B.O.E. gets tougher on bankers

[crankedup]

toppstuff said:

crankedup said:

Odd that, could have sworn I mentioned in passing that not all those in the finance industry are dishonest scum. I then went on to mention that I know two people who are involved at a high level of seniority who are honest as the day is long on 21/6/14. Still I guess to satisfy your need to believe I am really pissed with what has gone on and continues to be discovered as dishonest and some downright fraudulent practices within sections of the industry, it leaves a fair few yet to be counted. Estate agents used to be bottom of the 'respect pile' at least they are off the bottom of the heap now being replaced by the 'banking industry'.

Your broad-brush righteous indignation does not want to understand the complex finance industry. That would be too hard.

Taking the disparate and diverse range of jobs and functions that operate capitalism and attempting to regulate or control them with a single instrument ( cap their bonuses ! Make them repayable inside 7 years !! ) is both stupid and dangerous. Stupid because it simply does not address the main problems while also penalises people who have no possible involvement in "skulduggery" and dangerous because it represents how policy makers are pandering to a populist agenda rather than really grappling the problem areas at a fundamental level.

Rather than throw populist grenades at the sector, using the righteous indignation so elegantly guided in your mind by a compressed few minutes on a TV programme, you may instead want to be educated about how economics are actually applied. Credit, debt, equity, foreign exchange, active management, passive management, private equity, public equity, equity derivatives, credit derivatives, currency derivatives, shorting, stock borrowing, arbitrage strategies, exotics, swaps, cash management, treasury, hedging strategies, risk management etc etc etc etc... EACH sector is an inordinately complicated business which contains processes and procedures of frankly mind-boggling levels of engineering and complexity.

Yet these functions and processes are what makes the world tick - puts food in supermarkets, fuel in your tank, heat and light in your house, makes the car on your drive and the roof over your head. The whole "casino capitalism" thing incorrectly describes functions, without which, the world as we recognise it would crumble. Petrol companies, construction companies, engineering companies, pension funds - all of them use these services to reduce their risks, hedge their exposures to things that could threaten their profitability and the price that you end up paying for the goods they provide. Investment strategies that you think ( and are told ) are the key to all evil wrong-doing, are inside your own pension funds, reducing volatility, generating returns and paying you an income.

You may be encouraged by the populist media to think that this is one big industry that is merely solved by bashing on the head with bonus caps and being treated as a single, evil pariah. But that would be the uneducated view.

Are there things wrong with "banking"? You bet.

Have politicians and regulators gotten their head around how to best regulate and control the industry on which our whole society depends? Not a chance.

I don't know what the answers are. But I know that most of what has been done so far is misguided, pointless and driven by a lack of understanding, or even a desire to understand.

Maybe global capitalism has just become too complicated.

I do realize its a money go around thanks, jeez! What I want is tough regulations that will halt a re-occurrence of the 2008 crash. And strong penalties against those in the finance industry who deliberately commit fraud for personal betterment. I don't need to understand how it all works I just want to see less fraud. Is that immoral.

[Burrow01]

crankedup said:

I have no intention of weighing myself down with the minutiae of all those complicated issues of trading.

Is this not part of the problem - nobody outside of the industry actually wants to understand it - they all try and regulate it without going into the detail and understanding exactly what the problems really are

[toppstuff]

crankedup said:

I do realize its a money go around thanks, jeez! What I want is tough regulations that will halt a re-occurrence of the 2008 crash. And strong penalties against those in the finance industry who deliberately commit fraud for personal betterment. I don't need to understand how it all works I just want to see less fraud. Is that immoral.

This shows how misguided you are.

The financial crisis was a systemic break down of the system. Banks crashed through their solvency floors as credit instruments that had been previously rated as "investment grade" suddenly became anything but. It happened because there was too much leverage in the system and it became uncontrollable - effectively it was like a stack of dominoes. Correlation across asset classes moved to 1. Everyone rushed for the exit only to realise we were all in the same room. All asset classes collapsed in value. Solvency was toasted. Banks had to get propped up.

The only thing that will ultimately stop this happening again, is to control the amount of debt inside the system and better regulate the instruments used to construct that debt.

People need to understand that there is a relationship between political policy and the use of debt and the resulting credit crisis of 2007-9. When you listen to local radio with someone offering cheap finance on a new Golf, remind yourself that there is a relationship between this and the financial crisis. These financial and political threads are all interlinked.

But if it makes you feel better to blame it all on fraud, then I'm clearly not going to change your mind.

[crankedup]

Burrow01 said:

crankedup said:

I have no intention of weighing myself down with the minutiae of all those complicated issues of trading.

Is this not part of the problem - nobody outside of the industry actually wants to understand it - they all try and regulate it without going into the detail and understanding exactly what the problems really are

Most likely yes, but when we then consider that the big bosses of the various investment banks do not/did not understand the complexities of some plans its hardly surprising that people like me don't want to be bogged down. Only just found out about the so called 'dark room' trading, yet another very questionable operation.

[Derek Chevalier]

crankedup said:

What I want is tough regulations that will halt a re-occurrence of the 2008 crash.

Such as banning Help to Buy?

[crankedup]

toppstuff said:

crankedup said:

I do realize its a money go around thanks, jeez! What I want is tough regulations that will halt a re-occurrence of the 2008 crash. And strong penalties against those in the finance industry who deliberately commit fraud for personal betterment. I don't need to understand how it all works I just want to see less fraud. Is that immoral.

This shows how misguided you are.

The financial crisis was a systemic break down of the system. Banks crashed through their solvency floors as credit instruments that had been previously rated as "investment grade" suddenly became anything but. It happened because there was too much leverage in the system and it became uncontrollable - effectively it was like a stack of dominoes. Correlation across asset classes moved to 1. Everyone rushed for the exit only to realise we were all in the same room. All asset classes collapsed in value. Solvency was toasted. Banks had to get propped up.

The only thing that will ultimately stop this happening again, is to control the amount of debt inside the system and better regulate the instruments used to construct that debt.

People need to understand that there is a relationship between political policy and the use of debt and the resulting credit crisis of 2007-9. When you listen to local radio with someone offering cheap finance on a new Golf, remind yourself that there is a relationship between this and the financial crisis. These financial and political threads are all interlinked.

But if it makes you feel better to blame it all on fraud, then I'm clearly not going to change your mind.

Yes I do know that, its all in'storyville" your short overview matches exactly. I do wonder if you are being deliberately obtuse. But then you have left out the section whereby traders built up positions which were hopelessly overvalued, they did this for the sole reason of personal bonus payments. All that bundling up of crap to sell onto the next mug and forever upwards. I'm no banker obviously, but if a trader flogged a turd to an idiot its likely that person would want to flog another.

Basically what you are saying is my understanding of the situation and my wish to see regulation in place that would at least have some buffering effect.

Now you say I am misguided, purely because I mentioned that traders profiteered and the bosses turned a blind eye. For them it was win win. Tell me I am wrong.

[crankedup]

Derek Chevalier said:

crankedup said:

What I want is tough regulations that will halt a re-occurrence of the 2008 crash.

Such as banning Help to Buy?

TBH I am not sure that HTB (help to buy) is driving the housing market into a bubble. More housing inflation is imo being driven with foreign investors, particularly Chinese and Russian investors. They see London as a safe haven for money and housing as a good investment. Apparently millions of pounds invested into a prime London property remains uninhabited following purchase. I guess we see the trickle out effect from London into the suburbs and beyond.

[Randy Winkman]

Derek Chevalier said:

crankedup said:

What I want is tough regulations that will halt a re-occurrence of the 2008 crash.

Such as banning Help to Buy?

I don't think it needs to be banned since it was (very weirdly) a government initiative that they could have stopped at any point. Why the heck it was ever introduced is anyone's guess. To appease bankers perhaps?

[toppstuff]

crankedup said:

Now you say I am misguided, purely because I mentioned that traders profiteered and the bosses turned a blind eye. For them it was win win. Tell me I am wrong.

You're over simplifying and also wrong.

Traders were building up highly leveraged positions of huge size in debt tranches that were rated by third party ratings agencies. Given that the ratings were designed to indicate the relative "risk" across different tranches of debt, it is hardly surprising that financial institutions depended on those ratings to inform the positions they would take in them.

Let us also not forget that these debt positions simply would not exist without the credit that underpins them - every mortgage, every car loan, every credit card. Debt instruments only existed because governments kept pumping up the debt bubble. An investment bank needed the raw material ( debt ) to construct the CDOs they were trading - Governments were only too happy to provide it as they wanted the voters to feel richer. Clinton passed laws compelling banks to lend money to people who were bad credit risks - CDO's were a way for banks to package that dodgy debt and spread it around.

Let us remember that CDO's were created to actually REDUCE risk - by compartmentalising debt into different tranches and different ratings, paying a yield that increased where the rating was set as "riskier". These instruments were then in turn spread around the system rather than being concentrated.

Banks are there to make a profit and pay dividends. Regulators allowed them to operate - indeed they even relaxed regulatory oversight rather than increased it. I think it is over-reaching to regard this as fraud when the process was so deeply embedded into government policy.

It still beggars belief that the ratings agencies have gotten away so lightly.

[anonymous-user]

crankedup said:

All I want is for tough regulation to be imposed upon those areas of banking which helped get the World economy into st street and caused utter financial distress to tens of millions of people.

Only allow mortgages to be offered to the public at 80%LTV, maximum 3.5 times income then. No teaser rates, no gimmicks. Do not allow British domiciled banks to invest in derivatives with underlying assets worse than that. Job done. That's the army prepared for the last war. Now where is the next?

[otolith]

Just as an aside - the BoE has very sensibly required issuers wishing to use its repo facility to produce a liabilities side cash flow model for RMBS ABS. ESMA, while trying broadly to unite BoE and ECB compliance criteria, has decided to drop that requirement from CRA3. Frankly, the idea that you can properly understand the behaviour of a transaction with multiple liquidity support and credit enhancement features just by reading the prospectus and getting a qualitative idea of how they work is pretty laughable, IMO.

[Derek Chevalier]

crankedup said:

Derek Chevalier said:

crankedup said:

What I want is tough regulations that will halt a re-occurrence of the 2008 crash.

Such as banning Help to Buy?

TBH I am not sure that HTB (help to buy) is driving the housing market into a bubble. More housing inflation is imo being driven with foreign investors, particularly Chinese and Russian investors. They see London as a safe haven for money and housing as a good investment. Apparently millions of pounds invested into a prime London property remains uninhabited following purchase. I guess we see the trickle out effect from London into the suburbs and beyond.

If it's not HTB driving the bubble it must be the BOE keeping base rates as historical lows.

[anonymous-user]

crankedup said:

TBH I am not sure that HTB (help to buy) is driving the housing market into a bubble.

Anything that makes houses easier to buy increases the number of those with the means available to demand without increasing the supply. All other things being equal it would illogical if it didn't increase prices. Its a stupid policy which will only serve to make houses more unaffordable for anyone not on the scheme. You're right about the foreign money though and its not just a London thing... http://www.businessweek.com/articles/2013-08-22/fo...

[Randy Winkman]

fblm said:

crankedup said:

TBH I am not sure that HTB (help to buy) is driving the housing market into a bubble.

Anything that makes houses easier to buy increases the number of those with the means available to demand without increasing the supply. All other things being equal it would illogical if it didn't increase prices. Its a stupid policy which will only serve to make houses more unaffordable for anyone not on the scheme. You're right about the foreign money though and its not just a London thing... http://www.businessweek.com/articles/2013-08-22/fo...

Exactly. Why did they have a scheme to make things worse, instead of better?

[Murph7355]

fblm said:

Only allow mortgages to be offered to the public at 80%LTV, maximum 3.5 times income then. No teaser rates, no gimmicks. Do not allow British domiciled banks to invest in derivatives with underlying assets worse than that. Job done. That's the army prepared for the last war. Now where is the next?

Don't forget much stricter rules on credit cards and other credit vehicles (similar rules on teaser rates and gimmicks), credit checks on individuals etc etc, with commensurate raising of charges to cover the extra costs and amounts needing to be set aside to cover defaults.

A ton of stuff could be done to tighten the leash and avoid a repeat of 2008....but then the same people moaning about bankers will be back moaning about bankers only this time about how dare they refuse credit to people (/businesses) when they're so creditworthy.

[anonymous-user]

Randy Winkman said:

fblm said:

crankedup said:

TBH I am not sure that HTB (help to buy) is driving the housing market into a bubble.

Anything that makes houses easier to buy increases the number of those with the means available to demand without increasing the supply. All other things being equal it would illogical if it didn't increase prices. Its a stupid policy which will only serve to make houses more unaffordable for anyone not on the scheme. You're right about the foreign money though and its not just a London thing... http://www.businessweek.com/articles/2013-08-22/fo...

Exactly. Why did they have a scheme to make things worse, instead of better?

Because they rushed to introduce a policy to appease younger voters without stopping to think about the (obvious) unintended consequences. Politicians will take the easy route of appeasing a financially illiterate public instead of actually solving the problem every time. Which brings us nicely back on topic...

[anonymous-user]

crankedup said:

Didn't know about the so called 'Dark Rooms'.

Unless weve moved on to photography I think you mean Dark Pools. This should be good!

[crankedup]

fblm said:

crankedup said:

Didn't know about the so called 'Dark Rooms'.

Unless weve moved on to photography I think you mean Dark Pools. This should be good!

Educate me about the dark pools as offered earlier, I am intrigued as to how it works! I will admit that all I know about this system of extracting a profit is that the trader has milliseconds to action a trade, (time taken for transaction to be zipped through?) just prior to an open legitimate outsider purchaser, therefore secures a stock at a slightly lower price. So in a sense the trader is using inside information knowing a large stock purchase is taking place and can dive in to purchase at a slightly lower price just prior to the ongoing purchase mentioned. When multiplied that tiny % it adds a nice profit margin. O f course said trader can off load the stock at the slightly higher price for the profit that has just been manufactured. That is my very basic understanding which of course is no doubt entirely wrong.

Edited by crankedup on Thursday 7th August 12:36

[toppstuff]

crankedup said:

Educate me about the dark pools as offered earlier, I am intrigued as to how it works! I will admit that all I know about this system of extracting a profit is that the trader has milliseconds to action a trade, (time taken for transaction to be zipped through?) just prior to an open legitimate outsider purchaser, therefore secures a stock at a slightly lower price. So in a sense the trader is using inside information knowing a large stock purchase is taking place and can dive in to purchase at a slightly lower price just prior to the ongoing purchase mentioned. When multiplied that tiny % it adds a nice profit margin. O f course said trader can off load the stock at the slightly higher price for the profit that has just been manufactured. That is my very basic understanding which of course is no doubt entirely wrong.

Edited by crankedup on Thursday 7th August 12:36

This is algorithmic trading. It is not done by people, it is done by software. The idea is that software can identify the minutest trends using data collection and so, using an algorithm, anticipate movements the moment they occur and take a position before they gain momentum.

Most of the major movement in stock prices however, comes from index funds and pension funds. The single largest stockholder in Europe is not some "black box" hedge fund but in fact is the Norwegian Petroleum reserve fund. Dark pools are not IMO a major worry yet, but they could be.

A dark pool is essentially a "slush pot" of stock inside financial institutions that trade between themselves. The idea is that they allow institutions to aggregate positions into a single, larger, pot, so that when they go to the market to buy or sell, the identity of the individual holders is not immediately apparent - the whole deal will be pinned to a single bank rather than the multiple institutions that may stand behind it. So, for example, if Google wanted to buy stock in Amazon, they may get a bank to build a dark pool of their stock ( and others ) and then make a move with the total, aggregated position, without immediately tipping off the market who is making the move.

Dark pools are also used by some of the quanty, algorithm-driven hedge funds.

The regulators are onto this. The SEC has a working group on the subject and it is certainly not being ignored. Time will tell what will happen.

As I said though, it is worth remembering that the bulk of trading is still done by traditional pension funds and institutions like Norway, rather than a few blokes in Mayfair and a fund in the Caymans.

[toppstuff]

It is also worth noting that a "dark pool" is not necessarily as sinister as it sounds.

All it effectively means is that , say, JP Morgan are seen in the market to be making a big move on a stock for example, but the liquidity inside that position and the investors behind it cannot immediately be seen. It is therefore, "dark".

The opposite to this would be the chairman of Marks and Spencer announcing in a press release that they want to buy Debenhams. That is clearly not "dark".