are the banks paying off their loans?

[sidicks]

Sticks said:

Is there a good reason why the govt, as an employer, can change its employees' contracts and banks can't?

Does the bank ever want to make any money again in the future?

[sidicks]

anonymous said:

[redacted]

You do know the difference between an investment banker and an asset manager??
?
Sidicks

Edited by sidicks on Tuesday 11th January 13:24

[Sticks.]

sidicks said:

Sticks said:

Is there a good reason why the govt, as an employer, can change its employees' contracts and banks can't?

Does the bank ever want to make any money again in the future?

Sounds like a union phrase from the 70s and 80s. Employees holding the industry to ransom, just like the printers, for example.

Edited by Sticks. on Tuesday 11th January 13:18

[sidicks]

anonymous said:

[redacted]

Now fixed!

Asset managers manage funds on behalf or pension funds, they generally have nothing to do with investment banks (although some investment banks may have an asset mangement subsidiary) and have nothing to do with the credit crisis!

Sidicks

[MOTORVATOR]

munky said:

MOTORVATOR said:

You of all people Tonks could see early on that this wasn't sustainable and it seems that the risk management within the banks was below par to say the least.

So the question for me is did the banks act in a way that was risk manageable and the answer to that obviously has to be no for them to end up insolvent. Or do we fall back on school ground terminology of he told me to do it?

Any other organisation ending up in this situation we would probably be questioning the cavalier attitude.

You're generalising a bit there. There were a number of banks that did spot all the risks, knew a crash was coming, and acted accordingly. It was really quite obvious to many of us - record highs on the Dow Jones and FTSE almost every day, record house prices, record levels of consumer debt, building booms - we used to literally "count the cranes" looking out of the office window and when HSBC announced it was selling its own office building for $1bn to rent it back, it was obvious top of the market stuff.

However, it can be a case of damned if you do, damned if you don't. If you were over-exposed to property prices (as mortgage banks always are in a bubble*), lost a stack and needed a bailout, then you've been reckless. If like Goldman Sachs you knew you were exposed but sensibly hedged your risks by taking a bet in the opposite direction and avoided a bailout^ then you're villified because you "profited" from falling house prices i.e. from others' misery. So either way, you're damned.

• = to avoid being over-exposed to property, the mortgage banks would have had to stop doing any new business 5 to 10 years ago. That said, Northern Rock did act rather stupidly in its lending criteria.

^= Goldman was forced to take some 'bailout' money, to avoid stigmatising others that needed it and causing more bank runs!

Also many people and the media forget that the people getting bonuses are not the same people that caused these banks to lose money.

You're right I'm falling into the trap of referring to banks in the collective. So we should just focus on the failed (or more precisely needed to be rescued) banks.

The point is that if you look at NR for example as an organisation they did not manage their risks effectively. At a point in time of course it was great business to be in.

The trick is balancing profitability against risk. The argument about bonuses is that the areas of the org that made profits should still see their bonuses.

My argument would be that your division is a part of that overall structure and you are not working for a successful organisation. And in order to get it back on it's feet the pain needs to be felt across the whole organisation.

The alternative is for the whole organisation to go down the pan and you to be out of a job unless you are rescued either wholly by bailout or individually by break up.

The choice taken was wholly by bailout and therefore the organisation stands as a whole not as divisions.

[munky]

MOTORVATOR said:

munky said:

MOTORVATOR said:

You of all people Tonks could see early on that this wasn't sustainable and it seems that the risk management within the banks was below par to say the least.

So the question for me is did the banks act in a way that was risk manageable and the answer to that obviously has to be no for them to end up insolvent. Or do we fall back on school ground terminology of he told me to do it?

Any other organisation ending up in this situation we would probably be questioning the cavalier attitude.

You're generalising a bit there. There were a number of banks that did spot all the risks, knew a crash was coming, and acted accordingly. It was really quite obvious to many of us - record highs on the Dow Jones and FTSE almost every day, record house prices, record levels of consumer debt, building booms - we used to literally "count the cranes" looking out of the office window and when HSBC announced it was selling its own office building for $1bn to rent it back, it was obvious top of the market stuff.

However, it can be a case of damned if you do, damned if you don't. If you were over-exposed to property prices (as mortgage banks always are in a bubble*), lost a stack and needed a bailout, then you've been reckless. If like Goldman Sachs you knew you were exposed but sensibly hedged your risks by taking a bet in the opposite direction and avoided a bailout^ then you're villified because you "profited" from falling house prices i.e. from others' misery. So either way, you're damned.

• = to avoid being over-exposed to property, the mortgage banks would have had to stop doing any new business 5 to 10 years ago. That said, Northern Rock did act rather stupidly in its lending criteria.

^= Goldman was forced to take some 'bailout' money, to avoid stigmatising others that needed it and causing more bank runs!

Also many people and the media forget that the people getting bonuses are not the same people that caused these banks to lose money.

You're right I'm falling into the trap of referring to banks in the collective. So we should just focus on the failed (or more precisely needed to be rescued) banks.

The point is that if you look at NR for example as an organisation they did not manage their risks effectively. At a point in time of course it was great business to be in.

Correct, NR did not manage their risks - their lending criteria were too lenient and their view of the property market too rose-tinted, and their reliance on wholesale funding rather than deposits far too high. (HSBC by contrast, apparently, takes in more in deposits than it lends - which in itself could attract criticism from those who think banks should be lending more to businesses in the riskiest part of the business cycle, no matter if the demand isn't there).

However, when the media speaks of billions in bonuses for "the City", this does not include Northern Rock. NR has never been part of "the City", it was a provincial northern retail bank that got too big for its boots and paid the price. NR never paid big bonuses across the board, only to the directors that expanded the bank aggresively, which I fully agree was wrong but that comes under the more general corporate governance topic along with BP directors allegedly cutting back on costs and safety to earn higher profits. All large companies pay large bonuses to the Board of Directors, what makes "the City" different and a target is that a much wider group of staff can, subject to performance vs targets, earn substantial sums. Sure, a Northern Rock mortgage salesman might get a 10k bonus, but it won't be a million.

This is where the media does not discriminate, it generalises as follows. NR is a bank. Banks pay large bonuses. NR failed and needed bailing out. Therefore bonuses caused excessive risk and therefore bank failures, and now banks are being rewarded for failure by paying themselves bonuses.

The fallacy of this is that NR - a pure retail bank that has no lairy wide boy city traders (as the media likes to portray them) - did not pay large bonuses to large numbers of staff, but failed anyway. HBOS - very nearly a pure retail bank - also was not a "City bank", did not pay large bonuses, had no traders taking risk - and still failed. RBS was both a retail bank and an investment bank (it did and does have a presence in the City, originating from the purchase of NatWest and the Dutch bank ABN) but in their case, the cause for failure was not the risk-taking City-based investment bank - it was mostly because of the top level decision to buy ABN for an absurd price, which then turned out to have a shedload of toxic debt). The failure of RBS was not caused by the bonus-earning 'risk takers' of the City that are referred to by the media when they say that banks are paying x billions in bonuses.

The common thread of NR, RBS and HBOS (aside from all being from oop north and not traditional City banks) is that they had delusions of grandeur and expanded aggressively with borrowed money. Two of them are not even in the circle of banks that pay large bonuses and the other would still have failed without the investment banking arm - and, ironically - had it NOT had an investment banking arm, would have needed a larger taxpayer bailout, because the investment banking section of RBS has continued producing profits thus subsidising the losses in the retail arm (which is exposed to falling property prices, of course) as well as the ABN write-down.

MOTORVATOR said:

The trick is balancing profitability against risk. The argument about bonuses is that the areas of the org that made profits should still see their bonuses.

My argument would be that your division is a part of that overall structure and you are not working for a successful organisation. And in order to get it back on it's feet the pain needs to be felt across the whole organisation.

The alternative is for the whole organisation to go down the pan and you to be out of a job unless you are rescued either wholly by bailout or individually by break up.

The choice taken was wholly by bailout and therefore the organisation stands as a whole not as divisions.

In an ideal fairytale world, you might be right. However 2 reasons why you can't penalise the entire company for overall losses.

1) Structure. Large banks are run as a collection of entirely separate businesses, so it's not one company. A bank may have dozens of companies and legal entities. RBS is the holding company for sure, but RBS retail that gives you a car loan has absolutely nothing to do with RBS capital markets that manages IPOs for corporate clients, or the M&A part that advises companies on mergers, or the project finance bit that finances new airports in god knows where.
So it's not a perfect example but if Virgin Atlantic makes a loss one year because of some bad decisions, should you deduct pay from staff at Virgin Media who had a bumper year selling broadband?

2) So, one part of RBS lost a shedload of cash requiring taxpayer support. Another part of RBS makes a stonking profit, without which: a) the taxpayer would have had a larger bill, and b) the taxpayer would have to wait a helluva lot longer to get their money back.
The question is, what happens if you penalise the staff at the stonking-profits subsidiary? Answer - they leave and go elsewhere, leaving you without a stonking-profit making subsidiary, so now you're stuck with just your overly-exposed-to-property retail bank, which isn't making any money and so you can't pay back the taxpayer.
Would this actually happen or is it just staff holding the country to ransom as someone put it? Yes it could, and it did happen. Even the expectation of no bonuses under state ownership led 1,000 staff to leave the profit-earning arm of RBS last year.

It's a neat & tidy thought process to think "RBS bailed out by taxpayer, naughty RBS, should not be rewarded with pocket money" but whom are you penalising? The people at the top of RBS that caused the mess have already been fired - you're not hurting them. You're penalising the remaining staff (and those that joined after, of course) that are working hard to restore RBS. Old RBS is not new RBS, and the culprits have long departed but people tend to think of "a bank" as this amorphous entity like the Borg or something.

So as a taxpayer I ask you, would you rather get your money back (and a profit on top), or gain some sort of smug sense of justice that the bad bank has been punished but not see your money again?

[munky]

anonymous said:

[redacted]

anonymous said:

[redacted]

Now fixed!

Asset managers manage funds on behalf or pension funds, they generally have nothing to do with investment banks (although some investment banks may have an asset mangement subsidiary) and have nothing to do with the credit crisis!

Sidicks

But pensions have still taken a bit hit.

So what do you think about the chances of the Glass-Steagall Act or something similar being introduced again?

I actually agree with that. Split up the "universal" banks into retail and investment. Leave the investment banks to do what they want (within the rules) and pay what they want to whom they want - but no taxpayer safety net and discourage them from becoming too large to present a danger to the system as a whole (something regulators have failed to do so far). Prevent retail banks from carrying out the investment banking activities that pay large bonuses, then this argument about taxpayer financed bonuses goes out the window.

[munky]

On the US bailout: http://www.bloomberg.com/news/2010-10-20/bailout-o...

[ringram]

anonymous said:

[redacted]

Which is why bonuses and finance extract too much economic rents from society. Pointless paper shuffling with little to no social benefit.
Still thats capitalism and everyone has the same opportunity to take advantage.

[MOTORVATOR]

munky said:

anonymous said:

[redacted]

anonymous said:

[redacted]

Now fixed!

Asset managers manage funds on behalf or pension funds, they generally have nothing to do with investment banks (although some investment banks may have an asset mangement subsidiary) and have nothing to do with the credit crisis!

Sidicks

But pensions have still taken a bit hit.

So what do you think about the chances of the Glass-Steagall Act or something similar being introduced again?

I actually agree with that. Split up the "universal" banks into retail and investment. Leave the investment banks to do what they want (within the rules) and pay what they want to whom they want - but no taxpayer safety net and discourage them from becoming too large to present a danger to the system as a whole (something regulators have failed to do so far). Prevent retail banks from carrying out the investment banking activities that pay large bonuses, then this argument about taxpayer financed bonuses goes out the window.

See that now I would have been much more comfortable with. Gordon just buying the investment arms and letting the retail side go back to the existing shareholders.

Of course that would have involved business acumen so out of the question.


In seriousness though I couldn't get my head round not breaking them up at the time and regulating to control the exposure.

[munky]

MOTORVATOR said:

munky said:

anonymous said:

[redacted]

anonymous said:

[redacted]

Now fixed!

Asset managers manage funds on behalf or pension funds, they generally have nothing to do with investment banks (although some investment banks may have an asset mangement subsidiary) and have nothing to do with the credit crisis!

Sidicks

But pensions have still taken a bit hit.

So what do you think about the chances of the Glass-Steagall Act or something similar being introduced again?

I actually agree with that. Split up the "universal" banks into retail and investment. Leave the investment banks to do what they want (within the rules) and pay what they want to whom they want - but no taxpayer safety net and discourage them from becoming too large to present a danger to the system as a whole (something regulators have failed to do so far). Prevent retail banks from carrying out the investment banking activities that pay large bonuses, then this argument about taxpayer financed bonuses goes out the window.

See that now I would have been much more comfortable with. Gordon just buying the investment arms and letting the retail side go back to the existing shareholders.

small point though - other way around!

As a Lloyds (the formerly risk-averse, profitable, well-run bank!) shareholder, I was livid that one-eye and badger-face dumped a bankrupt scottish bank onto Lloyds and lied about how much had been lent to HBOS. So much so that I wrote to my (tory) MP to complain, who passed it onto the labour peer Lord Myners, who replied to me with some bullst answers.

[munky]

ringram said:

anonymous said:

[redacted]

Which is why bonuses and finance extract too much economic rents from society. Pointless paper shuffling with little to no social benefit.
Still thats capitalism and everyone has the same opportunity to take advantage.

there speaks someone without a clue what finance does, or how without a modern financial system (imperfect as it may be) to allocate spare capital to where it is needed, we'd still be in the dark ages. Which is why finance is as old as business itself.

[munky]

coyft said:

munky said:

ringram said:

anonymous said:

[redacted]

Which is why bonuses and finance extract too much economic rents from society. Pointless paper shuffling with little to no social benefit.
Still thats capitalism and everyone has the same opportunity to take advantage.

there speaks someone without a clue what finance does, or how without a modern financial system (imperfect as it may be) to allocate spare capital to where it is needed, we'd still be in the dark ages. Which is why finance is as old as business itself.

He's spot on. The majority of the financial system is pure friction, taking a cut from transactions.

Ah not you again, the one that makes daft statements without an argument to back it up?

Ok quick question. You need to raise £1bn to finance your expansion plans. You're not sure whether to raise it in debt, equity, or a hybrid. Bond issue or syndicated financing? Public equity offering or private? How do you choose, what are the cost, tax, control/governance and regulatory implications of each, and where do you get the money from? If you have a mate with a spare billion then fine.. if not, do you know who has, where they are, how to contact them, do you have the staff to go and do a fundraising roadshow in 15 countries, do you know what foreign investors' requirements are at the current time, what their local tax and regulatory implications are and which countries have restrictions (e.g. Reg-S) on which type of investments? In which circumstances would you be better off with a convertible bond issue? Should it be callable? Who will structure it for you? What price will you sell it at?

I also take it that you have no loans, no mortgage and no money on deposit as you have a better way of doing it without the friction.

[munky]

coyft said:

This isn't complicated it is very straightforward.

In an efficient market, willing lenders would lend to willing borrowers. There would be no need for a finance industry, clearly no market is 100% efficient. The more we come to rely on the financial services industry, the more inefficient the market is and the result is more friction. It is not a difficult concept to grasp.

You haven't answered any of the questions though so let's make it simpler. How do these willing borrowers and lenders find each other? Bearing in mind that a single borrower may need several lenders, and a single borrow won't want to invest/lend all their capital to a single borrower, they'll want to spread the risk. Then add in the different tax and legal jurisdictions these multiple borrowers and lenders will be in. Who will match them up? Are the multiple borrowers and lenders all willing to lend at the same rate and same time period? Secured or unsecured? Floating or fixed rate? Does it matter? What's the borrower's credit rating?

To take your argument, then any service business is friction. Lawyers - why do companies hire law firms? Surely better to draw up your own contracts with clients / suppliers and do everything in house, have your own permanent legal team or better still, study law yourself. Buying a house? Just a handshake with the seller will be fine, conveyancing costs are just friction. Need to print some sales brochures? Buy a laser printer and do it yourself, no need to hire a printing firm - they're definitely just friction, I mean how hard is photocopying? Surgeons - don't need 'em, do it yerself with a stanley knife. Insurance companies? Just self-insure. Save up the money you would have spent on contents insurance and pay yourself out when you get burgled.

The reason you are 100% wrong is that is usually more efficient to pay someone to intermediate or carry out specialist work for you. You also seem to think that finance consists entirely of making loans. That ceased to be the case at least 2500 years ago.

[sidicks]

coyft said:

Really? If that's the case why can't the majority of active fund managers beat the market? It is less efficient to pay the average fund manager for his specialist knowledge. Give a monkey a few bananas instead.

Put simply, the fund managers are the market, so only half can beat the market and half will underperform.

But I assume you knew that, and are just trolling.

Or do you really understand as little about the asset management industry as the banking industry?

Sorry if that sounds patronising....

Sidicks

[sidicks]

coyft said:

Asking me if I understand asset management is slightly patronising as I'd wager that I have a lot more assets under management than you do.

I bet my dad is bigger than your dad.

coyft said:

Telling me that half the active fund managers outperform the market made me fall off my chair laughing.

What constitutes the market return?
What return do the passive managers get?

[munky]

coyft said:

munky said:

The reason you are 100% wrong is that is usually more efficient to pay someone to intermediate or carry out specialist work for you. You also seem to think that finance consists entirely of making loans. That ceased to be the case at least 2500 years ago.

Really? If that's the case why can't the majority of active fund managers beat the market? It is less efficient to pay the average fund manager for his specialist knowledge. Give a monkey a few bananas instead.

I said usually. As it happens I'm not going to disagree with you about fund managers and where I have a choice, I don't pay them to manage my funds. I pick stocks myself.

But fund managers are not banks. Some banks have fund management arms, but most fund managers have nothing to do with banks. Hedge funds do usually outperform the market but they have tricks up their sleeve that normal funds do not, and the vast majority of their fees are based on performance, not a % of funds under management.

[Tadite]

petemurphy said:

All these billions that the taxpayer lent - are they all paying them off as they should do? if so whats the prob with bankers bonus's? if they are paying off according to the terms the gov set then fine surely? or are they fiddling it? if they are paying them off are we making a profit?

In the case of the US... Yes. The exception is AIG, the cars (although more then you would think), and of course Citibank.

[sidicks]

coyft said:

Burton Malkiel who wrote "A Random Walk Down Wall Street" compared $10,000 invested in the S&P 500 Index fund
to $10,000 invested in the average actively managed mutual fund. The time period was from 1969 -1998.
The Index investors fund was worth $311,000 while the actively managed fund was worth $172,000.

Tell me about these mutual funds. What were they benchmarked against? What were they permitted to invest
in?

I am talking about active managers managing against a benchmark index where the active views are also on the same index - in effect stock picking.

Sidicks

[munky]

coyft said:

munky said:

coyft said:

munky said:

The reason you are 100% wrong is that is usually more efficient to pay someone to intermediate or carry out specialist work for you. You also seem to think that finance consists entirely of making loans. That ceased to be the case at least 2500 years ago.

Really? If that's the case why can't the majority of active fund managers beat the market? It is less efficient to pay the average fund manager for his specialist knowledge. Give a monkey a few bananas instead.

I said usually. As it happens I'm not going to disagree with you about fund managers and where I have a choice, I don't pay them to manage my funds. I pick stocks myself.

But fund managers are not banks. Some banks have fund management arms, but most fund managers have nothing to do with banks. Hedge funds do usually outperform the market but they have tricks up their sleeve that normal funds do not, and the vast majority of their fees are based on performance, not a % of funds under management.

I said the financial services industry. I included for illustrative purposes borrowers and lenders, I also said that no marketplace can be 100% efficient. I often hear things like the financial services industry contributes x % of GDP to our economy banded about on PH. My view is that a lot of it is friction and we should aim to reduce it, not increase it.

If we were a closed economy (financial services are an export - the UK fin services industry earns the UK money from other countries) with no tax, no regulation and no risk of borrowers ever defaulting, plus a perfect and free market for matching up lenders funds with the best use (i.e. most profitable) of those funds, then you'd be right - bank profit would just be coming from elsewhere in the system.
However in an interconnected and rather complex world of different interest rates, exchange rates, tax regimes, and regulation regimes then financial intermediation is not only necessary, but is an enabler of the 'real' economy. It transfers spare capital to the most efficient use and in the most efficient way, at least the vast majority of the time it does and it does it so much better than any alternative and with economies of scale and pooling of risks, that the benefits to and growth of real economy outweigh the small cost. Sure, each lender could do their own due dilligence on hundreds of potential borrowers, do risk assessments, credit checks, calculate potential returns on whatever the money is being used for (if a business borrower), do their own money laundering checks on them (and face jail if they get it wrong), check the relative tax efficiency of multiple possible investments and then check that no rules or regulations in any country where the funds might be used have been breached, but that seems like a lot of effort for someone with a tenner in a deposit account. Multiply that thought for businesses - how much would it cost each firm to do all that? Much cheaper to outsource to someone specialising in all that. Or for a borrower, do you have the time to pitch to a hundred, or a thousand potential lenders or investors?
Division of labour is a well known economic benefit. A business focusses on what it does best, and outsources the peripheral stuff to someone with the knowledge and economies of scale to do it better. Same with individuals - I could do my own painting & decorating in my new house, or I could have done my own removals last month when I moved house or even my own conveyancing but since I earn more than those things cost, I'm better off not taking time off work to do it myself.
The real measure would not be some %GDP figure that's easy to google and bandy about, but the difference in GDP with and without a banking sector, going back 500 years say. Without any such sector my bet is that the UK's GDP would resemble somewhere like Botswana, unless of course we import our financial services, which then means money is flowing out of the country rather than in. However such a figure is impossible to calculate.

Edited by munky on Wednesday 12th January 00:47