Hopefully it’s a correction. The banks get a little smaller but it’s a huge opportunity. Once these properties are written down and sold to residential developers, we can add more units and make cities more livable.
Not going to happen in any meaningful scale. Absolutely not in Canada and perhaps on some degree in US. Media is already conditioning population about that in Canada.
I wish this could work out as well as it seems it could, but it’s not nearly as easy or flowery as a residential developer picking up an office building. A friend of mine in the space pointed out even though these spaces have a lot of floor space, plumbing is your main issue on converting these structures into livable spaces. Most of these spaces only have 1-2 bathrooms a floor, meaning an apartment-style floor plan adjustment turns into a nightmare regarding piping.
Converting CRE into residential is easiest (and probably cheapest) done by tearing the whole building down and building it from scratch. Pretty much nothing in commercial is designed to handle needs of residential and you can't just add missing pipes, shafts, stairs, isolation, etc. to an existing building.
Nah, easiest is changing the definition of "residential" from family to individual - the sector that the US lost in the 70s now known as long term hotels.
When you change this definition to
- communal kitchen
- communal bathrooms
- no window access
You solve many issues
- college costs (by bringing back dormitories instead of every college kid having an apartment)
- housing costs for early 20s that don't want to manage a whole apartment (and Uber eats 90% of meals)
- a small degree of homeless that are similar to the category above (especially the temporary homeless)
- baby boomer (now early gen x) "retirement" not quite to assisted living (yes, this group don't always need a private bathroom and kitchenette - when they have central dining halls)
Yep. Commercial -> Residential conversion is far from easy.
I'm active in a multifamily investor group and what I am hearing is that it is damn near impossible to make this work and actually cheaper to just build new multifamily vs convert.
What if you change the narrative from "single family" home (or multi-family dwellings) to "cater to couples and/or singles that can handle needed compromises"
the properties absolutely need to be written down to accommodate the cost of demolition. The businesses who overpaid and the banks that will repossess the buildings are obviously taking a hit and won’t fund this.
They do say the long real-estate cycle is 15-18 years. 2007 is 17 years ago.
While I don't like that type of rule of thumb, I can clearly feel why it makes sense.
I am on the brink of buying my first home as it is. And having seen peers having earned several hundreds of thousands from their houses over the past 4-5 years really adds pressure and FOMO.
I guess that is the sign to be extra cautious on buying. And I also think that this feeling is quite prevalent creating the perfect storm for a financial crisis.
Now is probably not the right time to buy because interest rates are at the highest levels in recent memory. Nobody in their right mind is selling right now unless they are being forced to out of financial desperation.
The commercial real estate crisis is a different problem based on the pre-2020 assumption that it was a good investment because remote work would never be widespread.
If parent has access to US-style fixed-rate, refinance-without-penalty mortgages, the interest rate isn't a major component.
Provided you can carry the payments, what do you care?
Buying now: interest is deductible on itemized taxes, can refinance when rates drop, build any home value appreciation
Buying later: your rent money is literally doing nothing for you, you've missed home value appreciation, and you need to pay more for a home in the future
Systemic home valuation decreases is the bigger threat to watch for (i.e. keep an eye on prices:incomes, etc).
That's the classic line of reasoning re rent/buy. But if you're taking out a loan to buy a house, you're still paying rent, you're just renting money instead of housing. And now you're responsible for everything that happens to your property for at least the next 5 years if not 30 just to make it worth it on the closing costs vs renting.
> In conclusion: It only makes sense to buy right now, if I have an expectation that the price will go up on the home.
What if someone does not want to deal with the volatility of a landlord, such as rental terms changing, or the property being sold, or the owner not maintaining the property?
At a minimum, being able to ensure you don’t have to move your family due to landlord changing their mind is worth something.
If you're putting 80% down in the US, I'd suggest the thought process is wrong. With good credit on a good property, 95% LTV isn't uncommon.
Looking at residential property as a forever home is wrong.
You're buying an asset, that happens to also let you not pay rent. Consequently, you want (1) value stability (see earlier qualities) and (2) leverage (as you get to keep all the profits and offset the interest).
80% LTV = 5x leverage of down-payment
95% LTV = 20x leverage of down-payment
Given that your net rate of return should also be against your down-payment, shrinking that substantially boosts effective return at time of sale.
I am in Denmark where the real-estate market is a bit different. The sane way to do it now (with the expectation that interest rates drop):
1. Variable rate short-termed loan - these are adjusted to the index called CITA.
2. When the rate is sufficiently low, refinance with a fixed rate loan.
3. If the interest rate increases, sell of the fixed rate loan at a discount and refinance with either a higher fixed rate or variable rate, depending on risk profile. (In Denmark a lot of people sold their loan at rate 80 last year due to increasing interest rates).
This could still backfire on you though. Say that you buy a house for $500,000 today with a 5% down payment and another 2008-esqe event happens and the value drops to $350,000. You are going to be underwater for the first mortgage when it is time to refinance the loan. I don't see how a bank is going to let you take a new mortgage for $475,000 on a house that's appraised by the bank for $350,000.
> your rent money is literally doing nothing for you
Your rent money is, but your down payment is not. Its getting at least a 5% return, and at best much more than that. And renting is cheaper than buying right now, because interest rates are high for current buyers BUT NOT current owners; supply and demand will presumably change that over time, but i.e. I can rent out our Austin home pretty cheap as is; if I'd bought it today and rented it out, I'd need to charge MUCH more to break even.
I agree you should buy what you want and use the payments as the guide; and maybe you can re-finance in the future. But when I plug payments into investment calculators, buying the home isn't coming out ahead of investing the down payment and renting instead.
The current rate is pretty close to the median rate for the last 50 years. My suspicion is we'll soon see the great Boomer sell-off as they try to get out at the top of the market, many of my friends (millennials and GenX) share the same stories of trying to get their aging parents out of mostly empty SFHs.
> share the same stories of trying to get their aging parents out of mostly empty SFHs.
Where are they moving to? My aging parents do not want to go to a condo or apartment, they have gotten used to living alone and don't want to deal with neighbors stomping on the floor above them, for instance.
Not everyone does. My grandmother died in her own home, with an aid coming to assist with daily caretaking. Though having taken care of a dying relative myself, it weighs on you and I'm really not sure if I could do it again.
>Now is probably not the right time to buy because interest rates are at the highest levels in recent memory. Nobody in their right mind is selling right now unless they are being forced to out of financial desperation.
It sure would be nice if selling out of financial desperation meant lower housing prices. This sure isn't the case though, even today.
That would make the case for higher cash to loan ratios. People still bought houses in the early 1980s when rates were dramatically higher than today.
First and foremost shouldn't housing be seen as a public need vs a profitable asset anyway? This sort of thinking is what leads to so many average Americans becoming obsessed with home values. I don't think real estate as asset squares well with we need real estate to live adequate lives, but I digress
The trouble with imaginary assets is that you can talk about them with a dollar sign on the front for years at a stretch - but you can only kite cheques for so long.
The Federal Reserve is paying 5% interest on $7 trillion of reserves held by banks. Since this is in excess of what the Federal Reserve is earning on the assets on its balance sheet they are booking the difference as “deffered assets”. Little of this needs to trickle down to retail depositors given the Federal Reserves “ample reserves” policy so this is effectively a bank subsidy.
For all the talk of the Fed “printing money” this is literally printing money because there is no offsetting asset on the Feds balance sheet. Eventually the hole in the balance sheet is supposed to be closed by interest earned that would normally be paid to the US Treasury.
In other words the Federal Reserve has figured out how to directly bail out banks without the consent of Congress to the tune of $10B+ per month. The higher they raise interest rates, the bigger the subsidy. That should leave a lot of banks well capitalized to pick up assets of small regional banks and REITs that will eventually fail. Roughly $10B in bank subsidies can translate into $100B in loans with required 8% capital ratios.
The Federal Reserve considers their “ample reserve” policy a “public good” as in it is good for the public to see savings eaten away by inflation and higher public debt burden of interest payments to subsidize banks.
> Federal Reserve is paying 5% interest on $7 trillion of reserves held by banks
This was sanctioned by the Congress in 2008. And the banks could earn more in the interbank market. That’s why the Fed pays that interest: to keep those excess reserves out of the market.
I cannot access the article. If the Federal Reserve thinks the banking system is imperiled, it will cut interest rates and loosen credit enough to reduce the amount of bad property debt to tolerable levels. This would be inflationary, though.
Given how aggressively we expanded the money supply just a few years ago, mass bank failures seem quite unlikely as asset price increases generated quite a bit of equity leaving plenty of buffer room for loan defaults.
Still plenty of liquidity out there. Commercial real estate is not a systemic threat.
Good one (for real, it made me chuckle) but really it's "I told you we should reinstate all the banking and financial restrictions that came into force in the 1930s because financiers and bankers can't be trusted to regulate themselves. Now we got this"
There’s no need for more regulation— this is working as intended. It will all be worked out by the checks and balances inherent to modern American capitalism. That is, when the banks’ balances are low, the government writes them huge checks to cover it. See? No need to panic: The market always does what’s right in the long run for bank shareholders and executives.
a recruiter for a company with a hybrid schedule that i balked at had starting telling me about the economic implications of not using offices, how the building value would go down, and shops nearby wouldn’t have traffic and loans against all of them would go delinquent
and I asked if that was the company’s stance for their office park
and no, it was just a vicarious interest in commercial real estate doomer articles
While I don't disagree in principle, the FT make the vast vast amount of their revenue from subscriptions, and they're the least click-baity of all the major newspapers (IMO, at least).
As mentioned, the Financial Times does not really rely on advertising (their advertising is limited only to their physical paper, their website is paywalled and does not contain advertisments as far as I see).
I want to see this play out without government intervention. If banks need to take losses, so be it. This needs to be unfettered and not be an excuse to lower interest rates.
The TARP bailouts showed all of us that bailing out banks in bad situations does little to help the average citizen anyway. Let them take the losses. Why on earth did we train banks that they can have all the upside but have the public eat the downside if a financial crisis ever arises out of their own behavior?
FDIC is backstopped by the Fed and participant banks. There is no hard limit anywhere. Make depositors whole, good luck to everyone else. If you’re exceeding FDIC insurance limits as a depositor, you should fix that, today. If you have exposure to at risk asset classes, you’re already exposed, you’re just waiting for prices to catch up to reality.
As an individual, spread deposits across accounts or institutions to stay within limits [1]. There are account products that will sweep your deposits across other institutions in order to ensure full coverage. Fidelity's cash management account will cover up to $5M using sweeps [2], for example. Mercury has a similar product for business accounts [3].
If you're a larger business (>$5M cash equivalents on hand), treasury management in government money market funds instead of a demand deposit account. All roads lead to mostly US treasuries here.
Splitting assets between banks doesn’t change the insurance income collected by FDIC, and nor does it change the overall risk profile for FDIC - its artificial structuring behaviour. It’s a minimum, not a cap.
Again, as my comment [1] mentioned, there are no hard limits. For FDIC to fail, the US government and it's largest member banks (including those considered globally systemic) would have to fail. There will be losses, but there will be no systemic failure. Properly titling and distributing deposits ensures you've met your obligation to meet deposit insurance requirements (although it might not matter such that happened with SVB depositors). You cannot control the regulatory mechanisms, but you can take somewhat straightforward, prudent measures to keep the paperwork you'll have to do and any interruptions to your finances to a minimum.
If your risk model is the US government allowing FDIC to fail, we're well outside of reasonable discourse. Your currency would be food, fuel, and firearms.
And how are credit-worthy people supposed to take out loans going forward for basic things like mortgages and credit cards, when there aren't enough bank deposits left to allow said banks to make loans? They're just supposed to wait until enough entrepreneurial financiers set up these institutions?
The problem is too many loans. Loans make it too easy to do things so there's always more pressure to lend. Eventually you get to a stage where loans are secured with loans (today's issue) because of greed and it becomes impossible to ever call in loans because it causes cascading failure.
When the problem is too many loans 'how do you still let people get loans' is not the right question to be asking.
Reserve rates have been 0% since 2020. All Deposit taking institutions with a loan department have carte blanche to print money. The model you're operating under doesn't actually map to how things are now.
It's not poor risk management. The banks (correctly) have identified that the government cannot, without massive backlash both political and economic in nature, permit them to fail in the way they should. They are some of the largest trees in the financial forest, and even if they are rotten to the core, they're incredibly big trees and as one of them falls, it will shred it's neighbors.
> took me a minute. Silicon Valley Bank, I presume
First Republic, SVB, Signature—our nation’s second, third and fourth largest bank failures in its history [1]. (WaMu.) Resolved so smoothly we don’t even talk about it less than a year later.
Most of SVB's executive team are now working at other banks as executives there. That to me signals that those banks are willing to roll the dice that "maybe we don't take as much risk as they did at SVB, but more than we're doing now".
> Weren't those banks just sold without the government stepping in?
They were put into receivership under the FDIC before being sold in a structured process [1]. In any other country, and at any time prior to ~2012 in our nation’s history, March 2023 would have been a financial crisis.
I wonder how much of a deterrent for executives at other banks firing the management really is, in the age of golden parachutes and good old boys networks.
Thanks for the links, measures like that might at least cause some concerns. On the other hand individual risk estimation sometimes seems to be completely out of whack when it comes to high level executives.
> Then the government is bailing out with FDIC, plus the economy explodes.
FDIC limits government losses to USD 250k per account or something like that, right?
I think it is still preferable to outright bailing out the entire bank.
This is what we should have done with Silicon Valley Bank.
I don't want businesses to fail because their bank took undue risk, but the reality is that sufficiently large businesses should have their money spread around multiple banks to reduce the risk to the business.
> I don't want businesses to fail because their bank took undue risk,
SVB didn't even take undue risk. They merely bought long-term bonds which lost book value due to rate hikes. What crushed them was high-profile people with insider knowledge of their bond holdings spooking the market.
Hindsight is 20/20, but what SVB was doing wasn't irresponsible with the knowledge they had at the time. I don't think any expected rates to climb as fast as they did. They were 80% unlucky.
Not hedging in ANY way against interest rates going up was explicitly undue risk. EVERY bet must be hedged. SVB said "well surely the government will never raise rates, so we can lock in money for 10 years to gain a small amount of extra profit", ignoring that their depositors were all highly aligned and literally friends that would act in concert.
You don't have every dollar you own locked up in a 7 year CD right? Because you're smart enough to know liquidity has non-trivial value! SVB purposefully ignored that in search of a slightly higher profit. It was trivially stupid.
>but what SVB was doing wasn't irresponsible with the knowledge they had at the time.
If you're a bank, and you think you've found a magic money glitch that requires no hedging, you are wrong. They weren't doing arbitrage, they were gambling.
mrguyorama already did a good job of pointing out how it was in fact undue risk. I wasn't addressing how so because I thought it was so obvious, but that may be just my history in finance and risk management.
The point I was trying to make was that unfortunately the businesses were also taking too much risk if they were storing all their money in a single bank. Just as an individual I am spread across multiple banks as a means of derisking myself and ensuring that I'm fully protected by FDIC in the event a bank does something this epically stupid.
afaik the problem isn't the (2008) bailout itself, it's that we continued playing the same exact game with the same exact people.
> Why on earth did we train banks that they can have all the upside but have the public eat the downside if a financial crisis ever arises out of their own behavior?
Deregulation and lobbies did it, it's been documented over and over again. Deep down greed is the culprit but it could have been somewhat tamed.
While I agree with you in principle, I'd want to know more about which loans were at risk that passed all of the banks risk assessment criteria compared to which ones did not that they may have been required to allow due to regulations.
I think the point is that the banks do not have enough cash to take the losses.
Nearly all money is someone else's debt, $1 of bad debt can lead to a chain of hundreds of people - each losing $1.
And if the government steps in with FDIC or other protections to prevent hundreds of people losing $1, then the government has to print more money, and inflation happens.
I would argue that the inflation has already happened, in the loans without adequate reserves. That creates money. The government would be printing money to prevent a deflation happening from the money disappearing.
When the government takes over a bank, they get that all the assets that go with it. Yes, at first the FDIC will pay out of its own coffers. But then the FED will liquidate all assets at the bank and recoup much of their payouts.
And the fdic does not fill its coffers from tax revenue. It is funded entirely by required payments from Banks. The FDIC will raise its required fees from banks, and the consumers want paying through their banks, not through taxes or printing. Though it does hurt consumers in the end.
Even if we have a cascading failure, the FDIC coverage backstops at $250,000, and it only recovers depositors, and we are talking about loans here, not deposits.
If banks fail, they fail. It may short term feel very painful for people, that I can agree with. My point is, as both a society and as a market place, need to eat the fruits of which grew from what we have sewn. If that means a lot of people get hurt, maybe finally we'll learn a lesson this time that allowing banks to act with impunity is a terrible idea and distorts the overall marketplace.
Ending those distortions will net win when the dust settles, allowing new players and new ideas to grow.
Keeping depositors whole isn't the same thing as backstopping terrible loans or other bad financial activity. They used to be largely separate entities until the "reforms" of the 1980s and 1990s. Perhaps there is something to be said for separation of concerns here
If the FDIC breaks, then the whole country is broken. FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency, which is ultimately the belief in an orderly US society that results in being able to trust that the digits listed in a database next to your name will allow you to procure products/services you want.
My point was that the “insurance” premiums and whatnot the FDIC collects are all fiction, because in practice, the Federal government will always step in if the reserves are insufficient (assuming it can). If it can’t, then the country is about to dissolve or otherwise undergo some major changes.
Kind of like the PBGC premiums that are wholly inadequate, and the real DB pension insurance is the political power your union has (see multi employer pension bailout a couple years ago).
>No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation.
The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency since it would disrupt so much of US society’s ordering, that it would decrease confidence in the US to be as economically productive and secure as it used to be.
> The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency
Not really given the FDIC’s role: a threat to FDIC reserves would require the kind of broad collapse that would be produced by an economic collapse that would threaten deflation even before considering the loss of money supply from deposit accounts evaporating. FDIC coverage of insured (and even uninsured, as allowed under the systemic risk exception) amounts in such accounts can only reduce to zero the money lost from those accounts, it can never be stimulus that would go beyond neutralizing that additional deflation threat to actually deal with whatever the broader cause of the collapse was.
Now, the separate fiscal and monetary response to that cause beyond preventing losses to deposits might overshoot and produce excess inflation eroding purchasing power, but that’s a separate issue.
> Does anyone know how the FDIC insurance is funded? In the case of total financial collapse at what point does the FDIC break?
“The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage” [1]. Your bank pays an insurance premium to the FDIC.
“FDIC insurance is backed by the full faith and credit of the United States government” [2]. If it burns through its reserves, the Treasury writes a cheque. The reserves are a political check on FDIC’s management; most governments fund deposit insurance straight out of their treasury.
That article doesn't support the claim that there is some precedent for unlimited FDIC insured deposits. It even specifically cites the process by which an exception was created.
Can you elaborate on why you now think there is a precedent that all deposits for future bank failures are insured?
Last years bank collapse has demonstrated that FDIC coverage is infinite so long as you have the right connections.
Also FDIC limit is theoretically a lifetime limit per individual. Again, no actual limit so long as you know the right people.
Also worth pointing out that when financial institution failure hits people personally regime changes follows quickly. It'd be at the ballot box in the US, but make no mistake it'd come swiftly. As a result, politicians will do whatever it takes to prevent that from happening.
The Big 5 banks have unlimited FDIC coverage because they're "too big to fail" and they scoop up the remains after the FDIC swoops in. Everyone else has the $250k per depositor.
That is why the CRE loans are such a huge problem. Their debt is owed to regional banks, not the big ones.
That said, the FDIC ignored their playbook and rules to try to calm things down last March. A few more banks went down but not the numbers people expected. That means we're in uncharted territory.. will the FDIC follow their own rules next time or do whatever they want? We don't know.
Going by https://www.federalreserve.gov/releases/lbr/current/ and JumpCrisscross's link, the banks that failed would have been around ~16th largest US bank at the time of failure. I don't know how large Washington Mutual was at the time failure compared to other banks, but just doing straightforward inflation adjustment would put it at #10, and I suspect it's closer to #5 or #6.
Correct. The comment I responded to claimed unlimited coverage was limited to the Big 5. We're less than a year from non-TBTF (we let them fail for god's sake) non-big-five banks (a) failing and (b) receiving unlimited depositor coverage.
> Last years bank collapse has demonstrated that FDIC coverage is infinite so long as you have the right connections.
The intention behind that intervention was clearly to stave off a sector wide run. What held true then and there is by no means guaranteed or even likely to hold true in the event of an actual panic.
> Also FDIC limit is theoretically a lifetime limit per individual.
As far as I know that is not true. Why do you say that? FDIC limits are applied per bank, per individual, per account type, but there is no individual lifetime limit, and a common "cash management" account technique is to distribute your money to multiple banks so you can take advantage of each bank's limit.
What rule are you referring to? FDIC coverage has never had a lifetime limit. That would mean someone who gets an FDIC payout at one bank should rush to pull their deposits at others.
What are you referring to in this document? The only reference to "lifetime" is for revocable trust accounts, which obviously is not the kind of FDIC insurance most people are concerned about.
I know that. I was replying to the statement that "Also FDIC limit is theoretically a lifetime limit per individual" which, AFAIK, has never been true.
I'm not exactly sure what they're saying either. My thought with the "theoretically" part was that the insurance funding program wouldn't be able to support widespread failures. Without adjusting funding, average lifetime claims wouldn't be able to sustain 1 failure per person let alone multiple. Sure, the rules don't stop you, but the reality does.
You should stop spreading fud - fdic limit is per account name per bank, not lifetime per person. So anyone can put their money into cash sweep that balances it across many banks to stay under 250k limit
You can't really because healthy banks will fail because of bank runs. Imagine your coworkers bank going under and losing savings above FDIC insured, suddenly everyone in the office is leaving to withdraw all their savings at other banks who are much less distressed.
If banks fail due to mismanagement, letting banks fail should be done, but you can't really blame the banks for not predicting covid and the massive decline in demand for office space. Protecting against once in a lifetime events won't be profitable and governments will have to end up subsidising them anyway.
Dollars -- whether created by the Fed or fractional reserve banking -- are debt with interest due. Coinage is the exception but it is very small quantity-wise.
> Dollars -- whether created by the Fed or fractional reserve banking -- are debt with interest due
This is not correct.
Loans create money. So the creation of money involves the creation of the loan. But if the loan is poofed, the currency doesn’t go away. (Think: loan to buy a house makes money, seller gets the money, buyer defaults, loan is impaired.)
But that is just fantasy accounting. If the bank loans me $200,000 to buy a house no one rationally suggests the bank has $200,000. They have a $200,000 share in a piece of real estate. The real liquid value of the asset should be discounted by the cost of reclaiming that asset and what it might be expected to fetch on the market (which as we learned in 2007, might as well be zero in some cases). The long-term value of that asset would be marked up by the expected gains in interest from the loan.
The bank (or anyone for that matter) only "lost" the money if they mistakenly believed they still had it in the first place. This is the same kind of analysis that leads people to claim they only lose money in the stock market if they sell after stock price drops. For tax purposes in the US it does work that way. But in reality, the money was gone the minute you bought the stock. There is never any guarantee of a future buyer or for that matter a guarantee of a brokerage even interested in executing your order.
But that's the point - the seller gets real money, that no one disputes should be real - but the buyer's bank should be careful how much it counts assets it would need to liquidate as lendable money.
The only asset the loan originator has as a result of this transaction is the loan itself and it has an equal and opposite offsetting liability for the deposit that was created along with the loan.
Banks don't liquidate assets to get "lendable money" so I guess maybe I don't understand the original statement at all then.
> Banks don't liquidate assets to get "lendable money" so I guess maybe I don't understand the original statement at all then.
True - what I meant was they can't just have a house on the books and loan out 100% of the difference between its value and what's still owed on it, because if the loans start defaulting they need a margin of error in case they can't sell the house for what they thought it was worth at the time of buying.
Last time I checked if I just immediately default on my mortgage the bank doesn't just get to go get their money back from the seller's account. Even if the seller was actually using the same bank.
Also the seller is now less a real asset. Their liquid asset worth hopefully went up in the sale. But their total net worth should be around the same, minus any fees they paid during the transaction.
Okay, I see what you're saying. The terms this discussion craves are liquidity and capital requirements.
Mortgages are assesed on risk-based metrics in terms of how much equity a bank must hold against each dollar loaned, and how much liquidity as well.
Apologies. The comment you're responding to makes multiple fundamental errors [1], so the discussion is a tad tough to follow.
[1] Banks have enough capital to absorb these losses, capital isn't cash, loss reserves aren't cash, there is no chain reaction of defaults in basic lending, bank failures and rescues aren't inflationary
I'm not sure that the bank owns a share in a piece of real estate.
If the house burns down in a fire, the bank is still owed its $200k, assuming it's a full-recourse mortgage. Same if the house's value drops to zero for some other reason. The money owed to the bank is separate from the house (again, in a full-recourse mortgage).
Of course, you can't sell the house and keep the mortgage, but that's only because the bank wants to be sure it will get its money; it's not because the bank owns a share of the house. Same story with the bank forcing you to insure the house.
So I think it's wrong to say that the bank owns a share of the house. Which raises the question: what, precisely, is the asset that's on its balance sheet?
Perhaps a better way to phrase it is "has an interest in". In either condition I think you would agree that the bank has some reasonable non-zero worth claim to the house. But it clearly is not the same as $200,000 cash.
Yeah, I agree it has an interest in it. It's just I can't name what the bank's asset actually is. What should go on the balance sheet? It gave cash to the borrower (ok, I know it's more complicated than that, but for the sake of argument let's pretend it gave a bundle of Bens), so it credits that asset by $200k. What does it debit? Not a share in a house. A promise to pay, sure, but that's just notional. What is the asset in reality?
(Hopefully I'm being clear that I'm not asking what GAAP says. I mean what does the bank have that it didn't have before?)
EDIT: this problem doesn't arise with a non-recourse mortgage, where the bank's asset is pretty clearly a share in the house. If the house burns down, the bank loses its money.
Sure, I know what the accounting says. I just don't know what it means.
If I own stock in Microsoft, it means I own a percentage of all its assets (real estate, intangibles, etc), along with a right to a percentage of its revenue streams. Plus I run the risk of my asset being worthless if Microsoft fails. So I know what that means.
Similarly, if I own Microsoft bonds, it means I have a right to a fixed revenue stream from it, and further, can claim a proportion of its assets if it stops paying me. So I can be said to 'own' a proportion of its assets, insofar as I have certain rights over them. And again, I run the (smaller) risk of my asset being worthless if Microsoft fails.
If I have lent Bob money on a non-recourse basis to buy a house, it's a similar story: I have the right to a fixed revenue stream from Bob, and can claim his asset if he stops paying me. So again, I can be said to own a proportion of the house, less whatever I'd pay him if I seized it. And again, I run the risk of the house burning down, etc etc.
In all three of these examples, my balance sheet asset refers to something real.
But if I've lent Bob money on a full-recourse basis, what is the asset? Not the house -- we've established that. Not the cash -- the cash is gone. So what is the debt instrument in my balance sheet based on?
How does anyone ever end up with a claim that allows garnishing future wages (that do not exist and are not guaranteed to exist at the time the loan is issued)?
The whole point of a loan (of any kind) is that it comes with risks. Different types of loans have different risks, and allow ownership claims of more or less things distributed in time and space). But no loan is risk-free, and so the idea that a loan provides an ownership claim of something that only notionally exists doesn't seem particularly strange.
I understand that. But if I own something that's only notional, it would seem to be saying that I own something that doesn't exist. Which is impossible.
Obviously I have claimed a right to $200k of future revenue streams Bob is able to provide me with (plus interest).
So ISTM that the 'asset' I would claim to own is Bob himself. I don't own a house or company stock that provides me future revenue streams; I would claim to own a share in a person that provides me with the same. This seems the only logical way to understand the situation.
You have a claim on something (Bob's labor) that might provide you the principal plus interest that you lent Bob, or it might not. But you do not own it.
You lent Bob the money with (hopefully) a clear understanding that in so doing, you could end up not receiving back some or all of the principal and interest. You adjusted the terms in various ways to decrease the chance of that happening, but you did not do this by acquiring ownership of anything.
But again, "Bob's labor" is purely notional. It doesn't exist. I can't have a claim to it as a free-floating entity independent of actually-existing things.
If I have a claim on Microsoft's future revenues, this implies that I own a share of Microsoft. If I have a claim on Bob's future productivity, this implies that I own a share of Bob.
Your rights as a shareholder of Microsoft are strictly delineated. You cannot, for example, walk into a MS office and take one of their computers (or any other equipment). You cannot claim any of their gross revenue, only what the board decides to release as a dividend. You can vote, but only at specific meetings that comes with their own highly evolved set of rules and regulations. You claim is actually fairly vacuous by comparison with most understandings of "ownership". You are literally a "shareholder", not an owner.
I'm replying a bit late to this... but what you say is true in both cases. Ownership doesn't entail doing whatever you like. It's the same with many things. You may own a mortgage-free house, but you still need to pay property tax; there are restrictions on what you can do within that house (not least criminal law); etc.
But this doesn't affect the argument. In fact, it looks as though you agree with my suggestion, which is that being owed money (on a full-recourse basis) by Bob has a very strong resemblance to being a shareholder in Bob.
I'm not sure where you got your idea of stock ownership, but you're describing it backwards for normal stock you buy at your broker. You would only have those ownership rights if you have a special class of stock, which is not something you normally buy at a stock exchange.
Can't all those be turned around? I don't think they're any kind of truism.
Interest compared to return on your use of money may not be any kind of disincentive (you profit by borrowing, that's the expectation)
Lent money always (ALWAYS) represents risk as well, for the same reason given above.
There's risk in anything, sometimes to proceed you accept it. Calling that 'ignoring it' doesn't make it any more important.
And I have no idea what the comment on bankruptcies is about.
But I agree on the main point, which is some armchair pundit like the OP finds it easy to draw a circle around a cherry-picked part of the economy-space and say "See! Some Obvious Conclusion!" and think they've said something. You have to look at all of it of course, as a complete system.
> If money is created as debt, how do you explain bankruptcies?
Banks typically loan money they don't have on hand (see fractional-reserve banking). And when they do that -- money is created out of thin air. Bankruptcies have nothing to do with it.
Retail banks need to have the money on hand to lend. That can come out of deposits (leaving a portion in reserve for liquidity, should the deposits need to be redeemed. (hence, fractional-reserve)) or other capital. There's a ledger that has to balance.
A Central Bank (at least one that is in control of its currency) can lend money and have it essentially come from thin air.
> the banks do not have enough cash to take the losses
Nope, the headline refers to loss reserves. The specific reserves these banks have set aside for these loans. The article alleges they need to increase those. That might, at worst, hit their earnings.
> all money is someone else's debt
All money originates as a loan. (Other than federal spending.) That link disappears the moment it’s created.
> if the government steps in with FDIC or other protections to prevent hundreds of people losing $1, then the government has to print more money
Deposits are highly liquid. Replacing a deposit with an FDIC guarantee isn’t generally inflationary. (In practice, the FDIC having to step in tends to dampen credit and money velocity.)
Part A of the comment is saying debt is a money multiplier up to 100x. One break in The chain erases the 100x of money.
Part B is then saying that if the debt chains collapse, erasing massive amounts of money, partially backfilling people via the limited insurance will cause inflation?
The bailout part of TARP worked (even though I disagreed with it at the time). The biggest problem is there was no stick. They need to have a system where they can claw back bonus, cancel golden parachutes, fire the c-suite and start investigations for criminality.
This. A couple of years after the 2008 mess, I looked up the names of some of the bigwigs who helped cause the collapse. A few had retired with golden parachutes. Most had just changed jobs and were leading other financial institutions. None of them suffered any sort of consequences.
We have a system that publicizes risk and privatizes losses. I don't think that's going away any time soon.
Trying to create a "stick" will be met with complaints of government overreach. Those same complainers will put on a show of holding their noses while filling the feedbag with as much carrots as will fit.
There are enough people in Congress that want to carve some sticks. But when it comes down to it, they don't have the guts to watch the herd starve just to make a point. If I were a member of Congress, I'd probably cave too. It would be nice if we could have a system that punishes those who destroy our economy, but it's not worth letting innocent people suffer to make that happen (IMHO).
> want to see this play out without government intervention. If banks need to take losses, so be it
We’re less than a year from the last set of bank failures. Shareholders were wiped. Foreign affiliate depositors were wiped [1]. If you’re arguing for limiting depositor protection, sure, but we’re well past TARP as precedent at this point.
Because not helping those folks had systemic risk, they were deemed "Too Big to Fail" and given interest free loans after they cut taxes to pay for their surprise necessary multi-trillion dollar war.
And Geithner saved us all as he was asked to do.
Is it the same people tasked with getting inflation down and whethering the induced bubbles this time? They have gotten inflation down, but they can't hide the unpaid expenses of "scorched earth" and "starve the beast" experts at this.
Geithner had nothing to do with TARP; the SEC was barely involved. This article has practically nothing to do with the SEC outside reporting requirements.
We’ve also gone through a round of bank failures, largely due to risk managers who couldn’t contemplate America raising rates, without moral hazard.
This is, if I read it correctly, banks reserving on average 90c against $1 of commercial real estate loans 30 days late - 10% recovery would be quite low.
> past FDIC insurance, if there is 'enough' of that
The FDIC’s balance sheet is unlimited. It’s an explicit full faith and credit agency. It has, to date, never pulled on that credit by managing its risk through fees on member banks.
> Does this mean it would take out “loans” from member banks if its insurance fund was exhausted?
Last year's failures in March caused an assessment in December [1]. In a crisis, that isn't enough time.
The way the system is designed, the Treasury would write a cheque. Full faith and credit means those FDIC claims would have the same legal standing as e.g. Social Security payments or tax refunds. Treasury would probably structure it as a loan to be paid back by future assessments, again, for political reasons. But they'd have discretion on the specifics at that point.
I think we should aim for _fairer_ government intervention.
What if this time, the government invests enough cash in banks to keep them standing and then retains ownership of a meaningful fraction of all participating banks? In however many years it takes for the banks to start paying dividends, a meaningful fraction of those are received by the government. That cash stream can be used to pay down debts or make green new deal investments, or fill a rainy-day fund for future crises. If share prices ever rise meanignfully, the government retains the ability to sell back to public markets.
An intervention can aim at stabilizing things today without being a _giveaway_.
It is not well-appreciated that the whole dollar system is destined for implosion because of the way dollars are created. The dollar is a debt instrument, there is always more owed than there are dollars in existence. It's an exponential and that only goes on so long.
I suggest episodes 1 (difference between currency and money) and 4 (how dollars are created) from the following series by Mike Maloney.
> dollar is a debt instrument, there is always more owed than there are dollars in existence
This is wrong.
Debt is regularly asymmetrically destroyed, we call it restructuring. And when a debt is destroyed we don’t destroy the correspondingly-created money. (Money is destroyed via separate mechanisms.)
That said, I suppose it’s neat seeing the gold bugs coming back on the crypto promoters [1].
bingo -- the whole system is bankrupt -- they have been papering it over with more and more printing since 2008 but check out curves of M2, national debt, etc. -- isn't going to work, something is going to break
Because the banking sector in aggregate holds the payment system hostage. The issue isn’t that the bank will lose money, it’s that you won’t be able to buy things and pay for utilities if banks can’t clear payments.
Best case: another country steps in and buys up those assets at a steep discount. 2010-2020 plays out pretty much like it did before, but a foreign national bank is now a major player in the US mortgage market.
Worst case: the contents of individual bank accounts poof out of existence. Riots and untold calamity ensues (it is difficult to say how bad this gets). Then another country steps in to buy up those assets at an even more steep discount. The subsequent housing crush the country is currently experiencing is worsened.
Government that smooths out the bumps. Provides some 'smoothing' to society so it doesn't crater and fall apart.
While also holding people accountable and criminally charging corporate executives.
It does seem like there is some reductionism to just crying 'nanny', since the same people that dislike the 'nanny' state also complain when the 'nanny' wants to hold people accountable, since they should be free to cheat. Yelling 'Freedom' anytime the state steps in.
You can't have both, complain when the state is a 'nanny' and helping, and then complain when the state disciplines people, the 'nanny' when stopping the child from doing things that will hurt itself.
Most banks saw their valuation drop by 90+% during the recession. Is that enough responsibility considering that banks employed millions of people, the majority of which and nothing to do with mortgages?
Why weren't executives and boardrooms held liable? That would have been a great start. Actually putting teeth behind regulations, clawing back bonuses and invalidating golden parachutes and culpable executives going to prison, preferably for a long time. None of the executives involved should legally be allowed to work in finance again.
If I as an individual pulled the stunts they did, or a smaller organization did, they'd be labeled fraudsters and prosecuted to the fullest extent of the law.
What TARP and its aftermath proves is that if you're big enough, you escape all real liability for your actions, and the public and your employees get to suffer the consequences.
Why should executives and boardrooms be left off the hook while the American public pays the price?
Those were also cases where the power-that-be decided to change the laws and regulations on the fly and removed the FDIC insurance limit to protect their friends in high places.
> the power-that-be decided to change the laws and regulations on the fly and removed the FDIC insurance limit to protect their friends in high places
No laws were changed. The FDIC always had broad discretion in managing assets and liabilities under receivorship. You are correct, however, in that a precedent was set.
Where you are incorrect is in the friends in high places bit. I was near (though not on) ground zero in those crises, and to the degree politics were involved, it was in the goodwill that would have resulted from visibly screwing certain Silicon Valley elites. If Signature hadn't failed, there is a good chance SVB's depositors would have been capped at the legal limit.
Last I checked, loans with generous terms given to people were called to be cancelled because they were "exploitative." For ordinary people, it makes much more sense for aid to come from a more direct means.
> That "profit" is not commensurate to the risk that the govt took on.
That's because the bailouts was intended to stabilize the economy rather than to turn a profit.
>Last I checked, loans with generous terms given to people were called to be cancelled because they were "exploitative."
What do you mean by this exactly? I don't know what this is in reference to.
Never mind the case, the biggest problem with TARP isn't the money per se, its the lack of substantially increased regulation and teeth to enforce it. Executives and boardrooms should have been bankrupted as the government should have clawed back pay, personal assets, and bonuses to pay for the damage that was done. In another words, boardrooms and c-suites should have been humiliated and fired en masse, with prison time for those culpable.
That would have been a good start. TARP funds were handed out with no teeth. The senate hearings largely ended up being for show, and only a few executives were held feet to the fire and even so, it was brief.
Not to mention, how the heck are these people still allowed to work in finance at all.
As you say, their profit isn't the point. Giving someone a loan with low enough interest is basically just handing them money free and clear with extra steps. So the real question is whether the handouts to the banks helped the populace or came at their expense. Would other uses of the money have helped more?
Yes and no. The government still has to pay interest on its debt, which is paid with tax receipts. The government shouldnt be in the business of making money, yes, but it also has to spend less than it makes. In this case, these loans would have had a negative real yield, meaning they made things worse debt wise. The consequence for higher debt, is devaluation of the dollar and these massive and frequent swings in economic conditions.
You should read the creature from Jekyll island. Bailouts just make the problem bigger and more centralized. It cant fix anything, its not possible, that debt still exists on someones balance sheet, it still accrues interest.
I'm confused about what seems like conflicting info in the wikipedia article. I can't reconcile the quote you picked from the intro with two statements in the 'Impact' section:
> In total, U.S. government economic bailouts related to the global financial crisis had federal outflows (expenditures, loans, and investments) of $633.6 billion and inflows (funds returned to the Treasury as interest, dividends, fees, or stock warrant repurchases) of $754.8 billion, for a net profit of $121 billion.
> A 2019 study by economist Deborah Lucas published in the Annual Review of Financial Economics estimated "that the total direct cost of the 2008 crisis-related bailouts in the United States" (including TARP and other programs) was about $500 billion, or 3.5% of the United States's GDP in 2009, and that "the largest direct beneficiaries of the bailouts were the unsecured creditors of financial institutions."[92] Lucas noted that this cost estimate "stands in sharp contrast to popular accounts that claim there was no cost because the money was repaid, and with claims of costs in the trillions of dollars."
Sure the government made money by dropping interest rates to zero and forcing safe money into every form of other investment.
However that also caused the greatest gap in income inequality ever. Those with assets got extremely wealthy and those living paycheck to paycheck got fucked. This is why no one can afford a house in the Bay Area unless you had money in stocks or real estate already.
"This is why no one can afford a house in the Bay Area unless you had money in stocks or real estate already."
The fact that people could afford houses in other areas seems to support that group-think and constrained supply is really at the heart of that issue. Also, affordability was an issue prior to the crisis (well, true affordability because the loans were too easy to get for many).
Yup. Affordability in area is always hard because the companies pay the minimum to get someone to walk through the door. When you're new, you're competing for work with people who already have housing and are looking for a new job. So they can underbid you.
A large number of mainstream economists believe that without TARP the entire global banking system would have collapsed, credit would have dried up and a depression would have been long lasting.
This is one of those situations where there was no good way out. The least awful option ended up being the best out. The real issue was that Timothy Geithner, Ben Bernanke and Henry Paulson could not effectively communicate the economic issues during an election.
As much as I respect John McCain, his decision to end his campaign to ‘return to Washington’ was an unmitigated disaster. Both for the economy as a whole and for that manifestation of the Republican Party. We can draw a direct line from that stunt through the Tea Party and into today’s current populist climate.
Long rambling explanation short, I don’t believe there were other options. Decisions were made in real time and in many cases, they had to be made overnight. Two major deals that would have dramatically altered the response to the subprime crisis both fell apart over night on a weekend. Ben Bernanke was (and remains) one of the world experts on the Great Depression. His education lead him to take policy steps that would prevent another Great Depression.
Maybe we’re worse off, maybe we’re not. But I’m glad I didn’t live my entire thirties under a depression.
> What about the "and afterwards" part, where the banks that were too big to fail were split up, and regulation was improved?
Whether TBTF banks should be split up is still being debated. With size comes resilience (and fewer books to look over).
In terms of improved regulation, the fact that we're less than a year out from the second, third and fourth largest bank failures in our nation's history with seemingly no memory of it seems to speak for itself [1].
I don’t understand your point, but yes, aspects of the US financial industry were improved as a result of the 2008 crisis. That happened because of roughly two years of work by congressional and senate oversight committees.
Other things (ie - derivatives) were not properly regulated. If you’re interested in what one form of regulation could have looked like, you should look up Brooksley Born. Most specifically, what happened to her when she proposed regulation.
Ben Bernanke spent so much time testifying and was so bothered by his experience that he used to be a registered Republican. Now he’s independent.
For anyone interested, here's a good summation of the Brooksley Born story[0].
Its a tragedy through and through. She faced harassment from all sides and her expertise was brushed off carelessly. Its really truly sad.
The same thing happened to Raghuram Rajan from the IMF. He delivered a paper criticizing the financial sector entitled "Has Financial Development Made the World Riskier" which argued that disaster loomed. The paper, which proved accurate, was aggressively criticized by Larry Summers, who served as the director of the National Economic Council in the Obama Administration. He was also ostracized for expressing a legitimately dissenting opinion on how financial markets in their then current form were a great risk the global financial system
I don’t think that’s true. The development of the Tea Party comprised several causes: the anti-constitutional attitudes of the Obama administration; Mr. Obama’s personal anti-American character; the general incompetence of the Obama administration; and, sadly, racism (I did not appreciate at the time how many of the folks who were vocal about the former factors were motivated by this last, utterly disgraceful, factor). These factors would have been lessened to one degree or another — or altogether missing — in a hypothetical McCain administration.
Granted, hypotheticals are always tricky, and one can’t predict what sort of malignant reaction a McCain administration would have provoked.
>the anti-constitutional attitudes of the Obama administration; Mr. Obama’s personal anti-American character; the general incompetence of the Obama administration
These are some pretty big things to posit without some citations.
Simply put I don't remember anything of this nature, at all, with the exception of the prevalence of racism.
I'm not saying Obama and his administration didn't have faults (they sure did) but like I said, other than the prevalence of racism, nothing else rings true.
You don't remember Obama's campaign of "Change we can believe in" and then he enacted every single Bush policy, and even kept their timelines? If you were a progressive left, you hated Obama as much as the American Taliban right hated Obama. He betrayed every single progressive ideal he supposedly stood for, including publicly and vehemently being against gay marriage for both presidential debates. He also signed the NDAA just before Christmas, which was the most anti-constitutional piece of legislation that you could conceive at the time. Obama kept talking about gun control, but Trump did more for gun control by banning bumpstocks than Obama ever did.
> These are some pretty big things to posit without some citations.
They really should be common knowledge. Among many other examples: the Chrysler bailout violated the Takings and Due Process clauses; the use of the IRS to persecute political foes violated equal protection; he started his political career with a fundraiser in the home of two violent terrorists, the founder and leader of the Weather Underground (this on its own should have disqualified him as a candidate for any civically-minded party); he is noted for such gaffes as referring to ISIS as the ‘jayvee [junior varsity] team’ and mistakes such as the premature 2011 withdrawal from Iraq which opened the door for the Islamic State, as well as for such poor domestic politics that his party lost over 1,000 seats.
Not all criticism of or disagreement with him was well-founded or well-motivated — as I noted, I failed to recognise at the time how many of his foes had racist motives — but he really was a profoundly bad president.
Didn't it really start with Newt Gingrich in the 90's? "Contract with America" etc.
Also, I would argue that Trumpism, at least from his base's point of view, is about challenging the Establishment. Sure, Trump is nasty and in no way deserving of the anointment as challenger of the Establishment but he's skillfully bamboozled his supporters into believing it.
Trumpers are right about one thing: the Establishment are an absolute abomination.
The depression part is probably true, however, I don't believe there was no other option. The problem with what we did is we confirmed there is no risk to owning bank stock or lending to banks and that should never be true. Instead there needs to be full risk for shareholders, secondary risk to bond holders and depositors need to be protected because being reasonably sure all or nearly all of your deposit will still exist and be available in a timely manner is the main thing we need from banks.
In that spirit, I think we could have done something/ written the laws to force something like the following to happen:
1. wipe out shareholders, convert bonds to common stock.
2. if the loss is so gargantuan that converting the bonds still leaves the bank insolvent, then wipe the bonds out too and offer shares up to certain value to depositors as conversion. If not enough convert then haircut depositors over a certain threshold for the rest up to a reasonable percentage of the negative equity and make up the rest with a government loan program at that point.
The expectation should be that if you own a big bank and it does stupid things you are going to lose your money, if you are a bond holder of a big bank and it is doing stupid things you should expect to be converted and possibly lose money. The expectations as a depositor is you will have all your deposit up to a threshold protected and you may lose some above that temporarily but are likely to get it back with a nice return in time.
> I don't believe there was no other option. The problem with what we did is we confirmed there is no risk to owning bank stock or lending to banks and that should never be true
There were better options. But it's unclear we would have found them in time. That's why we explored and enacted them aftewards. Which is what let First Republic, SVB and Signature fail last year, with investors being wiped out and no depositors impaired, so smoothly that it's no longer in popular memory.
Executives didn't go to jail and boardrooms weren't bankrupted en masse. Nobody had their bonuses clawed back and golden parachutes invalidated, and the government in all their power still allowed bonuses to be paid out with TARP money even as people were losing their jobs en masse.
There was never any meaningful regulation that came to pass afterward that split the banks up.
There were some marginal improvements to solvency requirements (which ironically were the standard before de-regulation in the 1980s and 1990s) and on the consumer banking side there is a little bit more protections, but nothing truly meaningful that limits downside exposure from the broader public ever got passed, let alone debated. Everyone was so fast to get back to "business as usual" you'd think nothing happened.
What happened with SVB et. al. last year is actually what the FDIC is suppose to do and was established to do, well before the 2008 financial crisis. The FDIC has always had the power to take receivership of failing banks and sell off their assets to make depositors whole. By their own admission they did much the same in the 80s and 90s[0]
> Executives didn't go to jail and boardrooms weren't bankrupted en masse
Sure, populist shows of retribution weren't prioritised. Keep in mind the time frames within which TARP was passed.
In last year's failures, stockholders were wiped out.
> government in all their power still allowed bonuses to be paid out with TARP money even as people were losing their jobs en masse
Based on what law did you want these binding legal agreements invalidated?
> never any meaningful regulation that came to pass afterward that split the banks up
Not true. The Fed and FDIC's powers were expanded thoroughly post crisis.
It remains unsettled whether breaking up the big banks is the right move for stability. America continues to have a large number of banks per capita relative to other countries.
> Everyone was so fast to get back to "business as usual" you'd think nothing happened
If you didn't watch the picture, sure.
> What happened with SVB et. al. last year is actually what the FDIC is suppose to do and was established to do, well before the 2008 financial crisis. The FDIC has always had the power to take receivership of failing banks and sell off their assets to make depositors whole.
What happened in '08 was outside the FDIC's purview. That was the problem. Depositors weren't running, it was the other parts of the system that failed.
>Sure, populist shows of retribution weren't prioritised. Keep in mind the time frames within which TARP was passed.
I don't think anyone is asking for populist retribution[0]. I'm asking for fraud, gross negligence, financial impropriety and a host of other actual things that happened to be prosecuted to the fullest extent of the law, and that would mean going after executives and boardrooms, where the decisions were made. Even by this point fining corporations is a slap on the wrist. Culpability is with the decision makers. That means executives and boardrooms.
Conversely, upon further review, it also means at least a few dozen regulators needed to be removed from their posts and investigations should have been opened into those failures too, to a much broader extent than they were.
>Based on what law did you want these binding legal agreements invalidated?
They should have made it a condition of accepting the TARP funds. I'm not surprised it wasn't (though I'm getting conflicting information when I go to look this up, there appears to be an optional provision that allowed the government to elect to do so, but its unclear if it made it into the final bill), but its plain silly that we attached no real sticks to this. In fact, it was proposed at the time[1], that much is certain.
>Not true. The Fed and FDIC's powers were expanded thoroughly post crisis.
Their roles perhaps, and we could discuss that, but it isn't what I posited. The real question I have is: What meaningful reform happened? There has already been rollbacks of the Dodd-Frank bill in the intervening years[3] and I'm unaware of any regulatory teeth over the derivatives market, for example.
Whether the FDIC and The Fed have expanded regulatory scope isn't the same thing as passing meaningful reforms.
>It remains unsettled whether breaking up the big banks is the right move for stability. America continues to have a large number of banks per capita relative to other countries.
I will contend that splitting banks up where "main street" banks (traditional loans, checking, savings and other things traditionally associated with mainstream consumer banking) and investment banking should be split. There's no reason the holder of my deposits should also be actively exposing the core safety of the institution by making speculative investments in the derivatives market, for example. Separating concerns is how it used to be, and the only outgrowth of the M&A of the 80s and 90s in the banking sector seems to only be new ways to create riskier investment portfolios. I don't think having these very disparate activities under the same business is a good thing, as you risk the institutions stability, as we saw in 2008, and again, to a lesser extent last year.
Boring banks are good banks. Note however I'm not saying those risky financial opportunities are in and of themselves bad. They aren't, per se, but they should be a separate business entity entirely, and not allowed to cross-pollinate each other to the extent that they do today, if at all.
>What happened in '08 was outside the FDIC's purview. That was the problem. Depositors weren't running, it was the other parts of the system that failed.
I said as much.
EDIT: I initially posited that the FDIC had similar authority prior to the events of 2008-2013. I incorrectly conflated the role of the Resolution Trust Corporation and the FDIC having management over that with the FDIC itself having authority to take a bank into receivership and to seek to sell its assets in-part or in-full, to make depositors whole. That's my memory failing me. I retract this assertion. This is indeed a post 2008 role it has assumed.
[0]: To me "populist shows of retribution" is more guillotine justice than simply enforcing the rule of law, and I think its intentionally combative. All anyone is really asking for here, as upset as I maybe regarding what happened in 2008[2], I'm only aski...
> What meaningful reform happened? There has already been rollbacks of the Dodd-Frank bill in the intervening years[3] and I'm unaware of any regulatory teeth over the derivatives market, for example.
Most derivatives are now centrally cleared, which means centrally reported. SIFIs are held to tight stress testing and reporting standards. Banks have to maintain failure plans. That's just off the top of my head.
All of these components allowed First Republic, SVB and Signature to fail in a way they could not have pre-2008.
> the FDIC has always had this power, and it was well exercised in the S&L crash and its aftermath between 1987-1994
No, it did not. No competent banking lawyer would allege as much.
And the S&L crisis famously involved depositors losing money because the FDIC was hamstrung [1]. The FDIC did not have the power to bail out e.g. AIG in 2008.
> Boring banks are good banks
I strongly recommend an introductory money and banking text [2]. Each of First Republic, SVB and Signature failed due to boring banking mechanisms.
>Most derivatives are now centrally cleared, which means centrally reported. SIFIs are held to tight stress testing and reporting standards. Banks have to maintain failure plans. That's just off the top of my head.
Which is a lower pool of banks, because of rollbacks to Dodd-Frank, which designate a much smaller class of banks as SIFI. In fact, the Federal Reserve pointed the finger at these rollbacks as an important piece of how SVB managed to fail in the first place[0][1]
If I understand correctly, being exempted of the SIFI status in practice means that regulators are much more lax in stress testing and enforcement of the tighter Dodd-Frank provisions.
When you say failure plans, we are really talking about reserves, there has always been some reserve / loss requirements, they were tighter until the de-regulation of the 80s and 90s, IIRC, and the only thing that has happened there is that some of that same tightness in regulation was restored, but its not net new in the sense that it pushed broader regulation, it only restored some aspects that were actually already in place at prior to the aforementioned de-regulation, IIRC
>Most derivatives are now centrally cleared, which means centrally reported
I'm unsure if this is meaningful or not, particularly since the conditions that caused LTCM to fail (and really drove much of the 2008 failings) still exist[3]
>No, it did not. No competent banking lawyer would allege as much.
And you're right. I conflated the role of the Resolution Trust Corporation and the FDIC (at some point, the FDIC was in charge of the RTC I think) which played a similar enough role in my memory that I ended up conflated here. I edited the post to reflect my errors. I should revisit this time period at a later date.
> Each of First Republic, SVB and Signature failed due to boring banking mechanisms.
That isn't really consensus of multiple agencies. They were negligent in managing their risk[1][2]
I don't think that's "boring bank" activity, to be repeatedly mismanaging risks. Unless textbook case of mismanagement by the bank[2] is a boring bank activity.
[3]: In my research, Warren Buffett of all folks maintains these risk are alive and well, "a ticking time bomb that will serve to poison markets", to paraphrase. I'm unsure what to make of it (Buffett by his own admission isn't the foremost authority on economics, though its hard to dismiss the guy given the track record) but it is interesting never the less.
TARP should have come with extremely strong regulation and bearing teeth. Fire the executives, claw back their bonuses and cancel their golden parachutes, and where proven to be culpable (which we now know, wouldn't have been hard to prove) should have served lengthy prison sentences. Essentially, bankrupt the boardrooms and executives involved and you send a very clear message about tolerance.
There is no reason the decision makers at the top should have been able to use TARP cash to pay themselves bonuses.
Its not all about the money, at the end of the day. Its what you do with it.
It should have had more strings attached. The banks should've been broken up again to undo the nonsense de-regulations from the 1980s and 1990s that exposed "main street' to such speculation in the first place.
Mind you, if individuals or smaller organizations did what the banks did, we would call them pyramid schemes and fraudsters and arrest all of them and prosecute them to the fullest extent of the law, not bail them out to continue business as usual
TARP was a decision made in a remarkably short time while the global financial system was burning. And it had to be made while the United States was facing a systemic wide crisis. Moreover some of the major banks did not want the money.
Some major employers in the United States were about to miss payroll. The most famous story was a McDonalds franchisee who was not going to be able to make payroll. They didn’t hold cash on hand and needed banks to keep rolling paper. When McDonalds franchisees cannot make payroll, there’s a potential for tent cities.
If they had years, I’m sure things would have been different.
Incidentally, Ben Bernanke got so sick of that line of questioning that he is no longer a registered Republican. He’s one of the people who pulled us back from the brink of recession and I don’t know he’s treated with the appropriate respect.
I buy that if you look at today's housing issues and trace it back, it would make sense that we never ramped housing construction back up, but this article glosses over many systematic issues that existed back then and today. For example, the author notes:
>To me, the strongest piece of evidence in favor of the recession causing the housing crisis rather than the housing crisis causing the recession is the fact that prices snapped back up, in similar geographic configuration, after the economy has recovered
This is unsurprising, its where all the good paying jobs still are. The centers of employment as it were, are in the areas with the most housing demand, and spillover from that will drive adjacent markets up as people at the top and wanting to move sell and move to LCOL areas. Fundamentally this is the issue with housing that I think is readily apparent to anyone who has looked at the market with any seriousness.
Now with w/r/t 2008 it was faulty mortgages and mortgage backed securities that caused the recession, not housing construction. That is accurate to say, if you want to paint in broad strokes, but the defaults on NINJA loans and variable mortgages leads to a depression in home buying as credit tightens up and losses mount. I don't see how you don't end up with some depression in the housing market as a result of this, even if its uneven in whom it affects. Alot of collateral is tied up in real estate and that assumes "up and to the right" value of real estate holds constant. You have to square that too.
In the US, real estate is in a tug of war between being two views: One is as an investment vehicle / asset. The other is as a commodity to which we all need to live because its required for housing. Those two don't square very well.
One thing is for sure, homeowners want the value of their home to appreciate, and they fight tooth and nail to make sure it does. I think in context, we as a society over-invested in "real estate is an asset and can be your nest egg cause they ain't making more!" type narratives, and would do well if we shifted toward "real estate is only as valuable as it is used productively for society"[0]
> I don't see how you don't end up with some depression in the housing market as a result of this, even if its uneven in whom it affects.
I don't think that's inconsistent with "the Fed has overreacted, and should have kept rates low/lower". It just means that probably more people would have been able to make the monthly payments, the depression would have been smaller.
And of course your implicit point is that letting too many bad loans fester could have (would have) cratered a sizeable portion of the financial system anyway.
But instead of treating this as an asset bubble we ended up with an understimulated recession. (It's completely ridiculous that US real estate with a growing population was seen as 'toxic assets' even by the government. Just put it on the balance sheet of some random agency and sell it later, when convenient. Or use it as social housing, whatever. But of course ... politics emerges from culture.)
If Biden loaned me 1 billion at 1% for a year and then I put it into money market funds paying 5%, I would pay it back after a year and have made 40 million on the side.
Everyone wins, even the government profited 10 million!!!
Did I just invent an infinite money hack to make everyone a millionaire?
It was definitely a subsidy even if fully paid back, but what were money markets paying back then? Plus at one point money markets briefly locked up from withdrawals and I'm not sure banks are allowed to invest in them though they also made companies into banks that weren't banks.
I state that one of the observations you can make about TARP and its aftermath is that banks weren't forced to do business differently and the bulk of the TARP money didn't go to help average Americans. There were other paths than TARP.
The fact it "didn't cost the government anything" is a red herring, in that it didn't produce the desired behavior or outcomes that were intended as the TARP money was suppose to have strings attached.
All I see is reasons for strong regulation and breaking up the banks so that "main street" banking is wholly separated from "wall street" banking, so losses can't cascade the same way, even if is at the expense of some marginal profits. Why should deposits and traditional lending be exposed to wall street speculation? This what happens when you allow speculative finance, corporate investment banking[1] and (for lack of a better term) regular banking to co-exist in the same institution.
Boring banks are good. We used to have a lot of them before the M&A sprees of the 1980s and 1990s, which was purely fueled by consolidation which in turn, those consolidated assets were invested in riskier and riskier financial markets and other endeavors. I will continue to argue it was not a benefit to the American public.
[0]: Though not all costs are directly monetary, or even monetary at all. One outcome of TARP and that time period is everyone is now comfortable with the idea of "too big too fail" and seemingly, governments are willing to bailout risky financial speculation of N size[2] with no consequences for those who made the decisions to participate in that speculation in the first place.
Keep in mind too, as noted elsewhere in this thread, its still up to debate whether that is strictly true or if the total cost has not been calculated correctly
[1]: I don't know where to draw the line here because "investment banking" is a really broad term, that covers everything from M&A finance to market making to individual investment services under the umbrella term. For arguments sake, I'm sticking with "corporate investment banking" to hopefully add clarity
[2]: N = whatever the minimum threshold is that financial institutions can convince the government to bail them out for while arguing not doing so will cause "a disproportional economic downturn"
Probably because the interlinking of deposits and debts across these institutions would lead to a near if not total collapse of the financial system. Quite a number of large banks DID fail in 2008-9 at first, before congress stepped in. Dodd-Frank was supposed to prevent this from happening again, but a disturbing number of relatively trustworthy advocates have suggested it is too weak to do so.
The TARP bailouts should have have been conditional on allowing the affected to borrowers stay in their homes. Those borrowers could have paid a monthly amount corresponding to fraction of their loan that the US government ending up taking over as part of the TARP program. Staying in those homes would have allowed those borrowers the possibility to continue to work and pay property and income taxes. Over time, this government intervention would have paid for itself instead of just paying the banks.
CRE risks are disproportionately concentrated in smaller bank holding companies, who saw CRE as safer debt prior to the pandemic, and who are more exposed to a small number of high-value deals gone bad. (Leverage was already rising in that market from 2017 on, so it's questionable in retrospect whether that was true even then, but in general smaller banks thought they were cleaning up their balance sheets with high-quality debt.)
The end result of any systemic crisis is likely to be regulator-mandated buyouts of smaller banks and CUs and even more aggressive concentration of banking power amongst the top twenty or so BHCs, similar to SVB ending up part of First Citizens.
> The TARP bailouts showed all of us that bailing out banks in bad situations does little to help the average citizen anyway.
Yeah, having money markets lock up, half the businesses in the company unable to pay their payroll (because everyone depends on short term lending to smooth out yearly cycles) and ATMs stop delivering cash sounds like it would be much better for the average citizen. Don't stop until unemployment hits 25%+.
Except loan reserves have nothing to do with that and is a balance between working capital and reserve. They just adjust the reserves higher. This is literally the system working as intended written with a headline to collect clicks for profit.
The Financial Times doesn't bait for clicks. It's written for subscribers who should understand the difference between reserves and capital in shorthand with respect to bad debts. A large part of why I love the FT is its articles are short. That means I can process them quickly. But it comes at the cost of context.
Subscription services are all about engagement and capture, both of which require clickbait to survive. This headline is absolutely designed to attract a click by harkening to financial collapse rather than crazy high capital requirements on mortgage books post financial crisis requiring mechanical recapitalization as interest rates and market stress take a toll.
> headline is absolutely designed to attract a click by harkening to financial collapse
No, it's not. I read it this morning and passed it over. Then I saw it on HN and realised we'd have a clusterfuck. A technical analogy might be someone conflating an outage with the service going under.
Why? Do you really think banks haven’t realized commercial loan debt isn’t lined up for major losses and haven’t securitized and hedged with CMBS credit default swaps? The article talks about the models assume historical losses - but this is an exact replay of residential subprime modeling. You would have to be a very dense portfolio manager to not have your own risk models aside from the regulatory mandated models for losses. In fact from my years trading on a major commercial and residential desk leading up to the financial crisis I emphatically know they all do, and even more so after the crisis with the roll out of relatively boned headed reg collateralization models. With SVB eating in it with unhedged loan portfolios in the rates spaces you better believe risk managers and the government have been poring over portfolio exposures to rates and credit shocks. The commercial mortgage bloodbath is executing in extreme slow motion over what’ll likely be a decade. No one is being caught unaware and unprepared.
That’s why it’s clickbait. The reaction here is exemplary. This isn’t doom this is the bread and butter ebb and flow of a banks loan book but without any sophistication on the reality of how banks manage these sorts of things. The regulatory loss provisions aren’t the only line of defense and it’s not even the first line. It reads as if banks were caught unaware of this looming crisis in commercial mortgages and there’s some unthinking machine responding only to the bare minimum regulatory requirements. The hand wringing about the financial crisis, as if no one learned anything and bank trading operations are run by total morons… if only they would listen to a bunch of programmers things could be different, etc.
Doom sells subscriptions, engagement is driven by dire headlines and articles that twinge out anxieties. The mechanical realities are boring, and are covered in trade media not general financial news.
> Bankers say they are prepared. Their reserves against delinquencies were higher than needed a year ago, and are now being drawn down as delinquencies rise, they say. They argue that regulators appear to be focused on small and mid-sized banks’ exposure.
Okay. But if this turns to shit, we best see some executive heads roll.
The headline describes loss reserves, not total capital.
When a bank makes a loan and it starts going sour, it impairs its balance sheet by noting a counterbalancing liability in the form of a loss reserve. The article alleges banks need to increase those loss reserves. It is not saying e.g. JPMorgan is exceeding its capital reserves.
I wouldn't say "nothingburger", but I would say HN users, as per usual, are misunderstanding the issue. It's not as serious as exceeding cash reserves. It's, theoretically, a temporary problem that bank executives are actually legally obligated to remedy.
It does, however, warrant banks reevaluating their risk assessment practices. Or maybe the problem is elsewhere? Something is definitely out of place for this situation to even arise so soon after the unpleasantness of 2008.
This is a nonsense headline. What it actually states is that for all commercial property that is at least 30 days late on payments, they have $0.90 per dollar in reserves (specifically for bad commercial property loans).
Not all commercial property that is 30 days late will end up in foreclosure, and the value to the bank of property in foreclosure isn’t anywhere close to $0.
The current reserve ratio isn’t alarming when looking at historical trends. Even if it is too low, comparing the total value of delinquent debt to the total reserves in a headline is misleading at best.
NYCB lost more than 50% of its value last week, but have other banks? BAC, JPM, etc. didn't budge. If most banks are diversified with other types of loans, maybe you will never notice. Or maybe they haven't accepted the losses yet.
Per Fed Chairman Powell in a recent interview, the Fed believes that mid-size and smaller regional banks (not larger banks) have the most exposure from bad commercial property loans.
JPMC in particular is literally too big to fail and that’s their entire business model. They’re so diversified and massive in everything that it’s impossible to fail. They’re the backstop of the backstop - see how the government resolved the small bank failure wave with JPMC taking on first republic and acting as a backstop against further bank chaos. This was a somewhat intentional ramp they’ve been on since 2008, become so massive that no amount of malfeasance or incompetence can disrupt their overall business.
296 comments
[ 2.8 ms ] story [ 338 ms ] threadWhen you change this definition to
- communal kitchen
- communal bathrooms
- no window access
You solve many issues
- college costs (by bringing back dormitories instead of every college kid having an apartment)
- housing costs for early 20s that don't want to manage a whole apartment (and Uber eats 90% of meals)
- a small degree of homeless that are similar to the category above (especially the temporary homeless)
- baby boomer (now early gen x) "retirement" not quite to assisted living (yes, this group don't always need a private bathroom and kitchenette - when they have central dining halls)
I'm active in a multifamily investor group and what I am hearing is that it is damn near impossible to make this work and actually cheaper to just build new multifamily vs convert.
Also, it sounds like you’re proposing building adult dormitories. Is there any evidence people want that?
While I don't like that type of rule of thumb, I can clearly feel why it makes sense.
I am on the brink of buying my first home as it is. And having seen peers having earned several hundreds of thousands from their houses over the past 4-5 years really adds pressure and FOMO.
I guess that is the sign to be extra cautious on buying. And I also think that this feeling is quite prevalent creating the perfect storm for a financial crisis.
If demand falls, then prices go down.
Otherwise, they track inflation (multiplied by desirability of the area you're looking in).
Which basically means: buy in areas with growing populations, good economies, and good achool zones.
The commercial real estate crisis is a different problem based on the pre-2020 assumption that it was a good investment because remote work would never be widespread.
Provided you can carry the payments, what do you care?
Buying now: interest is deductible on itemized taxes, can refinance when rates drop, build any home value appreciation
Buying later: your rent money is literally doing nothing for you, you've missed home value appreciation, and you need to pay more for a home in the future
Systemic home valuation decreases is the bigger threat to watch for (i.e. keep an eye on prices:incomes, etc).
So on top of this, if you decide to buy a house at 500k, you lock up 100k and still pay more in interest + HOA than ren for comparative apartment.
In conclusion: It only makes sense to buy right now, if I have an expectation that the price will go up on the home.
/edit: Added the conclusion
What if someone does not want to deal with the volatility of a landlord, such as rental terms changing, or the property being sold, or the owner not maintaining the property?
At a minimum, being able to ensure you don’t have to move your family due to landlord changing their mind is worth something.
also, renters I am referring to are commercial renters (so definitely not the cheapest ones).
Looking at residential property as a forever home is wrong.
You're buying an asset, that happens to also let you not pay rent. Consequently, you want (1) value stability (see earlier qualities) and (2) leverage (as you get to keep all the profits and offset the interest).
80% LTV = 5x leverage of down-payment
95% LTV = 20x leverage of down-payment
Given that your net rate of return should also be against your down-payment, shrinking that substantially boosts effective return at time of sale.
1. Variable rate short-termed loan - these are adjusted to the index called CITA.
2. When the rate is sufficiently low, refinance with a fixed rate loan.
3. If the interest rate increases, sell of the fixed rate loan at a discount and refinance with either a higher fixed rate or variable rate, depending on risk profile. (In Denmark a lot of people sold their loan at rate 80 last year due to increasing interest rates).
in 2006 this was sold for 2.365.000, in 2015 for 2.195.000. Is, the apartment lost 130k (roughly 20k USD) in 9 years.
(In Denmark we can see previous prices all apartments was traded for back to 1992 online)
Right now some places I look at would be ~5k + per month to purchase (factoring in taxes etc.), but rent for ~3.5k.
Your rent money is, but your down payment is not. Its getting at least a 5% return, and at best much more than that. And renting is cheaper than buying right now, because interest rates are high for current buyers BUT NOT current owners; supply and demand will presumably change that over time, but i.e. I can rent out our Austin home pretty cheap as is; if I'd bought it today and rented it out, I'd need to charge MUCH more to break even.
I agree you should buy what you want and use the payments as the guide; and maybe you can re-finance in the future. But when I plug payments into investment calculators, buying the home isn't coming out ahead of investing the down payment and renting instead.
Where are they moving to? My aging parents do not want to go to a condo or apartment, they have gotten used to living alone and don't want to deal with neighbors stomping on the floor above them, for instance.
It sure would be nice if selling out of financial desperation meant lower housing prices. This sure isn't the case though, even today.
That would make the case for higher cash to loan ratios. People still bought houses in the early 1980s when rates were dramatically higher than today.
First and foremost shouldn't housing be seen as a public need vs a profitable asset anyway? This sort of thinking is what leads to so many average Americans becoming obsessed with home values. I don't think real estate as asset squares well with we need real estate to live adequate lives, but I digress
For example, Egypt has decided to ditch the US dollar and join BRICS.
It’s a matter of time before things catch up with our economy.
For all the talk of the Fed “printing money” this is literally printing money because there is no offsetting asset on the Feds balance sheet. Eventually the hole in the balance sheet is supposed to be closed by interest earned that would normally be paid to the US Treasury.
In other words the Federal Reserve has figured out how to directly bail out banks without the consent of Congress to the tune of $10B+ per month. The higher they raise interest rates, the bigger the subsidy. That should leave a lot of banks well capitalized to pick up assets of small regional banks and REITs that will eventually fail. Roughly $10B in bank subsidies can translate into $100B in loans with required 8% capital ratios.
The Federal Reserve considers their “ample reserve” policy a “public good” as in it is good for the public to see savings eaten away by inflation and higher public debt burden of interest payments to subsidize banks.
This was sanctioned by the Congress in 2008. And the banks could earn more in the interbank market. That’s why the Fed pays that interest: to keep those excess reserves out of the market.
this is the only thing governments all over the world are going to do when everything falls apart
We've just started to rein in inflation. I don't think anyone (Fed, politicians, or the public) has the stomach for more QE.
see 2008, 2020
Given how aggressively we expanded the money supply just a few years ago, mass bank failures seem quite unlikely as asset price increases generated quite a bit of equity leaving plenty of buffer room for loan defaults.
Still plenty of liquidity out there. Commercial real estate is not a systemic threat.
and I asked if that was the company’s stance for their office park
and no, it was just a vicarious interest in commercial real estate doomer articles
simping for corporate
The TARP bailouts showed all of us that bailing out banks in bad situations does little to help the average citizen anyway. Let them take the losses. Why on earth did we train banks that they can have all the upside but have the public eat the downside if a financial crisis ever arises out of their own behavior?
Then the government is bailing out with FDIC, plus the economy explodes.
It's not as sexy as it sounds.
At least then it's bailing about depositors.
FDIC is backstopped by the Fed and participant banks. There is no hard limit anywhere. Make depositors whole, good luck to everyone else. If you’re exceeding FDIC insurance limits as a depositor, you should fix that, today. If you have exposure to at risk asset classes, you’re already exposed, you’re just waiting for prices to catch up to reality.
how do you fix it?
If you're a larger business (>$5M cash equivalents on hand), treasury management in government money market funds instead of a demand deposit account. All roads lead to mostly US treasuries here.
[1] https://www.fdic.gov/resources/deposit-insurance/brochures/i...
[2] https://www.fidelity.com/why-fidelity/safeguarding-your-acco...
[3] https://mercury.com/vault
(previous comment on the topic during SVB failure: https://news.ycombinator.com/item?id=35171289)
If your risk model is the US government allowing FDIC to fail, we're well outside of reasonable discourse. Your currency would be food, fuel, and firearms.
[1] https://news.ycombinator.com/item?id=39441532
When the problem is too many loans 'how do you still let people get loans' is not the right question to be asking.
Reserve rates have been 0% since 2020. All Deposit taking institutions with a loan department have carte blanche to print money. The model you're operating under doesn't actually map to how things are now.
TL; DR What we did in March 2023.
First Republic, SVB, Signature—our nation’s second, third and fourth largest bank failures in its history [1]. (WaMu.) Resolved so smoothly we don’t even talk about it less than a year later.
[1] https://en.m.wikipedia.org/wiki/List_of_largest_bank_failure...
Except now with the banks understanding that FDIC will make depositors whole, above and beyond the $250K limits.
The only thing this does is increase banks comfort with risk.
The stockholders care more about the stockholders than they do about the depositors. This is also true for most of the managers, maybe all of them.
Weren't those banks just sold without the government stepping in?
They were put into receivership under the FDIC before being sold in a structured process [1]. In any other country, and at any time prior to ~2012 in our nation’s history, March 2023 would have been a financial crisis.
[1] https://www.fdic.gov/news/press-releases/2023/pr23019.html
https://www.congress.gov/bill/118th-congress/senate-bill/219...
FDIC limits government losses to USD 250k per account or something like that, right? I think it is still preferable to outright bailing out the entire bank. This is what we should have done with Silicon Valley Bank.
SVB deposits were businesses.
You're ensuring every regional bank collapses and all businesses bank with Chase if you let SVB fail and don't bail out the depositors.
Maybe that's what you want.
It's not what the government wanted.
So they bailed out SVB.
SVB didn't even take undue risk. They merely bought long-term bonds which lost book value due to rate hikes. What crushed them was high-profile people with insider knowledge of their bond holdings spooking the market.
Hindsight is 20/20, but what SVB was doing wasn't irresponsible with the knowledge they had at the time. I don't think any expected rates to climb as fast as they did. They were 80% unlucky.
Not hedging in ANY way against interest rates going up was explicitly undue risk. EVERY bet must be hedged. SVB said "well surely the government will never raise rates, so we can lock in money for 10 years to gain a small amount of extra profit", ignoring that their depositors were all highly aligned and literally friends that would act in concert.
You don't have every dollar you own locked up in a 7 year CD right? Because you're smart enough to know liquidity has non-trivial value! SVB purposefully ignored that in search of a slightly higher profit. It was trivially stupid.
>but what SVB was doing wasn't irresponsible with the knowledge they had at the time. If you're a bank, and you think you've found a magic money glitch that requires no hedging, you are wrong. They weren't doing arbitrage, they were gambling.
The point I was trying to make was that unfortunately the businesses were also taking too much risk if they were storing all their money in a single bank. Just as an individual I am spread across multiple banks as a means of derisking myself and ensuring that I'm fully protected by FDIC in the event a bank does something this epically stupid.
So bail out the customers / depositors and wipe out the equity investors? That's what they did with SVB...
> Why on earth did we train banks that they can have all the upside but have the public eat the downside if a financial crisis ever arises out of their own behavior?
Deregulation and lobbies did it, it's been documented over and over again. Deep down greed is the culprit but it could have been somewhat tamed.
TARP prevented the economy from collapsing. I was unaware the average citizen didn't need loans or a functioning economy.
Nearly all money is someone else's debt, $1 of bad debt can lead to a chain of hundreds of people - each losing $1.
And if the government steps in with FDIC or other protections to prevent hundreds of people losing $1, then the government has to print more money, and inflation happens.
There is no good solution.
And the fdic does not fill its coffers from tax revenue. It is funded entirely by required payments from Banks. The FDIC will raise its required fees from banks, and the consumers want paying through their banks, not through taxes or printing. Though it does hurt consumers in the end.
But if its coffers run dry, the US treasury pays out.
Even if we have a cascading failure, the FDIC coverage backstops at $250,000, and it only recovers depositors, and we are talking about loans here, not deposits.
If banks fail, they fail. It may short term feel very painful for people, that I can agree with. My point is, as both a society and as a market place, need to eat the fruits of which grew from what we have sewn. If that means a lot of people get hurt, maybe finally we'll learn a lesson this time that allowing banks to act with impunity is a terrible idea and distorts the overall marketplace.
Ending those distortions will net win when the dust settles, allowing new players and new ideas to grow.
Keeping depositors whole isn't the same thing as backstopping terrible loans or other bad financial activity. They used to be largely separate entities until the "reforms" of the 1980s and 1990s. Perhaps there is something to be said for separation of concerns here
Practically, no, the FDIC set the precedent last year of full depositor coverage.
I know its un unlikely event but I've always been curious what would necessitate it to fail. As we know, all things can fail.
Sure, but the FDIC “breaking” would require the Treasury to actively repudiate its Constitutional and legal duties.
> FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency
No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation.
Kind of like the PBGC premiums that are wholly inadequate, and the real DB pension insurance is the political power your union has (see multi employer pension bailout a couple years ago).
https://news.bloomberglaw.com/daily-labor-report/biden-to-un...
>No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation.
The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency since it would disrupt so much of US society’s ordering, that it would decrease confidence in the US to be as economically productive and secure as it used to be.
Not really given the FDIC’s role: a threat to FDIC reserves would require the kind of broad collapse that would be produced by an economic collapse that would threaten deflation even before considering the loss of money supply from deposit accounts evaporating. FDIC coverage of insured (and even uninsured, as allowed under the systemic risk exception) amounts in such accounts can only reduce to zero the money lost from those accounts, it can never be stimulus that would go beyond neutralizing that additional deflation threat to actually deal with whatever the broader cause of the collapse was.
Now, the separate fiscal and monetary response to that cause beyond preventing losses to deposits might overshoot and produce excess inflation eroding purchasing power, but that’s a separate issue.
“The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage” [1]. Your bank pays an insurance premium to the FDIC.
“FDIC insurance is backed by the full faith and credit of the United States government” [2]. If it burns through its reserves, the Treasury writes a cheque. The reserves are a political check on FDIC’s management; most governments fund deposit insurance straight out of their treasury.
[1] https://www.fdic.gov/about/what-we-do/index.html#:~:text=The....
[2] https://www.fdic.gov/resources/deposit-insurance/brochures/i....
It holds enough capital to cover something like only 2% of insured deposits.
It's meant to cover local contained bank failures. It won't do shit in the event of a domino collapse event.
This is wrong. In the case of a large-scale collapse, depositors have a legal claim on the Treasury through the FDIC.
They absolutely did [1].
[1] https://www.fdic.gov/news/press-releases/2023/pr23019.html
Can you elaborate on why you now think there is a precedent that all deposits for future bank failures are insured?
Also FDIC limit is theoretically a lifetime limit per individual. Again, no actual limit so long as you know the right people.
Also worth pointing out that when financial institution failure hits people personally regime changes follows quickly. It'd be at the ballot box in the US, but make no mistake it'd come swiftly. As a result, politicians will do whatever it takes to prevent that from happening.
Which depositors were screwed for not having the right connections?
> FDIC limit is theoretically a lifetime limit per individual
No. It’s not even a limit at the same institution, just per ownership category.
That is why the CRE loans are such a huge problem. Their debt is owed to regional banks, not the big ones.
That said, the FDIC ignored their playbook and rules to try to calm things down last March. A few more banks went down but not the numbers people expected. That means we're in uncharted territory.. will the FDIC follow their own rules next time or do whatever they want? We don't know.
Less than one year! We had three banks fail—the second, third and fourth largest in our nation’s history—less than one year ago [1]!
None were TBTF, let alone big five. Every deposit was covered. I get that the headline reads hysterically to a lay reader, but less than one year!
[1] https://en.m.wikipedia.org/wiki/List_of_largest_bank_failure...
Correct. The comment I responded to claimed unlimited coverage was limited to the Big 5. We're less than a year from non-TBTF (we let them fail for god's sake) non-big-five banks (a) failing and (b) receiving unlimited depositor coverage.
> That said, the FDIC ignored their playbook and rules to try to calm things down last March.
There's the SOP and there's what they did, there was no relation between the two which means we have no clue what they might do next time.
The intention behind that intervention was clearly to stave off a sector wide run. What held true then and there is by no means guaranteed or even likely to hold true in the event of an actual panic.
As far as I know that is not true. Why do you say that? FDIC limits are applied per bank, per individual, per account type, but there is no individual lifetime limit, and a common "cash management" account technique is to distribute your money to multiple banks so you can take advantage of each bank's limit.
https://www.fdic.gov/resources/deposit-insurance/brochures/d...
I don't know what section of the Federal Register to consult to see if that is actually backed up by something enforceable
What rule are you referring to? FDIC coverage has never had a lifetime limit. That would mean someone who gets an FDIC payout at one bank should rush to pull their deposits at others.
but the government is owned and that will never happen.
If banks fail due to mismanagement, letting banks fail should be done, but you can't really blame the banks for not predicting covid and the massive decline in demand for office space. Protecting against once in a lifetime events won't be profitable and governments will have to end up subsidising them anyway.
This is not correct.
Loans create money. So the creation of money involves the creation of the loan. But if the loan is poofed, the currency doesn’t go away. (Think: loan to buy a house makes money, seller gets the money, buyer defaults, loan is impaired.)
The bank (or anyone for that matter) only "lost" the money if they mistakenly believed they still had it in the first place. This is the same kind of analysis that leads people to claim they only lose money in the stock market if they sell after stock price drops. For tax purposes in the US it does work that way. But in reality, the money was gone the minute you bought the stock. There is never any guarantee of a future buyer or for that matter a guarantee of a brokerage even interested in executing your order.
No, but the seller’s bank does.
Banks don't liquidate assets to get "lendable money" so I guess maybe I don't understand the original statement at all then.
True - what I meant was they can't just have a house on the books and loan out 100% of the difference between its value and what's still owed on it, because if the loans start defaulting they need a margin of error in case they can't sell the house for what they thought it was worth at the time of buying.
Also the seller is now less a real asset. Their liquid asset worth hopefully went up in the sale. But their total net worth should be around the same, minus any fees they paid during the transaction.
Mortgages are assesed on risk-based metrics in terms of how much equity a bank must hold against each dollar loaned, and how much liquidity as well.
Apologies. The comment you're responding to makes multiple fundamental errors [1], so the discussion is a tad tough to follow.
[1] Banks have enough capital to absorb these losses, capital isn't cash, loss reserves aren't cash, there is no chain reaction of defaults in basic lending, bank failures and rescues aren't inflationary
If the house burns down in a fire, the bank is still owed its $200k, assuming it's a full-recourse mortgage. Same if the house's value drops to zero for some other reason. The money owed to the bank is separate from the house (again, in a full-recourse mortgage).
Of course, you can't sell the house and keep the mortgage, but that's only because the bank wants to be sure it will get its money; it's not because the bank owns a share of the house. Same story with the bank forcing you to insure the house.
So I think it's wrong to say that the bank owns a share of the house. Which raises the question: what, precisely, is the asset that's on its balance sheet?
(Hopefully I'm being clear that I'm not asking what GAAP says. I mean what does the bank have that it didn't have before?)
EDIT: this problem doesn't arise with a non-recourse mortgage, where the bank's asset is pretty clearly a share in the house. If the house burns down, the bank loses its money.
The asset is a debt instrument, with everything implied by the specifics of that instrument.
If I own stock in Microsoft, it means I own a percentage of all its assets (real estate, intangibles, etc), along with a right to a percentage of its revenue streams. Plus I run the risk of my asset being worthless if Microsoft fails. So I know what that means.
Similarly, if I own Microsoft bonds, it means I have a right to a fixed revenue stream from it, and further, can claim a proportion of its assets if it stops paying me. So I can be said to 'own' a proportion of its assets, insofar as I have certain rights over them. And again, I run the (smaller) risk of my asset being worthless if Microsoft fails.
If I have lent Bob money on a non-recourse basis to buy a house, it's a similar story: I have the right to a fixed revenue stream from Bob, and can claim his asset if he stops paying me. So again, I can be said to own a proportion of the house, less whatever I'd pay him if I seized it. And again, I run the risk of the house burning down, etc etc.
In all three of these examples, my balance sheet asset refers to something real.
But if I've lent Bob money on a full-recourse basis, what is the asset? Not the house -- we've established that. Not the cash -- the cash is gone. So what is the debt instrument in my balance sheet based on?
The full-recourse loan instrument gives you access to any other assets Bob may have (including future assets such as wages).
They may start existing at some point in the future, or they may not.
How can I claim ownership over something notional?
The whole point of a loan (of any kind) is that it comes with risks. Different types of loans have different risks, and allow ownership claims of more or less things distributed in time and space). But no loan is risk-free, and so the idea that a loan provides an ownership claim of something that only notionally exists doesn't seem particularly strange.
Obviously I have claimed a right to $200k of future revenue streams Bob is able to provide me with (plus interest).
So ISTM that the 'asset' I would claim to own is Bob himself. I don't own a house or company stock that provides me future revenue streams; I would claim to own a share in a person that provides me with the same. This seems the only logical way to understand the situation.
You lent Bob the money with (hopefully) a clear understanding that in so doing, you could end up not receiving back some or all of the principal and interest. You adjusted the terms in various ways to decrease the chance of that happening, but you did not do this by acquiring ownership of anything.
If I have a claim on Microsoft's future revenues, this implies that I own a share of Microsoft. If I have a claim on Bob's future productivity, this implies that I own a share of Bob.
And so it is with Bob, metaphorically speaking.
But this doesn't affect the argument. In fact, it looks as though you agree with my suggestion, which is that being owed money (on a full-recourse basis) by Bob has a very strong resemblance to being a shareholder in Bob.
Why would that happen?
Its probably not? Money is created as debt:https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
You can really think through this yourself logically:
- There is nothing magic to lending money
- Interest paid back creates an incentive to lend money (not to borrow it)
- Borrowed money always (ALWAYS) represents risk, because the borrower may not be able to repay.
- Risk must always be measured. You can choose to ignore it, but it never goes away.
- If money is created as debt, how do you explain bankruptcies?
Interest compared to return on your use of money may not be any kind of disincentive (you profit by borrowing, that's the expectation)
Lent money always (ALWAYS) represents risk as well, for the same reason given above.
There's risk in anything, sometimes to proceed you accept it. Calling that 'ignoring it' doesn't make it any more important.
And I have no idea what the comment on bankruptcies is about.
But I agree on the main point, which is some armchair pundit like the OP finds it easy to draw a circle around a cherry-picked part of the economy-space and say "See! Some Obvious Conclusion!" and think they've said something. You have to look at all of it of course, as a complete system.
Banks typically loan money they don't have on hand (see fractional-reserve banking). And when they do that -- money is created out of thin air. Bankruptcies have nothing to do with it.
Retail banks need to have the money on hand to lend. That can come out of deposits (leaving a portion in reserve for liquidity, should the deposits need to be redeemed. (hence, fractional-reserve)) or other capital. There's a ledger that has to balance.
A Central Bank (at least one that is in control of its currency) can lend money and have it essentially come from thin air.
Nope, the headline refers to loss reserves. The specific reserves these banks have set aside for these loans. The article alleges they need to increase those. That might, at worst, hit their earnings.
> all money is someone else's debt
All money originates as a loan. (Other than federal spending.) That link disappears the moment it’s created.
> if the government steps in with FDIC or other protections to prevent hundreds of people losing $1, then the government has to print more money
Deposits are highly liquid. Replacing a deposit with an FDIC guarantee isn’t generally inflationary. (In practice, the FDIC having to step in tends to dampen credit and money velocity.)
Part B is then saying that if the debt chains collapse, erasing massive amounts of money, partially backfilling people via the limited insurance will cause inflation?
Please clarify this contradictory reasoning.
There's no good solution after the fact once the horses have bolted.
You can address it up front with regulation and don't leave the barn door open all the time.
We have a system that publicizes risk and privatizes losses. I don't think that's going away any time soon.
Trying to create a "stick" will be met with complaints of government overreach. Those same complainers will put on a show of holding their noses while filling the feedbag with as much carrots as will fit.
There are enough people in Congress that want to carve some sticks. But when it comes down to it, they don't have the guts to watch the herd starve just to make a point. If I were a member of Congress, I'd probably cave too. It would be nice if we could have a system that punishes those who destroy our economy, but it's not worth letting innocent people suffer to make that happen (IMHO).
We’re less than a year from the last set of bank failures. Shareholders were wiped. Foreign affiliate depositors were wiped [1]. If you’re arguing for limiting depositor protection, sure, but we’re well past TARP as precedent at this point.
[1] https://www.wsj.com/articles/the-pain-of-silicon-valley-bank...
And Geithner saved us all as he was asked to do.
Is it the same people tasked with getting inflation down and whethering the induced bubbles this time? They have gotten inflation down, but they can't hide the unpaid expenses of "scorched earth" and "starve the beast" experts at this.
Geithner had nothing to do with TARP; the SEC was barely involved. This article has practically nothing to do with the SEC outside reporting requirements.
We’ve also gone through a round of bank failures, largely due to risk managers who couldn’t contemplate America raising rates, without moral hazard.
The FDIC’s balance sheet is unlimited. It’s an explicit full faith and credit agency. It has, to date, never pulled on that credit by managing its risk through fees on member banks.
If so, interesting, I always sort of assumed the money would just come from the treasury at that point.
Last year's failures in March caused an assessment in December [1]. In a crisis, that isn't enough time.
The way the system is designed, the Treasury would write a cheque. Full faith and credit means those FDIC claims would have the same legal standing as e.g. Social Security payments or tax refunds. Treasury would probably structure it as a loan to be paid back by future assessments, again, for political reasons. But they'd have discretion on the specifics at that point.
[1] https://www.fdic.gov/deposit/insurance/assessments/specialas...
I suggest episodes 1 (difference between currency and money) and 4 (how dollars are created) from the following series by Mike Maloney.
https://www.youtube.com/playlist?list=PLE88E9ICdipidHkTehs1V...
This is wrong.
Debt is regularly asymmetrically destroyed, we call it restructuring. And when a debt is destroyed we don’t destroy the correspondingly-created money. (Money is destroyed via separate mechanisms.)
That said, I suppose it’s neat seeing the gold bugs coming back on the crypto promoters [1].
[1] https://goldsilver.com/about-mike-maloney/
It's not exponential.
The real answer is that ZIRP was a a bad idea
We're still talking about the largest era of wealth generated across any territory or time in human history, the American post-War ascendancy, right?
Grandparent said "collapse," which is what Jenga towers do.
Here's the era, in two charts:
[1] https://tradingeconomics.com/united-states/government-bond-y... [2] https://www.cbpp.org/income-concentration-at-the-top-has-ris...
Out of curiosity, what are you seeing? Rates going down is bad?
Here's the last millenia [1]. You'll notice a long-term trend of decreasing rates.
[1] https://www.businessinsider.com/chart-5000-years-of-interest...
Sort of like Y2K mitigations, then, right?
They will let 1 bank fail to send a message but paper over the losses for everyone else.
If you hold cash and aren't invested in something, you're a fool. Stocks, real estate, hell even crypto is better than fiat.
I'm not sure how one can make this conclusion without having known what would have happened if there was no TARP.
Worst case: the contents of individual bank accounts poof out of existence. Riots and untold calamity ensues (it is difficult to say how bad this gets). Then another country steps in to buy up those assets at an even more steep discount. The subsequent housing crush the country is currently experiencing is worsened.
[1]https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
Government that smooths out the bumps. Provides some 'smoothing' to society so it doesn't crater and fall apart.
While also holding people accountable and criminally charging corporate executives.
It does seem like there is some reductionism to just crying 'nanny', since the same people that dislike the 'nanny' state also complain when the 'nanny' wants to hold people accountable, since they should be free to cheat. Yelling 'Freedom' anytime the state steps in.
You can't have both, complain when the state is a 'nanny' and helping, and then complain when the state disciplines people, the 'nanny' when stopping the child from doing things that will hurt itself.
Why weren't executives and boardrooms held liable? That would have been a great start. Actually putting teeth behind regulations, clawing back bonuses and invalidating golden parachutes and culpable executives going to prison, preferably for a long time. None of the executives involved should legally be allowed to work in finance again.
If I as an individual pulled the stunts they did, or a smaller organization did, they'd be labeled fraudsters and prosecuted to the fullest extent of the law.
What TARP and its aftermath proves is that if you're big enough, you escape all real liability for your actions, and the public and your employees get to suffer the consequences.
Why should executives and boardrooms be left off the hook while the American public pays the price?
Less than a year ago, we suffered the second, third and fourth largest bank failures in our nation's history [1]. Shareholders were zeroed.
[1] https://en.wikipedia.org/wiki/List_of_largest_bank_failures_...
No laws were changed. The FDIC always had broad discretion in managing assets and liabilities under receivorship. You are correct, however, in that a precedent was set.
Where you are incorrect is in the friends in high places bit. I was near (though not on) ground zero in those crises, and to the degree politics were involved, it was in the goodwill that would have resulted from visibly screwing certain Silicon Valley elites. If Signature hadn't failed, there is a good chance SVB's depositors would have been capped at the legal limit.
The government undoubtedly provided its backing to the banks. That "profit" is not commensurate to the risk that the govt took on.
> That "profit" is not commensurate to the risk that the govt took on.
That's because the bailouts was intended to stabilize the economy rather than to turn a profit.
What do you mean by this exactly? I don't know what this is in reference to.
Never mind the case, the biggest problem with TARP isn't the money per se, its the lack of substantially increased regulation and teeth to enforce it. Executives and boardrooms should have been bankrupted as the government should have clawed back pay, personal assets, and bonuses to pay for the damage that was done. In another words, boardrooms and c-suites should have been humiliated and fired en masse, with prison time for those culpable.
That would have been a good start. TARP funds were handed out with no teeth. The senate hearings largely ended up being for show, and only a few executives were held feet to the fire and even so, it was brief.
Not to mention, how the heck are these people still allowed to work in finance at all.
This was the CARES Act.
So over the 5 years of holding those assets, that's a rate of return of 0.7%?
If you ignore the "getting your money back" part yes.
> In total, U.S. government economic bailouts related to the global financial crisis had federal outflows (expenditures, loans, and investments) of $633.6 billion and inflows (funds returned to the Treasury as interest, dividends, fees, or stock warrant repurchases) of $754.8 billion, for a net profit of $121 billion.
> A 2019 study by economist Deborah Lucas published in the Annual Review of Financial Economics estimated "that the total direct cost of the 2008 crisis-related bailouts in the United States" (including TARP and other programs) was about $500 billion, or 3.5% of the United States's GDP in 2009, and that "the largest direct beneficiaries of the bailouts were the unsecured creditors of financial institutions."[92] Lucas noted that this cost estimate "stands in sharp contrast to popular accounts that claim there was no cost because the money was repaid, and with claims of costs in the trillions of dollars."
Where it benefited was in potentially reducing economic harm, but the short term gain is offset by long term systemic issues.
However that also caused the greatest gap in income inequality ever. Those with assets got extremely wealthy and those living paycheck to paycheck got fucked. This is why no one can afford a house in the Bay Area unless you had money in stocks or real estate already.
The fact that people could afford houses in other areas seems to support that group-think and constrained supply is really at the heart of that issue. Also, affordability was an issue prior to the crisis (well, true affordability because the loans were too easy to get for many).
At what point in your career were you?
Anywhere in the Bay Area, or in the neighborhoods you were willing to live in? What weee your constraints?
This is one of those situations where there was no good way out. The least awful option ended up being the best out. The real issue was that Timothy Geithner, Ben Bernanke and Henry Paulson could not effectively communicate the economic issues during an election.
As much as I respect John McCain, his decision to end his campaign to ‘return to Washington’ was an unmitigated disaster. Both for the economy as a whole and for that manifestation of the Republican Party. We can draw a direct line from that stunt through the Tea Party and into today’s current populist climate.
Long rambling explanation short, I don’t believe there were other options. Decisions were made in real time and in many cases, they had to be made overnight. Two major deals that would have dramatically altered the response to the subprime crisis both fell apart over night on a weekend. Ben Bernanke was (and remains) one of the world experts on the Great Depression. His education lead him to take policy steps that would prevent another Great Depression.
Maybe we’re worse off, maybe we’re not. But I’m glad I didn’t live my entire thirties under a depression.
Whether TBTF banks should be split up is still being debated. With size comes resilience (and fewer books to look over).
In terms of improved regulation, the fact that we're less than a year out from the second, third and fourth largest bank failures in our nation's history with seemingly no memory of it seems to speak for itself [1].
[1] https://en.wikipedia.org/wiki/List_of_largest_bank_failures_...
Other things (ie - derivatives) were not properly regulated. If you’re interested in what one form of regulation could have looked like, you should look up Brooksley Born. Most specifically, what happened to her when she proposed regulation.
Ben Bernanke spent so much time testifying and was so bothered by his experience that he used to be a registered Republican. Now he’s independent.
Its a tragedy through and through. She faced harassment from all sides and her expertise was brushed off carelessly. Its really truly sad.
The same thing happened to Raghuram Rajan from the IMF. He delivered a paper criticizing the financial sector entitled "Has Financial Development Made the World Riskier" which argued that disaster loomed. The paper, which proved accurate, was aggressively criticized by Larry Summers, who served as the director of the National Economic Council in the Obama Administration. He was also ostracized for expressing a legitimately dissenting opinion on how financial markets in their then current form were a great risk the global financial system
[0]: https://www.sfgate.com/business/bottomline/article/Brooksley...
It’s quite interesting because we can look back in time and find some excellent people who sounded the alarm bells. They all got trounced.
I think if we can take any solace, it’s that Larry Summers did not serve as Obama’s Secretary of the Treasury. It went to Tim Geithner instead.
Granted, hypotheticals are always tricky, and one can’t predict what sort of malignant reaction a McCain administration would have provoked.
These are some pretty big things to posit without some citations.
Simply put I don't remember anything of this nature, at all, with the exception of the prevalence of racism.
I'm not saying Obama and his administration didn't have faults (they sure did) but like I said, other than the prevalence of racism, nothing else rings true.
They really should be common knowledge. Among many other examples: the Chrysler bailout violated the Takings and Due Process clauses; the use of the IRS to persecute political foes violated equal protection; he started his political career with a fundraiser in the home of two violent terrorists, the founder and leader of the Weather Underground (this on its own should have disqualified him as a candidate for any civically-minded party); he is noted for such gaffes as referring to ISIS as the ‘jayvee [junior varsity] team’ and mistakes such as the premature 2011 withdrawal from Iraq which opened the door for the Islamic State, as well as for such poor domestic politics that his party lost over 1,000 seats.
Not all criticism of or disagreement with him was well-founded or well-motivated — as I noted, I failed to recognise at the time how many of his foes had racist motives — but he really was a profoundly bad president.
edit: grammar
Also, I would argue that Trumpism, at least from his base's point of view, is about challenging the Establishment. Sure, Trump is nasty and in no way deserving of the anointment as challenger of the Establishment but he's skillfully bamboozled his supporters into believing it.
Trumpers are right about one thing: the Establishment are an absolute abomination.
In that spirit, I think we could have done something/ written the laws to force something like the following to happen: 1. wipe out shareholders, convert bonds to common stock. 2. if the loss is so gargantuan that converting the bonds still leaves the bank insolvent, then wipe the bonds out too and offer shares up to certain value to depositors as conversion. If not enough convert then haircut depositors over a certain threshold for the rest up to a reasonable percentage of the negative equity and make up the rest with a government loan program at that point.
The expectation should be that if you own a big bank and it does stupid things you are going to lose your money, if you are a bond holder of a big bank and it is doing stupid things you should expect to be converted and possibly lose money. The expectations as a depositor is you will have all your deposit up to a threshold protected and you may lose some above that temporarily but are likely to get it back with a nice return in time.
There were better options. But it's unclear we would have found them in time. That's why we explored and enacted them aftewards. Which is what let First Republic, SVB and Signature fail last year, with investors being wiped out and no depositors impaired, so smoothly that it's no longer in popular memory.
There was never any meaningful regulation that came to pass afterward that split the banks up.
There were some marginal improvements to solvency requirements (which ironically were the standard before de-regulation in the 1980s and 1990s) and on the consumer banking side there is a little bit more protections, but nothing truly meaningful that limits downside exposure from the broader public ever got passed, let alone debated. Everyone was so fast to get back to "business as usual" you'd think nothing happened.
What happened with SVB et. al. last year is actually what the FDIC is suppose to do and was established to do, well before the 2008 financial crisis. The FDIC has always had the power to take receivership of failing banks and sell off their assets to make depositors whole. By their own admission they did much the same in the 80s and 90s[0]
[0]: https://www.fdic.gov/resources/publications/crisis-response/...
Sure, populist shows of retribution weren't prioritised. Keep in mind the time frames within which TARP was passed.
In last year's failures, stockholders were wiped out.
> government in all their power still allowed bonuses to be paid out with TARP money even as people were losing their jobs en masse
Based on what law did you want these binding legal agreements invalidated?
> never any meaningful regulation that came to pass afterward that split the banks up
Not true. The Fed and FDIC's powers were expanded thoroughly post crisis.
It remains unsettled whether breaking up the big banks is the right move for stability. America continues to have a large number of banks per capita relative to other countries.
> Everyone was so fast to get back to "business as usual" you'd think nothing happened
If you didn't watch the picture, sure.
> What happened with SVB et. al. last year is actually what the FDIC is suppose to do and was established to do, well before the 2008 financial crisis. The FDIC has always had the power to take receivership of failing banks and sell off their assets to make depositors whole.
What happened in '08 was outside the FDIC's purview. That was the problem. Depositors weren't running, it was the other parts of the system that failed.
I don't think anyone is asking for populist retribution[0]. I'm asking for fraud, gross negligence, financial impropriety and a host of other actual things that happened to be prosecuted to the fullest extent of the law, and that would mean going after executives and boardrooms, where the decisions were made. Even by this point fining corporations is a slap on the wrist. Culpability is with the decision makers. That means executives and boardrooms.
Conversely, upon further review, it also means at least a few dozen regulators needed to be removed from their posts and investigations should have been opened into those failures too, to a much broader extent than they were.
>Based on what law did you want these binding legal agreements invalidated?
They should have made it a condition of accepting the TARP funds. I'm not surprised it wasn't (though I'm getting conflicting information when I go to look this up, there appears to be an optional provision that allowed the government to elect to do so, but its unclear if it made it into the final bill), but its plain silly that we attached no real sticks to this. In fact, it was proposed at the time[1], that much is certain.
>Not true. The Fed and FDIC's powers were expanded thoroughly post crisis.
Their roles perhaps, and we could discuss that, but it isn't what I posited. The real question I have is: What meaningful reform happened? There has already been rollbacks of the Dodd-Frank bill in the intervening years[3] and I'm unaware of any regulatory teeth over the derivatives market, for example.
Whether the FDIC and The Fed have expanded regulatory scope isn't the same thing as passing meaningful reforms.
>It remains unsettled whether breaking up the big banks is the right move for stability. America continues to have a large number of banks per capita relative to other countries.
I will contend that splitting banks up where "main street" banks (traditional loans, checking, savings and other things traditionally associated with mainstream consumer banking) and investment banking should be split. There's no reason the holder of my deposits should also be actively exposing the core safety of the institution by making speculative investments in the derivatives market, for example. Separating concerns is how it used to be, and the only outgrowth of the M&A of the 80s and 90s in the banking sector seems to only be new ways to create riskier investment portfolios. I don't think having these very disparate activities under the same business is a good thing, as you risk the institutions stability, as we saw in 2008, and again, to a lesser extent last year.
Boring banks are good banks. Note however I'm not saying those risky financial opportunities are in and of themselves bad. They aren't, per se, but they should be a separate business entity entirely, and not allowed to cross-pollinate each other to the extent that they do today, if at all.
>What happened in '08 was outside the FDIC's purview. That was the problem. Depositors weren't running, it was the other parts of the system that failed.
I said as much.
EDIT: I initially posited that the FDIC had similar authority prior to the events of 2008-2013. I incorrectly conflated the role of the Resolution Trust Corporation and the FDIC having management over that with the FDIC itself having authority to take a bank into receivership and to seek to sell its assets in-part or in-full, to make depositors whole. That's my memory failing me. I retract this assertion. This is indeed a post 2008 role it has assumed.
[0]: To me "populist shows of retribution" is more guillotine justice than simply enforcing the rule of law, and I think its intentionally combative. All anyone is really asking for here, as upset as I maybe regarding what happened in 2008[2], I'm only aski...
Most derivatives are now centrally cleared, which means centrally reported. SIFIs are held to tight stress testing and reporting standards. Banks have to maintain failure plans. That's just off the top of my head.
All of these components allowed First Republic, SVB and Signature to fail in a way they could not have pre-2008.
> the FDIC has always had this power, and it was well exercised in the S&L crash and its aftermath between 1987-1994
No, it did not. No competent banking lawyer would allege as much.
And the S&L crisis famously involved depositors losing money because the FDIC was hamstrung [1]. The FDIC did not have the power to bail out e.g. AIG in 2008.
> Boring banks are good banks
I strongly recommend an introductory money and banking text [2]. Each of First Republic, SVB and Signature failed due to boring banking mechanisms.
[1] https://www.fdic.gov/bank/historical/history/167_188.pdf
[2] https://www.amazon.com/dp/0134733827?ref_=cm_sw_r_apin_dp_NC...
Which is a lower pool of banks, because of rollbacks to Dodd-Frank, which designate a much smaller class of banks as SIFI. In fact, the Federal Reserve pointed the finger at these rollbacks as an important piece of how SVB managed to fail in the first place[0][1]
If I understand correctly, being exempted of the SIFI status in practice means that regulators are much more lax in stress testing and enforcement of the tighter Dodd-Frank provisions.
When you say failure plans, we are really talking about reserves, there has always been some reserve / loss requirements, they were tighter until the de-regulation of the 80s and 90s, IIRC, and the only thing that has happened there is that some of that same tightness in regulation was restored, but its not net new in the sense that it pushed broader regulation, it only restored some aspects that were actually already in place at prior to the aforementioned de-regulation, IIRC
>Most derivatives are now centrally cleared, which means centrally reported
I'm unsure if this is meaningful or not, particularly since the conditions that caused LTCM to fail (and really drove much of the 2008 failings) still exist[3]
>No, it did not. No competent banking lawyer would allege as much.
And you're right. I conflated the role of the Resolution Trust Corporation and the FDIC (at some point, the FDIC was in charge of the RTC I think) which played a similar enough role in my memory that I ended up conflated here. I edited the post to reflect my errors. I should revisit this time period at a later date.
> Each of First Republic, SVB and Signature failed due to boring banking mechanisms.
That isn't really consensus of multiple agencies. They were negligent in managing their risk[1][2]
I don't think that's "boring bank" activity, to be repeatedly mismanaging risks. Unless textbook case of mismanagement by the bank[2] is a boring bank activity.
[0]: https://www.reuters.com/business/finance/us-fed-points-finge...
[1]: https://www.newyorker.com/news/q-and-a/the-regulatory-breakd...
[2]: https://www.federalreserve.gov/publications/files/svb-review...
[3]: In my research, Warren Buffett of all folks maintains these risk are alive and well, "a ticking time bomb that will serve to poison markets", to paraphrase. I'm unsure what to make of it (Buffett by his own admission isn't the foremost authority on economics, though its hard to dismiss the guy given the track record) but it is interesting never the less.
There is no reason the decision makers at the top should have been able to use TARP cash to pay themselves bonuses.
Its not all about the money, at the end of the day. Its what you do with it.
It should have had more strings attached. The banks should've been broken up again to undo the nonsense de-regulations from the 1980s and 1990s that exposed "main street' to such speculation in the first place.
Mind you, if individuals or smaller organizations did what the banks did, we would call them pyramid schemes and fraudsters and arrest all of them and prosecute them to the fullest extent of the law, not bail them out to continue business as usual
Some major employers in the United States were about to miss payroll. The most famous story was a McDonalds franchisee who was not going to be able to make payroll. They didn’t hold cash on hand and needed banks to keep rolling paper. When McDonalds franchisees cannot make payroll, there’s a potential for tent cities.
If they had years, I’m sure things would have been different.
Incidentally, Ben Bernanke got so sick of that line of questioning that he is no longer a registered Republican. He’s one of the people who pulled us back from the brink of recession and I don’t know he’s treated with the appropriate respect.
>To me, the strongest piece of evidence in favor of the recession causing the housing crisis rather than the housing crisis causing the recession is the fact that prices snapped back up, in similar geographic configuration, after the economy has recovered
This is unsurprising, its where all the good paying jobs still are. The centers of employment as it were, are in the areas with the most housing demand, and spillover from that will drive adjacent markets up as people at the top and wanting to move sell and move to LCOL areas. Fundamentally this is the issue with housing that I think is readily apparent to anyone who has looked at the market with any seriousness.
Now with w/r/t 2008 it was faulty mortgages and mortgage backed securities that caused the recession, not housing construction. That is accurate to say, if you want to paint in broad strokes, but the defaults on NINJA loans and variable mortgages leads to a depression in home buying as credit tightens up and losses mount. I don't see how you don't end up with some depression in the housing market as a result of this, even if its uneven in whom it affects. Alot of collateral is tied up in real estate and that assumes "up and to the right" value of real estate holds constant. You have to square that too.
In the US, real estate is in a tug of war between being two views: One is as an investment vehicle / asset. The other is as a commodity to which we all need to live because its required for housing. Those two don't square very well.
One thing is for sure, homeowners want the value of their home to appreciate, and they fight tooth and nail to make sure it does. I think in context, we as a society over-invested in "real estate is an asset and can be your nest egg cause they ain't making more!" type narratives, and would do well if we shifted toward "real estate is only as valuable as it is used productively for society"[0]
[0]: In reference to Georgism: https://en.wikipedia.org/wiki/Georgism
I don't think that's inconsistent with "the Fed has overreacted, and should have kept rates low/lower". It just means that probably more people would have been able to make the monthly payments, the depression would have been smaller.
And of course your implicit point is that letting too many bad loans fester could have (would have) cratered a sizeable portion of the financial system anyway.
But instead of treating this as an asset bubble we ended up with an understimulated recession. (It's completely ridiculous that US real estate with a growing population was seen as 'toxic assets' even by the government. Just put it on the balance sheet of some random agency and sell it later, when convenient. Or use it as social housing, whatever. But of course ... politics emerges from culture.)
Everyone wins, even the government profited 10 million!!!
Did I just invent an infinite money hack to make everyone a millionaire?
Privatizing profits but socializing losses creates perverse incentives, besides being deeply unfair.
Sure. But the reforms enacted thereafter do.
The second, third and fourth largest bank failures in the nations history weren’t actions?
I state that one of the observations you can make about TARP and its aftermath is that banks weren't forced to do business differently and the bulk of the TARP money didn't go to help average Americans. There were other paths than TARP.
The fact it "didn't cost the government anything" is a red herring, in that it didn't produce the desired behavior or outcomes that were intended as the TARP money was suppose to have strings attached.
All I see is reasons for strong regulation and breaking up the banks so that "main street" banking is wholly separated from "wall street" banking, so losses can't cascade the same way, even if is at the expense of some marginal profits. Why should deposits and traditional lending be exposed to wall street speculation? This what happens when you allow speculative finance, corporate investment banking[1] and (for lack of a better term) regular banking to co-exist in the same institution.
Boring banks are good. We used to have a lot of them before the M&A sprees of the 1980s and 1990s, which was purely fueled by consolidation which in turn, those consolidated assets were invested in riskier and riskier financial markets and other endeavors. I will continue to argue it was not a benefit to the American public.
[0]: Though not all costs are directly monetary, or even monetary at all. One outcome of TARP and that time period is everyone is now comfortable with the idea of "too big too fail" and seemingly, governments are willing to bailout risky financial speculation of N size[2] with no consequences for those who made the decisions to participate in that speculation in the first place.
Keep in mind too, as noted elsewhere in this thread, its still up to debate whether that is strictly true or if the total cost has not been calculated correctly
[1]: I don't know where to draw the line here because "investment banking" is a really broad term, that covers everything from M&A finance to market making to individual investment services under the umbrella term. For arguments sake, I'm sticking with "corporate investment banking" to hopefully add clarity
[2]: N = whatever the minimum threshold is that financial institutions can convince the government to bail them out for while arguing not doing so will cause "a disproportional economic downturn"
Did you also feel the same way when SVB needed a bailout?
The end result of any systemic crisis is likely to be regulator-mandated buyouts of smaller banks and CUs and even more aggressive concentration of banking power amongst the top twenty or so BHCs, similar to SVB ending up part of First Citizens.
Yeah, having money markets lock up, half the businesses in the company unable to pay their payroll (because everyone depends on short term lending to smooth out yearly cycles) and ATMs stop delivering cash sounds like it would be much better for the average citizen. Don't stop until unemployment hits 25%+.
Nonperforming loans don't have a value of zero.
The Financial Times doesn't bait for clicks. It's written for subscribers who should understand the difference between reserves and capital in shorthand with respect to bad debts. A large part of why I love the FT is its articles are short. That means I can process them quickly. But it comes at the cost of context.
No, it's not. I read it this morning and passed it over. Then I saw it on HN and realised we'd have a clusterfuck. A technical analogy might be someone conflating an outage with the service going under.
That’s why it’s clickbait. The reaction here is exemplary. This isn’t doom this is the bread and butter ebb and flow of a banks loan book but without any sophistication on the reality of how banks manage these sorts of things. The regulatory loss provisions aren’t the only line of defense and it’s not even the first line. It reads as if banks were caught unaware of this looming crisis in commercial mortgages and there’s some unthinking machine responding only to the bare minimum regulatory requirements. The hand wringing about the financial crisis, as if no one learned anything and bank trading operations are run by total morons… if only they would listen to a bunch of programmers things could be different, etc.
Doom sells subscriptions, engagement is driven by dire headlines and articles that twinge out anxieties. The mechanical realities are boring, and are covered in trade media not general financial news.
Okay. But if this turns to shit, we best see some executive heads roll.
When a bank makes a loan and it starts going sour, it impairs its balance sheet by noting a counterbalancing liability in the form of a loss reserve. The article alleges banks need to increase those loss reserves. It is not saying e.g. JPMorgan is exceeding its capital reserves.
All this means is bank profits MIGHT be slightly lower this year. All of them set records for profits in 2023, so this seems like a big nothingburger.
It does, however, warrant banks reevaluating their risk assessment practices. Or maybe the problem is elsewhere? Something is definitely out of place for this situation to even arise so soon after the unpleasantness of 2008.
Reserves are entirely an accounting item. There are no cash reserves.
> warrant banks reevaluating their risk assessment practices
It’s predicting they already have. This article is messaging likely earnings outcomes. Not a crisis.
I feel like this should be said a second time.
Not all commercial property that is 30 days late will end up in foreclosure, and the value to the bank of property in foreclosure isn’t anywhere close to $0.
The current reserve ratio isn’t alarming when looking at historical trends. Even if it is too low, comparing the total value of delinquent debt to the total reserves in a headline is misleading at best.
It’s a concise one, assuming the reader has a working knowledge of our monetary system. A welcome assumption given the FT’s readership.
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