So we might be moving on to banking reform in the near future and I read an Op-Ed by Krugman...again....which brought up two different camps as explained below:
Op-Ed Columnist - Financial Reform 101 - NYTimes.com
I've color coded the two arguments since some of you are a little dense...then again since Daewoo is likely the only one to read this (damn you Georged!) with some thought it probably didn't make a difference. Moving on.

Personally I have been to focused on health care to look into banking. In fact, banking and the stock market are my least favorite topics (and I'm an accountant) since they make absolutely no logical sense by themselves. In any event, my gut is always to go against Krugman and to go with Volcker but I'd like to hear others thoughts on this and maybe get some good articles in here to see what reform should be done.

How about this one. Limit the size and scope of the banks AND regulate the holy living hell out of what they do.

The problem with doing as Krugman suggests and focusing primarily on regulating what they do is that since our entire financial system is pretty much an artificial construct, there is no way that they could keep regulation ahead of the major players. Outlaw one set of activities and in 2 weeks they have invented an entirely new set of nonsensical activities to replace them.

Look at the insanity that has been going on that led to the crash. It is not like nobody ever thought that loaning money to a crack dealer to buy a $400,000 house on an option ARM and then securitizing it, cutting it into tranches, and selling it as AAA papers to your pension fund was a bad idea. It was that the regulation cannot possibly keep up with the increasingly creative ways that these guys manage to come up with to pad their pockets while screwing the rest of us.

Part of the problem is a lot of the voters in this country. If you try to pass a law against lending $400,000 to somebody with no visible means of support and then pass the buck onto unsuspecting bond investors, I will guarantee you that a large portion of the country would be up in arms about "government interference" in financial markets.

Think back, steeeve, to before the crisis started when georged and I were talking about the absolutely insane practices going on and how it was going to screw us all. Every time we would suggest that the government should really be stepping up and trying to put the brakes on some of the more insane of these practices....at least to the point of forcing issuers to inform bond purchasers that the AAA paper they are buying is made up entirely of bottom end sub prime loans, Missouri Mule would start bouncing off the walls like a deranged monkey and accuse us of being socialists.

Right now, when the implosion is fresh in peoples minds, they can get away with passing reform. Usually you cannot get people to sit still long enough to understand what a tranche is, or what an SIV is, or what a derivative is and why, even though they sound like such a great idea, they can turn into time bombs when you actually track the counterparty risk.

Krugman IS right that you can have a run on smaller institutions, which is why both breaking up the big boys AND effective regulation are needed. As far as breaking up the big boys, it is just plain mind numbingly stupid to have companies around that are so big and interconnected that they pose a complete systemic risk. It is just ridiculous. That effectively puts the fate of our entire economy in the hands of a few VERY small groups of people, or in some cases in the hands of a single individual. That is nowhere near acceptable. It is dangerous and it is unamerican.

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If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

Hey, give me some credit for calling that you'd be the only one to respond.

I have a few friends in the banking industry but they are only in small banks in the midwest (like 2-3 branches max). They are upset because they end up paying for the mess that happened AND if they get hit with more regulation they get hit with that! All they do is give loans to farmers and frankly if they did something shady you'd hear about a lot of "accidental" drownings of bank officials in the midwest. So I'm confused how you don't put those guys outta business while still regulating Citi Bank

Jp may still show up.

The thing is, if the regulation is proper and decent, it should not impact them at all. For example, a regulation requiring that SIVs be kept on the books woudl not impact the local bank at all. Likewise a regulation that says you cannot package and sell bonds as AAA paper while making side bets that they will fail is not going to impact banks with 3-4 branches that are doing business in good faith.

What may well impact smaller banks is the (completely justified) moves that FASB seems to be making to force banks to mark loans to market as opposed to marking them to imagination. They (FASB) need to also go back and undo the damage done last year when congress basically browbeat them into lightening up on mark to market rules for the banks bond holdings. I honest to god could not believe it when I saw congress screeching about mark to market because it was making the banks look insolvent when, in fact, they were insolvent. And the american public lapped it up. People kept saying "they would not be in trouble except for the GUBERMENTS accounting rules". Yea...then why did we have to give them a trillion dollars?????

That is one place where good, local banks may take a hit. I know the little local bank here does not mark their loans anywhere near market because their default rate is less than 1%. There are only like 3000 people in the entire county. They literally know every person they loan money to personally.

Frankly, though, as long as we are going to let these mega banks exist, the smaller guys should get used to getting screwed. A lot of the smaller banks could have played the same games that the big boys did. They chose not to, in many cases because it was unethical as hell, but when the big correction came...when those who took insane risks and engaged in ethics free business finally were going to get their come uppins, and the smaller guys who behaved responsibly and ethically should have seen their behavior rewarded, what happened? We not only gave the big guys a trillion dollars, we sent the message that getting away from the responsible local lenders was the way to go because if you were with the big guys no matter what, uncle moneybags would take care of you.

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If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

Yeah, as one who loves accounting rules this was by far the oddest change in last 3-4 years. FASB has been on a FMV frenzy the last decade (even more so with IASB making the rules everywhere else...its going to be like metric system all over again) wanting everything to be basically "marked to market". Frankly it isn't much of a benefit for anything OTHER than investments and that's where they got rid of it!

Nothing like a valuation method to get people stirred up. The thing about valuation methods is they all turn out the same way in the long run. FIFO vs LIFO ends up the same. You don't hear people going "man, I'd sell a lot more widgets if I had just used FIFO instead". No, doesn't happen. Same thing with mark-to-market, and you are right, it didn't change the fact that they had worthless investments. NO ONE complained when it made their investments insanely high and probably overvalued. Like everything in the US, people want the rules changed as soon as they are in trouble by the very rule they wanted implemented. You'll hear people screaming for mark-to-market if this thing ever rebonds. My opinion has always been stick with one way and don't change it.

Or in short, the small banks picked up part of the tab while the big guys profited. I heard a saying the other day about how Citi and others do business: "heads I (the big bank) wins, tails the taxpayer losses". I couldn't agree more.

Sometimes I feel like our biggest industry is the manipulation of money which always ends up biting you in the long wrong. Perhaps I'm overblowing it though.

Agreed. I am not even entirely sure if it matters what method you use as long as it is consistent and people actually stick to it as opposed to using loopholes to claim that MBS paper, which is traded millions of times a day, is impossible to provide a market value for, so we are going to invent a model that is nonsesical to come up with a number that justifies our bonus.

IMO the big problem is that if they require banks to mark loans to market you end up with an unfair situation for the smaller banks who typically hold the loans they make to maturity and who often lend based on direct knowledge of the person they are lending to rather than just their credit score. I can just about promise you, though, that if they make an exemption for small banks, citibank will claim to be a small bank.

That is exactly it.

I dont think you are overblowing it at all. When securitizing bad mortgages is makes up a SIGNIFICANT part of your nations economic "output", you have a problem.

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If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

"Look! Each one of our 3,000 branches is under 10,000 square feet...that's pretty small".

Then were boned because unlike the great depression, we don't have the option of suddenly getting millions of manufacturing jobs. Not unless China suddenly wants to pay their workers $50 and hour. Granted China is starting to hurt a little now.

Yeah, maybe you are right about making banks smaller AND making them do less. I had a close relative who was a VP with Fannie Mae in the 80s who told me a decade ago before he died that policies back then were building up a problem that would explode. I didn't understand at the time what he meant when talking about the shady stuff but apparently it's been going on longer than people think....just took the right circumstances to kill us.

Or maybe you were right earlier when you said the US should have just taken the banks, cleaned their assets and sold them piecemeal. Either way, we aren't doing any of this and seems worse than passing a budget killing health care bill.

[quote=Steeeeve;396984]"Look! Each one of our 3,000 branches is under 10,000 square feet...that's pretty small".[/wuote]

The sad thing is that they would probably get away with it. That or they would say "Are you REALLY going to make us pretend to spin off each of our branches as a separate entity???"

Sure we do. War. While war is not actually good for the economy (contrary to conventional wisdom) wiping out Europes industrial infrastructure sure worked in the past. We just need to get somebody to do it. Sorry to any of you Europeans and Brits that might be out there. We need some REAL economic stimulus so we are going to continue doign everything we can to make the folks in the middle east hate the western world and then announce that the US is covered by an awesome missile shield, but if they launched at europe there is not a damn thing we could do about it.

YES. WE should have.

Sometimes in life you have to square up your shoulders, hold your head up, and take the consequences of your actions like a man. Anything else is dishonorable

- Daewoos Dad

Until we do the above, we will be nowhere close to out of the woods. Right now the ONLY reason those institutions are liquid is that we gave them trillions of dollars, changed accounting rules so they can go back to pretending that loans that are already in default are going to pay out at face value, and because the FED has bought up a whole bunch of the worse MBS paper out there.

We are quite literally working our hardest to set up a new, bigger, public money bubble.

IT is not going to work and there is a better than average chance our economy will crash and burn, but that is what we are trying to do. Not long ago Bernanke said that the first thing he does every day is check US bond yields to see if we crashed overnight. When even the head of your central bank has that attitude, it is time to start investing in physical commodities like bullets and canned food.

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If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

Ha, I honestly knew you were going to say war. Yeah, but I don't know if we can sustain a war....we kinda have a pansy country anyway.


Yeah, I have nothing invested right now and my dad keeps asking me what to invest him (although he was really close to retirement). I told him foreign currency at first but even that isn't working to well. Canned food haha, might not be bad. I'm not totally convinced we will crash again...I wonder if we will just linger at our current low for awhile. In my state FY12 is the first year without stimulus. We just figured out what to do with the FY10 stimulus money. Anyway, I know how well the stimulus did because the second that money is gone the budget drops to what it would have been without it (duh) as if nothing had happened. So basically we just delayed everything by 2 years. This is probably the best argument from the idiotic teabaggers...that the stimulus helped (slightly) prolong our agony.

So, I'm not sure if we should look for a second crash or just a long time of bottom dwelling.

By the way, I have ARRA meetings a lot. They are hilarious to go to. Basically the current discussion is deciding what they will call the already spent stimulus money after they get the money (yes, they spent it before they got it). The choices are "spend" it on supplies and equipment but you have to account for it literally to the serial number of the product OR you can "spend" it on salary. If you do salary you have to convert that to jobs saved...which is BS since everyone fully realizes you would not fire that many people should that money be gone. The later is a little easier believe it or not. Exciting! Lucky I think most of the people in my state (the ones dealing with this) are smart enough to see through the BS. In fact, I give the American public a little credit in that they smell the XXXX even if they can't figure out where it comes from.

The problem is that we would have to borrow money from whoever we are going to war with. Since borrowing money from China so we can blow up Beijing may be difficult, getting somebody else to blow up Europe is a MUCH better plan.

Either the stimulus will continue, in which case we will see a failure of the US bond market and a crash of the dollar, and our nation, or they will withdraw the stimulus in which case the economy will crash again, which will crash the market for US bonds, which will crash our currency and our nation. The "recovery" can pretty much be traced dollar for dollar to the stimulus from uncle moneyprinter or the trillion+ dollars that the fed has tossed out there.

Interesting note about the US treasury market.....did you catch that the treasury department has re-defined the term "indirect bidder". In the past the "indirect bid" was pretty much a proxy for "foreign bid". When the indirect bidders started falling off, indicating that foreigners have had enough of our fiscal insanity, they changed the definition so now about 20% of what used to be counted as dealer bids are classified as indirect bids. Oddly enough, the treasury dept still claims that the indirect bid is a proxy for foreign bidders.

So.....you spend the stimulus money on salary and then use your payroll budget to buy supplies. Sounds like a "take the water out of the LEFT side of the bucket" scenario to me.

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If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

Well, at least we have health care.

I didn't see that. Not surprising. What I can't understand is it still seems like the treasury market is somewhat strong (in comparison to other things).

10 cups of water saved!

[quote=Steeeeve;397070]Well, at least we have health care.[quote]

Thanks, but I already had health care.

It would be a lot easier to understand if the "Audit the Fed" bill had passed. Right now what bond market players are doing is buying long dated bonds, selling short maturity T-bills, and pocketing the difference in interest (borrowing short buying long). You use your long dated paper as collateral for the transaction so it does not actually end up costing you anything out of pocket.

As long as the fed keeps acting predictably (that is...acting like only those with billions of $$s to play with matter) this is a risk free activity.

And yet the bucket is still empty. I dont understand........

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If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

But now it will cost you less by increasing your costs and adding more people for your local doctor to look at.

Which hasn't passed because? Well I'm not even sure this would matter. Not like the Fed wouldn't just get the rules changed to make them in compliance. The person that sets the rules tends to never break them for that very reason.

Ah! But you WOULD have had less than an empty bucket.

Because they managed to convince a bunch of people that somehow by auditing the fed it would amount to a defacto takeover of the fed by congress since looking at their books and total control are obviously the same thing.

I am surprised we have not seen any of the major banks using this to refuse their audits.

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If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen. —Samuel Adams

You know, these conversations aren't as exciting when it seems like only one other person cares. The banks were the major cause of our financial collapse and if this forum is a good representation of what people care about and the amount of thought they give to a given subject then perhaps it might be time to worry.