The Physical Impossibility Of Death In The Mind Of Someone Living

by Daniel on April 21, 2016

I have a piece up on the New Yorker blog, on the same theme as Damien Hirst’s 1991 shark-in-formaldehyde artwork[1], as applied to big banks and their remarkable inability to write contingency plans for what they would do if they needed to declare bankruptcy, despite being point blank ordered by the regulators to do so.

It’s actually in my opinion, the single most toxic aspect of the culture of big banks. Greed and dishonesty are all very bad[2] but they are to a large extent self-limiting processes. Greedy people have loss-averse utility functions, which limits their willingness to risk total destruction for gain. Dishonest people can do a lot of damage, to their employer and its customers, but there is usually at least a weak incentive for the bank to weed them out. Gamblers and the congenitally risk-loving can pile up the losses, but they tend to flame out quickly. Although all of these personality types can persist in a big bank in equiibrium, and their presence is more than enough to account for what John refers to as the ongoing tax loss from the rest of the economy to the financial sector[3], it’s very rare that someone will have both the right combination positive qualities to be given control of a large bank, and the right combination of greed, dishonesty and risk-appetite to blow it up. To get that sort of result you need something stronger.

What you need is denial, one of the most powerful psychological forces known to man. The cultural problem that regulators need to worry about is the tendency to avoid thinking about important financial risks simply because the consequences of them are so nasty that powerful ego-defence mechanisms stop you from considering them[4]. As Zizek pointed out, as well as the three categories of knowns and unknowns from Donald Rumsfeld’s famous quote, we need to consider the unknown knowns – things which we do in fact know, but are not prepared to face up to. Things like death, or the possibility of a sustained and nationwide fall in nominal house prices.

[1] Which is itself apparently in the process of disintegrating and giving off toxic fumes as it does so, a metaphor I considered but rejected as perhaps too laboured.

[2] Pre-emptively: anyone who has been asked not to comment on my threads is still banned. If you are wondering whether your ban might have expired, it hasn’t. If you are genuinely unsure whether you are banned or not, tread carefully. In general the subject of whether I am an apologist for big banks has been done to death and I do find it irritating even when you’re not being excessively personal.

[3] I might disagree with estimates of the size of this tax loss relative to the useful services provided, because I think liquidity of investments is more valuable than John does, but that’s for another time.

[4] This is by no means confined to the financial sector. Think how many foreign wars have been launched on the basis of insufficient consideration of the downside risks. The “interventionist’s syllogism” – (A: this plan will not work B: in that case thousands of people will die and we can’t do anything to help them C: OK it will work then) is not valid, but something like it keeps getting used.



Dean C. Rowan 04.21.16 at 4:08 pm

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.


Quercus 04.21.16 at 4:34 pm

There’s probably some element of denial, sure, but it seems to me it’s more about a combination of hostage-taking (the banks deliberately want a failure to be so bad for everyone else that society has no choice but to bail them out, again.) and
‘heads I win, tails you lose’ where the bank decisionmakers get huge bonuses and respect if they guess right, and if they guess wrong, well, they’re still rich enough to not worry about where their next vacation mansion is coming from, even if the world economy is a smoking ruin. And of course safely having their bank/division be only the fourth-biggest/most profitable, and having to endure sneers and condescension from the risk-taking ‘winners’ would be worse than either.


this pea 04.21.16 at 6:09 pm

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.


Barry 04.21.16 at 7:11 pm

Daniel: “It’s actually in my opinion, the single most toxic aspect of the culture of big banks. Greed and dishonesty are all very bad[2] but they are to a large extent self-limiting processes. Greedy people have loss-averse utility functions, which limits their willingness to risk total destruction for gain. Dishonest people can do a lot of damage, to their employer and its customers, but there is usually at least a weak incentive for the bank to weed them out. ”

I disagree. It looks like the limitations don’t kick in until long after immense damage can be done, as we have already seen.

Remember, greed can be very ins notice it risks (‘blinded by gold’), and the corporate interests in weeding them out were certainly not evident.


The Temporary Name 04.21.16 at 7:37 pm

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.


Trader Joe 04.21.16 at 7:38 pm

I can think of only one instance – Nick Leeson of Barrings, where a single individual had the hubris and the organization lacked control, that a single set of actions could bring down a bank of any meaningful size.

More rationally, it requires a culture, time and the simultaneos actions of multiple individuals in concert both overtly and indirectly in concert with particular externalities to cause the type of damage that Living Wills seek to contain.

While I remain skeptical of the underlying models – the mere shift towards value at risk modeling and risk based capital requirements (and daily monitoring thereof) is already an affirmative step in changing the equation to one where its more likely that a shock will cause bank losses than bank losses will cause a shock.


The Temporary Name 04.21.16 at 7:51 pm

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.


Trader Joe 04.21.16 at 8:07 pm

Temporary Name

Large banks have a chief compliance officer. Its a C level post that’s either on par with CFO-COO or reports to that level, so pretty heavy hitters. Those guys no longer have “a couple of flunkies” they have hundred and sometimes thousands of staff monitoring things down to the transaction level and have sent tens of millions on the monitoring systems to do it.

Flawless – no. Massively more developed than in 2007 – Yes.


Layman 04.21.16 at 8:12 pm

“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.


The Temporary Name 04.21.16 at 8:15 pm

Trader Joe: by “C level” you’re meaning “chief level” by comparing it to CFO-COO?


Phil 04.21.16 at 8:19 pm

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.


Bloix 04.21.16 at 8:24 pm

Until 1970, New York investment banks had to be partnerships, and each partner had personal and unlimited liability for firm losses. The prestigious banks converted to the corporate form only slowly, in part because of the reputational advantage gained from bankers having skin in the game, but by 1999 all of them had become corporations. It was a lot tougher to be in denial when the risk being denied was bankruptcy and personal ruin.


Daniel 04.21.16 at 8:26 pm

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.

Denial is very much here and there. As I pointed out in the New Yorker piece, the letter of Dodd-Frank is that if these plans aren’t completed to the satisfaction of the Fed and FDIC, then the bank has to be broken up. And the presumptive Democrat candidate for President, Hillary Clinton, has publicly committed herself to saying that if the living wills can’t be made satisfactory, she would “absolutely” be prepared to see the big banks forced to sell assets and subsidiaries. This isn’t a bit of box-ticking – it’s a major level corporate survival issue of the sort that the CEO can only go so far in handing off. It will be the CEO who has to explain to the shareholders why they’re holding a yard sale of profitable operating subsidiaries.


The Temporary Name 04.21.16 at 8:33 pm

I read the New Yorker piece, and maybe it’s that I’m in denial. The other person I see those shareholders confronting is Hillary Clinton, and I’m having some problems seeing real follow-through.


Trader Joe 04.21.16 at 8:35 pm

@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).


Layman 04.21.16 at 9:19 pm

@13, agree, it’s hard to believe HRC would follow through. And, if she did, it’s hard to believe shareholders would actually punish the CEO. And if they did, the punishment would be to send him/her off with a fortune in their pocket. As long as executives avoid jail, they never lose.


Ronan(rf) 04.21.16 at 9:25 pm

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)?


Brett Dunbar 04.21.16 at 9:30 pm

Financial sector bailouts tend to be relatively cheap compared to the costs of a major financial firm collapsing. Indeed they often turn a profit, the AIG bailout had made the US about $23 billion by 2012. The economic problems were caused more by the freezing of the credit market, the direct costs of the financial crises were limited.

The UK explicitly guarantees a number of large financial institutions and imposes a tax based on the value of this insurance.


The Temporary Name 04.21.16 at 9:37 pm

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?


Dipper 04.21.16 at 9:45 pm

The whole thrust of regulation has been to take the banks out of banking. Mandatory clearing, reporting, MIFID, opening up of payment infrastructure etc all make the individual institution less significant. Banks now have to make their money through efficiency of operating the global banking infrastructure, not through occupying a privileged position that prints money for them. Ask your children in 30 years time which their favourite bank is and they will say “what’s a bank?”

The banking regulations look remarkably left-wing when taken in totality. I’m not sure why so many left wing journalists aren’t covering this more. Perhaps because because banker-bashing is just so much more fun than actually trying to understand what is going on.


Dipper 04.21.16 at 9:49 pm

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.


Phil Koop 04.21.16 at 11:22 pm

Ronan(rf) 04.21.16 at 9:25 pm

“Living will” is just glib catchphrase, not intended to be taken too literally. It also means something quite different in the American and European cases. What these cases have in common is that neither is a prudential regulation; they are not intended to avert disaster by curbing risk. Instead, they require plans that assume precautionary measures have failed. But neither relates to the sort of division of spoils you have in mind, which will remain in the jurisdiction of the courts.

The American requirement is for “resolution” – to assume that treatment has failed and the patient died. The analogy to a personal situation would be to require not merely a will, but advance payment for a funeral, arrangements for house insurance utilities to continue until the house is sold, cancellation of subscriptions etc – all the the things that next of kin are actually stuck with in real life. The problem comes when we depart the world of analogy and consider actual banking operations. Banks are required to assume simultaneously that they are sufficiently short of funds to be bankrupt and sufficiently flush to fund all of their post mortem commitments, and that is not such an easy needle to thread.

By contrast, the Europeans require “recovery”, meaning they are to assume that treatment is successful and the patient lives. The way this works is that banks are supposed to dream up a bunch stories ending in their deaths. Then, for each narrative, they are to identify “triggers” which would signal that they are in one of the tragic stories, together with specific actions that would allow them to recover – to change the ending and avert death.

The two approaches do much to reinforce stereotypes. The Americans merely want to make it safe for government to step aside and allow nature, red in tooth and claw, to take it’s course. The Europeans want to make intervention moot by eliminating the possibility of bank failure. The appalling thing to my mind, the thing that does the most to support Daniel’s interpretation, is that about a third of the European banks seem to have almost fully satisfied the ESA. Which is to say, about 2/3 of these banks couldn’t even succeed at a demonstrably viable creative writing exercise. What’s wrong with these people?!


Ronan(rf) 04.21.16 at 11:39 pm

Ah, thanks Phil. That clarifies it.


faustusnotes 04.22.16 at 1:54 am

I think another element of denial may be influence. You can see it in the big coal companies, which were investing heavily in coal on the assumption that a) China would grow forever and b) no one would intervene in their poisonous polluting businesses. They were clearly warned, and e.g. the divestment campaign was also warning investors in those companies. But they still did it. My guess is they would have done it anyway, but at least part of their reckless behavior must have been supported by their firm belief that they could buy their way out of the problem – through supporting denialist organizations and politicians, and by holding entire states (e.g. Wyoming, or Australia) to ransom with their economic clout.

It’s a lot easier to be in denial when you’re actively intervening in the public debate and regulatory frameworks to ensure that things favour you.


John Quiggin 04.22.16 at 2:29 am

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.


Sebastian H 04.22.16 at 3:54 am

The problem is one of institutional ethos at this point. The style of banker who is ascendant has changed over the last forty years or so. There are two ways of looking at ‘compliance’. Your compliance officer can be someone who limits what you do, or he can be someone who covers your ass when you do what you want. Right now too many banks are in “he should cover my ass” mode. I’m not sure what to do about it but some possible areas:

1) Bonuses when you had a long term equity share were supposed to align short term and long term goals. Now I’m not sure exactly how they function, but they don’t seem to be aligning any long term goals. That is probably a problem.

2) Lack of good metrics. Everyone thinks they need the “best and the brightest”, but there is a large bit of evidence that either they are somewhat crappy at figuring out who the best really are, or they are letting the best and the brightest snow them. It may be that we are using metrics which are only good at capturing short term successes, without measuring long term losses/risks. This may be closely related to the bonus issue. It may also be that banks are increasingly selecting for con-men styles (the importance of talking someone into a deal outweighs the importance of deals actually being good).

3. Regulatory arbitrage/capture.


Tabasco 04.22.16 at 4:09 am

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.


Sebastian H 04.22.16 at 4:44 am

“Finding bankers were guilty of criminal crimes was much more difficult.”

Even the clear cases of fraud that we know about weren’t pursued (the wholesale faking of notary signatures for example). So I don’t know that it is clear that finding bankers guilty of criminal crimes was difficult. For various reasons we didn’t try.


bruce wilder 04.22.16 at 5:22 am

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.


kidneystones 04.22.16 at 6:03 am

Hi Daniel. I don’t know if this is a (another) stunningly stupid observation, or not. My contact with bankers professionally is extremely limited. Like others, I have family involved in banking and close friends involved in private banking and actuarial science. I get the very distinct sense that most banks and most companies share a very real desire to keep their true financial state of affairs secret, even from those inside the company. I had students recruited to Anderson and other accounting firms who had no idea at all about the Enron-style accounting practices of these firms. Moreover, given the need to bring ‘dark money’ from drugs, etc. into the system isn’t there an extremely strong set of disincentives exerting pressure against any kind of real transparency, the kind of transparency a clear living will document entails. And the best part, by presenting the entire mess as an irreconcilable problem, the bankers can claim they’d like to comply and produce the ‘will’ but they simply ‘can’t’.


Dipper 04.22.16 at 6:07 am

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.


dsquared 04.22.16 at 9:13 am

Bonuses when you had a long term equity share were supposed to align short term and long term goals.

I thought this when I was a regulator. But the two investment banks which had far and away the highest level of employee ownership were Bear Stearns and Lehman Brothers (I once got very close to working for Bear and as far as I could see, the contract would have ensured my assets would be a house and some Bear Stearns stock for a decade. Lehmans was even more committed to it – if you sold a share of the stock, your boss would hear about it and ask you why). That’s what started me thinking that it’s basically not about incentives.


bruce wilder 04.22.16 at 2:32 pm

“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.


Layman 04.22.16 at 2:54 pm

I think it is more helpful to think about the motivations of the individuals who make decisions than to think in terms of what “the bank” does or doesn’t do. Bad news for “the bank” is not necessarily bad news for the ones making the decisions at the bank. Of course this is true not just of banks, but of pretty much all corporate commercial enterprise. With few exceptions, executives today have little incentive to safeguard the long-term health of their companies. Instead, they have incentives to produce immediate profits, often at the expense of that long-term health. When the chickens come home to roost, they are rarely punished; and when they are, they are ‘punished’ by being paid a fortune to make themselves scarce.

Looking to the OP, why aren’t bank account executives working harder to comply? Why should they? What do they personally gain if they comply, what do they personally lose if they don’t; and what other things can they do for more gain, things from which compliance efforts are a distraction?


Trader Joe 04.22.16 at 3:16 pm

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.


Yankee 04.22.16 at 3:31 pm

The way darwinian evolution works, almost all mutations are fatal or otherwise bad, but if you put out many many seeds or spores or sprats who cares, somebody will get the good one. Don’t play and you can be a coelacanth for the next 25 million years, no dinosaurs in your future. It’s rip and run all the way, baby.


Patrick 04.22.16 at 3:45 pm

> 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.


Dipper 04.22.16 at 3:45 pm

Exactly who is meant to be in denial here? Surely the biggest amount of denial was in the governments riding the credit wave and claiming it was all down to them? Gordon Brown’s “genius in reshaping the British economy” when all he was doing was stocking a consumer boom based on borrowing?

Most bankers I worked with had called a crash and been wrong so regularly that they had given up calling it. it was quite clear the governments were all fully committed to keeping the credit pumps going as long as possible. Why did bankers keep going? Well when you are paid (well) to do a job, you do the job.


Bloix 04.22.16 at 4:55 pm

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


Trader Joe 04.22.16 at 5:21 pm

What’s your point. I said exactly that.

Maybe the part where I wrote “There was no denial on Mozillo’s part, it was all hubris.” wasn’t clear?


Bloix 04.22.16 at 5:43 pm

“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.


Trader Joe 04.22.16 at 6:19 pm

And so the criminal behavior you allude to @39 is what? Making money or making bad loans? What should the rule have been that would have created a better outcome?

I’m fully with you that Mozillo was a crook. If I could only string up one person from the financial crisis he’d be my #1 choice by a good margin. I’m struggling to understand what you take issue with.


robotslave 04.23.16 at 2:34 am

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.


Barry 04.23.16 at 1:23 pm

Patrick: “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.”

Let’s start with robosigning. How many people went to prison, in cases where there were hundreds of fraudulent notarizations were made?


Brett Dunbar 04.23.16 at 2:03 pm

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.


Layman 04.23.16 at 2:10 pm

“Prosecuting for technical infringements of outdated regulations by junior staff, which had made no real difference would not seem terribly just.”

I think there is a lot wrong here, beginning with the idea that junior staff members decided on their own to sign the names of fictitious vice presidents of the bank, and to falsify notary attestations, and ending with the idea that these actions violated ‘regulations’ rather than, well, the law.

How about packaging up low-grade risky mortgages for sale while claiming they are high-grade, safe mortgages? How about bundling tranches of shitty mortgages into securities you claim are AAA grade instruments? How about selling them to unsuspecting clients while laughing about how shitty they are? No fraud here?


Patrick 04.23.16 at 2:27 pm

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 04.23.16 at 3:13 pm

The banks were pretty upfront about the construction of the securities and the mortgages on which they were based, it wasn’t fraud. The lowest tier were known to be pretty much worthless and the banks mostly hung on to them. The problem was that they had slightly underestimated the default risk so the second lowest tier were a bit riskier than they thought. The repeated construction of new securities from the second lowest tier of securities had the effect of concentrating risk rather than diluting it. The slight underestimation of default risk seems to have been an honest mistake. And that small error was the problem. The repeated securitisation had made the markets a lot more sensitive to that kind of error.

None of which has much to do with the robosigning the documents they were failing to follow statutory regulations but that wasn’t affecting the decision making.

Misconduct by some low level sales staff did, falsifying income assessment so a mortgage would be granted for example. But in those cases the victims, namely the banks, have shown little interest in pursuing a claim as the wrongdoers have little money. The borrowers got cheaper mortgages than the actual risk level would justify.


bruce wilder 04.23.16 at 3:22 pm

Brett Dunbar @ 48

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


Brett Dunbar 04.23.16 at 4:26 pm

They should have been better at estimating the risk, they failed to reach the level of competence that the investors were entitled to expect. They didn’t properly look at the quality of the mortgages backing the securities. There was a degree of negligence.


Tom West 04.23.16 at 4:35 pm

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.


Layman 04.23.16 at 8:28 pm

“I’m not an expert, but I figure, estimating the risk would be the task of credit rating agencies”

Yes, just as because there is an FDA and a local health department, I can sell shit sandwiches to people, knowing they are shit sandwiches, and when those people fall ill or even die, it is not my fault because, after all, it’s the job of the local health department and the FDA to warn people about my shit sandwiches.


T 04.23.16 at 8:30 pm

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.


Layman 04.23.16 at 9:13 pm

It’s rather obvious, Ze K, but I’m happy to help you out. Just as food service professionals know what is and isn’t legal and proper and safe, and are accountable when they knowingly cross the line, despite the existence of watchdogs; so do banking professionals know what is and isn’t legal and proper and safe, and so should they be accountable when they knowingly cross the line, despite the existence of watchdogs.

Mortgage bankers are by definition in the business of evaluating the risk of default, and one can’t excuse them on the grounds that there exist ratings agencies. With respect to ratings, bankers bring securities to ratings agencies along with a story about those securities, which story is intended to support the rating they want to get. If Moody’s overrated a shit sandwich, they did not do so after being told by the bank that it was a shit sandwich. Rather the opposite, I’m afraid.


Brett Dunbar 04.23.16 at 10:09 pm

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.


The Temporary Name 04.23.16 at 10:45 pm

The banks were best placed to assess the risk of the mortgages they were originating.

Maybe another aspect of denial is the bankers being convinced of this. There seem to have been a bunch of people who had a much better assessment of the situation.


kidneystones 04.24.16 at 12:09 am

@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 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.


Brett Dunbar 04.24.16 at 2:04 am

The bank is in the best position to assess the risk as it is dealing directly with the borrower. The weak supervision of the sales force meant that this wasn’t being done adequately. Securitisation meant that even if the mortgage did blow up it would be somebody else’s problem; as the debt would have been sold on.

Basically there were some things that were a bit screwed up. The problem was that when the mortgage default rate rose to slightly above historic norms then some of the securities were much riskier than they appeared.


Bloix 04.24.16 at 2:30 am

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.


CS 04.24.16 at 5:03 am

Greed is a fat demon with a small mouth and whatever you feed it is never enough.
– Janwillem Van De Wetering


bruce wilder 04.24.16 at 5:03 pm

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.


bruce wilder 04.24.16 at 5:51 pm

My last comment was a long-winded way of saying that thinking about money and finance in the neoclassical way, which is the neoliberal way, which is to imagine a more-or-less rational representative banker assessing the risks — that may be the way we are led to think about it, but it is not very sensible.

The kind of thinking that got the U.S. to the financial sector it has was the thinking that Mozilo did and Sanford I. Weill and other more obscure figures like them. And, it was met with the unresisting even cheerleading neoliberal thinking of figures like Larry Summers and the libertarian thinking of figures like Alan Greenspan and a host of mainstream academics engaged with the second neoclassical synthesis and the new financial economics.

It is not the only way to think about the problems that money and finance solve and create for coordination of economic activity, but it is the only thinking our political economy is willing to pay for, apparently or honor (excepting of course the rare Minsky Moment, when Minsky is remembered).


chris murphy 04.27.16 at 6:18 am

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

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