Comments on: Loans aren’t better than securities http://blogs.reuters.com/felix-salmon/2009/08/21/loans-arent-better-than-securities/ A slice of lime in the soda Thu, 23 May 2013 23:51:59 +0000 hourly 1 http://wordpress.org/?v=3.4.2 By: GaryD http://blogs.reuters.com/felix-salmon/2009/08/21/loans-arent-better-than-securities/comment-page-1/#comment-5864 GaryD Sun, 23 Aug 2009 21:58:34 +0000 http://blogs.reuters.com/felix-salmon/2009/08/21/loans-arent-better-than-securities/#comment-5864 I'm looking forward to the day when you call for the "disaggregation" of The Economist. I’m looking forward to the day when you call for the “disaggregation” of The Economist.

]]> By: fxtrader http://blogs.reuters.com/felix-salmon/2009/08/21/loans-arent-better-than-securities/comment-page-1/#comment-5831 fxtrader Sat, 22 Aug 2009 10:29:22 +0000 http://blogs.reuters.com/felix-salmon/2009/08/21/loans-arent-better-than-securities/#comment-5831 Felix, of course, bad assets are bad assets, regardless of whether they're loans or securities. So in principle, losing money on loans or securities will lead to the same outcome. Yet in reality, there's the issue of accounting - which is crucial as accounting dictates when you have to swallow losses. And critically, securities tend to be marked to market, while loans booked to maturity (of course, if the loan default you have to recognise it). If you go back and look at the S&L crisis of the 80's, the "bad" loans where those made before the Fed hiked up rates - in effect the S&L where lending at 5-7% while paying out 10+% on deposits - not a recipe for staying in business for long. Their way out was to keep lending like crazy to inflate the asset side of their BS so that overall they would look profitable. Then of course, as in any lending bubble, underwriting standards slipped and loans soured. But the point is that it took almost 10yrs from the initial "bad" loans to actually bankrupt the S&Ls. Felix, of course, bad assets are bad assets, regardless of whether they’re loans or securities. So in principle, losing money on loans or securities will lead to the same outcome. Yet in reality, there’s the issue of accounting – which is crucial as accounting dictates when you have to swallow losses. And critically, securities tend to be marked to market, while loans booked to maturity (of course, if the loan default you have to recognise it). If you go back and look at the S&L crisis of the 80′s, the “bad” loans where those made before the Fed hiked up rates – in effect the S&L where lending at 5-7% while paying out 10+% on deposits – not a recipe for staying in business for long. Their way out was to keep lending like crazy to inflate the asset side of their BS so that overall they would look profitable. Then of course, as in any lending bubble, underwriting standards slipped and loans soured. But the point is that it took almost 10yrs from the initial “bad” loans to actually bankrupt the S&Ls.

]]> By: Ken http://blogs.reuters.com/felix-salmon/2009/08/21/loans-arent-better-than-securities/comment-page-1/#comment-5820 Ken Fri, 21 Aug 2009 21:24:53 +0000 http://blogs.reuters.com/felix-salmon/2009/08/21/loans-arent-better-than-securities/#comment-5820 MattF, I believe the classical definition is that a bank makes money by borrowing short and lending long, and setting the interest rates accordingly. It's surprising how many different ways have been invented to mess that up, especially since (with prudence and moderate backing by the FDIC) it's relatively easy money. But I also wanted to hit the real meat of the story. Is Gov. Perry of Texas aware that furriners are taking over one of his state's banks? MattF, I believe the classical definition is that a bank makes money by borrowing short and lending long, and setting the interest rates accordingly. It’s surprising how many different ways have been invented to mess that up, especially since (with prudence and moderate backing by the FDIC) it’s relatively easy money.

But I also wanted to hit the real meat of the story. Is Gov. Perry of Texas aware that furriners are taking over one of his state’s banks?

]]> By: MattF http://blogs.reuters.com/felix-salmon/2009/08/21/loans-arent-better-than-securities/comment-page-1/#comment-5813 MattF Fri, 21 Aug 2009 19:47:53 +0000 http://blogs.reuters.com/felix-salmon/2009/08/21/loans-arent-better-than-securities/#comment-5813 Well, OK, but-- here's a question... What's your 'model' for how a bank makes a profit? Is there something distinctive about a 'bank', or is it just a collocation of dollars and people? Does a bank make money principally by charging fees for services? Or by holding assets whose value increases? Or by lending capital at some rate of interest? Or... what? Well, OK, but– here’s a question… What’s your ‘model’ for how a bank makes a profit? Is there something distinctive about a ‘bank’, or is it just a collocation of dollars and people? Does a bank make money principally by charging fees for services? Or by holding assets whose value increases? Or by lending capital at some rate of interest? Or… what?

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