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The Banker Who Said No

forbes.com

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Re: The Banker Who Said No

#31

Post by byrneseyeview »

anamax wrote: post #20
byrneseyeview wrote: post #16

Earlier quoted context omitted.

Is it really responsible for a bank to back 30-year loans with demand deposits, at 25-to-1 leverage? I really can't imagine that happening without government intervention, and if it only happens when the government makes it happen, there's a good reason to expect that it's irrational. Banks are hybrid companies in the sense that FDIC insurance means they are basically conduits for lending to the government. If I depo…

>E.g. if I pay someone $100 now for $100 worth of lawn care over the next five years, I make damn sure I can trust that person. If I pay the bank $100 for a CD maturing in five years, I don't. > This gives all banks an incentive to take undue risk Actually, you've just demonstrated that FDIC insurance gives you an incentive to take undue risk. You'll deposit your money at any bank without regard for whether said bank…

I have no clue what you are talking about. I'm an anarcho-capitalist.

I was talking about how the FDIC creates bad incentives. I don't think I said anything about how new regulations would help, since the bit you quote is about how the difference between good regulations and bad regulations is in what kind of talent is misallocated.

Edit: Perhaps the part about being 'balanced by regulations' threw you off. What I meant is that the government writes rules to keep people from doing what the FDIC gives them an incentive to do. Those rules, of course, do not work.

Re: The Banker Who Said No

#32

Post by catz »

bilbo0s wrote: post #7

"To prepare bids he locked himself in his office to write a computer program with 50 variables (now 250), ranging from home price changes by neighborhood to interest rates to origination dates." - Forbes.com 2009 "Beware of geeks bearing formulas" - Warren Buffet 2008

Didn't Berkshire Hathaway loose a lot of money because of the current mess?

Re: The Banker Who Said No

#33

Post by [deleted] »

jmtame wrote: post #6

To prepare bids he locked himself in his office to write a computer program with 50 variables (now 250), ranging from home price changes by neighborhood to interest rates to origination dates. Yep, he's a hacker.

[deleted]

Re: The Banker Who Said No

#34

Post by karl11 »

catz wrote: post #32
bilbo0s wrote: post #7

"To prepare bids he locked himself in his office to write a computer program with 50 variables (now 250), ranging from home price changes by neighborhood to interest rates to origination dates." - Forbes.com 2009 "Beware of geeks bearing formulas" - Warren Buffet 2008

Didn't Berkshire Hathaway loose a lot of money because of the current mess?

They went down as the market went down and did have some losses, but they also had an enormous pile of cash and not very much debt. Buffett has been waiting for the market to go down like it has so he could make his move with that cash. As a result, I think he's going to make out extraordinarily well in the coming years.

Sorry for the Buffett fanboyism, but he's the man.

Re: The Banker Who Said No

#35

Post by chris11 »

smanek wrote: post #9

Does anyone know if it's possible for an individual to buy a CDO? Supposedly everyone wants to get rid of these things and is desperate for cash, which makes it seem like a decent opportunity for buyers. If I had $10,000 I could afford to lose (and was willing to take a long shot with) is there some market where I can buy those sort of assets?

I really doubt you could buy a CDO for a fair price. The banking crisis basically happened because banks had their assets overvalued and over leveraged their securities.

And I believe that through some accounting tricks, most bulge bracket banks are still overvaluing their securities. And in some cases once the securities are correctly valued, the banks will be insolvent. That is one problem the bailout money is for, to enable banks to correctly value securities.

So I believe that if a bank actually sells any CDO's at a fair price, there will be major problems with keeping the rest of the securities overvalued.

And from the way I understand it, most of these over valued securities are based on multiple assets, so one CDO is going to track other CDO's, you can't pick a CDO that is solely based on correctly valued assets.

Compare it to a local bank that is insolvent.And this bank has overvalued their assets. So I am looking to buy a house, and see that the bank has called the loans on two houses that would be in my price range. Except one of the houses has been used as a meth house, and the owner would have to pay an extra 60-70k to make the house habitable. Well, it would be an easy choice for me, I would want to buy the other house for less than the value of the loan. Only in this comparison that doesn't work. See, the bank found out that if they grouped the mortgages together, they could sell overpriced pieces of the mortages. So I would not be able to buy anything from the bank that would give me legal ownership of property. And the mortgages are grouped together, so for every dollar I invested in one property I would be investing a dollar in that meth house.

Nobody really knows what the CDO's will be worth in 10 or 15 years, but I do know that the banks don't have a strong desire to price CDO's low enough to actually sell them.

Re: The Banker Who Said No

#36

Post by dantheman »

MaysonL wrote: post #27
anamax wrote: post #20

Earlier quoted context omitted.

>E.g. if I pay someone $100 now for $100 worth of lawn care over the next five years, I make damn sure I can trust that person. If I pay the bank $100 for a CD maturing in five years, I don't. > This gives all banks an incentive to take undue risk Actually, you've just demonstrated that FDIC insurance gives you an incentive to take undue risk. You'll deposit your money at any bank without regard for whether said bank…

The trouble is that the trust a bank or any such institution receives is not, and probably cannot be, well correlated to its trustworthiness. Cf. Bernard Madoff, and the vulnerability of any bank (especially when no insurance exists) to a run.

The threat of a run is only available if you lend out demand deposits, which is something that could be eliminated.

Re: The Banker Who Said No

#37

Post by jrockway »

BobbyH wrote: post #23
jmtame wrote: post #6

To prepare bids he locked himself in his office to write a computer program with 50 variables (now 250), ranging from home price changes by neighborhood to interest rates to origination dates. Yep, he's a hacker.

This sounds like a multi-variable linear regression he did in Microsoft Excel?

Programming is more than software engineering. Some things don't need to be engineered.

Re: The Banker Who Said No

#38

Post by gojomo »

gscott wrote: post #22
smanek wrote: post #19

Earlier quoted context omitted.

I'm a bit short of the wealth requirements to be called an accredited investor ... (1M net worth + 200K/year income). That just seems blatantly unfair to me. It's the government setting up a different set of rules for the rich.

> That just seems blatantly unfair to me. It's the government setting up a different set of rules for the rich. There was one VC here that mentioned how someone emailed him about also investing in 3 of the companies that he had invested in, and how he couldn't let the person do it because the person didn't fit the requirements to be an "accredited investor" then he mentioned what three companies they were. They were…

But doesn't the current crash highlight the superfluousness of the 'accredited investor' limits? Even investments poor people are allowed to make -- like common stock of giant financial institutions, even those with government sponsorship (Fannie/Freddie) -- can essentially go to zero.

The general markets are down 45% from their peaks. Why should submillionaires be denied the chance to put 55% of their portfolio in T-Bills, and 45% in highly-risky unregistered private securities? That wouldn't have done any worse than the public stock market... and might do a lot better, if you understand the private companies involved.

And if submillionaires are such easy marks, why not any limits on how much they can gamble in casinos or even state lotteries?

The 'accredited investor' limits are silly; a phony security blanket at best, an unfair impediment to broad-based entrepreneurship and investing at worst.

Re: The Banker Who Said No

#39

Post by jibiki »

ggchappell wrote: post #11
jhancock wrote: post #3

Earlier quoted context omitted.

It is a good read and he obviously is a "good" banker for not overextending his bank. But to say he doesn't rely on government help makes it sound like he runs a normal corporation. Banks are not normal corporations. Mine can't loan out money at 26 times my deposits. Can yours? Of course not, your not a bank. This is the rub with banks. They want to behave like private entities, but they leverage government backed cu…

> But to say he doesn't rely on government help makes it sound like he runs a normal corporation. Banks are not normal corporations. Mine can't loan out money at 26 times my deposits. Can yours? You might have a point there. I guess the question (regarding whether my point was valid) is whether federal deposit insurance is underpriced. I suppose there is a good chance that it is.

It's the kind of thing that can't be priced (as AIG found out.) The distribution of the default rate is unknown and unknowable (fat tails and black swans and so on.)

Also, if you increased the price of FDIC insurance, banks would need to make greater interest rates, and therefore would need to make riskier loans. You could make FDIC insurance contingent on taking less risk, but that sort of regulation always seems to backfire. (Of course we already have such regulation, the article even alludes to it. But increasing the strictness of risk-taking regulation would just solidify the major players.)

Re: The Banker Who Said No

#40

Post by jibiki »

karl11 wrote: post #34
catz wrote: post #32

Earlier quoted context omitted.

Didn't Berkshire Hathaway loose a lot of money because of the current mess?

They went down as the market went down and did have some losses, but they also had an enormous pile of cash and not very much debt. Buffett has been waiting for the market to go down like it has so he could make his move with that cash. As a result, I think he's going to make out extraordinarily well in the coming years. Sorry for the Buffett fanboyism, but he's the man.

Yes. He was one of the early warning voices (2003?) about the dangers of complex derivatives.
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