... "too big to fail" should include things like "don't make a bunch of terrible bets and then hoodwink your customers into taking the fall on those bets for you".
I don't understand the mechanics of this. It should be illegal for "too big to fail" banks to sell a security when they believe it's price will go down? Should it also be illegal to buy when one believes a security is going up?
...the alternative was to be the last one holding those CDOs when they exploded...
Goldman was the last one holding (some tranches of) ABACUS when the housing market collapsed. That's why they lost money.
So, the mechanic that did happen is that those banks were holding a ton of CDOs, and unloaded as many as they could before they exploded by calling their customers and saying "Hey, check this out, these bonds are super-hot right now, great deal, you should buy it".
As far as the mechanics of my perfect system, "too big to fail" should be done away with, along with proper enforcement of our existing fraud laws. We'll have eliminated the means (smaller banks) and motive (deterred by steep penalties) for this happening again. As of now, I don't see what's changed since 2008.
That settlement's ridiculous. A few hundred million for each bank? How many of these things did they take off their balance sheet in 2007-2008 while selling them to their customers as perfectly good bonds?
We'll have eliminated the means (smaller banks)...
Smaller banks wouldn't be able to sell securities they believe will go down? I didn't realize that buying low and selling at the peak required scale.
As of now, I don't see what's changed since 2008.
That's because you aren't paying attention. The I-Banks are now bank holding companies, the regulators have laid claim to several floors of their buildings and are imposing massive new programs, the banks have figured out that they need more stringent underwriting standards for homeowners and have drastically cut back on loans [1].
[1] The market for home loans is now over 90% Fannie/Freddie - strangely, the agencies haven't figured out that home loans should be reduced.
More, smaller banks means more diversity and less chance that a few of them can endanger the whole system.
As far as the I-Banks being bank holding companies now, I'm seeing more stuff under fewer roofs than there was before.. that seems less stable to me.
I don't actually have an answer for how to fix the problem, I'm just worried that we haven't had the kind of systemic change that we need. A little more auditing doesn't change anything, the banks pay a lot more than the regulatory agencies so they'll be able to capture them.
I don't understand the mechanics of this. It should be illegal for "too big to fail" banks to sell a security when they believe it's price will go down? Should it also be illegal to buy when one believes a security is going up?
...the alternative was to be the last one holding those CDOs when they exploded...
Goldman was the last one holding (some tranches of) ABACUS when the housing market collapsed. That's why they lost money.
Incidentally, I no longer work in finance.