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Old 01-10-2020, 01:22 PM
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"Too Big to Fail" - Solutions?


I think we all remember the phrase, "too big to fail," from the 2008 financial crisis. Financial institutions were saved from ruin, because it was deemed that their complete failures would be more detrimental to the economy than the money spent to prop them up, Fair enough, I guess. I can see the logic in that.

As far as I can tell, this is still the state of things in the banking world (in fact, my longtime bank, SunTrust, has merged with BB&T, so there is now one fewer large bank in the world). I am not aware of any significant change, but I would love to find out I am wrong.

What made me think about this again was all of the crap coming out regarding the Boeing 737MAX and now the release of internal communications indicating a corporation with some serious, serious problems. Ideally, Boeing would suffer huge financial costs, possibly leading to bankruptcy. But, as far as I can tell, they are also, "too big to fail." They are the only American company making large commercial airliners (and their military cargo/tanker versions), they manufacture a significant portion of our military aircraft (including the F-18, the F-22, the C-17, and the Chinook helicopter), and they are a big part of our space program. LockheedMartin is their only real competition on the military side of things. From a National Security perspective, we can't let them fail on their own merits right now.

I left college in 1989 intending to work in the aerospace field, and if I wanted to work on military aircraft, I could have gone to Boeing, Lockheed, Martin Marrietta, Grumman, General Dynamics, Sikorsky (then part of UT), Bell Helicopter, Northrop, and I'm sure a few others I am forgetting right now. They have all been consolidated into either Boeing or LockheedMartin, or they are gone entirely. We have allowed ourselves to become reliant on exactly two companies to manufacture the vast majority of our military aircraft.

So...what can we do about this? Are there currently regulations/laws that could permit either breaking up these large conglomerates, or at least preventing further mergers, but they are not being used due to a lack of political will? Or is there significant legislation that would have to be passed as part of a remedy?

What criteria do you use to determine if a company is "too big to fail." How do you develop objective measures to try to prevent over-consolidation?

Sorry if this seems a bit disjointed; it's something I've been thinking about for a while, but I have neither government nor significant business experience to form much of an opinion, other than that the current state of affairs seems unsustainable (and I'm not just talking about these two industries; they're just the ones foremost in my mind).
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Old 01-10-2020, 01:26 PM
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In my limited understanding, banks and other corporations that get "too big" could be broken up by legislation, but not under current law. IMO they should be broken up into smaller companies if they have any sort of monopoly, or if they are so big that their collapse would seriously harm the economy.
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Old 01-10-2020, 02:33 PM
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The problem with banks is that they are so interconnected that the failure of one has a ripple effect in the financial system. Boeing is not like that. If the commercial division failed, they would be able to sell off the defense division, with little or no ill effects. The commercial division could probably emerge from bankruptcy in reasonably good shape, worst case.
The cause for either splitting up or strictly regulating big banks is that they can take the economy with them. I don't think that's true for other big companies. There might be reasons to split some of them up, but that isn't one of them.
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Old 01-10-2020, 04:06 PM
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Actually, Boeing is such a big part of the US economy that its failure would have ripple effects. Certainly by itself, it's a big contributor to US foreign trade.
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Old 01-10-2020, 04:49 PM
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Monopolies (and kin like cartels) are generally bad. Everybody agrees on that except the kleptocrats themselves, their captured regulators, and some fringe post-rational libertarians. (And note that the heavy financialization of the U.S. economy dictates oligopolic behavior.)

Boeing itself recently had a competitor. (In fact some say it was surrender to the less quality-conscious culture of McDonnell-D that caused Boeing to slack off.)

With the banks, note that Lehman and Bear are gone, Merrill Lynch merged off, etc. — I'll guess the over-concentration is worse than ever.

Are today's big banks indulging in the sort of wild gambles that led to heavy losses in 2008? I don't know. But low interest rates mean that ordinary commercial banking will have low profit margins: I'm sure the banks have some profit-making enterprises not conducive to the public interest. If (or rather when) another major company needs to be bailed out, I hope the U.S.G. follows my advice, and sets the terms to maximize value for the taxpayer, as a white-knight investor.
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Old 01-10-2020, 05:47 PM
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Actually, Boeing is such a big part of the US economy that its failure would have ripple effects. Certainly by itself, it's a big contributor to US foreign trade.
That's true if they closed the factories and sent everyone home. But that is not likely to happen even if they go bankrupt.
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Old 01-10-2020, 07:31 PM
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It'll happen if people stopped buying their planes.
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Old 01-10-2020, 08:16 PM
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I think we all remember the phrase, "too big to fail," from the 2008 financial crisis. Financial institutions were saved from ruin, because it was deemed that their complete failures would be more detrimental to the economy than the money spent to prop them up, Fair enough, I guess. I can see the logic in that.

As far as I can tell, this is still the state of things in the banking world (in fact, my longtime bank, SunTrust, has merged with BB&T, so there is now one fewer large bank in the world). I am not aware of any significant change, but I would love to find out I am wrong.
Chances are, you wouldn't be aware of significant changes in the banking world unless you worked in the industry. The 2008 financial crisis was caused by the proliferation of RMBSs, CDOs, CMSs and other exotic financial instruments. Basically bundling up shit mortgages and passing them off as highly credit-worthy bonds. Shit no one heard of outside of Wall Street before the financial crisis.


In the past, there used to be anti-trust legislation to break up monopolies. For example, Bell in the eighties...which subsequently has mostly consolidated into Verizon and AT&T. Or Glass–Steagall which separated investment banks from your commercial bank and the similarly useless Dodd-Frank Act.


The thing is, no one likes to say "your company is making too much money, we need to break it up!" At least, not until it collapses under its own incompetence.
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Old 01-11-2020, 05:27 PM
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A poster in a nearby thread suggested that firms taking government bailouts should have their management and directors replaced and banned from any similar positions. Extend that to bankruptcies above $X valuation.
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Old 01-11-2020, 08:08 PM
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Ideally, Boeing would suffer huge financial costs, possibly leading to bankruptcy.
The vast majority (70%) of Boeing stock, is held by institutional investors, which fund people's retirement accounts like 401Ks and Pensions.

Why should current and future retirees take the hit?
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Old 01-12-2020, 01:40 AM
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Many of the super-rich have income sources independent of publicly-traded stock prices. For example, when a big corporation is in dire straits, the top officers often walk away with multi-million dollar bonuses or "parachutes."
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The vast majority (70%) of Boeing stock, is held by institutional investors, which fund people's retirement accounts like 401Ks and Pensions.

Why should current and future retirees take the hit?
Most Americans with a 401K have relatively little wealth tied up in stocks, let alone in a single specific stock.

But if we replace your "people" with "people whose wealth is in the top 5 percent" your statement hints at a major problem in financialized post-rational America. Through such funds, the middle-class has been co-opted to serve as accomplice or hostage to Big Business.

This is one reason why the serious OWS was treated as laughable, while the laughable Tea Party is still treated as serious. For another example, I recall mentioning a possible economic crisis to a middle-class relative. Her only reaction was concern for her Fannie-Mae stock.
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Old 01-12-2020, 02:22 AM
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Most Americans with a 401K have relatively little wealth tied up in stocks, let alone in a single specific stock.
And these peopled in particular have done very well in the past 10 years or so. A hit on Boeing stock is not going to make anyone sell their mansion.
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Old 01-12-2020, 07:43 AM
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This probably won't be a particularly popular view, but I think they should have been allowed to fail. I believe that people and the economy are much more adaptive than we think. I think the cure was worse than the disease. If we would have allowed them to fail, it would have been very bad, but it isn't like banks (as a concept) were suddenly going to disappear. Different banks would have quickly risen in the aftermath to take the place of those that failed. We would have a more resilient financial sector as a result. Some billionaires would have gone broke, but a few billionaires going broke every now and then is probably a good thing, just to remind them that they can. While of course, I cannot fault anyone from taking the actions they did, I can certainly understand why politicians globally acted as they did, I wish they hadn't of bailed them out.

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Old 01-12-2020, 10:33 AM
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This probably won't be a particularly popular view, but I think they should have been allowed to fail.
Assuming that by "fail" you mean that the banks whose immediate solvency was in question would have gone into bankruptcy with assets frozen, that would have been an utter disaster. Much of the world's financial system would have screeched to a standstill. Non-financial companies are dependent on banks of course, and the dependence is greater than it was in 1929. Absolute disaster.

What I think should have happened: The banks should have been required to raise new capital, e.g. via IPO, until their solvency was guaranteed. The banks would have been saved, but a moral lesson sent.

In September(?) 2008, Warren Buffett's company purchased $5 billion of Goldman Sachs preferred stock, paying 10% dividends in perpetuity. This was rather a sweetheart deal. Why couldn't I get some of that? Why couldn't the U.S. taxpayers, via the Dept. of Treasury, get some of that? Buffett has said he wouldn't have made this investment without confidence that the U.S. Treasury would orchestrate a big bailout. The sudden infusion of $5 billion of hard cash was useful to Goldman Sachs but the psychological boost from Buffett's seal of approval may have been more important.

But what about the other banks whose credit was in doubt? There was one white knight investor with pockets much deeper than Buffett's: the U.S. taxpayer.

Issue common stock or preferred stock? Which banks would be bankrupted, which merged off, which sustained with fresh capital? Let's not quibble about the details. The simple fact is that Buffet got a sweetheart 10% deal, while the taxpayer was left holding the bag.

Buffett had a duty to his stockholders to get a good deal. What happened to the SecTreasury's duty to taxpayers? The Feds helped JPMorgan Chase get a quick multi-billion dollar profit on the Washington Mutual takeover. They made sure Jamie Dimon was still a billionaire when the dust settled. Et cetera. But homeowners and taxpayers were treated as rubbish to help Wall St. bankers keep their billions. Shameful.
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Old 01-12-2020, 01:09 PM
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Of course, this is all simply my opinion. Until I invent a time machine and an army of killer robots to impose my will I cannot prove I'm correct, but I've already said too much.

See, I don't think it would have screeched to a halt because there would have been too much of interest in not having it screech to a halt. People and organizations would have very rapidly adapted. There would have an entire world of people working to ensure that it didn't happen. Kind of like Y2K in a sense. That's not to say there wouldn't have been short time pain. Probably a LOT of short term pain. It would have been disaster for some for sure. The government could certainly have stepped in to help anybody being too adversely affected through no fault of their own. I think despite what Buffet has said he and others like him would have got incredible deals, and they would have taken them once the price reached a point where the risk was worth the reward.

I think we're headed towards the exact same financial meltdown. And why wouldn't we? The lesson we sent was heads you win, tails we lose (and you win).

Again, solely my point of view

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Old 01-12-2020, 01:13 PM
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Also, just to reiterate. I cannot fault politicians for acting how they did. It would have taken balls of neutronium to do nothing and probably, for the most part, would have cost anybody doing nothing re-election. It is very easy for me, a person with no time machine and killer robots, to say "Bah, let them fail!" when there's no real consequence to it. It that same situation, with the same decision to make, I'd probably have done the bailout.
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Old 01-12-2020, 01:56 PM
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The bailout is one thing. What seemed and continues to seem objectionable is that virtually no one was prosecuted for the financial crimes that led to the 2008 crisis.
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Old 01-12-2020, 02:10 PM
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The bailout is one thing. What seemed and continues to seem objectionable is that virtually no one was prosecuted for the financial crimes that led to the 2008 crisis.
Who should be prosecuted and for which crimes?
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Old 01-12-2020, 02:18 PM
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I have no idea but the perception was that a lot of very wealthy people fucked up the economy without any personal consequences.
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Old 01-12-2020, 02:33 PM
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See, I don't think it would have screeched to a halt because there would have been too much of interest in not having it screech to a halt. People and organizations would have very rapidly adapted. There would have an entire world of people working to ensure that it didn't happen. Kind of like Y2K in a sense.
And that's kind of what they did.



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That's not to say there wouldn't have been short time pain. Probably a LOT of short term pain. It would have been disaster for some for sure. The government could certainly have stepped in to help anybody being too adversely affected through no fault of their own.
What does that mean exactly? Should the government bail out people who took out mortgages for homes they couldn't afford? Mortgages brokers who lost their jobs when the market collapsed? People who work at Bear Stearns or AIG in business units unrelated to financial crisis?

Do you really understand what the "short term pain" would be? With the potential collapse of the financial system, businesses can't take out loans to invest in growth or in some cases, even make payroll. That would then spiral into more "long term pain" like the Great Depression.


FWIW, the US Government and taxpayers made around $22.7 billion profit from the bailout when the US Treasury sold off the last of its shares in 2012.
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Old 01-12-2020, 02:39 PM
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I have no idea but the perception was that a lot of very wealthy people fucked up the economy without any personal consequences.
Right, but since we live in a country of laws, you (or someone) needs to identify which people, what they did that, and how whatever they did was illegal or fraudulent.

Which is part of the problem. There wasn't a whole lot of regulation around these financial instruments (mostly because no one understood them), so technically, they didn't break any "rules".
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Old 01-12-2020, 04:03 PM
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And that's kind of what they did.





What does that mean exactly? Should the government bail out people who took out mortgages for homes they couldn't afford? Mortgages brokers who lost their jobs when the market collapsed? People who work at Bear Stearns or AIG in business units unrelated to financial crisis?

Do you really understand what the "short term pain" would be? With the potential collapse of the financial system, businesses can't take out loans to invest in growth or in some cases, even make payroll. That would then spiral into more "long term pain" like the Great Depression.


FWIW, the US Government and taxpayers made around $22.7 billion profit from the bailout when the US Treasury sold off the last of its shares in 2012.
I'm not saying it didn't work out in some sense, except that the people most responsible for the crisis learned a valuable lesson. Unfortunately, it was the wrong lesson.

I wouldn't have bailed out individual mortgages. I'm talking about companies that, like your example, wouldn't have been able to make payroll. The gov't should have gone in and keep those companies running while the financial sector sorted itself out.

Just my point of view, even if I think it is unrealistic in the real world. It is like when the rolled out the H1N1 vaccine with insufficient testing. It worked out, and with people howling for the gov't to do *something* it is very hard to do nothing. But I really think we would have been better off if the banks involved had been allowed to collapse.
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Old 01-12-2020, 04:58 PM
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I'm not saying it didn't work out in some sense, except that the people most responsible for the crisis learned a valuable lesson. Unfortunately, it was the wrong lesson.

I wouldn't have bailed out individual mortgages. I'm talking about companies that, like your example, wouldn't have been able to make payroll. The gov't should have gone in and keep those companies running while the financial sector sorted itself out.

Just my point of view, even if I think it is unrealistic in the real world. It is like when the rolled out the H1N1 vaccine with insufficient testing. It worked out, and with people howling for the gov't to do *something* it is very hard to do nothing. But I really think we would have been better off if the banks involved had been allowed to collapse.
Where were you when this happened? Because one bank failing caused a liquidity crisis, and the ensuing recession. Can you imagine what would have happened if more failed without the Fed doing anything? There would have been a depression for sure.
As for people not learning, I think you mean those in government who opposed regulation even after the crisis. Banks are never going to give up short term gain to avoid longer term consequences. Since the consequences are longer term any CEO who was cautious was not going to have a competitive company and would be out on his ear in no time.
That's why regulation is important - to keep business from doing things for short term gain but with long term harm. This was true before the recession and is true today.
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Old 01-12-2020, 05:16 PM
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Where were you when this happened? Because one bank failing caused a liquidity crisis, and the ensuing recession. Can you imagine what would have happened if more failed without the Fed doing anything? There would have been a depression for sure.
As for people not learning, I think you mean those in government who opposed regulation even after the crisis. Banks are never going to give up short term gain to avoid longer term consequences. Since the consequences are longer term any CEO who was cautious was not going to have a competitive company and would be out on his ear in no time.
That's why regulation is important - to keep business from doing things for short term gain but with long term harm. This was true before the recession and is true today.
I have no doubt at all there would have been a deep recession or a depression. However, all we succeeded in doing is kicking the can down the road. All of the dysfunction is still there waiting to blow up again. The gov't should have let the cancer at the heart of it all die, and focused on preserving the rest. Prop up the companies that were dependent on the banks but not the banks themselves.

And yes, there should have been a lot of regulation put into place. I (partially) blame the Occupy movement for that (obviously the rest is the fault of cowardly politicians). They had a real opportunity to protest for real financial change, if they could have just kept the message direct and simple. Instead they decided to allow the movement to be open. The crazies became the public voice of the movement. The movement extended their message well beyond financial reform, and so it failed.

And look, I'm a total hypocrite (ok maybe not total) because I'm predicting a financial meltdown, but I still have the bulk of my retirement savings in things like NASDAQ index funds. I'm not anywhere near clever enough to predict when the next meltdown will happen. I'm just going to hope it is either soon enough that I can buy stuff cheap, or late enough that I'll have already pulled my money out of the market.

And yes I recognize that undoubtedly if nothing had been done there would have been swathes of people who would have had their retirement savings wiped out. I'm sympathetic to that, which is why I've said in the real world you kind of have to bail out the banks. But in a hypothetical world, I say let the banks die.
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Old 01-12-2020, 06:46 PM
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Most Americans with a 401K have relatively little wealth tied up in stocks
Hold on a minute. Take a 25 year old with a target retirement in 2060, their 401K is likely invested close to 90% in stock.

https://investor.vanguard.com/mutual.../profile/VTTSX

I'm sure Fidelity, T Rowe Price, etc. have a similar allocation.
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Old 01-12-2020, 08:05 PM
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I have no doubt at all there would have been a deep recession or a depression. However, all we succeeded in doing is kicking the can down the road. All of the dysfunction is still there waiting to blow up again. The gov't should have let the cancer at the heart of it all die, and focused on preserving the rest. Prop up the companies that were dependent on the banks but not the banks themselves.

And yes, there should have been a lot of regulation put into place. I (partially) blame the Occupy movement for that (obviously the rest is the fault of cowardly politicians). They had a real opportunity to protest for real financial change, if they could have just kept the message direct and simple. Instead they decided to allow the movement to be open. The crazies became the public voice of the movement. The movement extended their message well beyond financial reform, and so it failed.
Letting banks fail wouldn't have helped anything. Where they screwed up is not using the opportunity to either break up the big banks or restoring the regulations that kept the financial system for so long - and making acceptance of these a requirement for the banks to get bailed out.
Quote:
And look, I'm a total hypocrite (ok maybe not total) because I'm predicting a financial meltdown, but I still have the bulk of my retirement savings in things like NASDAQ index funds. I'm not anywhere near clever enough to predict when the next meltdown will happen. I'm just going to hope it is either soon enough that I can buy stuff cheap, or late enough that I'll have already pulled my money out of the market.

And yes I recognize that undoubtedly if nothing had been done there would have been swathes of people who would have had their retirement savings wiped out. I'm sympathetic to that, which is why I've said in the real world you kind of have to bail out the banks. But in a hypothetical world, I say let the banks die.
I agree with you. Since I'm already retired, I have a lot of my savings in stable income producing stock funds. I'm also selling some of the more volatile stuff to live on, I figure I can benefit from the suckers still buying in this market. The crash is taking longer than we thought - but it will happen.
No one, except someone on the brink of retirement, had to lose money in the crash. (Also assuming they had a job and didn't need to sell their retirement funds to keep their houses.) I didn't panic, and though I had large paper losses I kept buying and came out just fine. Dan Ariely used to say on Marketplace that the best financial strategy was to toss your investment statement unopened. Worked for me.
I admit I gave up some gains that I could have made lately for being more aggressive. But in the long run I think I come out ahead. And when I turn on Social Security and my annuity at 70, my dividends and interest should give me enough to live on without dipping into capital except for emergencies.
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Old 01-12-2020, 08:08 PM
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Hold on a minute. Take a 25 year old with a target retirement in 2060, their 401K is likely invested close to 90% in stock.

https://investor.vanguard.com/mutual.../profile/VTTSX

I'm sure Fidelity, T Rowe Price, etc. have a similar allocation.
I read that as most American have small or no 401Ks. Definitely true about no single stock. My last employer didn't even allow us to buy company stock in our 401K, an excellent rule.
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Old 01-12-2020, 09:14 PM
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A majority of Americans own stock, at least indirectly.

https://www.politifact.com/californi...ns-own-stocks/
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Old 01-12-2020, 09:24 PM
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A majority of Americans own stock, at least indirectly.

https://www.politifact.com/californi...ns-own-stocks/
Depends on how you define majority. From the link.
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The data in the graph comes from a paper published in November 2017 by New York University professor Edward N. Wolff.

One of the paper’s findings was that "despite the fact that almost half of all households owned stock shares either directly or indirectly through mutual funds, trusts, or various pension accounts, the richest 10 percent of households controlled 84 percent of the total value of these stocks in 2016."

This line by Wolff presents a key contrast that Khanna’s post glosses over: While about half of households own stocks in one way or another, the richest Americans hold the lion’s share of the value.

And in 2017, Gallup found that 54 percent of respondents owned stocks either directly or as part of a fund.

Those findings show a majority owning stocks — a modest majority, but still a majority.

In an email interview, Khanna told PolitiFact that he still feels the "essence of the post" is accurate but added that "a better headline would have been, "Most Americans Don’t Have a Real Stake in the Stock Market."
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Old 01-12-2020, 10:58 PM
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Depends on how you define majority. From the link.
A majority is > 50%. A majority of Americans own stocks. Full Stop. Saying otherwise is non-factual, at best.
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Old 01-13-2020, 02:03 AM
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Who should be prosecuted and for which crimes?
I linked to a video recently (in a different thread I guess) which discussed fraudulent behavior at Lehman Brothers — to disguise their high leverage they did sham one-day transactions at the end of every month to appear in compliance. Fuld perjured himself abiout this and another matter when he testified to Congress. I'm sure there was much other fraud going on, fraud you can read about on-line.

But it is VERY hard to prosecute for financial frauds. For example, worse-comes-to-worst Fuld could always use the ignorance defense: "Despite my multi-million salary I really am a stupid cuck. If anyone ever discussed these frauds with me I hadn't a clue what they were talking about."

There were several prosecutions, but not of any big players.

@ BeepKillBeep — Perhaps you didn't appreciate the approach I laid out. It's hard to send the fraudsters to prison, but I would have hit them in the pocketbook. I would have kept the financial system intact but made the U.S. taxpayer a major stockholder. The taxpayers, not the billionaires who gambled with taxpayer money, would have reaped the financial benefit from recovery.
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Old 01-13-2020, 05:10 AM
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Originally Posted by D'Anconia View Post
A majority is > 50%. A majority of Americans own stocks. Full Stop. Saying otherwise is non-factual, at best.
Having money in a 401k that invests in stocks is not owning those stocks in any meaningful way.
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Old 01-13-2020, 05:33 AM
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UIAM Boeing is currently about 0.66% of the S&P 500 by market cap.
Quote:
Originally Posted by D'Anconia View Post
A majority is > 50%. A majority of Americans own stocks. Full Stop. Saying otherwise is non-factual, at best.
You've managed to completely misunderstand the arguments against your position. Owning a little stock is not the same as owning a lot of stock. Full stop. Does your source show HOW MUCH stock those majority Americans own. Question mark?

Shutting down Boeing would have a large adverse effect on the U.S. economy — that much is correct. But your concern that the median U.S. citizen has a $17 stake in Boeing because of the index fund in his 401k is a peculiar perspective.
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Old 01-13-2020, 08:47 AM
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@ BeepKillBeep — Perhaps you didn't appreciate the approach I laid out. It's hard to send the fraudsters to prison, but I would have hit them in the pocketbook. I would have kept the financial system intact but made the U.S. taxpayer a major stockholder. The taxpayers, not the billionaires who gambled with taxpayer money, would have reaped the financial benefit from recovery.
That certainly would have been better.
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Old 01-13-2020, 09:48 AM
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Originally Posted by septimus View Post
I linked to a video recently (in a different thread I guess) which discussed fraudulent behavior at Lehman Brothers — to disguise their high leverage they did sham one-day transactions at the end of every month to appear in compliance. Fuld perjured himself abiout this and another matter when he testified to Congress. I'm sure there was much other fraud going on, fraud you can read about on-line.

But it is VERY hard to prosecute for financial frauds. For example, worse-comes-to-worst Fuld could always use the ignorance defense: "Despite my multi-million salary I really am a stupid cuck. If anyone ever discussed these frauds with me I hadn't a clue what they were talking about."

There were several prosecutions, but not of any big players.
Here's the thing though- although there may have been some criminal-ish stuff going on in the various companies, that stuff wasn't the reason for the 2008 financial crisis.

Popular opinion is fairly ignorant about the financial world- there's a mistaken notion that everything is done deliberately and that everyone knows what they're doing with this stuff, and more importantly, understands all the consequences. So when everything goes sideways, the assumption is that the first three conditions are true, and then the deduction is that if everyone knows what they're doing, and are doing things deliberately, then the ONLY way that everything can go sideways is if someone is doing something deliberately crooked and/or fraudulent to cause everything to go sideways.

This isn't so. My understanding of the financial industry is that some parts are relatively well understood and well regulated, but a lot of the esoterica of the non-consumer financial world isn't that well understood by anyone, including the major players, and that since there are so many players and so many interactions, that a lot of the consequences aren't well understood either, so that stuff like 2008 can happen when nobody's necessarily deliberately perpetrating a massive fraud.
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Old 01-13-2020, 10:01 AM
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Which is why the repeal of Glass-Steagall was a bad idea. It's one thing for an investment bank to muck about in poorly understood things like derivatives, knowing that the bank can fail if they invest poorly. But when that bank is FDIC-insured, it allows the bank a certain level of freedom at the expense of the taxpayer.
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Old 01-13-2020, 10:24 AM
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Originally Posted by bump View Post
Here's the thing though- although there may have been some criminal-ish stuff going on in the various companies, that stuff wasn't the reason for the 2008 financial crisis.
... since there are so many players and so many interactions, that a lot of the consequences aren't well understood either, so that stuff like 2008 can happen when nobody's necessarily deliberately perpetrating a massive fraud.
Partly correct. Partly wrong.

There was certainly overlap between fraudulent Wall St. moves and the mounting risk and its aftermath. The frauds at Lehman are an easy demonstration of this — they certainly did use fraudulent subterfuge to hide their leverage ratio which was in violation of contract and/or law. After all, it was the huge amount of credit that had been extended to Lehman that was the proximate trigger for the entire crisis. And as is often the case, the cover-up might be worse, in the criminal courts! You might convict Fuld for perjury without making other charges stick.

And that's just one man at one bank. Start another thread if you don't think there are other Wall St. fraudsters from that epoch whose deeds went unpunished.

Rating agencies seeking higher revenue were issuing credit ratings they didn't believe in. This aggravated the risks. I certainly think this was fraudulent; ask a lawyer whether it was criminal or civil fraud.

Sure; the general ignorance of the market was an underlying reason for disaster. But some of the ignorance was wilful. Many people understood that a housing bubble was in progress, likely to be burst. Yet rather than playing Cassandra, they profited from the bubble. Illegal or even immoral? Perhaps not. But the sanguine picture bump depicts is quite misleading.
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Old 01-13-2020, 12:28 PM
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I'm not saying there wasn't fraud, but it wasn't really the cause of the crisis, any more than a dozen other things.

I think it's natural for people to think that everything's perpetrated from the top, and that there's ultimately SOMEONE responsible who was the cause of the problem. That's not the case here. The reality is a lot more unclear, blurry and gray.
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Old 01-13-2020, 01:07 PM
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Quote:
Originally Posted by bump View Post

This isn't so. My understanding of the financial industry is that some parts are relatively well understood and well regulated, but a lot of the esoterica of the non-consumer financial world isn't that well understood by anyone, including the major players, and that since there are so many players and so many interactions, that a lot of the consequences aren't well understood either, so that stuff like 2008 can happen when nobody's necessarily deliberately perpetrating a massive fraud.
If you remember, Alan Greenspan said that he didn't understand some of the products at the time.
The banks, having knowledge of the algorithms used by the bond rating agencies, structured things to include as much junk as possible and still get rated AAA. Not really fraud, but headed that way. Some of the problems were structural, such as the banks getting to choose the bond rating company that rated their bonds - definitely an incentive for the raters to play ball.
That's why regulation is more important than prosecution, even if prosecution feels better to some people.
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Old 01-13-2020, 04:51 PM
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The ratings analysts knew, or should have known, that they were inflicting millions in expected losses on innocent investors. A motorist who accidentally kills 5 people will spend years in prison. What about a financial analyst who inflicts a loss of comparable magnitude knowingly? (in some societies he'd be sacrificed "pour éduquer les autres.")

But that ratings crime may be very hard to prove or prosecute. Is a fraudster who knows prosecution is exceedingly unlikely committing a fraud? By definition, is he a criminal or not?

There's a fuzzy line between greed and fraud; and the whole issue is complex and ambiguous — but do not underestimate the influence of greed and fraud on the disaster. Again: the crisis was first ignited by Lehman's defaults: they'd illegally cooked their books to borrow as much as they did.

A problem with regulation is that it's directed at yesterday's scams. What about clever new chicaneries tomorrow?

That's why the key to my proposed remedy was neither prosecution nor regulation. Forced recapitalization would have placed banks' ownership into the hands of people committed to prudent and proper behavior. The malfeasants would learn a lesson via their financial losses. This attacks a key crux: Moral hazard.
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Old 01-13-2020, 08:22 PM
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At the very least I would have insisted that the banks give the government a big equity in return for the bailout. Had I been at the helm, I would also have insisted on changing their boards of directors and firing the chief executives. Instead they voted themselves large bonuses. Why not? They have just defrauded the government out of hundreds of billions and come out unscathed. Except for Lehmann. And now they seem poised to do it again. And what about the rating companies? They are either incompetent or fraudsters. Somehow, and I don't know how, they have to be financed in some way other than by the companies they rate. That is just asking for trouble.
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Old 01-13-2020, 11:26 PM
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Originally Posted by septimus View Post
Owning a little stock is not the same as owning a lot of stock.
Duh.

But there was a claim that "most" Americans don't own stock, which is untrue.

Last edited by D'Anconia; 01-13-2020 at 11:27 PM.
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Old 01-14-2020, 12:56 AM
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I believe that it might be true that allowing the banks to fail was not an acceptable choice. I see no reason that fifty percent permanent reduction (retroactive to the last board meeting) for all executive compensation as a precondition for the each company being given these sweetheart deals should not have been offered to the stockholders. Subsequent increases in executive compensation would be deferred until after all loans were repaid.

Last edited by Triskadecamus; 01-14-2020 at 12:57 AM.
  #44  
Old 01-14-2020, 05:46 AM
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Quote:
Originally Posted by D'Anconia View Post
Duh.

But there was a claim that "most" Americans don't own stock, which is untrue.
So what? If 10% of Americans own 84% of all stocks, then the fact that a (slight) majority of Americans own any stock is utterly pointless.
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