I do not accept risk-return as a valid argument. It goes against the basic premise of going concern for a business. Aspiring celebrities take risks. Capitalists take some risk. Bankers handling other peoples’ money cannot afford to take risks. Doing so shows lack of consideration for both the business owners and the market.
Have you even been reading business news for the past five years? Did you read how leveraged the banks were five years ago? How much insurance AIG wrote?
Bankers won’t do stuff that will make them millions - personally - out of consideration for the market? You do know that the banks create products sure to fail, right? You know that mortgage brokers wrote loans that they knew were crap because they were high interest paying them better and they knew there were willing suckers to buy them.
People can easily convince themselves that the risky bet will pay off and eveyrone will be happy.
The London Whale didn’t go into that situation wanting to lose billions of dollars, you know. You need to face reality.
It may be I’m in another part of the world but the banks here (ours included) have some of the most conservative balance sheets in Asia, and our Central Bank is so stuffy I’d like to close it down with a tnt detonator.
Still and all our banks (the top ones) are rated as among the most stable in the world.
This type of comment makes me furious. It’s such a drive by simple minded remark that means essentially nothing and completely distorts the entire conversation.
Everything below here is not directed at Gorsnak but toward the general idea of blaming deregulation.
Regulation/de-regulation/over-regulation/etc are just words that are twisted to mean almost anything. If you have an agenda, you can make this mean anything.
Is the Canadian banking sector highly regulated? Yes. Did the Canadian banking sector weather the storm of the U.S. housing market crash? Yes. Maybe we could look at that a little bit deeper though.
The people that seem to blame de-regulation often point to the repeal of Glass Steagall: the Gramm Leach Bliley Act. The thinking is that the commercial banks shouldn’t be making risky investments like investment banks. Besides this idea being incredibly stupid (much of the investment banking activities that commercial banks like taking on are fee-based activities and not putting the balance sheet at risk), the Canadian banks were far more integrated than the U.S. banks. There was never any Glass Steagall type prohibition on Canadian banks operating in insurance or investment banking. They are the furthest thing from pure commercial banks. They are financial banking conglomerates.
Now, these de-regulation blamers take it further. Coupled with the Gramm Leach Bliley act you have the overturning of regulations prohibiting interstate branch banking in the 1990s. As a result, you have the emergence of the super large Too Big To Fail banks following the mergers of different banking institutions. This then gets blamed for the crisis. The problem of course is that Canada’s heavy banking regulations in effect guarantee that they will have just five large banks. They do not have the huge number of regional and local banks, which you see in the U.S.
So I guess my question to those that simultaneously blame the de-regulation that allowed banks to become integrated and larger while also praising the regulation of the Canadian system, are you a fucking retard? My guess is the answer is no; you just lack intellectual curiosity and instead rely on talking points from your glad-handing idiot politician matching your favorite color (red or blue).
Perhaps the problem is that the regulation that we have in the U.S. is completely idiotic. We have an absurd system of numerous overlapping regulatory bodies with insanely complex as well as vaguely written and in many cases conflicting rules. These agencies are staffed with imbecile bean counters that will spend months auditing incredibly unimportant items to an almost never-ending degree. They also spend no time and have no authority, nor in fact any understanding, regulating the actual risks which threaten the public, whether company specific or systemic. We then get the end result of a bunch of regulators that spend incredible amounts of time hassling companies but never actually uncover any real problems or prevent anything bad from happening. They also have constant changes adding new regulations, taking away others, letting some just go unenforced, adding/deleting brand new regulatory bodies, that results in the situation always getting worse.
It is therefore perfectly correct to blame over-regulation, de-regulation, lack of regulation, and unenforcement of regulation all at the same time. The real problem is that we have a fucked up government that fucks up everything they have their hands on.
This is no more true than the comments you are criticizing.
Are your banks regulated? Canadian banks were also very stable, and did not contribute to the problem. In fact in the US local banks, which tended to know the loans they were making, were still regulated, and often held the loans did okay until the housing price collapse caused the value of the loans to fall.
Government owned banks - whose CEOs don’t get huge bonuses for big profits - are going to be a lot more conservative. Other banks which may need to be bailed out need to be regulated, because that is the only way of stopping them from taking excessive risks.
And thank your lucky stars for not having been exposed to this mess day in and day out!
The sequence of ideas you’re presenting here sort of imply Canadian banks are government owned.
They of course are not; they are for-profit corporations that act purely to make money for their shareholders. LonghornDave’s characterization of them is quite accurate; they are massive financial conglomerates. There are some restrictions on what they can or can’t do (famously, they tried to get permission to sell auto insurance awhile back, and were shot down) but they are extensively diversified, billion-dollar outfits that act in just as predatory a fashion as one would expect.
Except my statement is of a general nature and is hyperbolic, whereas the other is specific and intended to be completely true.
I can tell you this, Dodd Frank is perfect ammunition for both sides of the debate. It has added tremendous unnecessary and incredibly difficult to understand, implement, and enforce regulations while also leaving huge consumer threatening risks unregulated. I don’t blame Democrats for it though; I blame the culture of our government.
It was not a separate problem. They were intrinsically linked. The derivatives were primarily CDOs and RMBS based on securitized mortgages. When the overinflated real estate market fell in 2007, it triggered a cascading collapse which took down the subprime industry, Lehman, Bear Sterns, nearly AIG and nearly the rest of the economy.
That would be consistent with what I’ve been told by people who analyze those things at the rating agencies.
Compare the budget of the SEC, FINRA, and other agencies with the total amount of wealth that was destroyed during the financial crisis.
I’m not sure I’m following your reasoning. The thinking behind the Glass Steagall act was to separate relatively conservative commercial banking (ie your savings and checking accounts and home mortgages) with the more speculative aspects of investment banking (options, commodities and derivatives trading, etc). Basically, the idea being you wouldn’t lose your life savings because some trader got in over his head or the bank bet wrong on some exotic investments.
Probably not very much options, commodity, and derivative trading going on in the 1920s and 1930s. The prohibited activity at the time of the legislation was more along the lines of traditional investment banking such as equity underwriting and selling in and investing in equities. My point though, which was really a minor one and shouldn’t be delved on too much, was that many of the investment banking activities that commercial banks currently like partaking in are the more fee-based types of transactions. I see no reason that banks should be precluded from engaging in those.
The thing about the Gramm Leach Bliley act is that it certainly does make for a surface level logical narrative. Banks were prohibited from doing something some people thought was risky via depression era legislation, that was overturned in the late 1990s, banks got in trouble within the next decade. The problem is that it doesn’t stand up to even the slightest bit of scrutiny. If anything, the repeals of Glass Steagall helped to make moderate the financial crisis.
The ridiculous premise that the Gramm Leach Bliley act led to the financial crisis should fall apart when you look at the major failures: Lehman Brothers, Bear Stearns, AIG, Merrill Lynch, Wachovia, Fannie Mae, Freddie Mac, or Bank of America (sort of failure). Were any of these failures a result of commercial banks undertaking investment banking activities? The only commercial banks in the list (Wachovia and Bank of America) failed because of regular mortgage banking activities (Golden West and Countrywide acquisitions). Glass Steagall restrictions would not have prevented anything.
That’s a rational response and a futile one.
The IRS makes money per agent; adding many more agents would bring in millions. But nobody wants to fund more IRS agents. Our bridges are collapsing but nobody wants to spend trillions on infrastructure improvement. Nobody wants to fund food inspectors unless there are deaths. People won’t even get flu shots until they get the flu.
Worse, rewarding people for good work in a crisis always takes precedence over rewarding people for preventing a crisis. Prevention is invisible, burdensome, boring, and can never be proven. Oh, there wasn’t a crisis last year? Let’s save some money and cut the obviously unnecessary prevention. It’s a similar psychology that makes people donate to build a building but nobody donates for the daily maintenance that’s needed to keep it functional. Invisible returns cost visible money. Money not spent on prevention can be spent on visible defense jobs, even if the military doesn’t want the weapons. Visible returns always win.
New York Mercantile Exchange (commodities) - founded 1882
Russell Sage - Created first OTC options in the US on the NYSE in 1876. Died in 1906 with about $70 million.
These things weren’t invented recently.
The point of G-S is to prevent investment banks from gambling with depositor’s money. The fact that some commercial banks failed because of bad mortgage lending practices does not invalidate G-S.
But ultimately people don’t care because people in this country have a short attention span. If banks are making a ton of money, people assume they will continue to make money forever. In fact, the entire financial crisis came about because the people who model CDOs and RMBS could not conceive of the possibility of housing prices going down.
The financial crisis was caused by both overregulation and deregulation. The government removed all market incentives for banks to make wise decisions by passing FDIC. Greenspan made it known the badly ran banks would be bailed out. The government failed to adequately regulate the banks in the absence of market mechanisms that would have punished poorly ran banks. In other words, the government failed to fix a problem it created.
I didn’t say they were just invented. The point was that the Glass Steagall act was not put in place to prevent banks from trading derivatives and commodities. It was a response to a collapse in the equity markets.
I understand the point of the original legislation. That doesn’t change the fact that the repeal had essentially nothing to do with the financial crisis. The major failures were not investment banking activities taking down commercial banks. The only potential case of that type of situation was with Citibank, but they really had a host of problems and their (near) failure was later on in the crisis. The financial crisis saw investment banks fail doing investment bank stuff, insurance companies fail doing insurance company stuff (I’ll grant that CDS are more near-insurance than insurance), and commercial banks failing doing commercial bank stuff. It had nothing to do with commercial bank deposits being used to fund investment banking activities.
Furthermore, it is especially absurd to blame GLBA on the crisis while also touting the strong regulation of the Canadian banking system.
People in this country also all want short easy soundbite answers to complicated questions. I’m more concerned with that problem than the short attention spans.
It was an American article I read, trying to look at the cultural angle, rather than the regulatory environment. This smacks of stereotyping but it said “the credit culture in white protestant countries have always been lax compared with those of Catholic and Asian countries.”
G10 nation whose banking sector weathered the crisis with the least trouble: Australia.
I can’t find a simple numerical index for ‘lightest - heaviest’ regulation, but Australia “deregulated” the financial sector 30 years ago.
Following deregulation, we had a major outbreak of criminal behaviour at the retail level, and institutional stupidity at the wholesale level, similiar to that which preceded the financial crisis in the USA.
We also had an episode of politically encouraged “low start loans” for poor people, similar to The Bush Administration’s 2004 ‘American Dream’ package of housing measures that sought to assist low-income groups through zero equity lending.
Fortunately for Australians, our period of encouraging poor people into “low start” loads did not co-incide with our period of paying de-regulated salesmen to sell “low doc” loans to poor people, and we had two small bumps which badly hurt a small number of people, rather than multiplying the effect giving one enourmous bump and badly hurting a large number of people.
So part of the standard explanation for Australian banking stability during the Euro/American banking crisis is just that we had already made those mistakes. From over here, I watched the subsequent failure of the American financial system with contempt and disgust: as Bismark famously said “Only a fool learns from his own mistakes”.
The 20th Century American WASP culture was notoriously anti-credit, anti-loan. For example, Ford initially resisted offering credit, insisting such debts would ultimately hurt the consumer and the general economy. 20 years ago there were still some companies which would do credit checks on new employees.
In contrast, Australia has always had a relaxed attitude towards debt. The difference reflects the fact that the USA gave away free land to settlers. Australia gave away assisted passage to help migrants get here: the cost was offset by selling land to settlers. Right from the start this meant that people borrowed money to start small land-holdings.
I can’t comment on the Irish attitude to debt, but among the peasent migrants I have known, the Italian attitude to debt has been that it is best kept inside the family.
The idea that the Chinese have a cultural objection to credit and debt is just laughable.
In the US, for a time at least, you can buy a car or a house with just your credit card. Here in my country (Asian-Catholic), non-document lending for a car or a house is unheard of. For the Chinese? Not sure. In Hong Kong maybe but I doubt they do it in the mainland.
He got it right in one. Derivatives were approved as a financial instrument by Congress. They were based on low interest mortgages which were also pushed by Congress. The Mortgages created an inflated housing market.
The result was a excess number of mortgages based on insufficient financial security which inflated the cost of houses faster than the rate of inflation. This created a housing bubble that wouldn’t have been half as bad except the banks were using derivatives as financial security. The derivatives were based on worthless mortgages and the mortgages were backed up by derivatives.
Congress created the situation which isn’t bad on the face of it but when both problems were brought before them they did nothing. It’s not an over or under regulation problem. It was an oversight problem. It was sad watching a bunch of politicians assail the business community when they themselves created the problem in the first place.