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Thread: Obama to Propose Limits on Risks Taken by Banks

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    Re: Obama to Propose Limits on Risks Taken by Banks

    Well, the markets hate it. Down to 9000 we go....soon.

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    Re: Obama to Propose Limits on Risks Taken by Banks

    Quote Originally Posted by donsutherland1 View Post
    The New York Times reported:



    Obama to Propose Limits on Big Banks - NYTimes.com

    IMO, this is a potentially important and welcome development for a number of reasons:

    1. Human nature, being what it is, assures the temptation to pursue large risks will not dissipate.

    2. In spite of the financial crisis and deep recession that occurred from the collapse of the housing bubble, stunning little has changed in the financial sector. Failure to change includes:

    3. Little sign of fundamental improvements to risk management. A lack of credit growth due to financial constraints and fear has provided the biggest check to risky practices, but once the fear dissipates the underlying risk management framework remains essentially the same

    4. Little evidence that the financial sector is giving substantially greater consideration to history relative to modeling in its risk management practices, even as risk is largely a human nature/behavior + firm/industry structure & linkages problem

    5. The failure to junk, dramatically revise, or narrow the focus of the use of models, including but not limited to VaR (value-at-risk), that performed poorly during the crisis and failed to flag important risks ahead of the financial crisis and, according to some noted economists e.g., Nobel Laureate Joseph Stiglitz, actually amplified risks. IMO, VaR can and should play a modest role in understanding risk, but it should not be the full or even largest answer to understanding risk. In effect, it could offer one set of scenarios, but other methods, including a rigorous and continuing assessment of history and structure, should be a regular part of any robust and dynamic risk management system that incorporates new lessons and evolves as industry and linkages evolve. Such an approach would require more human and financial capital, but the financial crisis is just the latest such event to demonstrate that risk management cannot be completely automated, models (simplifications themselves) cannot provide the whole answer to understanding risk, and models should guide but not replace human judgment when it comes to managing risk.

    6. Bonuses being awarded as a share of revenue not profits in several financial sector firms, in effect rewarding top line growth even if bottom line growth is sacrificed or does not materialize during the compensation period. Down the road, such behavior would lead to a renewed acceleration of credit growth and decline in credit standards.

    7. A Continuing mismatch between bank insurance premiums and the size/risk of such institutions. IMO, just as risk scales with firm size, insurance premiums should scale with size so as to provide a better match between future costs to the insurance fund and a firm's risk.

    8. Absence of accounting reform, to date, that would largely eliminate practices that keep risk off the financial statements, would require expensing of stock options and other instruments that dilute shareholder wealth, grossing of derivatives exposures on the balance sheet, and new financial sector presentation introduced by several accounting professors that would require differentiating between actual outcomes and forecasted outcomes (that's a technical detail that goes beyond the scope of this message, but suffice it to say valuations of certain items are really forecasts based on the assumption that the cash amounts will be realized as they are stated), etc.

    All said, I believe the Volcker approach contributes toward a regulatory structure that would address the financial sector risk/risk management environment as it actually exists, not the idealized idea that predated the rise of the housing bubble prior to the financial crisis.
    i thought expensing of stock options was already required?

    as a bank employee, i welcome tighter regulations. thanks.

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    These are the same liberals who forgot how Iraq attacked us on 9/11.


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    Re: Obama to Propose Limits on Risks Taken by Banks

    Quote Originally Posted by Erod View Post
    Just another way to interwine government into the banking process. Obama isn't satisfied that banks are paying back the bailouts, plus interest. Now, he wants to tax them further AND limit their ability to be a privately-run bank.
    Could you explain how consumer protections "limit their ability to be a privately-run bank"?


    Banks have grown but they haven't build a better mouse trap. They do well for themselves and their upper-tier employees, but what type of innovations have they brought to savings and lending? Late fees. Transfer Fees. Minimum balance fees. ATM Fees? Because depositing our money in their vaults and using their credit cards at 29.99% isn't enough.

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    Re: Obama to Propose Limits on Risks Taken by Banks

    Ain't no one sticking a gun to your head to use any credit card.
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    Re: Obama to Propose Limits on Risks Taken by Banks

    Quote Originally Posted by Harshaw View Post
    Ain't no one sticking a gun to your head to use any credit card.
    No, but they are sticking the proverbial gun to your head when they double the interest rate, and retroactively apply it to purchases you already made.
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    Re: Obama to Propose Limits on Risks Taken by Banks

    Quote Originally Posted by Harshaw View Post
    Ain't no one sticking a gun to your head to use any credit card.
    That's a pretty feeble argument, considering that many normal activities in modern society now require a credit card.

    Banks have every right to incentivize timely payments and responsible use, however usury used to be considered a crime -- An excessive or illegally high rate of interest charged on borrowed money.

    People in debt are more cooperative, less likely to complain at work, etc.

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    Re: Obama to Propose Limits on Risks Taken by Banks

    Quote Originally Posted by Erod View Post
    Just another way to interwine government into the banking process. Obama isn't satisfied that banks are paying back the bailouts, plus interest. Now, he wants to tax them further AND limit their ability to be a privately-run bank.
    Limiting their risk exposure is important so that we don't face the same situation again a few years down the road when the NEXT crisis hits, and we have to bail them out all over again.
    Last edited by Kandahar; 01-21-10 at 06:34 PM.
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    Re: Obama to Propose Limits on Risks Taken by Banks

    Im not sure If I agree with Obamas approach but I agree something needs to be done. The free market is one area I disagree with the right on simply because we have no "free" market. It has become as corrupt as washington thanks in a large part to washington. The banking sector is just one aspect that needs a overhaul from the bottom up. I read an article recently that stated that if you allocated all the wealth in the world that 3/5's of it is based on absolutly nothing. Its all a numbers game that starts in the banking sector. The banking sector is allowed to purchase items with no hard capital to back it up. This in a large part has led to many of our recent issues. Its all a shell game and when it goes wrong we all pay for it.

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    Re: Obama to Propose Limits on Risks Taken by Banks

    Quote Originally Posted by Scarecrow Akhbar View Post
    Here's an idea...

    ....tell the banks that the taxpayers aren't backing up their games, and if the bank takes a risk, it's taking a risk with it's own money.

    Eliminate Fanny-Mae and Freddie-Mac and return to a capitalist banking system.

    It's amazing how cautious banks can be when it's their own money at risk.

    And when a bank fails, it doesn't drag the whole country down with it.

    Socialism....always a damn ignorant idea.
    Exactly. Obama wants to treat symptoms and ignore problems.

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    Re: Obama to Propose Limits on Risks Taken by Banks

    Quote Originally Posted by Scarecrow Akhbar View Post
    It's amazing how cautious banks can be when it's their own money at risk.
    I'm really not sure what you're talking about here. The historical evidence certainly doesn't support that theory. Banks have always taken completely irrational risks, long before government occasionally bailed them out.

    Quote Originally Posted by Scarecrow Akhbar
    And when a bank fails, it doesn't drag the whole country down with it.
    That's what happens if you DON'T bail them out in extreme circumstances. They all owe money to each other. So when there is a systemic problem and one bank collapses, all of its creditors have to write off that debt which weakens THEIR financial position. Then the weakest links among THEM collapse, and the process begins anew.
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