Big Banks Had a Spectacular Quarter Despite All the Rules | Hacker News Reader

Big Banks Had a Spectacular Quarter Despite All the Rules

bloomberg.com

58 pointsartursapek59 comments

Despite all the rules? My friend, who do you think the rules are for? Compliance departments are EXPENSIVE, which means that only big banks can afford them. Which means less competition. Which means higher prices and profits for the few that remain.

Yes. Before the 2008-2009 financial crisis, ~100 new banks were founded every year.

From 2010-2015 there were 4 new banks total.

All right, I'll bite. If me and my SO wanna buy a house, how should we go about approaching the next financial crisis to get a good deal on one?

Who predicted the last one correctly, and what are those people saying now?

I'm under the assumption that the regulations put in place after the last financial crisis are impotent, and that the people in the finance industry have little incentive not to do it again. Is this an accurate statement?

What makes you think the next bubble will still be housing? Or be as big? Banks aren't leveraged on CDOs like they were precrisis. Current bubbles are probably subprime auto-loans, which is a much smaller market than home loans, and maybe apartments and commerical real estate. As millenials age they will move from city apartments out into the suburbs to have yards and access to good schools for their kids. This will probably continue to drive the housing market up. If you need a house in the short term you are gonna have to hop on the housing market rollercoaster and adopt your new NIMBY lifestyle.

EDIT: and for sources of financial news, I really like nakedcapitalism.com as a contrarian supplement to the regular stuff, check out these three articles then look at the dates.

http://www.nakedcapitalism.com/2007/03/market-correction-is-...

http://www.nakedcapitalism.com/2007/03/unwinding-fraud-for-b...

http://www.nakedcapitalism.com/2007/03/michael-panzer-on-sub...

I'm imprecise with my language because I don't know what I'm talking about really. If financial institutions did something horrible that should've sent them out of business, and they got bailed out, then it stands to reason the next time they figure out a way to do that, they will. So maybe not housing. But I bet there's some exploit somewhere.

So then my next thought is, if I can identify this, I should react accordingly. And I want to buy a house soon.

And those links - 100% marginal tax on all income above $500k!? I like the freewheeling nature of ideas there. Seems like a good place to brainstorm from

> I'm under the assumption that the regulations put in place after the last financial crisis are impotent, and that the people in the finance industry have little incentive not to do it again. Is this an accurate statement?

No. If you're talking specifically about the housing bubble/crisis that crippled the economy ~2008, the rules have stopped what happened then. People forget that during the housing boom, dogs (people's actual pets) were able to get no-doc loans for $500k. Right now, we're probably on the opposite end of that spectrum where a mortgage is extremely hard to get and only getting harder. I bought soon after the crash, and recently refied with the same bank. The documentation I needed and the scrutiny from the underwriters had increased a lot from when I originally purchased.

Yea wow the underwriters are getting picky. We recently bought with a mortgage, and they kept asking about two things that were hilarious from my end:

- transactions between my own accounts to put enough in one place for down payment (this despite sending them transaction records from both sides multiple times)

- the fact that my dad and I co-purchased a condo in the Midwest for 100k in cash. They kept asking for docs on the mortgage for that when there wasn't ever a mortgage. Idk how they wanted me to prove something that never existed. Finally got our insurance agent to call them up on the phone and explain, "yes real estate prices in flyover really are that cheap; no there never was a mortgage; no, that means there's no other bank to talk to"

Really frustrating process when they keep asking for stuff that doesn't exist. The loan officer at the bank that I was working with was similarly frustrated with their own underwriters.

Underwriters are difficult because every day people are trying to pull a fast one on them and it's their job on the line if there is fraud and the mortgage gets bought back.

Source: Father and step mother are contract underwriters.

In these cases I often wonder if there is a piece of software (or three) to blame. When someone's role is tied to a form requires them to pick an option, and gives no free-text alternative, this creates a recipe for making mindless, illogical demands. But in truth, it's not the underwriter, really: it's the underwriter parroting their bad software that is making mindless, illogical demands. (And the manager who gives instructions like, "Just fill out the form. No, I don't want to hear about exceptions. The form has worked for 15 years, why are you so special?")

That wouldn't surprise me at all.

Similar experience. When we were buying our first house, I sort of envisioned just walking into a bank, exuding the aura of "looking for a mortgage", and the bankers would tackle me into the ground with quotes. But instead we had to fight just to get the time of day from a banker. Even SchoolsFirst, well regarded for its customer service, gave us hassle just getting basic info. Getting actual quotes was, as you say, quite tedious. Lots of questions and documentation. We were smart and had our bank accounts in order, but still had to produce a couple weird documents anyway for them.

On top of that, real estate agents and sellers have gotten picky too. Most real estate agents we found wouldn't talk to us unless we had a mortgage lined up already.

The housing bubble burned _everyone_, and now I feel the market has spun the other way in its paranoia. That's perhaps a good thing.

I'd check out Random Walk on Wall Street. Read what it has to say on trying to time the market, and decide whether you think it applies to Real Estate. Then, think hard about why you're buying a home. Is it to live in for a long time? Or are you hoping to resell it in a short time frame? Are you thinking of Real Estate as an investment?

Burton Malkiel – author of random walk – says that in general you can't time markets. There's a ton of evidence on this. (Most is related to stocks and bonds, so take it with a grain of salt.) But what you can look for is irrationality.

Irrationality is what was identified by the folks who made a killing on the last crash. See "The Big Short".

Love that movie.

The house is for a very specific purpose: it's how I want my life to be. Both to live with SO, but also to have space to get an aquaponics setup running.

So that will be happening when it needs to happen regardless of market timing. But if there's a thing I can take advantage of in that window, totally should!

Is random walk on wall street viable on audio (audible) or are there a lot of charts and stuff?

The best quote on timing the market is: "The market can stay irrational longer than you can stay solvent." (John Maynard Keynes)

Peter Schiff predicted the housing bubble. He also claims that the current housing bubble is even bigger as the market imbalances have not been fixed (government interference and bailouts intervened in the natural free market process, if left to free market forces there would be a lot more failed banks).

He's also a gold bug. Other than housing bubble he claims there is a massive bubble in stock market and also that the next crisis will be a currency crisis as people lose confidence in US dollar.

He would probably suggest to invest in gold and in markets outside of US/EU.

Disclaimer: I am not saying I agree with Peter Schiff just describing his view, so please don't down vote me.

Peter Schiff is always predicting a crash, his call on the housing bubble is more of a stopped clock type scenario.

> Peter Schiff is always predicting a crash, his call on the housing bubble is more of a stopped clock type scenario

You're absolutely correct that he sounds like an inevitable broken clock outcome. However, his premise on why and how the last bubble was going to explode, was extremely well supported by argumentation & data. He didn't just say it, he argued it out and supported the premise, and he was right. It wasn't luck, it made perfect sense, and he wasn't the only person using the same argument details.

He's right this time that they've blown another huge bubble in asset values via cheap money / hyper low interest rates. The Fed has finally gotten to the point where they're openly admitting to that (Yellen just did so recently). This is the third time in 20 years they've generated vast asset bubbles with cheap money. Schiff is wrong on the timing because he has persistently underestimated how long the Fed could keep the bubbles inflated via said cheap money.

Raise interest rates just to the average level of the prior 50 years, and see what happens to the housing market.

For cases like this, it's probably more important to look at what the predictions were, rather than when. We accept that it's impossible to time markets... Well, that applies to both bulls and bears. I'm not familiar with Peter Schiff at all, but if he was calling the correct failure then, it's worth considering that he's calling the correct failure now.

Yes, I mean recessions / booms are cyclical so he is likely to be right again in the future when the next recession comes because he's been consistently predicting economic doom every year.

Why are people down voting me. I didn't say I agree with Peter Schiff just that he is one of the people who predicted the housing bubble and other bubbles he's been predicting every year since then.

In what fantasy does the US Dollar collapse, and our society is still stable enough to trade in something like gold? I'd invest in agricultural and blacksmithing skills if you're really worried about that.

It doesn't need to collapse suddenly. But be replaced by Yuan or more likely basket of currencies as a step by step process.

Every time I try to imagine that "peaceful" transition or something similar, I just see mushroom clouds.

I am not sure. Mushroom clouds would end in a total world economy collapse probably so it's not in the interest of US to go that route just because the world will become multi polar rather than the current model with a single superpower (This process is already well underway and I don't see how it can be stopped).

Yes US will end up losing some of advantages but it doesn't need to be so dramatic. Even in multi polar world with several super powers US will be one of wealthiest and most prosperous countries. The tremendous wealth accumulated over last century is not going anyway.

> The tremendous wealth accumulated over last century is not going anyway.

Wealth follows the wealthy, and most of the wealth in the US rests in very few hands, much of it offshore and in other ways hidden from taxation. If they leave, the "wealth" leaves with them for the most part.

But wealth is not just money. Infrastructure, industrial base, technology sector and military / space exploration complex, domain knowledge (just think about how hard it would be for a new upcoming power to replicate the deep knowledge of all the people working for something like NASA), highly educated population with valuable skills (tech, finance, science), real estate (houses and flats in US are bigger than rest of the world).

For another nation to get to the level of US it would need all of these things and it would take decades and massive investment to build up all of this. Few very rich people taking their money and leaving for some other country would not be the end of the world.

Our infrastructure is crumbling, tech is being exported and offshored, space is in tatters, and the latest from the military is an incredibly expensive jet it still won't work, and incredibly expensive boat they just don't want.

> Wealth follows the wealthy, and most of the wealth in the US rests in very few hands, much of it offshore and in other ways hidden from taxation. If they leave, the "wealth" leaves with them for the most part.

All true enough, but I'm not convinced the wealthy would leave the US en masse as it gradually declines in power and we enter a more multi-polar world, with the dollar possibly losing reserve status at some point. Where would they go, China? I think in the scenario where the US is less powerful compared to the rest of the world, it's still a very attractive place to live in many ways (edit: especially for Americans).

It could be an attractive place to live, if populism doesn't rule the day for too long, and we do actually bother to invest in some infrastructure. Without that, it could very rapidly become a singularly ugly place to live. Meanwhile if you're rich enough, maybe Switzerland starts to look more stable and appealing in the long run. You can still travel to wherever you like, but your wealth would be elsewhere.

I'm betting student loans are going to have something to do with it.

https://pbs.twimg.com/media/CkcJGZfVEAEw239.jpg:large

Except student loans are going to be worse. You can't exactly have your diploma foreclosed on, and they're difficult to extinguish through bankruptcy.

Your chart needs to be updated. It's no longer climbing at the same rate, because that rate of growth was impossible to sustain. The chart will increasingly begin to flat-line in the next decade. Student loans will not be the source of the next financial crisis, that problem is trivial to solve as necessary. It involves a trillion dollars; the financial crisis involved tens of trillions of dollars.

1) The Fed was printing nearly a trillion dollars per year for QE in prior years, one print run like that directed at student loans instantly ends the problem.

2) Option one is a bad premise, as it rewards the student loan borrowers and punishes savers (debasing the dollar). Alternatively, you can drop the interest rate on student loans (which would encourage a greater pile of debt long-term but solve the problem short-term). Or come up with any number of other easy solutions to the payments such as lower caps on monthly payments based on income.

3) The Feds can begin bringing down the cost of college education at any time, by slowly reducing their loan backing. Universities will be forced to unwind their spending bubble.

It seems so obvious that it's too obvious to end up happening... but I agree.

Kinda like giving home loans to people who have no ability to pay them back?

That's exactly why it seems obvious!

You can't just look at who predicted it correctly lat time. You also have to make sure that they didn't predict that it would occur other times when it didn't.

Adding on to your important thought, if you do NOT accept that the regulations are impotent, than you should look to a different sector besides housing that could cause a crisis. If it is the case that something else creates the problem, different people with different domain knowledge are likely to be the ones predicting it.

To grandparent comment: great point. Didn't think of that.

To parent: You too!

IMO, it's much better to buy when you can both easily afford it and it fits with what you want than trying to time the market. Just accept home ownership has high transaction costs. So, you need to be happy living their for 10+ years or renting is generally a better idea.

If you believe foreign speculation is playing a role in inflating your market, I'd watch China carefully, who didn't take much of a hit in the last crisis and has very bubbly real estate of its own ($1000 rents for $1 million apartments). For examle, when Japan's asset bubble tanked, it took California real estate a decade to recover.

But if a crash happens, you'll need to be liquid with lots of cash because banks are less likely to loan then. Putting that cash in the bank means you won't much upside from the current boom...its a tricky balancing act!

Hey related Q - if I got an in law being evicted in a smaller city over there (that still has massive new high rise development), is there still gonna be an easy cheap rental market? They are being very insistent on only buying, saying "nobody in China rents, only buys", so I guess that might be why you see low rents?

That isn't true at all. A lot of people rent in china. It's just that demand for housing to live in is way lower than demand for housing as a speculative asset.

Ok that's what I figured, I was skeptical at believing them.

This opinion is based totally on "The Big Short," so take it with a grain of salt:

It seems like the people who can predict a crisis correctly are the ones who actually do the legwork to verify the ground truth, in detail, when everyone else is just trusting conventional wisdom, the executive summary, and their current profit numbers.

However, the person who predicts the next crisis is probably going to have to be looking under different rocks than the people who predicted the last one.

Right. I believe it was Michael Barry (sp?) who looked into all the mortgages and found a ton of fraud, etc. When he brought the info to the big banks they were like, "how do you know all this?" And he was like, "I looked at the mortgages."

[blank stares]

It's difficult to say if there will be a financial crisis, but multiple current economic indicators are not predicting one any time soon (meaning in the next 6 months).

This isn't counted in those indicators, but also S&P 500 earnings are predicted to go up a lot by December 2018, according to S&P Global. Credit Suisse's Global Wealth Report predicts a 5% annual increase in wealth among all adults globally in the next 5 years.

Houses in major metropolitan areas have gone about 6% annually on average, counting recessions and popping of bubbles. Timing the market could help but it's very difficult. I predict they will keep rising at a 4-7% rate for the next decade, but I could be wrong. A recession is possible but I wouldn't delay buying a house right now. But I would definitely buy within your means and don't expect prices to rise, because the future is very difficult to predict.

There's a famous joke along the lines of:

Economists have predicted 12 of the 3 market crashes.

The problem with looking at who correctly predicted the last crash is that so many people make predictions of the form, "there will be a crash in the next x months". Eventually someone will be correct.

How will you be able to tell that person being correct due to random chance versus actually knowing that there would be a crash?

I am in the same situation.

I feel crisis are hard to predict timing wise. However I do also feel the stars are line up for another one for sure.

They started doing the same stuff they did pre-crisis like months later. But first they made sure to pay themselves billions of dollars in bonuses.

https://www.youtube.com/watch?v=mzJmTCYmo9g&list=RDmzJmTCYmo...

Robert Shiller gets a lot of credit for calling the real estate bubble. Though he did do so in around 2000, so he was very early.

He calls that bubble every single year. He was bound to be right eventually.

The rules put in place are a joke. Next bust is coming and everyone will pretend again that they didn't see it coming. And again nothing will be fixed and the tax payer will pay the bailout to the banks and their investors.

Have you bought a home in the last 5 years? It's not easy to get a loan. I had to verify all of my financial documents pretty thoroughly. Not only that, but my loan stipulated I still have enough cash to cover the mortgage for like six months. Not many people have $20 grand laying around after they buy a house.

Difficult to comply with (aka expensive) regulations create a barrier of entry that helps these entrenched megabanks. Also, in finance, whenever regulations impede business, after some time bankers learn how to circumvent the regulations with new products or business process changes.

The answer to this is new laws and rules

D.C. needs to refactor legacy

See Goodharts Law, Buffets institutional imperative, and numerous other similar arguments in other contexts: we must keep evolving

Government is no different. But the banks and reps get in the way of this on purpose

They have good reasons to do that. IMO the public has good reasons to reject this and require them to evolve as well

Wasn't that literally a decade ago, not adjusted for inflation?

How do the financials compare with other, unregulated sectors over the same period?

Restrictions breed creativity, eh?

With the restrictions came huge increases in the stability and effectiveness of significant bank operations (e.g. clearing of over the counter derivatives, derivative reporting and all that).

This shouldn't be surprising.

But, it is interesting to see whether the restrictions have bred the stability that they were designed too, or if banks are just shifting risks to new areas.

Those will get handy when the next crisis strikes (amplified by the vast capital held by index funds and resulting selling spree, infrastructure credit defaults, another round of real estate depreciation, etc.)

If "the market moves in the direction of maximum damage" maxim is correct, I'd also add some runaway inflation to the mix.

Raising interest rates certainly helped.

Also, this article is discussing revenue, not profit.

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