The headline describes loss reserves, not total capital.
When a bank makes a loan and it starts going sour, it impairs its balance sheet by noting a counterbalancing liability in the form of a loss reserve. The article alleges banks need to increase those loss reserves. It is not saying e.g. JPMorgan is exceeding its capital reserves.
I wouldn't say "nothingburger", but I would say HN users, as per usual, are misunderstanding the issue. It's not as serious as exceeding cash reserves. It's, theoretically, a temporary problem that bank executives are actually legally obligated to remedy.
It does, however, warrant banks reevaluating their risk assessment practices. Or maybe the problem is elsewhere? Something is definitely out of place for this situation to even arise so soon after the unpleasantness of 2008.
Good one (for real, it made me chuckle) but really it's "I told you we should reinstate all the banking and financial restrictions that came into force in the 1930s because financiers and bankers can't be trusted to regulate themselves. Now we got this"
There’s no need for more regulation— this is working as intended. It will all be worked out by the checks and balances inherent to modern American capitalism. That is, when the banks’ balances are low, the government writes them huge checks to cover it. See? No need to panic: The market always does what’s right in the long run for bank shareholders and executives.
a recruiter for a company with a hybrid schedule that i balked at had starting telling me about the economic implications of not using offices, how the building value would go down, and shops nearby wouldn’t have traffic and loans against all of them would go delinquent
and I asked if that was the company’s stance for their office park
and no, it was just a vicarious interest in commercial real estate doomer articles
Except loan reserves have nothing to do with that and is a balance between working capital and reserve. They just adjust the reserves higher. This is literally the system working as intended written with a headline to collect clicks for profit.
This is a nonsense headline. What it actually states is that for all commercial property that is at least 30 days late on payments, they have $0.90 per dollar in reserves (specifically for bad commercial property loans).
Not all commercial property that is 30 days late will end up in foreclosure, and the value to the bank of property in foreclosure isn’t anywhere close to $0.
The current reserve ratio isn’t alarming when looking at historical trends. Even if it is too low, comparing the total value of delinquent debt to the total reserves in a headline is misleading at best.
I want to see this play out without government intervention. If banks need to take losses, so be it. This needs to be unfettered and not be an excuse to lower interest rates.
The TARP bailouts showed all of us that bailing out banks in bad situations does little to help the average citizen anyway. Let them take the losses. Why on earth did we train banks that they can have all the upside but have the public eat the downside if a financial crisis ever arises out of their own behavior?
Sure the government made money by dropping interest rates to zero and forcing safe money into every form of other investment.
However that also caused the greatest gap in income inequality ever. Those with assets got extremely wealthy and those living paycheck to paycheck got fucked. This is why no one can afford a house in the Bay Area unless you had money in stocks or real estate already.
I state that one of the observations you can make about TARP and its aftermath is that banks weren't forced to do business differently and the bulk of the TARP money didn't go to help average Americans. There were other paths than TARP.
The fact it "didn't cost the government anything" is a red herring, in that it didn't produce the desired behavior or outcomes that were intended as the TARP money was suppose to have strings attached.
All I see is reasons for strong regulation and breaking up the banks so that "main street" banking is wholly separated from "wall street" banking, so losses can't cascade the same way, even if is at the expense of some marginal profits. Why should deposits and traditional lending be exposed to wall street speculation? This what happens when you allow speculative finance, corporate investment banking[1] and (for lack of a better term) regular banking to co-exist in the same institution.
Boring banks are good. We used to have a lot of them before the M&A sprees of the 1980s and 1990s, which was purely fueled by consolidation which in turn, those consolidated assets were invested in riskier and riskier financial markets and other endeavors. I will continue to argue it was not a benefit to the American public.
[0]: Though not all costs are directly monetary, or even monetary at all. One outcome of TARP and that time period is everyone is now comfortable with the idea of "too big too fail" and seemingly, governments are willing to bailout risky financial speculation of N size[2] with no consequences for those who made the decisions to participate in that speculation in the first place.
Keep in mind too, as noted elsewhere in this thread, its still up to debate whether that is strictly true or if the total cost has not been calculated correctly
[1]: I don't know where to draw the line here because "investment banking" is a really broad term, that covers everything from M&A finance to market making to individual investment services under the umbrella term. For arguments sake, I'm sticking with "corporate investment banking" to hopefully add clarity
[2]: N = whatever the minimum threshold is that financial institutions can convince the government to bail them out for while arguing not doing so will cause "a disproportional economic downturn"
If Biden loaned me 1 billion at 1% for a year and then I put it into money market funds paying 5%, I would pay it back after a year and have made 40 million on the side.
Everyone wins, even the government profited 10 million!!!
Did I just invent an infinite money hack to make everyone a millionaire?
I think the point is that the banks do not have enough cash to take the losses.
Nearly all money is someone else's debt, $1 of bad debt can lead to a chain of hundreds of people - each losing $1.
And if the government steps in with FDIC or other protections to prevent hundreds of people losing $1, then the government has to print more money, and inflation happens.
Even if we have a cascading failure, the FDIC coverage backstops at $250,000, and it only recovers depositors, and we are talking about loans here, not deposits.
If banks fail, they fail. It may short term feel very painful for people, that I can agree with. My point is, as both a society and as a market place, need to eat the fruits of which grew from what we have sewn. If that means a lot of people get hurt, maybe finally we'll learn a lesson this time that allowing banks to act with impunity is a terrible idea and distorts the overall marketplace.
Ending those distortions will net win when the dust settles, allowing new players and new ideas to grow.
Keeping depositors whole isn't the same thing as backstopping terrible loans or other bad financial activity. They used to be largely separate entities until the "reforms" of the 1980s and 1990s. Perhaps there is something to be said for separation of concerns here
But that is just fantasy accounting. If the bank loans me $200,000 to buy a house no one rationally suggests the bank has $200,000. They have a $200,000 share in a piece of real estate. The real liquid value of the asset should be discounted by the cost of reclaiming that asset and what it might be expected to fetch on the market (which as we learned in 2007, might as well be zero in some cases). The long-term value of that asset would be marked up by the expected gains in interest from the loan.
The bank (or anyone for that matter) only "lost" the money if they mistakenly believed they still had it in the first place. This is the same kind of analysis that leads people to claim they only lose money in the stock market if they sell after stock price drops. For tax purposes in the US it does work that way. But in reality, the money was gone the minute you bought the stock. There is never any guarantee of a future buyer or for that matter a guarantee of a brokerage even interested in executing your order.
When the government takes over a bank, they get that all the assets that go with it. Yes, at first the FDIC will pay out of its own coffers. But then the FED will liquidate all assets at the bank and recoup much of their payouts.
And the fdic does not fill its coffers from tax revenue. It is funded entirely by required payments from Banks. The FDIC will raise its required fees from banks, and the consumers want paying through their banks, not through taxes or printing. Though it does hurt consumers in the end.
> the banks do not have enough cash to take the losses
Nope, the headline refers to loss reserves. The specific reserves these banks have set aside for these loans. The article alleges they need to increase those. That might, at worst, hit their earnings.
> all money is someone else's debt
All money originates as a loan. (Other than federal spending.) That link disappears the moment it’s created.
> if the government steps in with FDIC or other protections to prevent hundreds of people losing $1, then the government has to print more money
Deposits are highly liquid. Replacing a deposit with an FDIC guarantee isn’t generally inflationary. (In practice, the FDIC having to step in tends to dampen credit and money velocity.)
I would argue that the inflation has already happened, in the loans without adequate reserves. That creates money. The government would be printing money to prevent a deflation happening from the money disappearing.
Part A of the comment is saying debt is a money multiplier up to 100x. One break in The chain erases the 100x of money.
Part B is then saying that if the debt chains collapse, erasing massive amounts of money, partially backfilling people via the limited insurance will cause inflation?
Dollars -- whether created by the Fed or fractional reserve banking -- are debt with interest due. Coinage is the exception but it is very small quantity-wise.
The bailout part of TARP worked (even though I disagreed with it at the time). The biggest problem is there was no stick. They need to have a system where they can claw back bonus, cancel golden parachutes, fire the c-suite and start investigations for criminality.
We have a system that publicizes risk and privatizes losses. I don't think that's going away any time soon.
Trying to create a "stick" will be met with complaints of government overreach. Those same complainers will put on a show of holding their noses while filling the feedbag with as much carrots as will fit.
There are enough people in Congress that want to carve some sticks. But when it comes down to it, they don't have the guts to watch the herd starve just to make a point. If I were a member of Congress, I'd probably cave too. It would be nice if we could have a system that punishes those who destroy our economy, but it's not worth letting innocent people suffer to make that happen (IMHO).
This. A couple of years after the 2008 mess, I looked up the names of some of the bigwigs who helped cause the collapse. A few had retired with golden parachutes. Most had just changed jobs and were leading other financial institutions. None of them suffered any sort of consequences.
I think we should aim for _fairer_ government intervention.
What if this time, the government invests enough cash in banks to keep them standing and then retains ownership of a meaningful fraction of all participating banks? In however many years it takes for the banks to start paying dividends, a meaningful fraction of those are received by the government. That cash stream can be used to pay down debts or make green new deal investments, or fill a rainy-day fund for future crises. If share prices ever rise meanignfully, the government retains the ability to sell back to public markets.
An intervention can aim at stabilizing things today without being a _giveaway_.
afaik the problem isn't the (2008) bailout itself, it's that we continued playing the same exact game with the same exact people.
> Why on earth did we train banks that they can have all the upside but have the public eat the downside if a financial crisis ever arises out of their own behavior?
Deregulation and lobbies did it, it's been documented over and over again. Deep down greed is the culprit but it could have been somewhat tamed.
> Then the government is bailing out with FDIC, plus the economy explodes.
FDIC limits government losses to USD 250k per account or something like that, right?
I think it is still preferable to outright bailing out the entire bank.
This is what we should have done with Silicon Valley Bank.
Best case: another country steps in and buys up those assets at a steep discount. 2010-2020 plays out pretty much like it did before, but a foreign national bank is now a major player in the US mortgage market.
Worst case: the contents of individual bank accounts poof out of existence. Riots and untold calamity ensues (it is difficult to say how bad this gets). Then another country steps in to buy up those assets at an even more steep discount. The subsequent housing crush the country is currently experiencing is worsened.
Because not helping those folks had systemic risk, they were deemed "Too Big to Fail" and given interest free loans after they cut taxes to pay for their surprise necessary multi-trillion dollar war.
And Geithner saved us all as he was asked to do.
Is it the same people tasked with getting inflation down and whethering the induced bubbles this time? They have gotten inflation down, but they can't hide the unpaid expenses of "scorched earth" and "starve the beast" experts at this.
Geithner had nothing to do with TARP; the SEC was barely involved. This article has practically nothing to do with the SEC outside reporting requirements.
We’ve also gone through a round of bank failures, largely due to risk managers who couldn’t contemplate America raising rates, without moral hazard.
> The TARP bailouts showed all of us that bailing out banks in bad situations does little to help the average citizen anyway.
Yeah, having money markets lock up, half the businesses in the company unable to pay their payroll (because everyone depends on short term lending to smooth out yearly cycles) and ATMs stop delivering cash sounds like it would be much better for the average citizen. Don't stop until unemployment hits 25%+.
CRE risks are disproportionately concentrated in smaller bank holding companies, who saw CRE as safer debt prior to the pandemic, and who are more exposed to a small number of high-value deals gone bad. (Leverage was already rising in that market from 2017 on, so it's questionable in retrospect whether that was true even then, but in general smaller banks thought they were cleaning up their balance sheets with high-quality debt.)
The end result of any systemic crisis is likely to be regulator-mandated buyouts of smaller banks and CUs and even more aggressive concentration of banking power amongst the top twenty or so BHCs, similar to SVB ending up part of First Citizens.
The TARP bailouts should have have been conditional on allowing the affected to borrowers stay in their homes. Those borrowers could have paid a monthly amount corresponding to fraction of their loan that the US government ending up taking over as part of the TARP program. Staying in those homes would have allowed those borrowers the possibility to continue to work and pay property and income taxes. Over time, this government intervention would have paid for itself instead of just paying the banks.
> want to see this play out without government intervention. If banks need to take losses, so be it
We’re less than a year from the last set of bank failures. Shareholders were wiped. Foreign affiliate depositors were wiped [1]. If you’re arguing for limiting depositor protection, sure, but we’re well past TARP as precedent at this point.
Probably because the interlinking of deposits and debts across these institutions would lead to a near if not total collapse of the financial system. Quite a number of large banks DID fail in 2008-9 at first, before congress stepped in. Dodd-Frank was supposed to prevent this from happening again, but a disturbing number of relatively trustworthy advocates have suggested it is too weak to do so.
Because the banking sector in aggregate holds the payment system hostage. The issue isn’t that the bank will lose money, it’s that you won’t be able to buy things and pay for utilities if banks can’t clear payments.
This is, if I read it correctly, banks reserving on average 90c against $1 of commercial real estate loans 30 days late - 10% recovery would be quite low.
> past FDIC insurance, if there is 'enough' of that
The FDIC’s balance sheet is unlimited. It’s an explicit full faith and credit agency. It has, to date, never pulled on that credit by managing its risk through fees on member banks.
While I agree with you in principle, I'd want to know more about which loans were at risk that passed all of the banks risk assessment criteria compared to which ones did not that they may have been required to allow due to regulations.
It is not well-appreciated that the whole dollar system is destined for implosion because of the way dollars are created. The dollar is a debt instrument, there is always more owed than there are dollars in existence. It's an exponential and that only goes on so long.
I suggest episodes 1 (difference between currency and money) and 4 (how dollars are created) from the following series by Mike Maloney.
> dollar is a debt instrument, there is always more owed than there are dollars in existence
This is wrong.
Debt is regularly asymmetrically destroyed, we call it restructuring. And when a debt is destroyed we don’t destroy the correspondingly-created money. (Money is destroyed via separate mechanisms.)
That said, I suppose it’s neat seeing the gold bugs coming back on the crypto promoters [1].
NYCB lost more than 50% of its value last week, but have other banks? BAC, JPM, etc. didn't budge. If most banks are diversified with other types of loans, maybe you will never notice. Or maybe they haven't accepted the losses yet.
JPMC in particular is literally too big to fail and that’s their entire business model. They’re so diversified and massive in everything that it’s impossible to fail. They’re the backstop of the backstop - see how the government resolved the small bank failure wave with JPMC taking on first republic and acting as a backstop against further bank chaos. This was a somewhat intentional ramp they’ve been on since 2008, become so massive that no amount of malfeasance or incompetence can disrupt their overall business.
Per Fed Chairman Powell in a recent interview, the Fed believes that mid-size and smaller regional banks (not larger banks) have the most exposure from bad commercial property loans.
Readit News
When a bank makes a loan and it starts going sour, it impairs its balance sheet by noting a counterbalancing liability in the form of a loss reserve. The article alleges banks need to increase those loss reserves. It is not saying e.g. JPMorgan is exceeding its capital reserves.
All this means is bank profits MIGHT be slightly lower this year. All of them set records for profits in 2023, so this seems like a big nothingburger.
It does, however, warrant banks reevaluating their risk assessment practices. Or maybe the problem is elsewhere? Something is definitely out of place for this situation to even arise so soon after the unpleasantness of 2008.
I feel like this should be said a second time.
and I asked if that was the company’s stance for their office park
and no, it was just a vicarious interest in commercial real estate doomer articles
simping for corporate
Nonperforming loans don't have a value of zero.
Not all commercial property that is 30 days late will end up in foreclosure, and the value to the bank of property in foreclosure isn’t anywhere close to $0.
The current reserve ratio isn’t alarming when looking at historical trends. Even if it is too low, comparing the total value of delinquent debt to the total reserves in a headline is misleading at best.
It’s a concise one, assuming the reader has a working knowledge of our monetary system. A welcome assumption given the FT’s readership.
The TARP bailouts showed all of us that bailing out banks in bad situations does little to help the average citizen anyway. Let them take the losses. Why on earth did we train banks that they can have all the upside but have the public eat the downside if a financial crisis ever arises out of their own behavior?
[1]https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program
However that also caused the greatest gap in income inequality ever. Those with assets got extremely wealthy and those living paycheck to paycheck got fucked. This is why no one can afford a house in the Bay Area unless you had money in stocks or real estate already.
So over the 5 years of holding those assets, that's a rate of return of 0.7%?
The government undoubtedly provided its backing to the banks. That "profit" is not commensurate to the risk that the govt took on.
Where it benefited was in potentially reducing economic harm, but the short term gain is offset by long term systemic issues.
I state that one of the observations you can make about TARP and its aftermath is that banks weren't forced to do business differently and the bulk of the TARP money didn't go to help average Americans. There were other paths than TARP.
The fact it "didn't cost the government anything" is a red herring, in that it didn't produce the desired behavior or outcomes that were intended as the TARP money was suppose to have strings attached.
All I see is reasons for strong regulation and breaking up the banks so that "main street" banking is wholly separated from "wall street" banking, so losses can't cascade the same way, even if is at the expense of some marginal profits. Why should deposits and traditional lending be exposed to wall street speculation? This what happens when you allow speculative finance, corporate investment banking[1] and (for lack of a better term) regular banking to co-exist in the same institution.
Boring banks are good. We used to have a lot of them before the M&A sprees of the 1980s and 1990s, which was purely fueled by consolidation which in turn, those consolidated assets were invested in riskier and riskier financial markets and other endeavors. I will continue to argue it was not a benefit to the American public.
[0]: Though not all costs are directly monetary, or even monetary at all. One outcome of TARP and that time period is everyone is now comfortable with the idea of "too big too fail" and seemingly, governments are willing to bailout risky financial speculation of N size[2] with no consequences for those who made the decisions to participate in that speculation in the first place.
Keep in mind too, as noted elsewhere in this thread, its still up to debate whether that is strictly true or if the total cost has not been calculated correctly
[1]: I don't know where to draw the line here because "investment banking" is a really broad term, that covers everything from M&A finance to market making to individual investment services under the umbrella term. For arguments sake, I'm sticking with "corporate investment banking" to hopefully add clarity
[2]: N = whatever the minimum threshold is that financial institutions can convince the government to bail them out for while arguing not doing so will cause "a disproportional economic downturn"
Privatizing profits but socializing losses creates perverse incentives, besides being deeply unfair.
Everyone wins, even the government profited 10 million!!!
Did I just invent an infinite money hack to make everyone a millionaire?
Nearly all money is someone else's debt, $1 of bad debt can lead to a chain of hundreds of people - each losing $1.
And if the government steps in with FDIC or other protections to prevent hundreds of people losing $1, then the government has to print more money, and inflation happens.
There is no good solution.
Even if we have a cascading failure, the FDIC coverage backstops at $250,000, and it only recovers depositors, and we are talking about loans here, not deposits.
If banks fail, they fail. It may short term feel very painful for people, that I can agree with. My point is, as both a society and as a market place, need to eat the fruits of which grew from what we have sewn. If that means a lot of people get hurt, maybe finally we'll learn a lesson this time that allowing banks to act with impunity is a terrible idea and distorts the overall marketplace.
Ending those distortions will net win when the dust settles, allowing new players and new ideas to grow.
Keeping depositors whole isn't the same thing as backstopping terrible loans or other bad financial activity. They used to be largely separate entities until the "reforms" of the 1980s and 1990s. Perhaps there is something to be said for separation of concerns here
The bank (or anyone for that matter) only "lost" the money if they mistakenly believed they still had it in the first place. This is the same kind of analysis that leads people to claim they only lose money in the stock market if they sell after stock price drops. For tax purposes in the US it does work that way. But in reality, the money was gone the minute you bought the stock. There is never any guarantee of a future buyer or for that matter a guarantee of a brokerage even interested in executing your order.
And the fdic does not fill its coffers from tax revenue. It is funded entirely by required payments from Banks. The FDIC will raise its required fees from banks, and the consumers want paying through their banks, not through taxes or printing. Though it does hurt consumers in the end.
Nope, the headline refers to loss reserves. The specific reserves these banks have set aside for these loans. The article alleges they need to increase those. That might, at worst, hit their earnings.
> all money is someone else's debt
All money originates as a loan. (Other than federal spending.) That link disappears the moment it’s created.
> if the government steps in with FDIC or other protections to prevent hundreds of people losing $1, then the government has to print more money
Deposits are highly liquid. Replacing a deposit with an FDIC guarantee isn’t generally inflationary. (In practice, the FDIC having to step in tends to dampen credit and money velocity.)
Its probably not? Money is created as debt:https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Part B is then saying that if the debt chains collapse, erasing massive amounts of money, partially backfilling people via the limited insurance will cause inflation?
Please clarify this contradictory reasoning.
There's no good solution after the fact once the horses have bolted.
You can address it up front with regulation and don't leave the barn door open all the time.
Deleted Comment
Why would that happen?
We have a system that publicizes risk and privatizes losses. I don't think that's going away any time soon.
Trying to create a "stick" will be met with complaints of government overreach. Those same complainers will put on a show of holding their noses while filling the feedbag with as much carrots as will fit.
There are enough people in Congress that want to carve some sticks. But when it comes down to it, they don't have the guts to watch the herd starve just to make a point. If I were a member of Congress, I'd probably cave too. It would be nice if we could have a system that punishes those who destroy our economy, but it's not worth letting innocent people suffer to make that happen (IMHO).
> Why on earth did we train banks that they can have all the upside but have the public eat the downside if a financial crisis ever arises out of their own behavior?
Deregulation and lobbies did it, it's been documented over and over again. Deep down greed is the culprit but it could have been somewhat tamed.
Then the government is bailing out with FDIC, plus the economy explodes.
It's not as sexy as it sounds.
At least then it's bailing about depositors.
Deleted Comment
FDIC limits government losses to USD 250k per account or something like that, right? I think it is still preferable to outright bailing out the entire bank. This is what we should have done with Silicon Valley Bank.
TARP prevented the economy from collapsing. I was unaware the average citizen didn't need loans or a functioning economy.
I'm not sure how one can make this conclusion without having known what would have happened if there was no TARP.
Worst case: the contents of individual bank accounts poof out of existence. Riots and untold calamity ensues (it is difficult to say how bad this gets). Then another country steps in to buy up those assets at an even more steep discount. The subsequent housing crush the country is currently experiencing is worsened.
And Geithner saved us all as he was asked to do.
Is it the same people tasked with getting inflation down and whethering the induced bubbles this time? They have gotten inflation down, but they can't hide the unpaid expenses of "scorched earth" and "starve the beast" experts at this.
Geithner had nothing to do with TARP; the SEC was barely involved. This article has practically nothing to do with the SEC outside reporting requirements.
We’ve also gone through a round of bank failures, largely due to risk managers who couldn’t contemplate America raising rates, without moral hazard.
Dead Comment
Yeah, having money markets lock up, half the businesses in the company unable to pay their payroll (because everyone depends on short term lending to smooth out yearly cycles) and ATMs stop delivering cash sounds like it would be much better for the average citizen. Don't stop until unemployment hits 25%+.
The end result of any systemic crisis is likely to be regulator-mandated buyouts of smaller banks and CUs and even more aggressive concentration of banking power amongst the top twenty or so BHCs, similar to SVB ending up part of First Citizens.
We’re less than a year from the last set of bank failures. Shareholders were wiped. Foreign affiliate depositors were wiped [1]. If you’re arguing for limiting depositor protection, sure, but we’re well past TARP as precedent at this point.
[1] https://www.wsj.com/articles/the-pain-of-silicon-valley-bank...
Did you also feel the same way when SVB needed a bailout?
The FDIC’s balance sheet is unlimited. It’s an explicit full faith and credit agency. It has, to date, never pulled on that credit by managing its risk through fees on member banks.
The real answer is that ZIRP was a a bad idea
Deleted Comment
Sort of like Y2K mitigations, then, right?
Deleted Comment
Dead Comment
They will let 1 bank fail to send a message but paper over the losses for everyone else.
If you hold cash and aren't invested in something, you're a fool. Stocks, real estate, hell even crypto is better than fiat.
I suggest episodes 1 (difference between currency and money) and 4 (how dollars are created) from the following series by Mike Maloney.
https://www.youtube.com/playlist?list=PLE88E9ICdipidHkTehs1V...
This is wrong.
Debt is regularly asymmetrically destroyed, we call it restructuring. And when a debt is destroyed we don’t destroy the correspondingly-created money. (Money is destroyed via separate mechanisms.)
That said, I suppose it’s neat seeing the gold bugs coming back on the crypto promoters [1].
[1] https://goldsilver.com/about-mike-maloney/
It's not exponential.
https://webcache.googleusercontent.com/search?q=cache:https:...