Shadow Banking: Goldman’s derivative exposure 25K% of assets in ‘08, 33K% in ‘09 | Hacker News Reader

Shadow Banking: Goldman’s derivative exposure 25K% of assets in ‘08, 33K% in ‘09

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16 pointsdsplittgerber18 comments

OK. This statistic refers to notional value. Adding up notional values makes as much sense as adding apples, oranges, yen and dollars. Actually it makes less sense than that. You cannot understand a bank's book without access to the individual line items.

If you have the line items, you have everything. Without that you have to rely on high level financial statements and the opinions of bank examiners or other regulators. And as Lehman, Madoff, Enron and other cases show, it means you have nothing.

It is time for banks, who operate a public trust, to offer continuous (lagged) line item disclosure to enable crowdsourcing of risk analysis. The markets are running on the informational equivalent of fumes. No wonder they sputter.

I call this Real Transparency. It is no more intrusive than the fact that I can find out how much you paid for your house and how much you borrowed to buy it. Information like this is necessary for the functioning of a proper market and price system. These are worth preserving more than the privileges of banks.

Real Transparency is the kind of regulatory reform that would make a difference. Not the kind which gives power hungry regulators more information to ignore.

> It is time for banks, who operate a public trust, to offer continuous (lagged) line item disclosure to enable crowdsourcing of risk analysis.

I read (probably in the Economist) that a regime like this is already in operation in New Zealand or Australia (if memory serves me right).

I believe that you are referring to monetary policy in NZ. This is not the same thing. Essentially I am suggesting that banks have about the same amount of financial privacy that you and I do. They do a lot more transactions, so there is much more for them to tell.

the derivative exposure could be risk-reducing, fwiw.

It could. Though the netting out only works when your counter-parties turn up to play their part.

True... However it seems to me that singling out a specific type of transaction (such as derivatives) because it faces this kind of risk (the risk of the instrument * the risk of the counter-party) is a bit silly.

Much of what we finance is based on a mental model the future that might not be true. Consider a mortgage. If your house burns down then you still owe the payment.

So the financial industry invented "fire insurance" for the counter-party risk of derivatives, called CDOs. But they too are blamed for the crisis.

The fact is, any set of financial products/buyers/sellers will converge upon a non-worst-case view of the future, and the price of risk will adjust accordingly. Any line you draw in the sand (such as for capital adequacy requirements) is simply an estimate about how risky the future is... and notably it's still a gamble that the future will occur at or above some point in a probability distribution.

I agree. Just for the record: I also love short-sellers.

So do I. I think one of the biggest problems with the financial industry is limits on short selling.

Short sellers got rough treatment during the crisis, much of it undeserved. But we should not lump all short sellers together.

Fear mongers do exist, but they only thrive in a low information environment, such as a panic. If banks and other companies provided, or were compelled to provide better ongoing information, they wouldn't be exposed to rumors in the first place. They probably wouldn't see their stocks overinflated either, due to the actions of legitimate short sellers.

I would argue that the "parasitic" short sellers who are information poor should not be viewed differently than "long sellers" who are information poor... and are generally considered perfectly acceptable.

A "panic" is just the price decreasing version of a bubble...

I agree. Ever notice how the media always treat a stock market rally like a sunny day? Too many sunny days bring a drought, which in this case means no chance to buy value at a good price. Short sellers are like rain.

My main complaint is that investors are information-starved and our public policy is to blame. All this outrage about people gaming the system is a distraction. We need to fix the system, starting with the banks.

I'm curious what your proposed solutions would be... mine are:

- remove capital adequacy requirements as they (like a paper seatbelt) create a false sense of security. Firms should compete on the basis of soundness as well as other characteristics.

- pass a law outlawing bank bailouts.

- remove restrictions on non-accredited investors, short-selling, derivatives/options trading.

- Increase disclosure requirements for financial institutions.

- Create a new financial statement called "Statement of Risk Exposure" which is a list of the firms' assets in terms of risk. If an asset is on a debt owed by another firm, then that firm's risk statement could be copied and inserted inline, recursively.

You can see my suggestions about transparency above. I won't repeat them here. It provides the teeth to your disclosure requirement. I would suggest that instead of asking for line items by risk, we simply open the banks' books and get an electronic term sheet for everything listed. I don't want to know their risk numbers. They calculated them.

Your other measures are interesting. I would keep capital adequacy but seize the bank before capital went to zero. That would improve incentives a bit.

The key thing is to claw back the economic rents that bankers have been handed. Most of these rents are connected to information that bankers have and we don't. This can be changed, but not with the help of today's regulators who are still in thrall to the banking industry despite their statements to the contrary.

Yes. We need more bank failures! We should get to the point where a bank failure gets the same attention as any other bankruptcy.

The book "Just get out of the way" (http://www.amazon.com/Just-Get-Out-Way-Government/dp/1930865...) has some interesting ideas on how to apply the lessons of now-developed nations to developing ones: Don't copy the bloated institutions the rich world has now, but get inspired by what made them great in the first place. Often these were simpler policies. (Of course this also applicable to developed economies, again.)

The author also advocates ridding banks of any (even implicit) government guarantees, to make customers look out for their money instead of relying on glorified ponzi schemes. (Which banks are in a lot of developing countries.)

People (not economists) always blame the crisis on bad lending. That's like saying the guy who had full-blown AIDS died of pneumonia. It's true in a literal sense, but it's not meaningful in that you're blaming the symptom rather than the disease.

Uh, it's 25 and 32 THOUSAND % each!

Had to shorten the title and missed inserting the K back in. My bad, sorry.

Summing notional values is not an intelligent or accurate way to determine a firm's derivative exposure.

Please don't use the terms interchangeably.

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