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Fixed Income Madness
Anyone who's been paying attention for the past year shouldn't be surprised by this, but it's something that's always worth re-emphasizing: the federal bailout of the banking industry last year has allowed banks to rebound 
and make enormous amounts of money this year. Without the bailout, many of them wouldn't even be around today, and they certainly wouldn't be making vast sums of money:
Many of the steps that policy makers took last year to stabilize the financial system — reducing interest rates to near zero, bolstering big banks with taxpayer money, guaranteeing billions of dollars of financial institutions’ debts — helped set the stage for this new era of Wall Street wealth.
....With interest rates so low, banks can borrow money cheaply and put those funds to work in lucrative ways, whether using the money to make loans to companies at higher rates, or to speculate in the markets. Fixed-income trading — an area that includes bonds and currencies — has been particularly profitable.
....Goldman Sachs and its perennial rival Morgan Stanley were allowed to transform themselves into old-fashioned bank holding companies. That switch gave them access to cheap funding from the Federal Reserve, which had been unavailable to them.
Those two banks and others like JPMorgan were also allowed to issue tens of billions of dollars of bonds that are guaranteed by the Federal Deposit Insurance Corporation, which insures bank deposits. With the F.D.I.C. standing behind them, the banks could borrow the money on highly advantageous terms. While some have since issued bonds on their own, they nonetheless enjoy the benefits of their cheap financing.
As the piece points out, banks aren't using all this cheap money to increase lending. They're using it to fund bigger and bigger bets in the fixed-income sector — the same sector that brought us junk bonds, credit default swaps, subprime loan securitization, interest rate carries, collateralized debt obligations, and all the rest of Warren Buffett's "financial weapons of mass destruction." Fixed income was a sleepy backwater until about 30 years ago, and if we had any brains we'd apply a massive dose of regulatory narcotics to make it that way again. Instead, we're actually egging it on. It's like giving Nero a new barbecue lighter for Christmas because his last one got burned up in that big fire.
Anyway, in the absence of any will to seriously regulate these guys, at the very least we should demand that they get themselves off the federal teat immediately. They're all fond of the fiction that they're rugged individualists now that they've paid back their TARP money, but it ain't so. Taxpayers saved them last year, and taxpayers are underwriting their profits this year. I can think of better things for taxpayers to be doing.
FI is ok
Fixed Income isn't all some casino royale. In fact, large mature companies get most of their financing for everyday investments from it. Fixed Income IS lending, just as much (if not more) than equity.
I'm having a hard time
I'm having a hard time reconciling your positions here Kevin. Everytime I mention the fact that's it's clear we should have let these guys fail spectacularly, I'm met with the response that the financial sector would have imploded and we'd instantly be back in the dark ages. BUT, pretty much every regulatory measure you're asking for ends with what has become the financial sector being destroyed (and I'm not saying you're wrong for saying so). So which is it? It's ok if it is destroyed at the hand of the government, but it's not ok if it implodes because the hand of the government withheld something from it?
If we had taken the later route, we wouldn't have created such perverse incentives that has bankers taking risks as large or larger than they did prior to Sept 2008. There's a reason these guys are making lots of money when the market is up 60% since March. It's called wild speculation with borrowed money.
Regulation that limits risk
Regulation that limits risk and makes it harder to create opaque derivatives would not lead to the destruction of the financial sector (why do you think it would?) -- on the contrary, it would make it more viable with lower peaks and higher valleys. And it would make it focus more on serving functions that help the economy rather than making bets for the benefit of its own traders.
However, the blame should go to congress for this lack of regulation -- not to the financial companies. It should be taken for granted that rational actors will always act to maximize their own benefit. That is precisely why government should step in and regulate to make the process beneficial to the public interest, and to reduce systemic risks, rather than allow it to become a casino for the benefit of a limited few -- with the prospect of having to bail them out again when their bets turn out to be bad.
Well, since these companies
Well, since these companies are making money right now exactly because of insane amounts of risk and continued peddling of opaque derivatives, it would lead to the "destruction" of the industry as it currently exists.
but that's exactly the point
The industry, or the way in which it functions right now, needs to be destroyed. You seem to assume that the only possible way for these guys to squeeze out profits is if they're massive and require insane amounts of leverage & the peddling of opaque derivatives. I don't happen to think that they're too stupid to achieve profitable status in a sensible, but rigorous, regulatory environment -- one that reduces the likelihood of putting us where we found ourselves a year ago (and now we find ourselves facing again today).
If you allow the banks to
If you allow the banks to "fail spectacularly" when they take too much risk, there is no good reason to believe that the new banks that take their place will act any differently -- since the rules of the game remain the same, and so do the individual actors' incentives.
So you need to change the rules, it seems to me, if you are going to have a viable system. And if you are going to change the rules, you might as well keep the banks that already exist -- and make them follow the new rules. Doing otherwise would create more chaos and unemployment, as major institutions disappear, and eventually end up in a similar crisis anyway.
@junebug Did you actually
@junebug
Did you actually read anything I wrote? You haven't disagreed with anything I've said, except you're overlooking the fact that by bailing these people out we ACTIVELY CREATE INCENTIVES to repeat the actions that required bailing them out in the first place. And, SHOCKINGLY, those actions are being repeated right now.
@JS
No... by letting people fail, you don't create incentives for failure. By propping people up when they fail, you do. You can change the rules all you want, but if these guys know in the back of their minds that they're going to get a bailout no matter what they do (but we're too big to fail!), you're not going to change any behavior.
If you want fear of failure
If you want fear of failure to become an incentive that changes individual behavior, you will need some way to make sure that the individual actors themselves fail (i.e., lose their shirt) when their companies fail. Otherwise, it is rational for them to take huge risks if they can make $10 million a year or more and get to keep it when their company fails, say once every 10 years. So pay bonuses as company stock options that can only be exercised at retirement, and then maybe you have a meaningful incentive for them to act in the interest of the company. (That, too, would be changing the rules, of course).
was Lehman a one-off experience?
"... you're overlooking the fact that by bailing these people out we ACTIVELY CREATE INCENTIVES to repeat the actions that required bailing them out in the first place."
I have no idea how otherwise seemingly rational people can imagine that we'd still have anything resembling a functioning economy if those guys had been completely let go. Under the circumstances as they were (as they are?), there was nothing wrong with bailing out the banks, and the effects of Lehman's failure illustrate pretty clearly what would've happened if the government had chosen to let the even bigger players fail. So the problem isn't with bailouts, per se. The problem is in failing to regulate them more stringently after handing them all that cash.
What's good for the millionaires is good for America!
They that have the gold make the rules, baby.
The only thing I see is to raise the corporate profit tax, start taxing offshore profits (like Obama said he would do but has reneged on), and create a truly progressive tax code.
But none of this will ever happen.
Duh
What you've pointed out Kevin is the clear case for NO BAIL OUTS! You F' up and you pay the price. No free money to get back to your old tricks again. It doesn't take a rocket scientist to figure out that a free market sans knee jerk reactionary bailout happy politicians will drive institutions to behave properly.
Adopting KISS (Keep it Stupid Simple) approach to things is cheaper, especially in the long term.
Of course more and more regulatory action on the part of government is the solution right Kevin? More and more and more government involvement only serves to increase costs over the long haul. Why oh why would we want to continue to pay more to discipline banking institutions through complex and convoluted regulations when all we have to do is cut the money off, let them crumble and get back to our lives citizens.
"Anyway, in the absence of
"Anyway, in the absence of any will to seriously regulate these guys, at the very least we should demand that they get themselves off the federal teat immediately."
That's what conservatives said for decades in regards to welfare reform and progressives fought tooth-and-nail against any reform. It took Clinton to reform the system and now, slowly but surely, Obama is walking back those reforms.
So why is one type of welfare good and the other type bad?
Because one type of welfare
Because one type of welfare keeps food in people's bellies and roofs over their heads and the other type of welfare keeps 6 figure bonuses rolling out to millionaires?
i am among those who agreed
i am among those who agreed that bank receivership was not an easy step: there was no congressional support, for one thing, and it's not clear to me how the fdic or someone else would have actually run the big banks for another.
so i understood the notion that we should set up conditions to allow the banks to make money and bail themselves out.
but setting that up without increasing capital ratios for the larger banks? without insisting that bonuses not be paid with mark-to-model earnings? unbelievable.
speaking of unbelievable, we have our friend james2, whose twaddle i've actually come to enjoy. for example, his first paragraph - does it have meaning in the english language?
and his second paragraph is, of course, untrue: excessive leverage was the problem that threatened the global financial system. leverage ratios are down; ergo, the risk is not as high as it was in september, 2008. god knows how james2 came to his conclusion....
Banking
I'm sorry, and your point is ?
How long did it take to regulate after 1929?
Does anyone know how long it took Congress to enact stock market regulation after the 1929 stock market crash? And did all the regulation come in one big bill, or several small ones?
Maybe there's still hope that we can rein in these playboys.
the Long Recession
What the finance industry did to the credit markets, they will do to the commodities markets, destroying supply chains, industries and (more) jobs. Banks have already been buying real commodities to trade. As more speculative capital chases investments in real assets, the gaming of markets to increase returns for the speculators will cause shortages, price increases and market disruptions that could lead to a collapse of economic activity. This is what the finance industry did to the credit markets, and is what they will eventually do to commodities markets if they are not stopped. They will not be stopped because the public officials charged with oversight have either been fooled into thinking asset bubbles are wealth creation or co-opted by the wealth those bubbles amass for the few. The Great Recession will be renamed the Long Recession, as the finance industry leads the economy from bust to bust to bust.
Did they really even pay
Did they really even pay back their tarp? GS got $70 bln and paid back 10 with interest.
To add insult to injury,
To add insult to injury, when the bailouts where being thrashed out last year there as all this hue and cry that bailing out Wall Street would help save Main Street.
Fast forward to today and Wall Street is boasting record earnings while loans and credit to Main Street have become rarer than a politician with ethics. Far more Main Street businesses have gone under than financial concerns. The whole thing was a big, fat lie.
Do you even think about anything you're writing on Fin Sec?
First, the wailing and gnashing of teeth re banks profiting from bailout money is just incoherent. Some months ago you were all gloom and doom about the rescues and cheap money saving the financial sector, and whether the taxpayer would profit.
Now, ... the taxpayer is profiting, but you are outraged that the banks are turning a profit. This is just incoherent. Wailing about banks not lending - in the midst of a major recession, when in fact bank lending collapse has not in reality happened [forced lending into insolvent firms might get you your boosted lending, but then the banks would be loss making, of course a new area for outrage]
Second, the article is illiterate: any article writing this "Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like trading stocks and bonds, rather than in the ho-hum business of lending people money" began from illiteracy. Goldman was never a lending institution (commercial bank), it has always been a merchant bank or investment bank in your terms. No bloody classic firm lending in its business model from the damned get go.
Third, on your idiotic intro: Fixed Income is rather dominated by classic bond business, and things like sub-prime securitisation, and interest rate carries existed for a bloody long time without problems. You should be glad they were created (although not glad they were abused). CDOs and 3rd order securities may not have been a great idea, but then Junk Bonds in the 80s were labelled as Evil but once domesticated (and regulated) turned out to be quite good and useful tools for both investing and financing the economy.
A further note on your illiteracies and populist know-nothingism:
"As the piece points out, banks aren't using all this cheap money to increase lending. They're using it to fund bigger and bigger bets in the fixed-income sector — the same sector that brought us junk bonds, credit default swaps, subprime loan securitization, interest rate carries, collateralized debt obligations, and all the rest of Warren Buffett's "financial weapons of mass destruction.""
Buffet labelled exotic derivatives as financial weapons of mass destruction, no loan securitisation, nor junk bonds nor interest rate carries. Only CDOs makes the list. It is more than slightly dishonest (and had a conservative commentator done such a thing on a subject you actually understood, you would be howling about that).
Further, this sort of illiterate arty writing fundamentally doesn't get the structure of the financial system. It confuses merchant bank operations with classic commercial banking operations, with retail (consumer) banking. All are different lines of business, and under the current negative economic conditions with firms (and individuals) trying to reduce leverage / debt burden, it is entirely EXPECTED that banks with Fixed Income operations (and otherwise actually), will rebound first off of improved interest rate spreads. This is in fact what Geithner et al predicted and you all bloody whinged on wasn't going to occur. Well, their bet is coming, and so you whinge on, "oh it's too profitable and not by more debt to the firms or whatever..."
But no, Drum wants to once more demonstrate that his otherwise solid analytical skills are wasted on this subject as he prefers to indulge in innumerate populist ranting, rather than useful comment (or perhaps point out the idiocy of the current pseudo reform of the regulatory structure in the US, and the shameful carve out of 2/3 your banks from consumer oversight, and apparenlty the ditching of reforms to simply structure and thus strenghten regulatory capacity). No it is better to write pure tripe in a populist howl. This is no better than the illiteracy Drum has identified on the American Right's side relative to health care. Ah but not his favoured politics and populism, eh?
One of the problems with bank rescue is the populist response. Damned if you don't, as then the evil banks threw the economy into the rubbish heap, but damned if you do as, if the bank return to profitability and start rebuilding capital, the ignoramus populist (Drum) screams bloody murder about that injustice as well.
This is what a successful bloody fucking rescue was ALWAYS going to look like mate. Jesus on a bloody stick, you're a real hypocritical cretin on these issues. Well, next time you bloody howl on about the cretinous American right on their hypocrisies (and they are legion, you should be glad, make you Lefties look good), look in the bloody mirror.
The points about regulation
The points about regulation are welcome, of course. A quibble on point two: I believe that the point of the NYT article is that Goldman and Morgan Stanley, for example, were allowed to become bank holding companies during the crisis and this enabled them to get cheap government money as well as FDIC guarantees for new bonds they issued. But then they used this cheap money (at least so the article states) to do new high-stakes trading rather than for bank lending. You may agree or disagree with this -- but it's a different point from the one you said the NYT was making. Didn't know the Brits could speak such good French, btw.
One does not magically become a lending bank by changing
legal status.
The quid pro quo you are suggesting could not have existed as no Treasury nor other personal literate in banking would expect a Goldman Sachs, a pure play merchant/investment bank to become a lender simply due to legal conversion. They have neither the infrastructure nor skills to become primary lenders. The legal conversion was to address Liquidity Risk for them, not to see them magically become commercial bank lenders. That is impossible.
If you are basing your expectations on the profound ignorance of say the article, well of course you shall get lathered up over magical illusions.
(Et je n'ai rein ecrit ici en langue de moliere, donc l'origine de votre demarche m'echappe)
Goldman Sachs embezzled
Goldman Sachs should have its bank charter revoked and it should be heavily fined for its deceit of becoming a lending bank in order to embezzle money from the people of the United States. In addition, its executive managers and the colluding officials of the Treasury should serve lengthy times in federal prison for such a crime. Both parties knew Goldman Sachs had no intention of honoring its banking charter commitments, and should be severely punished.
Try not to be too idiotic
The bank holding charter is a permit, not an obligation, idiot. There was no deception involved. It was merely a convenient legal tool for the Americans to use. Jaysus, your sloberring is growing more and more incoherent. Banking charter commitments...
Bank charters, mind you, don't come with magic wands to create a lending infrastructure overnight (branches, lending systems, loan officers, etc), even had that been (which only illiterate Leftist gits would believe that regardless) part of the intention. I believe the Goldman charter was for a federal bank holding company. That holds obligations with respect to investing in risk management and compliance with banking prudential regulations. No one is forced to lend. That is a business decision.
And you people go on about the comportment of the Opposition relative to Global Warming. Your ranting rather resembles the quality, in rationality and connexion with fact, of theirs in this area. That is disconnected from reality.
banking is not a right
The bank holding charter is a privilege to do banking business bestowed by the public. Banking is not a right. Goldman Sachs' bank holding charter should be revoked so they can make money without any help from, or embezzlement of, the American taxpayer.
I think the NYT article was
I think the NYT article was pointing out that money that went to investment banks like Goldman was not being used for traditional loans -- even though they got that money because they put on the mantle of a lending institution. It's a point worth making, I think, regardless of what conclusion one should draw from it. I believe, as I wrote earlier, that Goldman broke no laws and that, if the government wanted a different outcome, it should have regulated otherwise. I don't think it's Goldman's fault.
As for "French", I don't know if it's purely American usage, but I was using it to mean "strong language" -- as in "Pardon my French". Chacun à son goût.
In lieu of nationalization
The reason the Treasury is allowing this gambling to go on is that this is the Geithner plan to recapitalize banks without nationalization. Allow them to make these bets and hope it comes out for the best.
Ah, casino talk.
So Jr lost to Vegas and he came to Daddy, and Daddy didn't want Mommy to find out or there would be hell to pay, so Daddy gave Jr another stake and told him to go back and recoup his losses?
Oh man, I know how this one turns out.
The role of Jr is played by Wall street investment banks, the role of Daddy is played by the US government, and the role of Mommy is played by us, the taxpayers.
Tripp
Casino?
What is being described is classic interest spread business. That is old-school lending, whether merchant or commercial bank business. This kind of business is core and well-understood relative to risk models. Anyone who fucks this up truly is incompetent on a basic level.
This is what your banks recovery was always going to look like, for the sake of bloody rational Christ. Corporate lending - SME or Big Corps never leads, it trails.
It only speaks to the sheer illiteracy of you lot that you're upset by this. Criticise your Right morons relative to global warming or health care relative to deliberate illiteracies (and they seem legion), but you share the same sin.
listen, smartass, plenty of
listen, smartass, plenty of us totally understand what is happening. what we are noting is that the fact that the resultant profitability, engineered in order to bail out banks weighed down by shitty assets, is being used to pay out substantial bonuses. this actually doesn't take much brain power, and your putting on airs while ignoring it really takes the cake.
Yeah, but...
What The Lounsbury says, pokes to the eye with a sharp stick about "Leftists" aside, is correct, particularly this:
"...the idiocy of the current pseudo reform of the regulatory structure in the US, and the shameful carve out of 2/3 your banks from consumer oversight, and apparenlty the ditching of reforms to simply structure and thus strenghten regulatory capacity."
Our byzantine, dysfunctional, regulatory structure is the real problem. And it sure looks like that structure will not be changing much, thanks to the best Senate that money can buy. And Kevin didn't mention the bonuses in his original post. Just saying.
kevin didn't have to mention
kevin didn't have to mention bonuses: that's where the bank profits go. we all know this.
It is more than abundantly evident you don't understand
Of course is one wants to complain about percent of bank income going to bonuses feel free. Do so in a literate manner I would suggest, and not complain about banks returning to possibly interim profitability or write nonsense with respect to where said profits came.
presumably, the lounsbury,
presumably, the lounsbury, you think your 2:49 p.m. constitutes literacy.
another mistake on your part.
try and make sense, will ya?
fact-checking
Nero didn't celebrate Christmas, silly.
great article
great article
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