Axel Weber's comments, especially, are very much worth your attention: "The [banking] industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them..."
"That was one of the things that struck me: that the industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them."
Add the fact that both desks were full of short-sighted greedy people, and this is how the 2008 crisis started. The credit department knew the loans were risky and would default. The credit department was saying "Look, we are clever, we sold these garbage loans on to some sucker, the sucker will take the hit." Meanwhile, the treasury department was saying "Look how we managed to boost our yields and profit, we have been clever, not like those companies which just stashed money in government bonds, and this is as safe as government bonds." (Little did they know.)
This was the exactly situation which led to the blowup of every bank when they realized the garbage they'd been selling had been bought by the other department in the same bank. Unfortunately, the federal government bailed out the crooks, which meant they got away with it, which means *the corrupt culture of scamming is still intact* and they're probably building up the next ready-to-blow mess of garbage securities. Correct move was to bail out the homeowners and *seize* the banks, nationalizing them and replacing their management with honest people.
I love the first part of Axel Weber's remarks, hate the second.
Yes, absolutely, there is no hope that partial-equilibrium measures taken by individual banks can ever prevent a systemic crisis; that ought to be self-evident. And yet perversely, most coverage of crises take this view. I recall that Goldman Sachs was lauded for getting out of its positions before everyone else, which it was able to do because it had a better VaR model and risk oversight empowered to act on it. But it must be obvious that this is not a possible systemic solution; it is not possible for every bank to exit a position before every other bank.
Even when discussing systemic oversight functions, the matter is wrongly cast in a moral framework: if only evil banks wouldn't take such risks, then everything would be all right. But taking risks is what good and useful banks do! The point is to prevent them all from taking the *same* risk at the same time. One of the worst offenders here was also one of the most popular: Michael Lewis in his book, and movie, The Big Short. Lewis portrayed Michael Burry as a sort of anti-establishment hero, single-handedly fighting the recklessness of the big banks. But he was "fighting them" by buying credit default swaps on MBS bonds. One thing that made the crisis so big is that there were far more mortgage backed bonds than there were mortgages to back them (about 2/3 of all bonds were synthetic, if memory serves.) How were mortgage backed bonds issued without mortgages to back them? By writing credit default swaps on underlying mortgage bonds. Who were these swaps sold to? People like Michael Burry! In other words, Michael Burry and people like him played an indispensable role in creating exaggerated systemic risk, even though individually they were "right". I get why Lewis needed to focus on a hero for narrative reasons, but the problem here is not a Great Man view of history so much as a complete inversion of the facts.
On the other hand, no, having an occasional board member take a responsible social position is not a possible solution to the problem. Keynes really only put half the case. It is not just that bankers don't mind being ruined in conventional ways, along with all the other bankers; it is absolutely essential to their successful operation as businesses that they risk being so ruined. The responsible bank that refuses to engage in a popular new line of business - SPACs or NFTs or Bitcoin or whatever - is just going to lose business to all the banks that don't so refuse. Its best and most productive employees will leave to joint those other banks because they are paid directly for generating profits. The losing bank will then underperform in areas unrelated to the hot new business too. Its executives will be ousted by the board for poor performance and replaced with hires from the other banks that have been making profits engaging in the new business; and that is the equilibrium. One can imagine a parochial backwater with banks run as an informal and clubby cartel that can solve this coordination problem without intervention (looking at you, Canada), but most of the time regulation will be required.
"That was one of the things that struck me: that the industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them."
Add the fact that both desks were full of short-sighted greedy people, and this is how the 2008 crisis started. The credit department knew the loans were risky and would default. The credit department was saying "Look, we are clever, we sold these garbage loans on to some sucker, the sucker will take the hit." Meanwhile, the treasury department was saying "Look how we managed to boost our yields and profit, we have been clever, not like those companies which just stashed money in government bonds, and this is as safe as government bonds." (Little did they know.)
This was the exactly situation which led to the blowup of every bank when they realized the garbage they'd been selling had been bought by the other department in the same bank. Unfortunately, the federal government bailed out the crooks, which meant they got away with it, which means *the corrupt culture of scamming is still intact* and they're probably building up the next ready-to-blow mess of garbage securities. Correct move was to bail out the homeowners and *seize* the banks, nationalizing them and replacing their management with honest people.
I love the first part of Axel Weber's remarks, hate the second.
Yes, absolutely, there is no hope that partial-equilibrium measures taken by individual banks can ever prevent a systemic crisis; that ought to be self-evident. And yet perversely, most coverage of crises take this view. I recall that Goldman Sachs was lauded for getting out of its positions before everyone else, which it was able to do because it had a better VaR model and risk oversight empowered to act on it. But it must be obvious that this is not a possible systemic solution; it is not possible for every bank to exit a position before every other bank.
Even when discussing systemic oversight functions, the matter is wrongly cast in a moral framework: if only evil banks wouldn't take such risks, then everything would be all right. But taking risks is what good and useful banks do! The point is to prevent them all from taking the *same* risk at the same time. One of the worst offenders here was also one of the most popular: Michael Lewis in his book, and movie, The Big Short. Lewis portrayed Michael Burry as a sort of anti-establishment hero, single-handedly fighting the recklessness of the big banks. But he was "fighting them" by buying credit default swaps on MBS bonds. One thing that made the crisis so big is that there were far more mortgage backed bonds than there were mortgages to back them (about 2/3 of all bonds were synthetic, if memory serves.) How were mortgage backed bonds issued without mortgages to back them? By writing credit default swaps on underlying mortgage bonds. Who were these swaps sold to? People like Michael Burry! In other words, Michael Burry and people like him played an indispensable role in creating exaggerated systemic risk, even though individually they were "right". I get why Lewis needed to focus on a hero for narrative reasons, but the problem here is not a Great Man view of history so much as a complete inversion of the facts.
On the other hand, no, having an occasional board member take a responsible social position is not a possible solution to the problem. Keynes really only put half the case. It is not just that bankers don't mind being ruined in conventional ways, along with all the other bankers; it is absolutely essential to their successful operation as businesses that they risk being so ruined. The responsible bank that refuses to engage in a popular new line of business - SPACs or NFTs or Bitcoin or whatever - is just going to lose business to all the banks that don't so refuse. Its best and most productive employees will leave to joint those other banks because they are paid directly for generating profits. The losing bank will then underperform in areas unrelated to the hot new business too. Its executives will be ousted by the board for poor performance and replaced with hires from the other banks that have been making profits engaging in the new business; and that is the equilibrium. One can imagine a parochial backwater with banks run as an informal and clubby cartel that can solve this coordination problem without intervention (looking at you, Canada), but most of the time regulation will be required.