Using a throwaway b/c I have worked on wall st. in the past and may do so again in the future. Bank of America is the most likely bank of the big 4 US banks to explode from all this. They are sitting on 113.5 billion (yes with a b) in losses in the hold to maturity account. See page 110 of their most recent 10-K linked below. At this point the whole hold to maturity thing seems more and more like a tobashi, and we should just do what Europe does, mark everything to market, and force the banks to raise more capital with CoCos or something similar. Also note that all the other big 3 banks stock price popped after earnings, but not BoA. Second most likely of the big 4 is Wells Fargo, but that is due to commercial real estate exposure, which will take a couple more years to play out.
The only thing that could cause this to become a problem is if they're forced to sell which only happens during a bank run. The government explicitly protects these large banks from runs. Thus I think your fear mongering is unwarranted. And while the tone of your comment is conspiratorial, as if no one else has noticed the htm losses, the stock is not valued at a level that indicates much risk of failure. So wall street has collectively spoken and the consensus is that bofa profits may be challenged but that there is little risk of receivership or anything like that.
I swear, the negative nancies on the internet never seem to get tired of finding new reasons the sky is falling.
In fact the movement of their stock price has shown that many others have noticed the hold to market losses, so there is no hidden conspiracy here. However, I do object to the notion that the government is explicitly protecting large banks from runs. Unless your arguing to big to fail means depositors are prevented from withdrawing funds into e.g. money market accounts[0] somehow? I would posit that the government is in effect inducing the loss of deposits from the banking system by offering higher interest rates on overnight reverse repos and Tbills than banks which are sitting on low yielding long term assets are able to match.
My argument here is that by forcing mark to market accounting across the board, banks would have to recognize these losses earlier and we wouldn't need to socialize the losses as frequently as we are have been in the past few months.
Furthermore, while you're free to argue that I am a "negative nanc[y]" who believes "the sky is falling", the words "more likely" are doing a good bit of work in my earlier comment. If you really want to argue that BoA and Wells balance sheets are honky dory[1], I happy to hear your analysis, but I can do without the name calling.
Bank runs result from depositors who suddenly lose confidence in the safety of their money. MMFs are not causing runs per se, but maybe bank walks. However the officially released data has shown that this isn't happening in recent weeks.
I agree the gov't screwed over the banks here. I'm not sure how forcing MTM alone would help. What we'd have needed is better regulation, or simply more thoughtful monetary policy.
For BoA, if you stare at the balance sheet, sure it looks not great. If no one ever looks at it, things probably work out just fine, because again, only thing that is going to cause an issue is if alarmists start spreading FUD and folks start yanking deposits.
Yeah fair. I think MTM helps here because it forces the regulators hands a bit. If all these banks had to go out and raise capital in the summer and fall of 2022, because their regulator comes in and say "Hey, your undercapitalized, fix that.", then they probably don't go under 6 months later.
Where I think we need to agree to disagree is you seem to think the run it's self is the problem, whereas I believe the insolvency which spooked the herd is the issue.
Announcing a capital raise is what pushed SVB over the edge (triggered the run). I don't see how doing that in summer or fall of last year would have helped. If anything their position was slightly improved by the time of the run as compared to October when the ten year yield was peaking.
Buffet explained why that is, while talking about how they sold all other bank shares over the last six months. That is actually the scariest part of this --- if the fear around small banks were unfounded, Buffet would be snapping them up.
> Charlie Munger, the Berkshire Hathaway vice-chairman and Buffett’s right-hand man, echoed his concerns, telling the meeting: “I don’t think having a bunch of bankers, all of whom are trying to get rich, leads to good things. I think bankers should be more like an engineer, avoiding trouble rather than trying to get rich … It’s a contradiction in values.”
It's a good comparison. Engineers can be personally liable if they are negligent in their jobs. Why not bankers?
Problem with that is, politicians promise all kinds of things for their election campaigns, then do whatever TF they want anyway once they're elected and sitting pretty effectively untouchable by the peasantry that elected them, getting rich and fat for a few years before "retiring" to a cushy board position of some company they "incidentally" helped during their political "career".
Politicians are mostly professional parasites and most political systems seem to attract, apart from the odd once-in-a-while genuine idealist, exactly that type of people.
It seems like the electorate prefers those who promise the moon over honest idealists.
I find it very hard to imagine that there is a lack of honest grass-roots idealists in a country of 350+ million people, so it must be a lack of people willing to vote for them.
A lawsuit against the author, the intern who +1d the PR, the senior who approved the PR, the engineer who ran the linter, the engineer who changed a variable name, the engineers who got it into prod, the engineer who fixed it (and introduced a new bug)
Uh, no? The parent was talking about software engineers, whereas this guy was closer to the hard-engineering and construction aspects, and on top of that, he was involved in wire fraud... Huge difference versus just being a smaller actor with no intent to concoct a big scheme.
Exactly. In order to make this work, you'd have to license "software engineers", and you'd need to pass laws requiring a signature from a licensed software engineer before shipping certain products.
And if a product fails in a significant way, you'd need to either revoke the engineer's license, or impose even more serious punishments.
Without appropriate legal structures, the best you can do is say, "No, that's a dangerous idea and I won't do it. You'd have to fire me first." Which I strongly encourage saying when appropriate. But it's not the same as a regulated industry with written best practices.
In the absence of more specific regulations, it's usually difficult to "pierce the corporate veil". The corporation itself has liability. The shareholders have limited liability. And sometimes corporate officers have personal liability for certain things.
At the same time, I don't think it makes sense to punish a junior programmer for writing buggy software. It's the corporation that should be creating processes which detect and prevent bugs.
Software would need to converge on some building standards. You can regulate concrete for example, because there is a right way to do it, and it is well known with obvious tests.
I think rigorous building standards for certain components of software is possible, and I think we should do it, eg payments. But unlike building, I don't think all software should need to follow standards.
It makes more sense for some professions to be high-risk/high-reward—e.g., a startup executive. But banks are innately conservative institutions—depositors need to be able to get their money on demand, so it makes more sense to take measures that make banking professionals more conservative.
Just to remember that there are different sorts of liabilities and punishment.
For example, losing one's net worth might be an example. Shareholders are already subject to it, while for employees, even when fired, they just lose the potential of future earnings, leaving their accumulated net worth untouched.
Wikipedia calls this the principal-agent problem ( https://en.wikipedia.org/wiki/Principal%E2%80%93agent_proble... ). Should employees in a position of power be agents that are putting up some collateral as a guarantee to be forfeit in case things go south? Or otherwise would unwarranted risk-taking behavior in their job be enough to go to jail when the results of their actions impact others in the world at large negatively?
Banks are a specific situation where employees can get one-sided rewards for increasing exposure to tail risks with other people’s money. It’s to avoid misaligned incentives with delayed (by years) feedback.
Engineers (or at least engineering firms) also get rewards for exposure to tail risks. As do many other professions. I'm not convinced bankers are special in that regard.
I think the OP argues -- and I agree -- that Engineers and their Managers -- especially their Managers, given how decision making works in the Bay Area, should be punished too.
I don't see the issue: that is part of being an Engineer: lives and livelihood of people depend on your work "working." That is how it works in all Engineering fields. Somehow in software engineering we give the title and forget the responsibility.
On the other hand, in a lot of jobs, engineers are overruled and treated as monkey typists, so...
Example: At Boeing, Engineers were overruled on 737 Max, and passengers paid the price. Time someone pays for that, in this case FAA included.
tl;dr: "Somewhere between the janitor and the CEO, reasons stop mattering," # Steve Jobs (note: Rubicon is VP for him)
On the other hand, engineers are ultimately the people who implement whatever the management wants to do, so if they absolutely refuse to do some shady shit, they can't be overruled.
It's sort of the same as the question of whether soldiers should be held responsible for wars. There wouldn't be any wars if they all refused to fight. On the other hand, they are just carrying out orders. On a third hand, why the hell is "just carrying out orders" a good excuse for killing people? Why would anyone just "carry out the orders" without thinking about it themselves? Why should we be able to outsource our ethics? These are all questions that anarchists (the serious, intellectual variety), like to ask.
It's a fair question. I think the necessity of this tends to drop off with power. So I don't know if it's really necessary for a grocery bagger... But it probably wouldn't hurt. Feels like a fine broad brush policy.
I really don't understand how this relates to the current banking crisis (yet). They're complaining about the amount of leverage in the investment banking system (seemingly unlimited when counting the leverage of derivatives) but all the banks that failed recently were doing normal banking (taking deposits and making loans).
> ...but all the banks that failed recently were doing normal banking (taking deposits and making loans).
I feel like the term "normal" here is a bit loaded.
To quote Buffett on First Republic Bank[1]:
>> If you take First Republic, for example, you could look at their 10-K and you could see that they were offering non-government-guaranteed mortgages in jumbo amounts at fixed rates, sometimes for 10 years, before they changed to floating. That's a crazy proposition.
Rubbing salt into the solvency wound, an overwhelming majority of First Republic's long-term assets were tax-exempt municipal bonds, and thus not eligible BTFP[2] collateral.
In the case of SVB, it was an extreme outlier with respect to sector concentration of uninsured depositors where all it took was a single individual with influence in a tight-knit community to trigger historically unprecidented outflows, which in turn forced massive losses in long-dated securities to be realized in an attempt to quench the liquidity demand impulse, which in turn broke the bank's solvency...nevermind that their outsized duration risk wasn't hedged, or that their Chief Risk Officer stepped down almost a year before the bank's demise without proper regulatory disclosure.
Then there's the matter of certain relaxations to the Dodd-Frank Act pushed during the Trump administration[3; see Title IV]...nevermind that Frank himself sat on the board of Signature Bank, or that SVB's CEO Becker sat on the board of the San Francisco Fed. I suspect it's not merely a coincidence that the assets of these failed banks skyrocketed shortly after deregulation yet remained under a certain $250 billion asset threshold "for strategic reasons".
Has anyone heard of a software engineer actually being held personally liable?
I think it would be good for the field if this was a possibility, but as far as I know it this is only really possible for the classical “get a license or operate under an industrial exception” type engineers.
Something that I found interesting moving into the financial sector is that some individuals at the bank can be held personally liable for bad decisions. For example, top compliance officers at a bank can be held liable if it later turns out terrorists (or the like) were able to bypass bank controls. This is supposed to engender good risk management around compliance risk.
If we can do it for compliance officers, why not for CEOs? The average citizen is more likely to be harmed by financial collapse than a terrorist.
> If we can do it for compliance officers, why not for CEOs?
CEOs are hired to be the public face of the company. The board who hires the CEO doesn't want the face of their company being a criminal, and in the U.S. corporate boards overwhelmingly dictate the law books. That's how capitalism works.
So once a CEO is held liable for a bank collapse, then they can never be a CEO again because they would also be a criminal. It's perfect. What is wrong with that?
I don't think that's capitalism, I think that's corruption, which may be a big part of this implementation of capitalism, but I feel like it is separate.
bc this is probably more effective at giving a bunch of occupy wall street kiddos satisfaction than actually changing things. also, if we're gonna go down that road then start holding ppl at the fed liable too
The finance sector has lots of constraints other industries don’t - and shouldn’t.
I feel it’s inappropriate to use the already really strict requirements bankers face as a justification to expand government control to other industries.
I’m not talking about common sense rules like liquidity requirements. I mean things like extremely invasive “know your customer rules” and holding compliance officers personally liable.
I don't think parent was suggesting to expand it to other industries -- they specifically meant banking CEOs. Which mirrors what Buffett was suggesting.
Engineering is significantly more intellectually rigorous than banking and finance. I'm not trying to say bankers a dumb or anything - far from it. They're quite smart, and they know their industry well, but engineering enjoys the privilege of sitting on top of "hard science" and mathematic whereas banking has... economics?
Imagine the field of engineering in a world where science still debated whether the world was flat or round, or whether empiricism was even worth the trouble in physical sciences (and if you felt strongly one way or another you were considered an ideologue) -- that's where economics is today.
sure, there are things that are uncertain about economics, but there are a great many things that are understood as well. Within Finance, its understood that some things are riskier than others. SVB blew up because they opted to buy highly risky long dated, low yield bonds even when there was good reason to believe that the economy was entering an inflationary period.
Low yield bonds are pretty much by definition the safest instrument around, that's why they're low yield. (High-yield aka junk bonds are the risky ones.)
In SVB's case, the risk was not in the bonds themselves, but in the facts that a) there was a yawning mismatch between the high interest they needed to pay out on deposits to stay competitive and the low interest they were getting on their locked-in capital, and b) their customers were heavily concentrated in a single industry, namely fickle VCs and their companies.
Parent is taking issue with SVB's long date preference for the yield bump, which from a risk standpoint wasn't appropriate for their depositor base, in an inflationary environment.
Risk management has far more depth and consequences than you realise. For example, by far the safest form of investment would be 10yr T-bills held to maturity. Which is what SVB had. The Fed made their paper value worthless because of the high interest rate they set. If they were greedy and opted for highest yield then there would have been a good chance that they stuck around longer.
Problem is that I'm not sure wether to blame the fed or the banks.
It’s totally irresponsible to invest in 10 year government bonds, without hedging duration risk, especially if your clientele is SVB’s clientele. But doing so would have dampened the short term gains that paid bonuses for a few quarters.
I would say, engineers sit at the bottom of office politics. Lowest caste of the food chain. Depending on company you have pointy haired manager, sales people or technically uneducated product manager above. At the end nobody is responsible for anything. See Volkswagen gas fraud: https://en.m.wikipedia.org/wiki/Volkswagen_emissions_scandal I really wanted to see real punishment here.
When I say "sits on top of" I mean in terms of the intellectual foundation. The reason why engineers can confidently say a bridge is safe is in large part due to the massive amount of pre-existing knowledge of mathematics, metallurgy, physics, geology, etc that they apply when designing such things. They are are building real-world things on top of existing human knowledge other humans figured out decades or centuries ago.
Economics just isn't as well grounded, so Banking is always going to be less certain - and perhaps, for that reason, should be far more conservative.
Buffet has advocated for changes to the law that would benefit society at his expense. But he will continue using the rules to his advantage until they change. Maybe some would call that dishonest? I know some say it's hypocrisy. I think it's admirable but practical.
Good example of: don't hate the player hate the game. When the person winning advocates for rules that make it harder for them to win, how can anyone get upset?
>> When the person winning advocates for rules that make it harder for them to win, how can anyone get upset?
The funny thing is a lot of players act like that kind of change is going to affect their status as winner, as if it's a competitive disadvantage when in reality it affects all players. If the wealth scale looked more like a quadratic instead of an exponential with the same rankings I think they'd all be just fine.
A funny thought: if he really wanted to effect change, one option would be to really flaunt his wealth. I mean, his public persona at least is fairly grandfatherly and subdued.
Rent out every billboard in D.C. and cover them with distasteful caricatures of elected officials. Or, something better than that, I’m sure with millions of dollars he could hire some top tier trolls.
Given Apple is just inches away from becoming a chartered bank, & Buffet is one of their largest shareholders, I wonder if he wants this punishment also directed towards Apples way too?
If Apple's bank defaults on it's customers deposits, I'm pretty sure he would.
He's talking about tying the executives compensation to bank outcomes. It's called skin-in-the-game, and it's a value he's espoused for his entire career.
The point is that moral-hazard is a big part of why these banks collapse. Executive compensation is tied to the value of the company on the way up, but not on the way down... which obviously creates a dynamic where executives are willing to take massive risks because they're basically playing with their investors' money.
Apple’s savings account is with Goldman Sachs, balance is limited to 250k and it is FDIC insured up to 250k. It seems like they are playing it safe: an existing bank with FDIC limits, but better integrated into UI and Apple ecosystem. It seems irrelevant to banking executives’ fuck ups.
Woah... This is an extremely naive view of "banking safety." FDIC limits provide absolutely zero protections for bank investors.
Buffett isn't worried about the customers, he's worried about these investors (himself). Executives can still trivially crash a bank, bankrupting investors, by putting their own earnings targets above what are long-run, safe strategies.
He invested in Apple, not Goldman Sachs. If the latter defaults on deposits, it a damage to reputation damage, sure. But again, cap on balance and FDIC insurance should ensure that customers would get their money back and it probably would not even affect other services.
I imagine that if you were to automatically claw back all the bonuses previously paid upon a bank failure, the people running banks would take risks much more seriously
Bring back Glass-Stiegel. Bankers are like college students on Spring Break, going wild unless the police come in and break up the party. Banking needs to be boring and only slightly profitable, and strictly policed.
As for whether bank CEOs should suffer, well, that's the whole point of having a limited liability corporation: to isolate the company's owners from the legal consequences of their misdeeds.
> that's the whole point of having a limited liability corporation
If your argument is that “there’s nothing we can do about this without completely abolishing LLCs” then that strikes me as somewhat absurd.
The limited liability privilege that exists today does not in any way make you immune from prosecution if your actions are criminal. Sam Bankman-Fried is one obvious example.
Whether CEOs should “suffer” or not depends entirely on whether they have broken the law, not whether they are leading an LLC.
If you want to read more about messed-up incentives, Patrick McKenzie wrote a long article about this [1]:
> Suppose you’re a salesman and you’ve identified that the deposit franchise is a natural hedge. Bracket the question of whether you can convince the decisionmakers for the deposit franchise to do business with you. Who in the economy most needs an interest rate hedge? Who could you sell that to?
> I claim that it is the mortgage industrial complex, and if you want me to be more specific, it is the government-sponsored entities (Fannie Mae, Freddie Mac, etc). They [enable] the housing market operating in the U.S. by providing securitization infrastructure which, as a side effect, backstops credit risk in conforming mortgages with the full faith and credit of the U.S. government. Agency mortgage backed securities (MBS) are the second largest dollar-denominated fixed income category in the world. They are much larger than minor players like “all corporate bonds combined.”
[...]
> Now, if you cast your memory back to the high-quality assets of certain recently failed banks which suffered large mark-to-market impairments, do you remember their constitution? They were largely a mix of Treasuries and, hmm, wait a minute, a much larger amount of agency MBS.
> SVB, ~$80 billion in MBS. Signature Bank, ~$20 billion. First Republic, only about ~$10 billion.
> These portfolios increased in size materially during a period of low interest rates, backing up the truck on interest rate risk effectively, and then had a foreseeable outcome (billions of dollars in losses) when interest rates rose.
[...]
> I express certainty that there were formal incentive systems which encoded this recommendation. For example, one of many ways by which we regulate banks is by capital requirements. Different assets require different amounts of capital to carry them on the books, in a process called “risk weighting.” Since banks will optimize for return on capital, adjusting risk weights is a way to substantially guide their behavior via shaping incentives without directly mandating one’s preferred outcome.
[...]
> It was not an accident that banks loaded up on MBS. We wanted them to. We told them to.
(By "we" I assume he means bank regulators.)
> [...] We didn’t expect the rate hikes to blow up a large chunk of the U.S. banking sector. We knew they would cause losses, to banks and all other holders of financial assets, but modeled them as survivable and more palatable for society than continuing inflation was. We appear to continue to believe that, at least to the extent we believe we can have our cake and eat it too.
So I'm wondering what the implications are of this. Banks taking interest rate risk is traditional. Mortgage-backed securities are a diversified version of that, which lowers most risks (or at least, we assume so after 2008) but not interest rate risk. If the implication is that banks shouldn't fund Fannie Mae / Mac as much as they did, who should?
> Agency mortgage backed securities (MBS) are the second largest dollar-denominated fixed income category in the world. They are much larger than minor players like “all corporate bonds combined.”
Banks were forced, basically at gunpoint, to lend to extremely high-risk borrowers (most of the minority communities) in poor areas by the federal government.
The Community Reinvestment Act, and other strong-arming laws, loaded mortgage securities with sub-prime debt bombs -- thanks to the government.
Banks were responding to carrots and sticks from the government. It's no surprise, since the line between banks and government is extremely blurry. Government capitalizes, incentivizes and strictly controls bank operations.
Bankers were the fall guys for government pressure to give unaffordable homes to minority groups.
Can you share more info / links on this take? In this [1] conclusion by the federal reserve it assigns little weight to its contribution to the crisis. I think that the government would be reluctant to blame itself rather than banks, so valid criticism can come from the outside.
Banks were making loans to anyone, taking their cut, selling those loans to investment banks on Wall Street (who also took a cut) and rolled them into collateralized mortgage backed securities, which were fraudulently marketed as having very little risk and sold to the public.
The banks didn't care if the home buyer couldn't pay, because they were just taking a cut and passing off the risk to the public.
Maybe it's not such a great thing to raise interest as quickly as has happened. Like it sounds like sensible raises when you look at percentage points, but if you look instead at the percentages, then it becomes clear that it's a huge and quick shift. If cost of borrowing doubles (I don't know the actual numbers off the top of my head) that's bound to cause some stress.
I don't think the full blame lies with greedy banks here.
While our system directly incentivizes deception, please keep in mind that any particular instance of deception is due to the moral failing of the person involved.
If the people's interests were codified as law, there would be a "poverty" punishment for weathly people doing wrong with their power, where you would be limited to living at the federal poverty limit, you can't say it's cruel or unusual punishment because people live this way every day, just because you had privilege doesn't mean it shouldn't be revoked and that extra wealth used to pay back your victims.
In this case it wans't criminal, just mismanagement, but there's nothing to say you deserve to be a corporate officer, that should be up for revocation too, getting society to shelter you with corporate fictional liability limitations. The fact this is an absurd 'punishment' for misdeeds or crimes tells a lot about who gets to say what laws are.
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[ 3.1 ms ] story [ 181 ms ] threadAlso, BofA isn't one of the banks in trouble. As far as we know.
https://investor.bankofamerica.com/regulatory-and-other-fili... https://en.wikipedia.org/wiki/Tobashi_scheme
I swear, the negative nancies on the internet never seem to get tired of finding new reasons the sky is falling.
My argument here is that by forcing mark to market accounting across the board, banks would have to recognize these losses earlier and we wouldn't need to socialize the losses as frequently as we are have been in the past few months.
Furthermore, while you're free to argue that I am a "negative nanc[y]" who believes "the sky is falling", the words "more likely" are doing a good bit of work in my earlier comment. If you really want to argue that BoA and Wells balance sheets are honky dory[1], I happy to hear your analysis, but I can do without the name calling.
0: https://www.bloomberg.com/news/articles/2023-03-31/why-us-ba... 1: https://www.americanbanker.com/list/20-banks-and-thrifts-wit...
I agree the gov't screwed over the banks here. I'm not sure how forcing MTM alone would help. What we'd have needed is better regulation, or simply more thoughtful monetary policy.
For BoA, if you stare at the balance sheet, sure it looks not great. If no one ever looks at it, things probably work out just fine, because again, only thing that is going to cause an issue is if alarmists start spreading FUD and folks start yanking deposits.
Where I think we need to agree to disagree is you seem to think the run it's self is the problem, whereas I believe the insolvency which spooked the herd is the issue.
It's a good comparison. Engineers can be personally liable if they are negligent in their jobs. Why not bankers?
Politicians are mostly professional parasites and most political systems seem to attract, apart from the odd once-in-a-while genuine idealist, exactly that type of people.
I find it very hard to imagine that there is a lack of honest grass-roots idealists in a country of 350+ million people, so it must be a lack of people willing to vote for them.
https://www.cnbc.com/2017/08/26/vw-engineer-sentenced-to-40-...
And if a product fails in a significant way, you'd need to either revoke the engineer's license, or impose even more serious punishments.
Without appropriate legal structures, the best you can do is say, "No, that's a dangerous idea and I won't do it. You'd have to fire me first." Which I strongly encourage saying when appropriate. But it's not the same as a regulated industry with written best practices.
In the absence of more specific regulations, it's usually difficult to "pierce the corporate veil". The corporation itself has liability. The shareholders have limited liability. And sometimes corporate officers have personal liability for certain things.
At the same time, I don't think it makes sense to punish a junior programmer for writing buggy software. It's the corporation that should be creating processes which detect and prevent bugs.
I think rigorous building standards for certain components of software is possible, and I think we should do it, eg payments. But unlike building, I don't think all software should need to follow standards.
For example, losing one's net worth might be an example. Shareholders are already subject to it, while for employees, even when fired, they just lose the potential of future earnings, leaving their accumulated net worth untouched.
Wikipedia calls this the principal-agent problem ( https://en.wikipedia.org/wiki/Principal%E2%80%93agent_proble... ). Should employees in a position of power be agents that are putting up some collateral as a guarantee to be forfeit in case things go south? Or otherwise would unwarranted risk-taking behavior in their job be enough to go to jail when the results of their actions impact others in the world at large negatively?
It seems engineers screw up on purpose often enough that the monetary incentives must be there.
Should we hold developers at uber criminally liable if the company fails? management? where does it stop?
Apparently not even if they design a system for thwarting regulators from doing their job.
I don't see the issue: that is part of being an Engineer: lives and livelihood of people depend on your work "working." That is how it works in all Engineering fields. Somehow in software engineering we give the title and forget the responsibility.
On the other hand, in a lot of jobs, engineers are overruled and treated as monkey typists, so...
Example: At Boeing, Engineers were overruled on 737 Max, and passengers paid the price. Time someone pays for that, in this case FAA included.
tl;dr: "Somewhere between the janitor and the CEO, reasons stop mattering," # Steve Jobs (note: Rubicon is VP for him)
(See https://www.businessinsider.com/steve-jobs-on-the-difference....)
[Edit: P.S. Some of us gave a professional oath and take it pretty seriously. We should not hold our peers to lower standards.]
It's sort of the same as the question of whether soldiers should be held responsible for wars. There wouldn't be any wars if they all refused to fight. On the other hand, they are just carrying out orders. On a third hand, why the hell is "just carrying out orders" a good excuse for killing people? Why would anyone just "carry out the orders" without thinking about it themselves? Why should we be able to outsource our ethics? These are all questions that anarchists (the serious, intellectual variety), like to ask.
[1] https://youtu.be/5QBkn42PSxk?t=620
I feel like the term "normal" here is a bit loaded.
To quote Buffett on First Republic Bank[1]:
>> If you take First Republic, for example, you could look at their 10-K and you could see that they were offering non-government-guaranteed mortgages in jumbo amounts at fixed rates, sometimes for 10 years, before they changed to floating. That's a crazy proposition.
Rubbing salt into the solvency wound, an overwhelming majority of First Republic's long-term assets were tax-exempt municipal bonds, and thus not eligible BTFP[2] collateral.
In the case of SVB, it was an extreme outlier with respect to sector concentration of uninsured depositors where all it took was a single individual with influence in a tight-knit community to trigger historically unprecidented outflows, which in turn forced massive losses in long-dated securities to be realized in an attempt to quench the liquidity demand impulse, which in turn broke the bank's solvency...nevermind that their outsized duration risk wasn't hedged, or that their Chief Risk Officer stepped down almost a year before the bank's demise without proper regulatory disclosure.
Then there's the matter of certain relaxations to the Dodd-Frank Act pushed during the Trump administration[3; see Title IV]...nevermind that Frank himself sat on the board of Signature Bank, or that SVB's CEO Becker sat on the board of the San Francisco Fed. I suspect it's not merely a coincidence that the assets of these failed banks skyrocketed shortly after deregulation yet remained under a certain $250 billion asset threshold "for strategic reasons".
[1] https://youtu.be/5QBkn42PSxk?t=488
[2] https://www.federalreserve.gov/financial-stability/bank-term...
[3] https://www.congress.gov/bill/115th-congress/senate-bill/215...
I think it would be good for the field if this was a possibility, but as far as I know it this is only really possible for the classical “get a license or operate under an industrial exception” type engineers.
If we can do it for compliance officers, why not for CEOs? The average citizen is more likely to be harmed by financial collapse than a terrorist.
CEOs are hired to be the public face of the company. The board who hires the CEO doesn't want the face of their company being a criminal, and in the U.S. corporate boards overwhelmingly dictate the law books. That's how capitalism works.
I don't think that's capitalism, I think that's corruption, which may be a big part of this implementation of capitalism, but I feel like it is separate.
I feel it’s inappropriate to use the already really strict requirements bankers face as a justification to expand government control to other industries.
I’m not talking about common sense rules like liquidity requirements. I mean things like extremely invasive “know your customer rules” and holding compliance officers personally liable.
Considering the forum, it’s important to raise this distinction I think due to the lack of ethics and uniform professional standards in software.
The question remains…
Should a board of directors and other senior leaders be liable for software harms (eg. Breaches) caused by poor oversight, malfeasance or greed?
Imagine the field of engineering in a world where science still debated whether the world was flat or round, or whether empiricism was even worth the trouble in physical sciences (and if you felt strongly one way or another you were considered an ideologue) -- that's where economics is today.
In SVB's case, the risk was not in the bonds themselves, but in the facts that a) there was a yawning mismatch between the high interest they needed to pay out on deposits to stay competitive and the low interest they were getting on their locked-in capital, and b) their customers were heavily concentrated in a single industry, namely fickle VCs and their companies.
Problem is that I'm not sure wether to blame the fed or the banks.
This was 100% SVB fault and 0% Fed fault.
Economics just isn't as well grounded, so Banking is always going to be less certain - and perhaps, for that reason, should be far more conservative.
The funny thing is a lot of players act like that kind of change is going to affect their status as winner, as if it's a competitive disadvantage when in reality it affects all players. If the wealth scale looked more like a quadratic instead of an exponential with the same rankings I think they'd all be just fine.
Rent out every billboard in D.C. and cover them with distasteful caricatures of elected officials. Or, something better than that, I’m sure with millions of dollars he could hire some top tier trolls.
I don't follow finance at all, so could you provide some additional information/sources as to what you're referring to?
(And yes, I've already did a quick Google for 'buffet stealing' with the only seemingly relevant link that he was a shoplifter (?) [1])
[1] https://www.fool.com/investing/general/2013/11/17/warren-buf...
Talk about shutting the stable door after the horse has bolted three times running.
Congress even watered down the laws made after the 2008 crisis to prevent this from happening.
Where was he then?
If there’s still horses in the barn, close the doors.
He's talking about tying the executives compensation to bank outcomes. It's called skin-in-the-game, and it's a value he's espoused for his entire career.
The point is that moral-hazard is a big part of why these banks collapse. Executive compensation is tied to the value of the company on the way up, but not on the way down... which obviously creates a dynamic where executives are willing to take massive risks because they're basically playing with their investors' money.
Buffett isn't worried about the customers, he's worried about these investors (himself). Executives can still trivially crash a bank, bankrupting investors, by putting their own earnings targets above what are long-run, safe strategies.
This is the principal-agent problem: https://en.wikipedia.org/wiki/Principal%E2%80%93agent_proble...
As for whether bank CEOs should suffer, well, that's the whole point of having a limited liability corporation: to isolate the company's owners from the legal consequences of their misdeeds.
If your argument is that “there’s nothing we can do about this without completely abolishing LLCs” then that strikes me as somewhat absurd.
The limited liability privilege that exists today does not in any way make you immune from prosecution if your actions are criminal. Sam Bankman-Fried is one obvious example.
Whether CEOs should “suffer” or not depends entirely on whether they have broken the law, not whether they are leading an LLC.
It’s called “limited” liability for a reason.
> Suppose you’re a salesman and you’ve identified that the deposit franchise is a natural hedge. Bracket the question of whether you can convince the decisionmakers for the deposit franchise to do business with you. Who in the economy most needs an interest rate hedge? Who could you sell that to?
> I claim that it is the mortgage industrial complex, and if you want me to be more specific, it is the government-sponsored entities (Fannie Mae, Freddie Mac, etc). They [enable] the housing market operating in the U.S. by providing securitization infrastructure which, as a side effect, backstops credit risk in conforming mortgages with the full faith and credit of the U.S. government. Agency mortgage backed securities (MBS) are the second largest dollar-denominated fixed income category in the world. They are much larger than minor players like “all corporate bonds combined.”
[...]
> Now, if you cast your memory back to the high-quality assets of certain recently failed banks which suffered large mark-to-market impairments, do you remember their constitution? They were largely a mix of Treasuries and, hmm, wait a minute, a much larger amount of agency MBS.
> SVB, ~$80 billion in MBS. Signature Bank, ~$20 billion. First Republic, only about ~$10 billion.
> These portfolios increased in size materially during a period of low interest rates, backing up the truck on interest rate risk effectively, and then had a foreseeable outcome (billions of dollars in losses) when interest rates rose.
[...]
> I express certainty that there were formal incentive systems which encoded this recommendation. For example, one of many ways by which we regulate banks is by capital requirements. Different assets require different amounts of capital to carry them on the books, in a process called “risk weighting.” Since banks will optimize for return on capital, adjusting risk weights is a way to substantially guide their behavior via shaping incentives without directly mandating one’s preferred outcome.
[...]
> It was not an accident that banks loaded up on MBS. We wanted them to. We told them to.
(By "we" I assume he means bank regulators.)
> [...] We didn’t expect the rate hikes to blow up a large chunk of the U.S. banking sector. We knew they would cause losses, to banks and all other holders of financial assets, but modeled them as survivable and more palatable for society than continuing inflation was. We appear to continue to believe that, at least to the extent we believe we can have our cake and eat it too.
So I'm wondering what the implications are of this. Banks taking interest rate risk is traditional. Mortgage-backed securities are a diversified version of that, which lowers most risks (or at least, we assume so after 2008) but not interest rate risk. If the implication is that banks shouldn't fund Fannie Mae / Mac as much as they did, who should?
[1] https://www.bitsaboutmoney.com/archive/deposit-franchises-as...
Wow. Really?
The Community Reinvestment Act, and other strong-arming laws, loaded mortgage securities with sub-prime debt bombs -- thanks to the government.
Banks were responding to carrots and sticks from the government. It's no surprise, since the line between banks and government is extremely blurry. Government capitalizes, incentivizes and strictly controls bank operations.
Bankers were the fall guys for government pressure to give unaffordable homes to minority groups.
Are these the same banks that were choosing to issue loans to people with no job and no assets?
>A NINJA (no income, no job, and no assets) loan is a term describing a loan extended to a borrower who may have no ability to repay the loan.
https://www.investopedia.com/terms/n/ninja-loan.asp
Banks were making loans to anyone, taking their cut, selling those loans to investment banks on Wall Street (who also took a cut) and rolled them into collateralized mortgage backed securities, which were fraudulently marketed as having very little risk and sold to the public.
The banks didn't care if the home buyer couldn't pay, because they were just taking a cut and passing off the risk to the public.
I don't think the full blame lies with greedy banks here.
Central banks intervene in the natural flow of interest rates. Central banks manipulating interest rates have created a housing and startup bubble.
Central banks acts as socialism for the rich. Enhancing income differences. Now all is paying for this mess through inflation.