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Comment by Tuna-Fish | Hacker News Reader

I've been saying this for a while now, including on HN.

> The reason I tend to believe this scenario is because it's completely consistent with their behavior.

Another reason to believe this is that it is something that has happened often in the past before modern banking regulations. Seriously, read history of banking in Netherlands or England, the idea:

"Oops, I just lost my customer deposits. I'm probably going to get lynched now. But hey, if I just hide this until I make the loss back from fees/reckless trading, I'll be able to pay my customers back and avoid being lynched. It's a win-win."

Is something that at least hundreds, if not thousands of bankers have had over the course of history. As far as we know, it never works.

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As far as we know, it never works.

There's no way to know how often this sort of thing has happened in the past. We only find out about the cases where a bank is not able to earn back it's loss and runs out of cash. At that point they have to admit they're insolvent.

If the bank was able to earn back the money and become solvent again, then no one outside the bank would know it happened and the bank would have every reason to cover it up to save its reputation.

As far as we know, fractional reserve works within some range of standard deviation.

> As far as we know, it never works.

Only because when it does work, you never find out.

Im not sure about banking but its worked for a couple local bookies I know

> Oops, I just lost my customer deposits. I'm probably going to get lynched now. But hey, if I just hide this until I make the loss back from fees/reckless trading,

See also: loss aversion as a cognitive bias resulting in excessive risk taking http://en.wikipedia.org/wiki/Loss_aversion http://blog.usabilla.com/how-loss-aversion-and-risk-influenc...

Also the London whale http://en.wikipedia.org/wiki/2012_JPMorgan_Chase_trading_los... Nick Leeson http://en.wikipedia.org/wiki/Nick_Leeson et al.

> As far as we know, it never works.

You might not know if it does work, but due to the cognitive bias mentioned above, odds are against it.

> As far as we know, it never works See also, the fate of Barings Bank http://en.wikipedia.org/wiki/Barings_Bank

One of my favorite bits of commentary on financial matters comes from that. Some laconic British commentator was referring to Nick Leeson as "that chap who made money hand over fist for Barings Bank, until he didn't".

> As far as we know, it never works.

That's not true at all. Almost every bank in the western world did this in the past six years. They became technically insolvent due to losses in the housing bubble, but through, for example, huge piles of free money given to them by the U.S. government, were able to keep on trucking until they could earn enough money and get back into solvency. That was the entire theory behind the bailout.

Not all banks that were insolvent managed to keep on going; many failed. But many survived.

So this strategy works perfectly well if you have the ear of the Federal Reserve or another entity that can provide very large amounts of money. It works well when the amount you are insolvent by is small compared to your revenue stream. It does not work well if you are a Ponzi scheme operator and if you have stolen ALL of the money.

"Complain and get a bailout" is a different strategy than "hide it and hope" or "make risky bets".

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