Thursday, February 21, 2013

The Real Problem with the Big Banks

The Real Problem with the Big Banks, New Yorker article.
The fundamental problem with the banks isn’t that they look (and act) more and more like hedge funds. The fundamental problem with banks is what it’s always been: they’re in the business of banking, and banking, whether plain vanilla or incredibly sophisticated, is inherently risky.

As he proposes, it could be a lot less so if banks were simply required to have more equity for the money they lend.

But it lends perspective to the old adage: "as safe as money in the bank". In a world where every generation has its bank failures, I wonder how such a saying even comes about?

For the minority these days (though still a sizable one) who are savers, it is recommended to not have all your money in the bank, and certainly not in one bank. "Don't put all your eggs in one basket" is a smart counter-idea to the one above.


Ken said...

Simple maths explains it all. A bank with 3% equity will have about the same profit as one with 9% equity: there funds on loan will be 97% and 91% respectively, about 7% difference. So the return on equity for the 3% bank will be close to 3 times as high as for the 9% bank.

Of course the 3% bank will go broke a lot easier, but by then the investors may have made so much money that it doesn't matter. Plus they don't have to pay out the banks losses above 3%.

Eolake Stobblehouse said...

Yes, that is indeed the logic for the bankers.
In the article he claims that it does *not* have to hurt profit. But I confess that all steps beyond my interest and knowledge, too deep.

Pascal [P-04referent] said...

The fundamental cause of the crisis, IMO, is incredibly easy to explain: banks started trading in DEBTS (pompously called "subprime loans", whatever the flark that means) as if they were ASSETS or merchandise. In other words, they started trading with stuff which, at the very atart, was completely VIRTUAL, artificial.
Trading stock-market shares of cereals, or mineral, or oil, or whatever concrete product whose existence is certain in the immediate future (at worst), is itself concrete. A debt is, at best, nothing more than a promise to pay back money. It's mere wind, if not hot air. Heck, whole shucking NATIONS have borrowed more than they could ever possibly pay back, and spent it all liuke there was no tomorrow! (A rather apt expression, for some governments...)
They (the banks) merrily started speculating, and COMPETING, OVER-BIDDING, on stuff that originally had no real existence. It was doomed from the very start, because the principle itself was as solid as building castles on clouds.

Remember that quote attributed to Chief Sitting Bull? "When the last tree will have been cut down, when the last fish is caught, when the last buffalo gets hunted, when the last brook dries out, the White Man will suddenly realize that their money cannot be eaten or drank."

"The System", both complex and computerized, has simply given all those apprentice sorcerers an excuse to trade on stuff that doesn't exist. But the end result, amassing money from fools who dream of profitable gambles in that skewed system, now THAT is real. Money brings power. And luxury. And there's no end to the amount of those that one can covet. And "there's a thousand born every minute", so why waste a GOLDEN opportunity?

Nowadays, a polar bear skin is worth around $100,000. The more rare they become, the more profit there is to be made. Now THAT, my friends, is how to make more and more profit with less and less merchandise. The ideal, of course, being to accomplish near-infinite profit from little to no real goods.
Or, failing that, multiplying severalfold the dubious value of goods by fabricating an unending stream of ever-briefer fads.

I currently use a VERY old-fashioned cellphone, which I received as a gift when a relative of mine received an iPhone as a present. A few weeks ago, the arrival of an all-recent, latest-generation iPhone meant that I inherited the old one, still very much functional and satisfactory, thank you very much.
I'm currently keeping that "obsolete" old iPhone 1.0 in its box, until the older model with touchless screen gets lost or accidentally damaged. Because one thing's for sure, no street thief is going to snatch THAT old trinket from my hand and run with it!
And in the meantime, no Big Brother can secretly track me through a GPS which my old phone DOES NOT EVEN POSSESS.
And guess what? It makes very good phone calls. That's all I really need it for. (Yes, my daily life is pretty calm...)

I still haven't felt the "need" to upgrade from DVD to Blu-Ray and 3D television. Heck, I've got more bargain-sale DVDs than I can manage to watch, what with 2D TV programs being rather decent in the evening.
Sure, hi-def, and color before that, were pleasantly welcome... when they became routine! A few years' patience is only "patience" if you're the always impatient type. SO MUCH cool stuff I bought dirt cheap AFTER the fad had deflated like a carelessly heated soufflé...

Pascal [P-04referent] said...

Annoyingly, more and more nowadays you are being forbidden to make significant purchases in cash. "They" want money to have a trail, in the name of fighting organized crime and money laundering. Yeah, right. Tell it to the foot.
Not yet in Lebanon, lucky for me. Not when the biggest kingpins are all in the Government. There was a sensational bank-ruptcy scandal (of a bank, hence the two words) a few years back, which had to be buried before too much investigating was done.
I had to open a bank account when I gave some University classes for two years. They wouldn't pay me in cash, even though the total amount remained ridiculously modest. I think I still have around $47 unpent on that account. Or is that $43? Who cares. THAT money is very obviously dusty. :-D
No, wait, I seem to remember it's around $24.68.
Barely worth the gas for the trip to go close it down.

But really, how derpishly dopey do you have to be to "invest" in ever-bartered DEBTS?
The blumen banks THEMSELVES caused the housing bubble by doing this!
And guess what? Absolutely unsurprisingly, apart for the mortgages on HOUSES, they're all still doing exactly the same: handing out an endless machinegun fire of instant credits to people who are already hairtip-deep in debts!
Want to know what the most popular "banking products" in Lebanon are, these days?
- The plastic surgery loan, for a few years now (google it). Admittedly, it can be swiftly paid back if it catches you a husband. One less discerning that still-single Pascal here. ;-p
- The maternity loan. Yes, for the expenses of delivering a baby, with the hospital bills and stuff.
- The wedding loan. Because no self-respecting Lebanese would get married without throwing cash out the windows. Heck, just the fireworks (usually in the daytime) can amount to $10,000, if not double!
- And sales offers of "buy now for nothing, onlyh start paying in one year" are everywhere. I get weirded out looks when I turn back home the moment my wallet is almost empty. (I keep the bus money in a separate pocket...)

Pascal [P-04referent] said...

The trick to the shtick is, of course, that the real profit is not in those alleged "financial goods" themselves. The real profit was always in pocketing a commission when you trade them. All you needed was moronic investors that only saw an ever-rising market value to keep the money pump running.
Okay, so one also had to keep alert and skidaddle before the Hindenburg blimp went "POP!" And it was of course very easy to spot the greedy daredevils who didn't pull back in time and got their faggy faces bukkake'd.

Fear not, my friends. All that vanished money, all those wildly dancing billions, weren't lost for EVERYBODY. That very real money went into some very real (and very secretive) pockets.
Proof is, the luxury market barely saw a transient cooling down for about 12 to 18 months, when "some people" needed to lay low for a while, to not reveal their own "unmisfortune" too blatantly.

You want to invest your savings into company shares that will NEVER EVER crash? Here are a few names: Louis Vuitton, Prada, Rolls Royce, L'Oréal, Chanel, Tiffany's, DeBeers, Dom Pérignon... they ain't never going out of business from lack of clients, trust me.
(Now, poor management and getting bought out, that's another thing.)

Welcome to the Purgatory of Mammon. Watch the boiling vats, that's frying oil in there. MGO soybean oil laced with pesticides.

More on that on my upcoming blog post, a.k.a. "December 2012 Apocalypse, the sequel".
It probably WAS the End of the World... but no prophecy ever announced the End of Hell.
(Okay, except when Wolverine was magicked there and had to lop Satan's jhorloks off with HIS OWN soul-cleaving sword!)

The end for now.

[Josie, that's your cue to troll away in one swift four-word snarky sentence. Don't over-exert yourself, darling!]

Eolake Stobblehouse said...

ten grand for fireworks? That's insane, even when you *have* the money!
I've long thought expensive weddings is sick, but this takes the cake. As it were.
Makes me feel better about buying the occasional camera I don't strictly need.

Pascal [P-04referent] said...

Well, what's the point of being loaded with moolah, if you don't literally blow it in smoke? ("Literally" in a literal way. ;-)
The civil war taught as this much. Hey, all that ammo doesn't exactly come cheap, y'know.

The whole point of life in Lebanon is to show off in the face of all those OTHER lame show-offs!
Any wonder why SUV sales in the Third World remain steadily on the rise?

In France, they have a saying: "Big car, tiny wee-wee". That's why I plan on buying a Smart Fortwo. Because I'm such a show-off! No point in having it if you don't flaunt it. (~_^)

Back to those "passé" phones, anyway it's silly to get a 4G smartphone in Lebanon... when even the 3G in this country is still years behind decent criteria!
My top DSL speed to this day is around 1.2MB per MINUTE. For $22/month. And no extra features such as free local calls or sat-TV programs.

Heck, modernizing the country requires money! And our politicians all have big sons/daughters to marry. Priorities...

Pascal [P-04referent] said...

"The civil war taught US this much."

Eolake Stobblehouse said...

I hear an Australian billionaire is blowing his wad on building a Titanic II. To me that makes more sense, at least a lot of jobs will be created.

Eolake Stobblehouse said...

"My top DSL speed to this day is around 1.2MB per MINUTE"

Hokey mofo. They should be charged with false advertising if they use "broadband" for that. That's around what I have per second.

Pascal [P-04referent] said...

A lot of jobs, Steve... and hopefully a boat that floats. THIS time.
But I'm not too sure about that. I heard they want to make it "as faithful to the original as possible".
I've seen what that gave with Doctor Who.
I ain't booking in that fancy floating coffin until Cpt. Skeleton & his crew of high-flying dutchmen make it back and forth at least once across the Atlantic.

Yeah, my innurnet MAY be 60 times slower than yours... but it's also 6 times faster than my old dial-up, so there. :-/
"False advertising"? WHAT "false advertising"? Just because the recharge card reads "1Mbps"? Picky, picky.
The fine print on the other side clearly states, and I quote (cleans microscope lens): "Indicated speeds are «Up to» based on your location and the capability of your copper phone line."
That's «Up to», not «up yours». Make no mistake. Say no more. Blink-blink, nudge-nudge.

In theory, all of Lebanon was supposed to get equipped with optic fibers circa mid-2012 (or was that END 2012? but no, I don't think so).
In actuality, if all the people living just in the major cities have optic fiber, they'll be very fortunate already.
Oddly enough (but who are WE to judge the culture of other countries?), them crazy Lebanese seem to consider that the cost of updating communications infrastructures far outweigh the economic benefits of having the entire country heave itself out of the woodfire-powered caves, onga-monga!

Whence my heartfelt irony when I end up with an "old" iPhone because someone just received the newest 4G model fresh from the Silicon Cleavage... I mean Valley!
Hah... as if the 3G in this country was true 3G to begin with. That'll be the day!
A local satirist summed it best: "The internet, just like the electricity, suffers from prostate hypertrophy." He means the flow output. Metaphorically. Blink-blink-nudge-nudge.

So... broadband internet... what's it like, guv'nor?

"And now for something completely different."

"In this picture, we see two Syrian insurgents cleverly camouflaged. [KABOOM!] Well, not too cleverly. To be honest, there aren't many blue police phone booths in Syria, in order to disguise yourself as two of them casually driving a battered tank."

Eolake Stobblehouse said...

"and hopefully a boat that floats. THIS time.
But I'm not too sure about that. I heard they want to make it "as faithful to the original as possible"."

Sure, but they also stuff it with safety features out the wazzoo. And I'd think that not only the paranoia of the history but also all that's learned since then should help.

Though I had to admit that my first reaction was the same: What, you need more footage to enhance the end of the movie?

Only good thing is that it stayed afloat much longer than the Kingship Wasa!

Pascal [P-04referent] said...

Appropriate quote of the day:
"Tis not all to be happy, you also need to know that the others are unhappy." -- (Jules Renard)

You're velkome, dekadent kapitalists.