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Beware Of False Profits

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So, I work at a bank.  I have to admit, it is a nice gig.  We get every federal holiday off and the most vacation I’ve ever had.  My department doesn’t keep banker’s hours, but we don’t work a crazy schedule either.  The poor accounting department though…

We don’t have a lot of exposure to residential real estate, so we escaped the slaughter that has infected other major banks.  Almost.

In statistics there is something called survivorship bias.  The premise is that if you are measuring, say, mutual funds, and you only include those funds that didn’t shut down, you will be overstating your performance because those funds that didn’t survive aren’t around to drag down your average returns.  Or the winner’s curse, where a company tries to take over someone else and outbids everyone to the point where they win the company, but have over paid so much that they will never find value in the transaction.

I’d like to steal those two phrases and reuse them.

Survivorship bias is a bias against the banks who did things well.  If you have a bank account then you are probably familiar with:

Well, the money that is used to pay that $250,000 comes from insurance premiums paid by member banks.  As more banks fail, more money is needed to fund the insurance.  Since there are fewer banks, the surviving banks need to pay more to make up for both the increased risk and smaller pool of premiums.

In the same vein, the winners curse applies because we didn’t lose, we are cursed with higher premiums.

I wonder what the word is for people who purposely misuse existing phrases to fit their own agenda.

Another aspect of the increased government oversight of banking is that we are required to keep more capital on hand to meet expected future losses.  Basically, we are required to reserve our profits from today in anticipation of losses tomorrow.  As a result we would have posted a profit of $30 million for 2010.  Then the regulators came in, shook the magic 8-ball and read:

A quick reference to a random number generator told them that we should reserve $50 million against future losses.  All of the sudden we had to post a $20 million loss.  (Needless to say, these are our real numbers, but you get the idea.)

I admit I am being flippant about the process, but at the end of the day, it’s our accounting mumbo-jumbo against their regulatory mumbo-jumbo.  Some day, we’ll recover from all of this and get back on track.  What I  am most interested to see is the new financial crisis that results from the rules imposed from this financial crisis.  I predict that the new regulations will cause a spike derivatives, led by midgets taking a short position on Bonds, who they think he won’t be prosecuted for PEDs.   Cattle growers will then be bullish on futures, fooling the dance teachers into thinking the markets are in contango.  Naturally, this will lead the auto manufacturers to invest heavily in the ABS market, not realizing that it won’t keep the credit markets from seizing up.

I’ll bet all of my WaMu stock that this happens.  Any takers?

And so it goes.



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