03-04-2016, 08:09 PM
(03-04-2016, 07:31 PM)Yojimbo Wrote: My opinion on letting them fail is basically it would have hopefully had two effects. One, show the industry that practicing such risky behavior has consequences and two, would have lead to less concentration of money in so few banks.
Well the heads of those banks took massive hits in bonuses and stock option value. If you were way up at Lehman or Bear, you lost millions in equity you never get back.
As for "concentration of money", deposits are guaranteed up to $250k (maybe $500k now). There's really no impact there and it's uncorrelated.
You have no idea how seriously banks take risk management. The idea they were just taking foolish bets expecting a taxpayer bailout is just complete fantasy of demagoguing politicians looking to deflect their share of blame.
The source of the financial crisis was really the equity tranches most banks held on their prop desks, either as investment seeking yield or because no one would actually buy that shit. But knowing the risk, they took out insurance on those bets in case markets went south. The problem, whether incompetence or ignorance or both, is no one understood or maybe acknowledged the counterparty risk. It wasn't actual cash or insolvency that caused the problem, but technical rules stemming from marking-to-market creating technical default....which means they had to unload assets to meet covenant requirements, which further depressed valuations. If you could hold the paper long enough, i.e. someone who could print money and didn't play by the same rules (like the Fed), you were going to make a profit because the fire-sale had the paper trading well below its asset value.
Their models also incorporated a history of uncorrelated bets to reduce risk (i.e. diversification), but a lesson learned is that in a liquidity-driven financial crisis all assets become correlated and so instead of your loss being offset with a gain elsewhere, you lose TWICE as much. They did manage their risks and hedge their bets - their models were wrong, in largely new and unexpected ways.
It's not the first time their models have been wrong and won't be the last. The same sort of thing on a little lesser scale happened with the Savings & Loan bank (your mom & pop banks you're advocating for) in the 80's. This was the infamous Michael Milken "junk bond king"....he went to jail, and now "junk bonds" are referred to as high-yield corporates and are a legit, major asset class and important source of funding for smaller companies.
