According to Cooper Union’s president, Jamshed Bharucha, it currently operates at a $12 million annual deficit. The number reflects several factors: ... most significantly, $10 million a year in payments on a $175 million loan the school took out a few years ago, in part so that it could invest money in the stock market.
And this, ladies and gentlemen, is why meaningful bank regulation is long overdue. The signs of the present crisis were there to see for anyone with eyes in 2005: in that year my ex-landlady, who was from Bushwick, one of the poorest parts in New York, bought five rental properties with no-money-down loans.
Let's have this again: Bank of America found nowhere better to invest than in this clueless lady that perceptibly could not run her rental empire successfully, and they loaned her the funds anyway.
And this, ladies and gentlemen, is why meaningful bank regulation is long overdue.
This would sound a little less popular as: "Even if your college owns the land under the Chrystler building and has entirely predictable cash flow for loan service, you should be unable to construct a new academic building which you sincerely, but perhaps unwisely, believe to be your most important priority, unless you can come up with $160 million in cold hard cash."
I'm just finding it hard to square the narrative of sophisticated Wall Street operators conning low-sophistication average Americans into making wildly leveraged bets on real estate with the facts of this case, where (presumably) highly educated New Yorkers who own a lease with NPV of several hundred million dollars are assumed to be incapable of making a judgement call like "Do we want to build out facilities to support our core operations or not."
I don't see how your conclusion follows from the data. It appears to have been a very wise decision by the bank, given that even though Copper Union's investments have gone bad they're still paying the loan back. If I were a bank I would jump at an opportunity to own a loan that's backed by the land under the Chrysler building.
And the bank could afford to lose that $175 million. And then the bank would gladly take the Chrysler land or whatever other collateral it was promised.
They would probably then get a loan from a credit union or a sovereign fund, or bond buyers with appetite for junk, or one of those fancy Silicon Valley social lending sites.
It's not like Cooper Union is the paragon of financial prudence here, borrowing money to play the stock market.
At least BofA could repo your landlady's estate, rent it out, and have it bounce back by now.
What would bank regulation would have done to stop Cooper Union's getting a loan and blowing it?
If you own the land under the Chrysler building, someone is going to be willing to lend you money. It seems to me this is the bank functioning pretty well.
Regulation that would requie borrower to declare what the loan would be used for and force lender to get all the money back if the borrower spends it on something else.
I'm not saing that this would be good regulation or if this regulation would prevent this exact case. Just giving an example.
So not really "bank regulation" as much as "legally-enforced risk aversion", then?
And what unintended consequences would that have?
Maybe a better idea is for those who actually need to be risk-averse to carefully consider the full chain of risks associated with their investments, and not merely put their full faith in abstract systems - especially regulatory systems, which fail quite often.
The financial crisis wasn't the result of banks conning the public; it was the result of essentially everyone at every level buying into too-good-to-be-true presumptions about the real estate market.
Legal enforcement of how much gambling bank can do with the money, people with accounts there entrusted them.
Noone considers full chain of risks. Most people feel they are immortal, feel that they are forever winners as soon as they won 3 times in a row. Besides there really no risk taken by decission makers. They often don't even loose their jobs.
The only thing we can do is set up barriers to curb the risky behavior. Some risks are worth to be taken but by hedgefund not a bank.
As for the financial crisis no catastrophy can be traced to a single cause but it often turns out that not failing at single point could have averted the catastrophy.
> Legal enforcement of how much gambling bank can do with the money, people with accounts there entrusted them.
And are the limits of "how much gambling" the bank can do with the money defined by some universal prescription or by the particular understanding established by the bank and the depositor in each case?
If the former, then we're back to universal usurpation of everyone else's risk judgments by... whom, exactly? Yet more human beings, subject to the same failures of judgment as the people who you claim are incapable of effectively assessing risk?
If the latter, where's the evidence that there ever was a breach of that understanding? Reward is proportional to risk, and those seeking high-interest investment opportunities implicitly acknowledge that with higher return comes higher risk.
> Noone considers full chain of risks.
Plenty of people do, and where sufficient information to make a confident risk judgement is unavailable, plenty of people take that into account and plan accordingly.
"Most people" do not feel they are immortal or perpetual winners; indeed, although the systemic effects of the financial crisis have impacted us all, the number of people who did not engage in irrational real-estate speculation far exceeds those who did. (The "everyone" I mentioned above refers to segments of the chain of investment, not to individuals in general).
> The only thing we can do is set up barriers to curb the risky behavior
No; there are plenty of other viable alternatives, like providing mechanisms to insulate unwilling third parties against the risk-taking activities of others. Most public policy and regulatory intervention seems to do the exact opposite, however, and seeks to shoehorn everyone in society into a single uniform pattern of interaction, which, of course, exposes us all to the new systemic risks it creates and doesn't account for, and leaves us little room for escape.
Let's regard regulation as what it is: a flawed attempt to mitigate the downside of universal social systems in order to sustain those systems, and justify corralling everyone into them in order to maximize their putative upside. The problem is that it just doesn't work: at best we're reducing small and predictable risk impacts for massive and chaotic ones, which doesn't yield an environment suited to evolutionary resilience.
As in everything else, variation is the key to stability and survival, and top-down regulation of individuals' subjective risk judgments diminishes variation. We need lots of separate baskets to put our eggs in, not one giant over-engineered basket that's ultimately no more unbreakable than the Titanic was unsinkable.
The problem was that, for the guy making the loan, and his superiors all the way up, this was not a mistake, but rather the whole foundation of their bonuses. The loan was almost certainly at a higher than normal interest rate, and thus when bundled with other such loans, could be sold at a substantally higher price, thus generating higher profits. This, even though everyone making these loans knew (or should have known) that there was no way they were going to be repaid. The trouble was that the bank regulators, unlike those in the 80's during the savings and loan crisis, let this go on unchecked, and have not prosecuted anyone for the massive frauds that took place.
Note, of course, that the profits booked for such loans, were temporary and delusional. The bonuses paid, however, were real, and permanent - never clawed back.
I believe that if actually bank were left to run unchecked, specially having no help from government, more of them would fail... Yes, it would be quite painful in short term, but long term that sort of crap would stop.
The regulation that exist right now, and that people keep trying to expand, has the end result that ties the government too tighly with banks, and bailouts and other help from government become a necessity.
Removing FDIC and letting banks fail would mean that individuals would only deposit money when banks had high equity %. i.e. the bank owners/shareholders invest 30 cents of their own money for every 70 cents of the customers that is loaned out. That way if loans start to fail the customer is protected by the owners share.
well governments de facto need the banks to lend them money, which is used to finance their welfare policies (and their wars), which in turn gets them elected. So politicians make it easy on the bank and ask everyone to pay up. I am making things sound simple on purpose, but it's not too far from the reality.
It sounds like you're talking about eliminating things like the FDIC, which is crazy. People (and banks) suffered tremendously before bank regulation evened out the business cycle. Then they decided to ease things up and let banks play around with depositors' funds, and within a decade we had the financial crisis.
Banks ran wild with unregulated markets that ended up being a huge percentage of the economy. That's what got us into trouble.
Banks and the financial sector were always heavily regulated, even during the years before the crisis.
The whole securitization of debt and cutting it up into tranches only get fuelled up to such an extent, because there were customers hungry for yield but barred from buying anything that didn't have some official (even useless) triple-AAA stamp on it.
It's just debt arbitrage. The problem is that they were not sufficiently sophisticated (i.e., they were ignorant about how the game was rigged, the house was built on an old cemetery, or that they were walking through the part of town with the highest violent crime rate) to profit in an extremely hazardous environment.
I won't get into the "providing liquidity" or "it's just moving money around" arguments (feel free, though), but it's not significantly different from taking out a loan or accepting funding for a start-up. In most cases, you are accepting more financial risk than you can afford to pay in the belief that you can leverage that capital to generate a profit above the principal and interest.
While in come cases it can be very much like gambling, that also covers "games" where skill can influence the outcome. For example, slot machines in a Russian casino are probably not the best risk. However, if you're a good poker player, you can do quite well in private games.
It's a gamble along the lines of "I bet I can invest money better than the bank". Often turns out the bank can invest money better. I wonder who convinced them to invest, er, gamble.
In the short term I'm sure it's true. But in the long term, banks have a major advantage over us mortals: they get bailed out. So I'd imagine they tend to win in the end.
Before we discuss more regulation of either banks or universities, perhaps we should first consider the extent to which we need more regulation of regulation.
No, it isn't. People across the world make billions (combined) every week doing just that. From Fortune 500 LBO's over leveraging assets to finance real estate portfolio expansion (despite what you read in the papers, there are still many profitable ways of doing this) to bank loans for starting small businesses - it's all about risk management and entrepreneurs having better access to information on profitable opportunities than those with capital (often, banks, but also angel investors). I'm a bit fed up with the 'finance = gambling' fallacy - there is a spectrum of risk profiles, and money can be made in arbitraging this risk, without it being 'gambling' (which is, by definition, risking money on a 100% or near 100% stochastic process. Yes I realize one can argue that poker wouldn't fall under gambling under that definition, but I'm not talking about the margin).
Do you truly not see a difference between a company leveraging their own assets and a college taking out a loan to play the stock market? Your argument is solid, but simply doesn't apply in this scenario. No college is in a good position to do this. If they were, they'd be a hedge fund instead.
"I find the whole idea of borrowing money for investment purposes a little strange. Isn't that basically just gambling?"
which is exactly what my comment addressed. One can debate what investment strategies colleges should use, or how much risk they should take on - probably less than these people did, I don't know and I don't really care either. The GP was throwing around populist blanket 'debt = bad' rhetoric, that's the point I was agitating against.
I think you're reading "invest" more broadly than I am, and it's not unlikely that I am misusing a technical term, but I certainly do not want to be taken as arguing that debt is intrinsically bad.
Oh I don't look at usernames on purpose - I want to avoid falling into the traps of 'upvote/downvote because I usually like/dislike this guy's answers' and 'I have a mental image of such and of this guy because of previous posts, therefore this post must be correct/wrong too'.
Anyway I did read your post (and I'd argue, I read that reasonably) as saying 'debt = bad'. So if you're not saying that and only meant this particular investment, then I guess we're resolved our differences.
You could argue that this is exactly what you're doing when you buy a house. You're more or less borrowing money to invest it in real estate. I think the problem is borrowing money for risky purposes (which btw seems to be the scenario for about 50% of gangster related movies)
It's only the same if you buy the house purely to re-sell it later. Most people live in the houses they buy, so they extract value out of it that a bank wouldn't, even if they don't earn more when they sell it.
If she had been able to run a business, now would be a good time to own property in Bushwick. Seems to be quickly gentrifying and rents are increasing.
I must admit that I don't spend a lot of time on HN defending banks, but I'm not sure what they are supposed to have done wrong in this case. A commercial entity wants to borrow money and they have plenty of assets to cover the loan if it goes bad - not the bank's fault they were bad at investing.
Well the bank would normally be on the hook for making the bank loans. Unless it bought insurance then it would only be on the hook if the insurer failed. Luckily they had buddies at the fed/ government to ensure this insurance was paid out at the full 100 cents on the dollar.
And this, ladies and gentlemen, is why meaningful bank regulation is long overdue. The signs of the present crisis were there to see for anyone with eyes in 2005: in that year my ex-landlady, who was from Bushwick, one of the poorest parts in New York, bought five rental properties with no-money-down loans.
Let's have this again: Bank of America found nowhere better to invest than in this clueless lady that perceptibly could not run her rental empire successfully, and they loaned her the funds anyway.