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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

    Quote Originally Posted by Scarecrow Akhbar View Post
    Here's an idea...
    Uh-oh... I should stop reading right there, given the poster... But I can't help myself...

    ....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.
    Um... Where do banks get their money? (Hint: Not the ATM)

    Eliminate Fanny-Mae and Freddie-Mac and return to a capitalist banking system.
    "Return to"... you say? Didn't realize we had left. And exactly how does Fanny and Freddie relate to this 'returning to'... In your mind?

    It's amazing how cautious banks can be when it's their own money at risk.
    Next time you make a deposit, you be sure to tell the banker that your money is not to be loaned out to anyone, and they should only loan their own money out.

    And when a bank fails, it doesn't drag the whole country down with it.
    I think that's the general idea... Consumer protections that minimize the investors/depositors exposure to high-risk securities.

    Socialism....always a damn ignorant idea.
    Public education, emergency services, and the postal service... Toss 'em all out, right, Scarecrow?


    You seem to be confused about how banks, stockbrokers, and insurance companies actually get the money to invest. (Hint: It's not the ATM.)

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    Re: Obama to Propose Limits on Risks Taken by Banks

    Based home mortgage loans on a single household income for married couples for their primary residence.
    "He who does not think himself worth saving from poverty and ignorance by his own efforts, will hardly be thought worth the efforts of anybody else." -- Frederick Douglass, Self-Made Men (1872)
    "Fly-over" country voted, and The Donald is now POTUS.

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    Re: Obama to Propose Limits on Risks Taken by Banks

    I'm pleased to see that the early reviews for Obama's proposal are overwhelmingly positive and bipartisan. Both The Atlantic and the National Review have endorsed it. Here is what Jim Manzi at the National Review had to say:


    President Obama’s Excellent New Banking Proposal - Jim Manzi - The Corner on National Review Online
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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.
    So long as such institutions do not depend on government for any direct or indirect support e.g., they cannot depend on FDIC insurance on the deposits they hold or the Fed's myriad facilities for liquidity, I would have no objection.

    However, it is not very likely that the major banks would be willing to forego deposit insurance and access to the Fed window even as they would like to be free to take risks that could trigger harm to taxpayers via use of the FDIC insurance fund or Fed intervention.

    Eliminate Fanny-Mae and Freddie-Mac and return to a capitalist banking system.
    I believe both those institutions should be cleaned up, broken into small pieces, and then those small pieces privatized. It should also be abundantly clear that the federal government would not back the paper of such successor organizations.

    It's amazing how cautious banks can be when it's their own money at risk.
    That is exactly why financial institutions should not be leveraging their own investments using funds that are directly or indirectly tied to taxpayer support.

    And when a bank fails, it doesn't drag the whole country down with it.
    If funds tied directly or indirectly to taxpayer support e.g., deposit insurance, were segregated from all other funds, then when a major financial institution collapsed, there would not be a cascading impact that would lead to the kind of bailouts that occurred during the most recent financial crisis. In other words, funds that are FDIC insured for funds that originate from FDIC insured institutions should be segregated. A firm's own capital above and beyond those funds should be permitted to be invested as the firm sees fit. However, I suspect that the financial institutions want government to stay out of all of their investment decisions and, at the same time, want the benefits of taxpayer support for their deposits/access to Fed facilities should their investment decisions backfire.

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    Re: Obama to Propose Limits on Risks Taken by Banks

    Quote Originally Posted by liblady View Post
    i thought expensing of stock options was already required?

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

    I stand corrected. After 2005, stock options were to be expensed.

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    Re: Obama to Propose Limits on Risks Taken by Banks

    obama---the pivoting populist who raises the debt ceiling ONE POINT NINE TRIL

    LOL!

    what an idiot

    the grassroots guy whose own geithner guaranteed all aig obligations in full, then obviously embarrassed by all the grease for the bigwigs, bid the obscenely bailed out bankrupts to bear falsely their books

    what a phony

    massachusetts, virginia and new jersey can see clean thru

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    Re: Obama to Propose Limits on Risks Taken by Banks

    Quote Originally Posted by apdst View Post
    Now wait, wasn't PBO just complaining a few weeks ago about banks not making enough loans?

    This is some dumbass regulation in the making.
    If banks can't use the money to buy securities, they may be forced to make old fashion loans that are less profitable but also less risky. Not that that ought to be the aim of this regulation.

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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.

    Agreed


    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:

    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


    This is not correct. Leverage ratios at have come down at the major institutions. Credit standards have been tightened.

    1. 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

    Do you have a basis for this comment? The CEOs of the companies at the FCIC meeting stated the opposite.

    2. 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.

    This statement is agreed by all I think. I have not heard any financial institution that said " the model " did it. Models played a role, faulty judgement played a role, lousy ratings from the rating agencies ( who Obama never mentions) were a big problem, Fannie and Freddie with fed guarentees of trillions in bad loans, mortgage origination was a huge problem. The list goes on.

    Simple answers are fun, but hardly ever accurate.

    3. 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.

    How do you think revenue is defined for a financial company like GS?

    4. 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.

    Just not accurate in my view. I do not understand the concept of a larger portfolio means higher risk. Did you mean higher leverage. Size is meaningless if the leverage ratios are in line.

    5. Absence of accounting reform, to date, that would largely eliminate practices that keep risk off the financial statements, require the 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.

    Agreed. But this is not something that the financial institutions have control of. Speak to the AICPA. The SEC could ask for different type of reporting. So could the bank regulators.

    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.
    Our banking system has to be able to compete on the world stage. Credit is a key to growth of any economy. If folks think things are bad now ( and they are) continue to find ways to shrink our credit markets and see what happens to this economy.

    This adminsistration feels that the economy needs to shrink and perhaps they are correct. Just be prepared for a downtrend in our standard of living. We have been living beyond our means for the last 20+ years as debt grew; federal, state and individuals.
    Last edited by washunut; 01-21-10 at 11:55 PM.

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    Re: Obama to Propose Limits on Risks Taken by Banks

    Quote Originally Posted by donsutherland1 View Post
    So long as such institutions do not depend on government for any direct or indirect support e.g., they cannot depend on FDIC insurance on the deposits they hold or the Fed's myriad facilities for liquidity, I would have no objection.
    FDIC is insurance paid for by the banks why wouldn't we want that

    However, it is not very likely that the major banks would be willing to forego deposit insurance and access to the Fed window even as they would like to be free to take risks that could trigger harm to taxpayers via use of the FDIC insurance fund or Fed intervention.

    This only makes snese if you go along with the " to big to fail" concept. If there is resolution authority for failed large banks who cares if they go out of business


    I believe both those institutions should be cleaned up, broken into small pieces, and then those small pieces privatized. It should also be abundantly clear that the federal government would not back the paper of such successor organizations.

    This is exactly what got Feddie and Fannie in trouble. These are institutions that guarentee home loans. If the government backs the loan there is no value in privitizing them, without the government backing they are useless.



    That is exactly why financial institutions should not be leveraging their own investments using funds that are directly or indirectly tied to taxpayer support.



    If funds tied directly or indirectly to taxpayer support e.g., deposit insurance, were segregated from all other funds, then when a major financial institution collapsed, there would not be a cascading impact that would lead to the kind of bailouts that occurred during the most recent financial crisis. In other words, funds that are FDIC insured for funds that originate from FDIC insured institutions should be segregated. A firm's own capital above and beyond those funds should be permitted to be invested as the firm sees fit. However, I suspect that the financial institutions want government to stay out of all of their investment decisions and, at the same time, want the benefits of taxpayer support for their deposits/access to Fed facilities should their investment decisions backfire.
    What the financial institutions want ( the best of both worlds) and what we allow can be seperate things without blowing up one of the most important parts of our economy.

    Just think of the ramifications of the totality of Obama's gameplan. Single payor health care, control over the banking sector, growth in federal spending. What percent of the overall economy would be under the federal government control. Oh wait I forgot cap and trade, and that to the pot!
    Last edited by washunut; 01-22-10 at 12:40 AM.

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    Re: Obama to Propose Limits on Risks Taken by Banks

    Washunut,

    Several quick points:

    1) I favor FDIC insurance. It was an invaluable reform from the Great Depression. My point was that if financial institutions want unfettered ability to take on risk, then those institutions should forego any direct or indirect taxpayer support. I was not calling for the elimination of FDIC insurance. Such a move would be highly counterproductive.

    2) I favor resolution authority to deal with institutions that pose systemic risk. Unfortunately, I have serious concerns that political interests will generally trump the kind of difficult decisions that would be necessary to resolve a large, failed institution.

    3) The GSEs had no government guarantee. That the federal government intervened to bail them out instead of cleaning them up, breaking them into small pieces, etc., does not change the reality that there actually was no statutory guarantee. As a result of a perceived guarantee, not to mention very bad practices, there was an inherent bias toward underwriting too many mortgages at abnormally low rates of interest. Allowing them access to additional Treasury funds is counterproductive and may well be delaying their making the structural and policy reforms necessary to become viable.

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