The Physical Impossibility Of Death In The Mind Of Someone Living

Two comments: First, while the denial analogy helps to focus the analysis on a powerful, if unorthodox factor, it also imputes a personality to banks that goes beyond mere legal personality. Whose ego needs defending? If denial is a composite function of the culture of governance, i.e., of the individual egos of the bankers who call the shots, then do we want to incentivize their cathexis upon mere objects of material value, i.e., assets? (Courts tend not to award damages for infliction of emotional distress for loss of valuable objects.) Moreover, do we want to validate this cathexis upon objects by treating it as a species of survival instinct?

Second, while it’s true that we ordinary individuals have a hard time confronting our mortality, if only enough to prepare our wills and other end-of-life documents, the fact is that there are plentiful aids to getting the job done at relatively little or no cost. In most cases, once an individual decides to take the step, doing it right shouldn’t be a huge undertaking. Not so much for the banks, I take it.

Well the shark has in fact been replaced. The new one has a rather different facial expression, which may or may not affect metaphor creation.

I had a relative at a branch of one of the firms that tried to destroy the world, and locally there seemed to be limitations (brokers working crazy shell games turfed relatively quickly before huge things happened), but that didn’t prevent people in New York from sinking the whole operation.

Naive questions:

How do these banks assign the task of compliance on this issue? Is it a bonus-worthy issue? Why would this be denial instead of chore-avoidance?

What I imagine is Top Guy giving the chore to Flunky because he doesn’t care much: there’s no personal cost to Top Guy of course, and denial is neither here nor there. Flunky, on the other hand, might rather be doing money-earning things and might be happy to dispense with the chore with as little work as possible.

Correction/illumination happily accepted.

“Its a C level post that’s either on par with CFO-COO or reports to that level, so pretty heavy hitters. ”

You should try being the one at the table saying “yes, I see we could make a lot of money by doing that, but I don’t think it’s entirely consistent with regulatory requirements.” I speak from experience.

Re CCOs: when John Braithwaite was doing work on regulation in the pharmaceutical industry, he met more than one senior executive who was introduced to him as the Vice President Responsible For Going To Jail. (Good pension, I guess.) But that’s pharma, and this was back in the 80s.

Re the OP, I guess the difficulty is planning for downside risks that are too big to mitigate & hence too big to plan for – if you took them seriously you’d end up charging into the boardroom like this guy.

@9 Yes. Chief Compliance Officer is usually on the same line of the org chart, which is to say reports to the CEO or Chairman or whatever it is they have.

@8 Layman – Yes, to be sure. But its better to have been the guy saying “we need to figure out how to do this to get it inside the regs” then be the guy coaching the CEO on what the answer should have been ahead of his congressional hearing. The pendulum will eventually swing back, but right now the bias is towards coloring inside the lines rather than outside of them – +$100B of industry fines will do that (talk among yourselves as to whether it should have been more or a mix of fines and jail).

Interesting article, though I’m not sure (I might have misunderstood) on the living will comparison. Afaict It’s not really a living will in terms of (1) laying out very general terms for end of life, treatment or no treatment. In this case the no treatment decision has been made for them, or (2) in the sense of appointing an administrator to make these decisions for you.
It seem s much closer to a will will, ie dividing up inheritance among your brood. In that case, and I’m perhaps missing something here, what are the internal, institutional politics at play ? If you’re making decisions on subsidiaries viability, who gets what from remaining resources, and havin g to think seriously(which could have negative real world effects) about financial weaknesses, isn’t this closer to a plain old distributional and political issue (much like writing up your inheritance will)?

If a bank is too big to fail, but someone’s determined to break it up, the likelihood is that the shareholders are going to be somehow insulated, right?

I would also point out that Compliance is the second line of defence and Audit the third. Audit usually talk to the Regulator regularly, and act on behalf of the Regulator to report progress on any issues that the Regulator has identified in one of their frequent inspections.

The Regulator has the power to remove any member of a bank, and they do do this. If you work in a bank, it is career limiting, if not career suicide, to get on the wrong side of the Regulator.

Ah, thanks Phil. That clarifies it.

A more rational grounds for denial is that in the real disasters, no one can tell who will suffer and who will escape. Perhaps in the next banking crisis, we will see lots of bankers punished, but probably not the ones who were most guilty. Indeed, part of the reason for the softness of the bailouts was the empathy felt by the central bankers and regulatrors for those who would suffer if banks were shut down despite being
(a) individually innocent in many cases
(b) very like the central bankers and in terms of personal background
Of course (b) is crucial. Central bankers and regulators are much more hardnosed when the victims are factory workers or nurses.

@25
empathy felt by the central bankers and regulatrors for those who would suffer if banks were shut down despite being
(a) individually innocent in many cases

Huh? Do you mean individually guilty? And in any case, guilty of what? Sure, there plenty who were guilty of arrogance, bastardry, greed, psychopathy and hubris but those things aren’t crimes, in the criminal law sense of the word. Finding bankers were guilty of criminal crimes was much more difficult.

I recall “I’ll be gone, you’ll be gone.” And, I wonder. About the uses of “denial”.

I almost certainly do not understand banking or finance in the way those who think “living wills” are a vitally useful tool of macroprudential regulation do.

It seems to me that bankers (using the term very loosely for a broad and varied class of financial intermediaries) are selling insurance and volatility makes insurance valuable; volatility can also change who gets paid from insurance — insurer or insured (or beneficiary). The intermediaries do not have to be either risk-averse or risk-lovers to see that, as intermediaries, they benefit from increased risk. A financial sector that is volatile and even fragile could be that much more profitable for its cadre, because it makes what they sell — insurance, trust — more scarce and valuable and the payoffs from either selling insurance or collecting in adverse circumstances that much greater.

This whole argument is nonsense.

1. Its not as though regulators have told bankers to come up with a living will and nothing else. In the UK, banks do nothing but adapt to regulation. There are lots and lots of them, and they spend all their time and money implementing them. Senior bankers talk to regulators all the time, and I suspect the discussion is along the lines of “I cannot implement all your regulations at the same time because there are too many. Which ones do you want me to do now and which later?”

2. Other regulations make a living will an irrelevance. A major purpose of the industry regulations is to make a bank going bust an easily survivable event.

3. The argument here seems to be based round bankers being bad and regulators being good and wise. This is not always the case. Often regulators do not understand the consequences of their regulations, and bankers have to tell them.

4. Joe Nocera and Bethany MacLean wrote an excellent book on the banking crisis “All The Devils are Here”. One interpretation of the banking crisis is that western governments used inflating property prices as a pyramid scheme to stimulate growth and hence obtain re-election. In this view, bankers are messengers not the cause of the crisis.

5. I’m sure none of this is of any interest to most participants here who just want another excuse to Beat Up The Bad Guys.

“Aligning incentives” is pretty much always wankery.

What I am trying to wrap my mind around — or unpack, to mix metaphors reflecting my confusion — is “denial” in this context.

The banker is playing a game on the presumption that the game will continue. Even if she is playing fast and loose enough to erode the basis for the game itself, calculating on winning rests on the game going on. And, if the banker loses and the game goes on — situation normal, the system can handle players losing the game. Partly because if the game goes on, wins balance losses. The political problem arises because the game is one that holds the economy together. If a player’s losing breaks the game, that is a different kind of disaster. Losses can become a blackhole.

“Living wills” themselves seem like a form of denial that the behavior of the players can break the game.

Probably not expressed very well. I am uncomfortable with the individualism I see in the OP, but not sure what to do with it.

BW@33
I think the problem is its hubris chained to denial.

To take a simple example – no-documentation mortgage loans. This wasn’t “new” when it was introduced in 2003/2004 to the acclaim of many for how ‘easy’ it made the mortgage and refinance process. It had been tried before and failed before and I’d be prepared to bet that every bank that ultimately decided they’d use that product – somewhere at the table was someone who said “this is stupid, we’ll get killed”. As the ex-CEO of Citi said however, when the music is playing you have to dance – so bank after bank, even some that were historically quite sound undewriters, joined the bad decision.

Mozillo at Countrywide, if he wasn’t the first, he was among the first to offer these loans. His “reward” for launching a decision that would certainly contribute to the global financial crisis was to have his company acquired by BofA – essentially at Fed gunpoint, for a massive premium to what it was worth. Even if he had been take out for “zero” which was still a premium to what Countrywide was worth, he had already harvested several fortunes in option gains and salary during his tenure.

There was no denial on Mozillo’s part, it was all hubris. He knew he’d either ‘win’ the game or someone would buy him out to stop him from winning and all but said so on several occasions. At some tipping point in fact, it was impossible for him to lose since he’d made several fortunes in the effort – whether he broke the game or not didn’t matter to him. The product he championed is also inherently hard to regulate against since its essentially legislating against making bad underwriting decisions.

Where the denial lives is thinking that living wills, Dodd-Frank, the CFPB and all the rest will even remotely prevent the replication of this exact scenario at some point in the future when a sufficient number of today’s principals have forgotten the consequence of no-doc loans. The denial is in the hubris that it “will be different this time” because of X, and even if it isn’t “I can get out before it falls – a la Mozillo.” That’s where the individual denial lives – in the hubris that you’re smarter and the rules won’t apply.

> The product he championed is also inherently hard to regulate against since its essentially legislating against making bad underwriting decisions.

And that’s why I think all of this moralizing and pontificating is a waste of time. Banks underwrite to protect their own interests, not those of borrowers, and not those of society as a whole. We collectively suffer if sufficiently many sufficiently large banks do a bad job at this. We can either break them up, or make them buy loads of insurance. Everything else is a waste of time.

I can’t help but think that our nearly a decade long effort at finding something, anything that we can call “fraud” or at least credibly enough threaten to call fraud to get a settlement, even if the fraud or purported fraud in question isn’t causally related to the actual harm we’re dealing with, is a sort of societal effort at avoiding this bottom line. Scrutinizing thousands of hours of sales conversation to try to find something somewhere that amounts to a questionable material statement is a waste of time, unless you’re an investor looking to find some justification for shifting your loss onto another entity. Calling out the improper notarial practices of some low wage employee who’s job is to sit and sign business records all day and attest that the business records in front of him are in fact the records of the business that employs him is a waste of time unless you’re a court protecting the integrity of the legal process (which is entirely valid, but not exactly going to watchdog us against the next inflationary bubble and resulting collapse), or a homeowner in foreclosure trying to advance a technical defense.

@35 – Mozillo wasn’t “in denial.” He’s a crook. The denial here is by people who want to excuse criminal behavior with psychobabble.

“The denial is in the hubris that …“I can get out before it falls – a la Mozillo.” ”

That’s not denial and it’s not hubris, it’s an accurate forecast of events.

“when a sufficient number of today’s principals have forgotten the consequence of no-doc loans.”

The principals won’t forget the consequence. They keenly remember the consequence – they or people like them got very rich.

While it’s all good fun to roll around in a bit of Gladwellesque ‘splaining, I don’t think we need to do any beard-tugging psychological analysis when good old-fashioned profit maximization covers things quite nicely.

US banks have, for a very long time now, made higher profits over time than they otherwise might by shifting the risk of very large market/system disruptions onto the taxpayer via the government.

If a bank is to present a credible plan for an orderly wind-down, then the bank must first be operating in a manner which makes significant assets available that might otherwise be marked “profit.”

The presentation and rejection of these plans is simply a negotiation, in which the banks and the government are trying to agree on a disaster threshold of sorts; the minimum level of financial meltdown at which the government is still willing to commit its own (i.e. the taxpayers’) assets.

That was fairly inconsequential. The regulations assumed a paper based system while the banks had switched to a computer based system. What happened was the banks stopped generating a pile of documents no one was ever going to look at or use. The information was there and accessible when needed.

Prosecuting for technical infringements of outdated regulations by junior staff, which had made no real difference would not seem terribly just. Especially if it had been quite well known that the regulator hadn’t been enforcing the rule.

Barry- Imagine a counterfactual world where absolutely everything happened exactly the same, except no “robosigning.”

The same financial crisis still happens. The same documents still get signed. The same people still go through foreclosure.

Nothing substantive changes.

Its a sideshow. Its legitimate for the courts to care, because it still speaks to the integrity of the legal process. But if your worry is the financial crisis that resulted from the housing bubble, this is pointless. And in a way, its a telling bit of pointlessness- its a reminder that no matter how much certain political factions talk about caring about systemic issues, they’re not emotionally capable of grasping politics except in the context of specific, identifiable groups of people who can be accused of lacking virtue, and blamed.

Brett Dunbar @ 48

That’s some trolling you’re doin’ there. The other Brett will be jealous.

I see all of this as an almost insolvable problem of innovation and technology.

Like evolution, most innovation will fail. Worse, it may take 5-10 years before it’s obvious that an innovation is fatal. When we had a culture where transmission of ideas took 20 years, we could handle such failures, which might take out companies, but not whole industry categories. Now, if someone has an idea that appears successful, you either adopt it with 5 years, or you’re fired and your company bought out by someone who *has* followed the innovatation.

When people were praising Canadian banks in 2008 for avoiding the worst of the crisis, I was remembering hand-wringing in the industry about how Canadian banks were doomed (or at best irrelevant on the global stage) because they were ignoring the innovation necessary to survive the modern world of banking. If the US had managed to keep the bank game rolling another 2-3 years, the Canadian banks (probably with new American owners) would likely have been right there with them.

They dodged a bullet that time, but perhaps the next time the innovation succeeds and their conservatism dooms them. (It’s easy to forget that every *successful* innovation has its chorus of people predicting its doom as well.)

In other words, if you don’t play, you lose automatically and are called an idiot for ignoring progress. If you do play, you’ll probably lose anyway, but at least you were on the band-wagon with lots of company. And who knows, maybe you win.

And on the national scale, it’s the same. You can enforce conservatism (or like Canada did, have a conservative culture), but that simply means that in a global environment, you’ll essentially become irrelevant when innovations succeed and you’ve failed to adopt it, and when the innovative countries eventually *do* crash, they take down the world, so you end up paying the price for their innovation, but not getting the benefits.

In a regional, less technological world all of this occurred in slow motion, so innovation had a longer chance to fail before it took over the industry. Not so any longer.

(And this applies to almost any industry. I’m waiting for the first truly catastrophic agricultural failure, as most technologically conservative practices have died with the companies that didn’t ‘keep up’, except for boutique operations, which will not feed the world in the event of an innovation failure that takes a decade to detect.)

In other words, you can’t win, you can’t break-even, and you can’t even get out of the game. Thanks, technology.

robotslave @43 Phil Koop @22

@43 Yes. +1. Whatever.

DD’s quote from the NYTs piece: “There are a few possible explanations for why the banks have collectively failed, thus far, to file credible living wills.” I think the key phrase is “thus far.” If the banks believe they are in a negotiation, then this is exactly what they should be doing unless they think their negotiating position would substantially deteriorate over time. It would be odd indeed if the senior management of all the banks, assumed to be operating independently, suffered from the same psychological malady producing the same insufficient response. Rather, hasn’t waiting out the regulators and prosecutors been a pretty effective strategy thus far? Now if the banks are broken up for an insufficient response by October or to whenever the deadline is extended then bravo DD. But I’d be happy to make a side bet.

Phil Koop @22

I’d be very interested in your reactions to any posts following your original comment given your professional perspective. In particular, any insight into the dynamic between the banks and the regulators in the US (I believe that was what the OP was about) in context of negotiating the misnamed “living wills.” Thanks in advance.

The banks were best placed to assess the risk of the mortgages they were originating. They slightly underestimated the default risk. Basically they assumed that the next to bottom tier would normally pay out in full. The defaults would be largely limited to the bottom tier. However the default level of the high risk was higher than had been historically the case. Some of this was due to commission based sales staff understating the risk to their employer. The banks were insufficiently cautious.

@58 I think this is bullshit. Banks gambled that they could reap larger profit from high-risk loans and then rely on additional funds from tax-payers when the crap packages found fewer and fewer buyers. That’s my own crude understanding of what happened.

I took a quick look at a variety of papers on the Canadian banking system and at Glass-Steagall because that’s how (we) Canadians usually construct our superiority, such as it is, over American practices. There’s a predictable political tilt to the conclusions. I thought this WSJ piece raised some provocative questions http://www.wsj.com/articles/SB124165325829393691 This passage jumped out at me:

“Canadian banks are not compelled by laws such as our Community Reinvestment Act to lend to less creditworthy borrowers. Nor does Canada have agencies like Fannie Mae and Freddie Mac promoting “affordable housing” through guarantees or purchases of high-risk and securitized loans. With fewer incentives to sell off their mortgage loans, Canadian banks held a larger share of them on their balance sheets. Bank-held mortgages tend to perform more soundly than securitized ones.

In the U.S., Federal Housing Administration programs allowed mortgages with only a 3% down payment, while the Federal Home Loan Bank provided multiple subsidies to finance borrowing. In Canada, if a down payment is less than 20% of the value of a home, the mortgage holder must purchase mortgage insurance. Mortgage interest is not tax deductible.

The differences do not end there. A homeowner in the U.S. can simply walk away from his loan if the balance on his mortgage exceeds the value of his house. The lender has no recourse except to take the house in satisfaction of the debt. Canadian mortgage holders are held strictly responsible for their home loans and banks can launch claims against their other assets.”

As a consumer of banking products and as advocate of responsible capitalism (yes, there is such a beast) it seems that an improved and probably simplified regulatory regime is required. The burden is not exclusively on the banks. I know a number of people speculating successfully in the US housing market. If I elect to borrow 300k using an ARM and then am forced to sell the house at a loss, that’s on me entirely. The US problems are, in part, illustrated in the WSJ article. Political forces from the left and right complicate the decision-making process. Mrs. kidneystones and I spent nearly a decade in a tiny ancient apartment with two kids saving the money for our first home. I have absolutely zero sympathy for get-rich quick profiteers on either side of the table who ‘go big’ and then expect the rest of us to pick up the tab when reality bites.

The old axiom that the cost of housing should never exceed 25% of household income serves very well and I can’t for the life of me understand why this kind of basic economic lesson isn’t used to teach math and life lessons in schools.

When mortgage bankers bore the risk they didn’t do this sort of shit. Securitization and the ability to pass the risks known to insiders to suckers who believed that AAA actually meant something made the crisis.

Tom West @ 52: I see all of this as an almost insolvable problem of innovation and technology.

Or a problem of knowledge, uncertainty and learning . . . which I suppose is much the same thing. An interesting comment.

Sometimes on CT, the question comes up, “What is neoliberalism? [other than whatever it is you (I) do not not like]?” Well, this policy of financial deregulation and consolidation is neoliberalism in action. At its ideological core is the revival of the idea of the self-regulating market economy, an idea that dominates mainstream economics.

The self-regulating, self-stabilizing economy is the central idea of classical liberalism; the neo comes into it, for economists, because now a canonical list of “market failures” justify (sic!) government interventions to shape or discipline the self-creating emergent market institution.

In some ways, Polanyi would recognize the current iteration of claims for the self-regulating market as same old, same old. As a set of ideas, it is not so much a static set of doctrines as a dialectic, held in tension in a dialogue between often somewhat dogmatic libertarians exemplified by Milton Friedman against a range of soi disant skeptical mainstream scholars who bring to analysis the canonical list of market failures and some consciousness that the analytic models from theory fall somewhat short when purposed as maps of reality. (Not that we should ever interpret the contradiction between theory and reality as disproof of the theory and discard the theory! Heaven forfend!)

Friedman acknowledged externalities and other market failures, in theory, but argued that the cure was often worse than the disease in practice, that government intervention and regulation in its clumsiness could be more costly than simply leaving the market to fall short of theoretical perfection.

Accepting Friedman’s frame of the economy as a system of self-stabilizing markets seeking homeostatic equilibrium, an array of mainstream economists argue imperfection and its cures, but usually from the standpoint of making the imperfect market economy more like the perfect market economy of their theoretical conception, and the guiding light remains laissez faire and an openness to competition as a magical cure-all, despite the accumulated list of market failures justifying (sic semper) regulatory intervention.

The neoliberal argument against regulation — particularly a regulatory regime that relies on elaborate structuring of the industry regulated, defining its products and methods of operation — is that such regulation necessarily retards and constrains innovation. As technical possibilities advance, the industry will have to restructure to take advantage of such technical possibilities, aka innovate. But, the regulators, to have the necessary transparency and moral certainty need to keep the regulated industry in a static box where things are well and traditionally defined. Only the freedom of the entrepreneurial capitalist enables the experimental testing and discovery necessary to develop the new forms of industry and commerce. So, regulation must be weakened or abandoned so that the hundred flowers of innovation may bloom in that fertile garden of capital, the free market (though all the wonks agree that an esoteric list of “market failures” justify some regulatory nudging, cleverly devised to take advantage of the undoubted power of markets).

In neoclassical economics, the formless market is the only box the genius of innovative capitalism needs as competition between rational entrepreneurs guides those John Galts in their pursuit of their selfish interests to further our common interests in a cornucopia of innovation and progress.

Trader Joe@8 Two words, “London Whale”.