Gov't Salary Controls for Banks

[pejp]

You clearly don't understand the difference between regularity for the sake of everyone's clarity and salary controls. Salary controls being pure socialism and regulatory control being necessary.
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point to the part in my post where I said I agree with salary controls???

you clearly don't bother to read posts before jumping to conclusions.

for the record, I dont agree with salary controls whatsoever. Although we need some regulation in terms of exposure in the derivative space. We should never again be forced into a position where public money is required to bail out private companies.

 

[BigPapaVol]

point to the part in my post where I said I agree with salary controls???

you clearly don't bother to read posts before jumping to conclusions.

You boldly said what the people on here fail to understand in a post about salary controls. Does that mean something different in the King's English? Please enlighten us.
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[rjd970]

This is what people on here completely fail to understand. The idea that market forces are infallible is wrong. I've heard so many people who have literally no idea what they are talking about claiming that 'they should have been allowed to fail because that's what the market wanted'. A failure would have been absolutely catastrophic.

Let me ask you this....would a failure today be as equally catastrophic?

I guess what I am getting at is the problem with "too big to fail" is that when something like this happens it is up to the government (read "taxpayer") to "bail them out". I will be the first to admit I'm no expert on this, but common sense says that the solution to this is to make sure they are not "too big to fail" in the first place.

Say what you will about the market forces not being infallible, but in this instance I think the market was telling us that putting the majority of our banking system in the hands of a few, very large, institutions is not only risky...it is overly dangerous. Especially considering that it was primarily the cause of a few small departments within these banks.

 

[pejp]

You boldly said what the people on here fail to understand in a post about salary controls. Does that mean something different in the King's English? Please enlighten us.
Posted via VolNation Mobile

This is what i said....

This is what people on here completely fail to understand. The idea that market forces are infallible is wrong.

That has nothing to do with salary controls, I'm talking about several posters who seem to have 100% faith in the market and believed that the banks should have been allowed to go under. Nothing in my post referred to salary controls.

 

[pejp]

Let me ask you this....would a failure today be as equally catastrophic?

I guess what I am getting at is the problem with "too big to fail" is that when something like this happens it is up to the government (read "taxpayer") to "bail them out". I will be the first to admit I'm no expert on this, but common sense says that the solution to this is to make sure they are not "too big to fail" in the first place.

Say what you will about the market forces not being infallible, but in this instance I think the market was telling us that putting the majority of our banking system in the hands of a few, very large, institutions is not only risky...it is overly dangerous. Especially considering that it was primarily the cause of a few small departments within these banks.

I dont think its a question of being 'too big', but the amount of exposure to a particular asset class should be looked at closely. Basically the banks were all piling into an asset class that they did not know how to price. They were buying CDO's and had no idea how much they were worth. It's basic risk control really. If you were buying a portfolio of stocks, you probably wouldn't buy all tech stocks, or all housing stocks for example. You would spread your risk around. The banks saw that mortgage cdo's were the most profitable, and the lack of transparency meant they could pretty much mark them at whatever price they wanted, so they took ridiculous risks. The risk control simply needs to be enforced.

 

[rjd970]

I dont think its a question of being 'too big', but the amount of exposure to a particular asset class should be looked at closely. Basically the banks were all piling into an asset class that they did not know how to price. They were buying CDO's and had no idea how much they were worth. It's basic risk control really. If you were buying a portfolio of stocks, you probably wouldn't buy all tech stocks, or all housing stocks for example. You would spread your risk around. The banks saw that mortgage cdo's were the most profitable, and the lack of transparency meant they could pretty much mark them at whatever price they wanted, so they took ridiculous risks. The risk control simply needs to be enforced.

So who enforces the risk control? Who enforces salary control? The slope starts to get real slippery.

I mean I guess what you are saying makes sense, I'm just not familiar with how it would be enforced. I still think, however, if these firms were not as big as they were then we may not have seen such huge capital being placed into these risky investments. I certainly don't think the potential crash would have been as big as this one was shaping up to be.

 

[pejp]

Well, normally risk control is overseen by an internal risk management group. For example, at a hedge fund they would have a risk management group who analyse trades and keep an eye on exposure. They produce reports for each portfolio manager or portfolio detailing exposure and also run various scenarios on those portfolio. E.g. if the value of the $ falls to X, then the effect on the portfolio would be y. They have measures such as DV01 (the dollar value of a 1 basis point change), VaR (the probability of a certain change in portfolio over a given period)….if a portfolio falls foul of any of these measures it is handed to senior management who may order the trader to cut their loss, or to move out of a position, or take some kind of preventative measure. Sometimes they may even be asked to stop trading entirely. I have no inside knowledge of Lehman, but I would imagine that the risk control group must have known that something was up. I can only presume that they were simply ignored by management.

No matter what way you look at it, you could make the argument that any measure is a 'slippery slope'. If they control the amount of capital then that could be seen an unnecessary control. I certainly don’t think that salary controls are the answer.

But then we face another problem….say we have some entity that measures bank risk, if it’s a government agency people will complain about too much government control. If it’s a private entity then it will face pressure from banks and it will be incredibly hard to keep it impartial.

In summary - I don’t know the answer, but whatever it is, people will find a reason to complain.