulators have been hinting executives will be held responsible
for systemic failures in their bank. Bankers have been responding by ensuring
full compliance with regulations. Just kidding, nobody knows how to fully
comply with bank regulations. Bankers have generally responded by ceasing
high-risk activity completely. For example, there are tens of thousands of
Somali refugees in the US. To my knowledge there is no commercial bank that
will help them send money home to their families. Somalia is simply too high
risk.

~~~
nikatwork
_> literally hundreds of thousands of pagers of them, nobody really
understands them_

BaselII[+] and friends are relatively clearcut and are designed to prevent
credit meltdown. The rules and reporting requirements are baked into Bank
software and dataflow. Auditors will spank you with fines, and will revoke
your accreditation for serial offences. This can force an involuntary
acquisition.

 _> there are tens of thousands of Somali refugees in the US. To my knowledge
there is no commercial bank that will help them send money home to their
families._

That is the result of draconian anti-terrorism laws and has nothing to do with
regulations around credit reserves.

You seem to be concerned around over-regulation, however the article is
clearly arguing the opposite: _" Deregulation has allowed perverse incentives
into the very fabric of global finance."_

~~~
cynicalkane
I was replying to the poster who was wondering why people don't go to jail
when banks break the law.

I was making the charitable assumption he was talking about banks that were
breaking laws. Most of the significant regulatory actions taken against banks
do not involve Basel capital requirements. With regards to the financial
crisis, simply being bad at running a bank isn't a crime.

While we're on the subject, political leaders and voters do not really
understand the distinction here either. Capital requirements are separate
from, for example, anti money-laundering, but in the eyes of voters it's all
more regulation against the evil banks.

------
liamconnell
Someone correct me if I'm way off, but I've been thinking that leveraged
markets and margin trading have more of a negative effect than just creating
risk of a domino effect. They also resist change (change that is sometimes
needed).

If tons of huge banks have tons of money on the line in leveraged crude oil
futures, then there would be resistance to global movement away from fossil
fuels. Larger financial markets should in theory provide oil to the gears of
the economy, but I think that if the industry becomes so bloated it will
actually cause additional friction.

Please point me in the right direction if there is anything written on this
topic.

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msravi
This is an excellent article that gets to the crux of the issue: other
people’s money.

And, I can't help but delve one level deeper.

Who's money were the banks playing with? Pension funds, mutual funds... in
other words, funds in which the ordinary taxpayer had his/her money.

Whom did the taxpayer bail out? His/her own money - which they "invested" in
these funds/banks for safekeeping without sufficient knowledge of the risks.

Unfortunately, we haven't learned our lesson either. We still like to allow
others to manage our money and risks for us.

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jellicle
The lessons of the crash were: absolutely no one went to jail, and every
banker involved made nearly as much money during the worst years of the crash
as during any other year.

So, what's the problem?

~~~
cjf4
Ultimately so did the taxpayer. Those bailout loans everyone likes to complain
about were some of the best investments the federal government has ever made.

~~~
thrownaway2424
I doubt those loans had anywhere near the ROI of, say, the land grants for the
transcontinental railroad, the Louisiana Purchase, or the Alaska Purchase.

~~~
sswaner
Actually, the government did very well considering that the loans (especially
the AIG loan) were short term and fully repaid. The government made $5.6
billion on $67.8 billion loaned, the Federal Reserve made a profit of $17.7
billion.

[http://projects.propublica.org/bailout/entities/8-aig](http://projects.propublica.org/bailout/entities/8-aig)

The Louisiana and Alaska purchases didn't turn a profit for years, and took a
substantial amount of additional capital. AIG is back to relative stability
and pays taxes.

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_pmf_
It's not so much that they ignored it. It has been positive reinforcement for
them that no matter what they do, they will never be held accountable.

