US banking crisis: Warren Buffett says bosses should face ‘punishment’
theguardian.com
theguardian.com
It's a good comparison. Engineers can be personally liable if they are negligent in their jobs. Why not bankers?
Politicians are mostly professional parasites and most political systems seem to attract, apart from the odd once-in-a-while genuine idealist, exactly that type of people.
I find it very hard to imagine that there is a lack of honest grass-roots idealists in a country of 350+ million people, so it must be a lack of people willing to vote for them.
https://www.cnbc.com/2017/08/26/vw-engineer-sentenced-to-40-...
And if a product fails in a significant way, you'd need to either revoke the engineer's license, or impose even more serious punishments.
Without appropriate legal structures, the best you can do is say, "No, that's a dangerous idea and I won't do it. You'd have to fire me first." Which I strongly encourage saying when appropriate. But it's not the same as a regulated industry with written best practices.
In the absence of more specific regulations, it's usually difficult to "pierce the corporate veil". The corporation itself has liability. The shareholders have limited liability. And sometimes corporate officers have personal liability for certain things.
At the same time, I don't think it makes sense to punish a junior programmer for writing buggy software. It's the corporation that should be creating processes which detect and prevent bugs.
I think rigorous building standards for certain components of software is possible, and I think we should do it, eg payments. But unlike building, I don't think all software should need to follow standards.
For example, losing one's net worth might be an example. Shareholders are already subject to it, while for employees, even when fired, they just lose the potential of future earnings, leaving their accumulated net worth untouched.
Wikipedia calls this the principal-agent problem ( https://en.wikipedia.org/wiki/Principal%E2%80%93agent_proble... ). Should employees in a position of power be agents that are putting up some collateral as a guarantee to be forfeit in case things go south? Or otherwise would unwarranted risk-taking behavior in their job be enough to go to jail when the results of their actions impact others in the world at large negatively?
It seems engineers screw up on purpose often enough that the monetary incentives must be there.
Should we hold developers at uber criminally liable if the company fails? management? where does it stop?
Apparently not even if they design a system for thwarting regulators from doing their job.
I don't see the issue: that is part of being an Engineer: lives and livelihood of people depend on your work "working." That is how it works in all Engineering fields. Somehow in software engineering we give the title and forget the responsibility.
On the other hand, in a lot of jobs, engineers are overruled and treated as monkey typists, so...
Example: At Boeing, Engineers were overruled on 737 Max, and passengers paid the price. Time someone pays for that, in this case FAA included.
tl;dr: "Somewhere between the janitor and the CEO, reasons stop mattering," # Steve Jobs (note: Rubicon is VP for him)
(See https://www.businessinsider.com/steve-jobs-on-the-difference....)
[Edit: P.S. Some of us gave a professional oath and take it pretty seriously. We should not hold our peers to lower standards.]
It's sort of the same as the question of whether soldiers should be held responsible for wars. There wouldn't be any wars if they all refused to fight. On the other hand, they are just carrying out orders. On a third hand, why the hell is "just carrying out orders" a good excuse for killing people? Why would anyone just "carry out the orders" without thinking about it themselves? Why should we be able to outsource our ethics? These are all questions that anarchists (the serious, intellectual variety), like to ask.
I feel like the term "normal" here is a bit loaded.
To quote Buffett on First Republic Bank[1]:
>> If you take First Republic, for example, you could look at their 10-K and you could see that they were offering non-government-guaranteed mortgages in jumbo amounts at fixed rates, sometimes for 10 years, before they changed to floating. That's a crazy proposition.
Rubbing salt into the solvency wound, an overwhelming majority of First Republic's long-term assets were tax-exempt municipal bonds, and thus not eligible BTFP[2] collateral.
In the case of SVB, it was an extreme outlier with respect to sector concentration of uninsured depositors where all it took was a single individual with influence in a tight-knit community to trigger historically unprecidented outflows, which in turn forced massive losses in long-dated securities to be realized in an attempt to quench the liquidity demand impulse, which in turn broke the bank's solvency...nevermind that their outsized duration risk wasn't hedged, or that their Chief Risk Officer stepped down almost a year before the bank's demise without proper regulatory disclosure.
Then there's the matter of certain relaxations to the Dodd-Frank Act pushed during the Trump administration[3; see Title IV]...nevermind that Frank himself sat on the board of Signature Bank, or that SVB's CEO Becker sat on the board of the San Francisco Fed. I suspect it's not merely a coincidence that the assets of these failed banks skyrocketed shortly after deregulation yet remained under a certain $250 billion asset threshold "for strategic reasons".
[1] https://youtu.be/5QBkn42PSxk?t=488
[2] https://www.federalreserve.gov/financial-stability/bank-term...
[3] https://www.congress.gov/bill/115th-congress/senate-bill/215...
I think it would be good for the field if this was a possibility, but as far as I know it this is only really possible for the classical “get a license or operate under an industrial exception” type engineers.
If we can do it for compliance officers, why not for CEOs? The average citizen is more likely to be harmed by financial collapse than a terrorist.
CEOs are hired to be the public face of the company. The board who hires the CEO doesn't want the face of their company being a criminal, and in the U.S. corporate boards overwhelmingly dictate the law books. That's how capitalism works.
I don't think that's capitalism, I think that's corruption, which may be a big part of this implementation of capitalism, but I feel like it is separate.
I feel it’s inappropriate to use the already really strict requirements bankers face as a justification to expand government control to other industries.
I’m not talking about common sense rules like liquidity requirements. I mean things like extremely invasive “know your customer rules” and holding compliance officers personally liable.
Considering the forum, it’s important to raise this distinction I think due to the lack of ethics and uniform professional standards in software.
The question remains…
Should a board of directors and other senior leaders be liable for software harms (eg. Breaches) caused by poor oversight, malfeasance or greed?
Imagine the field of engineering in a world where science still debated whether the world was flat or round, or whether empiricism was even worth the trouble in physical sciences (and if you felt strongly one way or another you were considered an ideologue) -- that's where economics is today.
In SVB's case, the risk was not in the bonds themselves, but in the facts that a) there was a yawning mismatch between the high interest they needed to pay out on deposits to stay competitive and the low interest they were getting on their locked-in capital, and b) their customers were heavily concentrated in a single industry, namely fickle VCs and their companies.
Problem is that I'm not sure wether to blame the fed or the banks.
This was 100% SVB fault and 0% Fed fault.
Economics just isn't as well grounded, so Banking is always going to be less certain - and perhaps, for that reason, should be far more conservative.
As for whether bank CEOs should suffer, well, that's the whole point of having a limited liability corporation: to isolate the company's owners from the legal consequences of their misdeeds.
If your argument is that “there’s nothing we can do about this without completely abolishing LLCs” then that strikes me as somewhat absurd.
The limited liability privilege that exists today does not in any way make you immune from prosecution if your actions are criminal. Sam Bankman-Fried is one obvious example.
Whether CEOs should “suffer” or not depends entirely on whether they have broken the law, not whether they are leading an LLC.
It’s called “limited” liability for a reason.
He's talking about tying the executives compensation to bank outcomes. It's called skin-in-the-game, and it's a value he's espoused for his entire career.
The point is that moral-hazard is a big part of why these banks collapse. Executive compensation is tied to the value of the company on the way up, but not on the way down... which obviously creates a dynamic where executives are willing to take massive risks because they're basically playing with their investors' money.
Buffett isn't worried about the customers, he's worried about these investors (himself). Executives can still trivially crash a bank, bankrupting investors, by putting their own earnings targets above what are long-run, safe strategies.
This is the principal-agent problem: https://en.wikipedia.org/wiki/Principal%E2%80%93agent_proble...
Also, BofA isn't one of the banks in trouble. As far as we know.
https://investor.bankofamerica.com/regulatory-and-other-fili... https://en.wikipedia.org/wiki/Tobashi_scheme
I swear, the negative nancies on the internet never seem to get tired of finding new reasons the sky is falling.
My argument here is that by forcing mark to market accounting across the board, banks would have to recognize these losses earlier and we wouldn't need to socialize the losses as frequently as we are have been in the past few months.
Furthermore, while you're free to argue that I am a "negative nanc[y]" who believes "the sky is falling", the words "more likely" are doing a good bit of work in my earlier comment. If you really want to argue that BoA and Wells balance sheets are honky dory[1], I happy to hear your analysis, but I can do without the name calling.
0: https://www.bloomberg.com/news/articles/2023-03-31/why-us-ba... 1: https://www.americanbanker.com/list/20-banks-and-thrifts-wit...
I agree the gov't screwed over the banks here. I'm not sure how forcing MTM alone would help. What we'd have needed is better regulation, or simply more thoughtful monetary policy.
For BoA, if you stare at the balance sheet, sure it looks not great. If no one ever looks at it, things probably work out just fine, because again, only thing that is going to cause an issue is if alarmists start spreading FUD and folks start yanking deposits.
Where I think we need to agree to disagree is you seem to think the run it's self is the problem, whereas I believe the insolvency which spooked the herd is the issue.
I don't think the full blame lies with greedy banks here.
The Community Reinvestment Act, and other strong-arming laws, loaded mortgage securities with sub-prime debt bombs -- thanks to the government.
Banks were responding to carrots and sticks from the government. It's no surprise, since the line between banks and government is extremely blurry. Government capitalizes, incentivizes and strictly controls bank operations.
Bankers were the fall guys for government pressure to give unaffordable homes to minority groups.
Are these the same banks that were choosing to issue loans to people with no job and no assets?
>A NINJA (no income, no job, and no assets) loan is a term describing a loan extended to a borrower who may have no ability to repay the loan.
https://www.investopedia.com/terms/n/ninja-loan.asp
Banks were making loans to anyone, taking their cut, selling those loans to investment banks on Wall Street (who also took a cut) and rolled them into collateralized mortgage backed securities, which were fraudulently marketed as having very little risk and sold to the public.
The banks didn't care if the home buyer couldn't pay, because they were just taking a cut and passing off the risk to the public.
> Suppose you’re a salesman and you’ve identified that the deposit franchise is a natural hedge. Bracket the question of whether you can convince the decisionmakers for the deposit franchise to do business with you. Who in the economy most needs an interest rate hedge? Who could you sell that to?
> I claim that it is the mortgage industrial complex, and if you want me to be more specific, it is the government-sponsored entities (Fannie Mae, Freddie Mac, etc). They [enable] the housing market operating in the U.S. by providing securitization infrastructure which, as a side effect, backstops credit risk in conforming mortgages with the full faith and credit of the U.S. government. Agency mortgage backed securities (MBS) are the second largest dollar-denominated fixed income category in the world. They are much larger than minor players like “all corporate bonds combined.”
[...]
> Now, if you cast your memory back to the high-quality assets of certain recently failed banks which suffered large mark-to-market impairments, do you remember their constitution? They were largely a mix of Treasuries and, hmm, wait a minute, a much larger amount of agency MBS.
> SVB, ~$80 billion in MBS. Signature Bank, ~$20 billion. First Republic, only about ~$10 billion.
> These portfolios increased in size materially during a period of low interest rates, backing up the truck on interest rate risk effectively, and then had a foreseeable outcome (billions of dollars in losses) when interest rates rose.
[...]
> I express certainty that there were formal incentive systems which encoded this recommendation. For example, one of many ways by which we regulate banks is by capital requirements. Different assets require different amounts of capital to carry them on the books, in a process called “risk weighting.” Since banks will optimize for return on capital, adjusting risk weights is a way to substantially guide their behavior via shaping incentives without directly mandating one’s preferred outcome.
[...]
> It was not an accident that banks loaded up on MBS. We wanted them to. We told them to.
(By "we" I assume he means bank regulators.)
> [...] We didn’t expect the rate hikes to blow up a large chunk of the U.S. banking sector. We knew they would cause losses, to banks and all other holders of financial assets, but modeled them as survivable and more palatable for society than continuing inflation was. We appear to continue to believe that, at least to the extent we believe we can have our cake and eat it too.
So I'm wondering what the implications are of this. Banks taking interest rate risk is traditional. Mortgage-backed securities are a diversified version of that, which lowers most risks (or at least, we assume so after 2008) but not interest rate risk. If the implication is that banks shouldn't fund Fannie Mae / Mac as much as they did, who should?
[1] https://www.bitsaboutmoney.com/archive/deposit-franchises-as...
Wow. Really?
Talk about shutting the stable door after the horse has bolted three times running.
Congress even watered down the laws made after the 2008 crisis to prevent this from happening.
Where was he then?
If there’s still horses in the barn, close the doors.
Central banks intervene in the natural flow of interest rates. Central banks manipulating interest rates have created a housing and startup bubble.
Central banks acts as socialism for the rich. Enhancing income differences. Now all is paying for this mess through inflation.