Comments on: What would happen to investment banks in a crisis? http://blogs.reuters.com/felix-salmon/2012/03/16/what-would-happen-to-investment-banks-in-a-crisis/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Danny_Black http://blogs.reuters.com/felix-salmon/2012/03/16/what-would-happen-to-investment-banks-in-a-crisis/comment-page-2/#comment-37104 Tue, 20 Mar 2012 09:57:24 +0000 http://blogs.reuters.com/felix-salmon/?p=12484#comment-37104 MrRFox, yeap because Northern Rock had done a great job for the UK.

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By: MrRFox http://blogs.reuters.com/felix-salmon/2012/03/16/what-would-happen-to-investment-banks-in-a-crisis/comment-page-2/#comment-37103 Tue, 20 Mar 2012 09:26:44 +0000 http://blogs.reuters.com/felix-salmon/?p=12484#comment-37103 Um,… no, Mr. Black – a Northern Rock solution would have been more fair, and would have been seen to be so by the general population. But that would have meant the end of a lot of 8-digit annual paydays on Wall Street – and we can’t have that, can we?

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2012/03/16/what-would-happen-to-investment-banks-in-a-crisis/comment-page-2/#comment-37096 Tue, 20 Mar 2012 06:02:20 +0000 http://blogs.reuters.com/felix-salmon/?p=12484#comment-37096 beccanyc, there is a fundamental difference between taking an investment from Buffet and taking from the gov in terms of signalling. An investment from the “world’s greatest investor(TM)” says we are a great bet and gonna be around a while, an investment from the government says we are on the way to nationalisation, sell now whilst the shares are not worth zero. Thats why when TARP rolled round the Treasury forced all the banks to take an investment on identical terms even the ones that arguably didn’t need it – Wells and JPM for instance.

There was an interesting article on the AIGFP negotiations. I am quoting from memory so the details may well be wrong but it is more or less correct. Two of the banks offered a 2% haircut if the others agreed but one of the two was French and the french regulator vetoed their offer. I guess they could have extra-legally enforced a writedown like they did with the bondholders of the auto firms but it is hard to see how that would have achieved anything except more uncertainty about bank futures.

As for the Vanity Fair article, it would be interesting to see what was actually said and in what context. If he was asked narrowly about TARP investments or these swaps then arguably he is correct. But any of the other interventions? GS would have survived the disappearance of the credit wrap for agency MBS? The sudden disappearance of the CP market? China making a cash loss of around 1/3 of its fx reserves, Russia something 1/4? The knock-on disruption to the housing and treasuries market? Hard to believe he would make that claim and harder to believe that a competent journalist would not press him on it.

As for Paulson, Geithner and their team, I think that under the circumstances they did the best they possibly could and a pretty good job at that. One only has to stare across the ocean at the job that the mafia of the mediocre did in the UK to see what could have been the result….

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By: beccanyc http://blogs.reuters.com/felix-salmon/2012/03/16/what-would-happen-to-investment-banks-in-a-crisis/comment-page-2/#comment-37068 Mon, 19 Mar 2012 19:47:39 +0000 http://blogs.reuters.com/felix-salmon/?p=12484#comment-37068 “What people are worried about here is a generally too close relationship between big investment banks and the state (which I think is what’s meant by “conspiracy theory” here, although IMO that’s a bit dismissive), and it’s not unreasonable that they focus these concerns on the big investment bank which seems to have the closest relationships with the state.”

i think this is a pretty reasonable response to my posted comment. GS people are all over the place—not just Paulson, but also some of his support at Treasury, and now Dudley and Draghi. So if someone wants to investigate closely to decide if, based on facts, decisions were made during the crisis environment that were unfairly supporting GS economics, they should do so.

Personally, i think the AIG case is pretty clear—Paulson et al, in the midst of crisis made worse by the Lehman bankruptcy, did what they could to forestall an AIG bankruptcy. All market participants benefited, and in fact it’s at least likely that the economy was/is better off than it would have been without their actions. One can argue that the decision was made because of a desire to support GS—but given how little GS had to gain as an individual counterparty of AIG, and how much Paulson had to lose if in fact it was seen to be a GS-centric decision, that conclusion seems quite far-fetched.

If you were to argue that the lack of a ballsier approach by the government to negotiation was driven by a GS-centric view, again i’d disagree for the reasons stated in my original post.

but i believe that the negotiation should have happened, and GS and others should have suffered some direct economic damage from the unwind of the trade via the Treasury.

and with respect to the weekend during which GS and MS violently joined the community of institutions subject to Fed oversight and regulation in return for access to the discount window: Bernanke et al should have taken Mack and Blankfein to the cleaners on that one. getting 15c out of GS on the AIG book is nothing. Taking 49% of corporate equity in return for giving access to liquidity at the Fed….that would have taken balls, but it would have been a helluva show. I don’t know why Buffett got a better deal out of GS than Treasury/Fed did. I like to think i think it doesn’t have much to do with Paulson, who i think understood how dire the situation was generally and wanted more than anything for the country’s economic system to survive.

That said, Treasury took a bat to AIG shareholders’ heads, to Lehman shareholders’ heads, and to Bear shareholders’ heads. So i dunno.

One other thing: when GS leadership (Blankfein and Cohn), at the height of economic pain in our country, claimed that they never needed government support (Vanity Fair interview 3/09), they were lying in a way that was so bald-faced as to be insulting to anyone with a brain. Their lack of humility and gratitude is the key reason why they are now suffering reputational damage, and why GS won’t be able to get out of the way of this avalanche of bad PR until they’re gone.

In other words, GS might not have done anything so wrong during the crisis, and the facts don’t support the heavy criticism they are singled out for every day for years now……but arrogance kills. Every time.

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2012/03/16/what-would-happen-to-investment-banks-in-a-crisis/comment-page-2/#comment-37062 Mon, 19 Mar 2012 17:22:50 +0000 http://blogs.reuters.com/felix-salmon/?p=12484#comment-37062 MrRFox, good to see after a break that the brain trust is back.

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2012/03/16/what-would-happen-to-investment-banks-in-a-crisis/comment-page-2/#comment-37061 Mon, 19 Mar 2012 17:22:04 +0000 http://blogs.reuters.com/felix-salmon/?p=12484#comment-37061 Also I am moderately sure that in Sept TSLF was extended to include ABS of the sort GS had insured. In which case they would have been able to repo it. There used to be a spreadsheet of this sort of stuff floating around and it is possible I am confusing it with TALF which would be post Maiden Lane 3

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By: MrRFox http://blogs.reuters.com/felix-salmon/2012/03/16/what-would-happen-to-investment-banks-in-a-crisis/comment-page-2/#comment-37060 Mon, 19 Mar 2012 17:06:21 +0000 http://blogs.reuters.com/felix-salmon/?p=12484#comment-37060 “You seriously suggesting that saving GS was even on Paulson’s reasons for intervening with AIG?” (D.B.)

Lovely to see you again, Mr. Black. No matter what self-serving, exculpatory assertions he makes, we’ll never actually know what was in Paulson’s mind, will we? He did have a clear conflict of interest though. That’s the beginning and the end of it, ethically speaking.

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2012/03/16/what-would-happen-to-investment-banks-in-a-crisis/comment-page-2/#comment-37059 Mon, 19 Mar 2012 16:46:16 +0000 http://blogs.reuters.com/felix-salmon/?p=12484#comment-37059 dsquared, you seriously think that if it has been loads of Standard Chartered alumni – am trying to think of a vaguely serious bank that was not on the AIGFP swap list – that they would or could have behaved differently vs AIG? You seriously suggesting that saving GS was even on Paulson’s reasons for intervening with AIG?

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By: dsquared http://blogs.reuters.com/felix-salmon/2012/03/16/what-would-happen-to-investment-banks-in-a-crisis/comment-page-2/#comment-37058 Mon, 19 Mar 2012 15:45:46 +0000 http://blogs.reuters.com/felix-salmon/?p=12484#comment-37058 “so i think the GS/AIG story is not really about GS, and the focus on GS to the exclusion of others is pretty darn unfair”

I don’t think it’s particularly unfair. If there were dozens of Credit Suisse alumni working in the highest level of the US government, and if the Treasury Secretary who negotiated the deal was a former CEO of RBS, and if that Treasury Secretary had held unminuted, off-the-record meetings with Nomura, then there would be much less focus on GS in this case. What people are worried about here is a generally too close relationship between big investment banks and the state (which I think is what’s meant by “conspiracy theory” here, although IMO that’s a bit dismissive), and it’s not unreasonable that they focus these concerns on the big investment bank which seems to have the closest relationships with the state.

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By: KenG_CA http://blogs.reuters.com/felix-salmon/2012/03/16/what-would-happen-to-investment-banks-in-a-crisis/comment-page-2/#comment-37054 Mon, 19 Mar 2012 14:33:21 +0000 http://blogs.reuters.com/felix-salmon/?p=12484#comment-37054 I didn’t focus on GS, I just gave them as an example of what an investment bank would do in a crisis. Which they did.

And in all my comments on this topic, over the last few years, I have never suggested any kind of conspiracy that drove the lack of negotiation, only incompetence. The government/Fed should have negotiated a discount, even if it was only 15%, for 15% of what they were risking was still a lot of money.

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