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An Australian man I know referred the other day to the GFC, and I didn’t know what it was. I was once embarrassed to when I thought that LTV stood for Ling Temco Vought, which it used to, rather than Loan to Value. Turns out GFC is Strine for the Global Financial Crisis.

The issue isn’t merely the high pay and big bonuses at financial firms, because even if you have salary caps the profit then goes to the shareholders. The issue is the alternation between large losses and high profits, and who therefore deserves the current high profits.

A few months ago I wondered why banks can pay 50% of their revenue in bonuses, and why their profits are so large. One of the answers I got was that they make so much money because they are not paying for the impliedcost of their insurance by taxpayers, and that seems to me plausible. Every few years some bank or other — e.g. the Mexican currency crisis years ago — loses more money in year than it ever made in its lifetime.

It seems to me that the institutions that got bailout money or guaranteed credit backstops from the taxpayers have profited immensely from the administration’s actions. What they have earned is not windfall profits — I assume windfall means the wind comes by and blows down the apples for you to pick up. What they have benefitted from is more like let-me-fix-up-the-weather-for-you profits. The Fed and the taxpayers put a floor under their stock prices, which in technical terms means they gave them a put.

Usually when someone buys an out-of-the-money put and can’t pay cash, they have to fund it with an out-of-the-money call, the two options together comprising a costless collar. So, the banks that got saved by the taxpayers should, in all fairness, be short a call to the taxpayers, and their profit and upside above some reasonable level should belong to taxpayers now that the call is in the money.


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