re: The Obama Bank Shakedown- "It has nothing to do with justice or restitution"

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Banks need to start loaning money out like they always have

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I guess they heard you because commercial and industrial loans made by commercial banks are sitting close to their highest levels post crisis and right around their pre-crisis average.

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stay away from the risky derivatives trading

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Everything has risk. Would you say a commercial loan made to you is less risky than a 10-year interest rate swap with JP Morgan as the counterparty? Or how about a Eurodollar future?Because that's what you're implying. Derivatives are not weapons of mass financial destruction, they are just financial instruments that have their own risk profiles.

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They do not know shite about risk either.

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Maybe you should start a consulting business to go drop some wisdom on them. I mean we're only talking about people that understand risk on an enormous scale better than any other human being on the planet, who's backup to their backup models are still made by particle physics PhDs. I'm sure you'll enlighten them.

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I suppose Hedge Funds also have taxpayer backstops for their investments?

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Nope, they also don't have a mountain full of regulation to comply with.

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We have been bailing out the Banks since the 80s, so how are they not Utilities?

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Commercial and investment banks weren't bailed out in the 80's, S&L's were. In 2008 as some have already pointed out, some banks didn't need or want bailouts but had to, the bailouts were to keep the global financial system from collapsing. Now post crisis banks are being regulated to the point where they may look more and more like utility companies, but that is a consequence of the bailout and not a material implication with taking a bailout.

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Maybe you should start a consulting business to go drop some wisdom on them. I mean we're only talking about people that understand risk on an enormous scale better than any other human being on the planet, who's backup to their backup models are still made by particle physics PhDs. I'm sure you'll enlighten them.

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Do you mean the Value-At-Risk models they use? If they understand 'risk' on an enormous scale then why did we have these bailouts (BofA has a $118 billion commitment to cover its toxic assets from FED)?

Please do enlighten me with some evidence that the risk models used by these institutions are sound? The past decade of failures and insolvency tell me these models are very flawed, create false sense of confidence. However, people are cowards by nature, so maybe the models (wrong as the are) are a necessity, wrong or right. I'd rather have no model than one that underestimates risk.

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stop using the modeling methods of the Engineering sciences to quantify 'risks' in financial instruments.

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What does "modeling methods of Engineering sciences" mean? What modeling methods do you recommend for measuring risk en masse?

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So they "threatened" give them taxpayer subsidized bail out money with strings attached?

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No, some of them were forced to take the bailouts. I'm sure many of the banks who were acting responsibly and didn't need a bailout knew it was a bad idea to accept these funds.

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No, some of them were forced to take the bailouts

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They were "forced" to meet capital requirements - as they always have been.

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It is quite amazing the big banks have been able to successfully make the argument to the sheeple idiots that it was mean of Uncle Sam to ask for something in return for the bail out money they needed to survive. They didn't have to take the money - they were absolutely free to fail all on their own the way God intended capitalism to function

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Absolutely. ST is right on, they did not have to take the money, they needed to because they were insolvent. Failure is part of capitalism, not cronyism.

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Engineering relies on data but the systems are constrained, with a limited number of degrees of freedom.

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So you are suggesting economic models should not be based upon data and should have an unlimited DOF?

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Do you mean the Value-At-Risk models they use?

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Do you actually think they just look at VaR models and call it a day? Important rule of thumb, if during a congressional hearing a financial institution references a risk model in an explanation to these senators and representatives, then its probably a pretty simple model that is a marginal decision driver.

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If they understand 'risk' on an enormous scale then why did we have these bailouts (BofA has a $118 billion commitment to cover its toxic assets from FED)?

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You mean A bailout. As I said earlier, S&L's were bailed out in the 80's. The ignorance of what occurred in 2008 still astounds me to this day. Were banks completely innocent in the events leading up to the financial crisis? Absolutely not. But for some reason everybody seems to forget about pointing fingers at every other cog in the process, not the least of which the regulators whom were blatantly absent and the political motivations for increasing home ownership (then the originators, rating agencies, or borrowers themselves).

When 2008 happened, it was complete crisis. A good friend of mine was on the credit desk at BofA during the crisis. He had an ABS book that he hedged out the credit risk with CDS, only problem was when they wrote down one of the deals he had from 85 to 63 in the morning, CDS didn't move because it was so illiquid at the time it just didn't trade. He lost $20 million dollars that day. You know the flip side of all of this that people don't realize? That same book is now extremely profitable at this point in time.

By the way, that $118B you're referencing was BofA's TARP takedown. If you're so mad about them using "you're taxpayer dollars" for this program, why are you mad about one of the only government programs that has been paid back in full, early, with interest?

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Please do enlighten me with some evidence that the risk models used by these institutions are sound?

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Not claiming anything is perfect, but how about the ~20T notional swaps business, ~4-5T daily repo business, ~10B IG/HY, ~8B Treasury, ~15B equity, etc. market that primary dealers transact and hold on a daily basis (I'm not even going into any of the option, futures, munis, the list goes on and on). They do this daily and now continue to comply with new regulatory reporting requirements that constrict all aspects of these businesses more and more. They've done this daily for decades, and only once have had an instance where it all crashed down (at a time when everything crahsed).

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he past decade of failures and insolvency tell me these models are very flawed,

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Mother of god name me some times of insolvency for a primary dealer. You have LTCM and 2008... don't worry I'll sit back and wait...

All ears...

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I'd rather have no model than one that underestimates risk.

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You'd rather have zero concept of your risk profile compared to one you know underestimates it? I'm really glad you're not in charge of any risk management for a firm that's big enough to do business with us (I hope).

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Econometric models will show one some 'risks' but not the 'risk' of using the model.

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If you're suggesting that institutions follow models blindly without knowing the limitations of them... you're incorrect.

I'd also contend that much of the "mis-evaluated" risk you perceive had more to do with government backstops and an over abundance of people willing to purchase MBS and CDOs with NO evaluation of risk. That's not a modeling failure.

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Also, a mathematical model (econometric or any model) by definition is constructed with a finite set of variables.

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Yes. Which is why I do not understand your advocacy of an unlimited DOF approach. No such thing exists.

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The rub is that in the real-world, there are infinite sources of risk, so any model is therefore a crude reduction of economic reality.

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That's a bit silly. There are innumerable things that can make a plane crash. But that doesn't mean that a wind tunnel can't accurately mimic an airplane's performance.

And while there is an infinite number of risks, they are not all created equally. For exapmle, there is a risk a that a gigantic meteor will crash into earth. But in an economic model... that risk can generally be ignored, as there are far more likely discrete and stochastic events.

Again, I'll pose the question... in lieu of using models with finite variables... what do you suggest be used to evaluate risk?