Wealth Management Products in China (2015) [pdf] | Hacker News Reader

Wealth Management Products in China (2015) [pdf]

rba.gov.au

46 pointsjpelecanos13 comments

This screams fraud. Banks in China offer a product which claims a guaranteed rate of return, yet the deposits are invested in securities, loans, other risky investments. So I guess its like a bond - I only read the first paragraph but would love this explained.

Question. Do they guarantee a payout (like a bond), but then they themselves assume the risk of the mix of riskier securities? Or are they claiming a guarantee but then offloading the risk onto the consumer and making a false promise?

Unrelated, but even in the US, the standard deposit insurance "guarantee" is not exactly guaranteed. If a small insured bank fails, the FDIC can absorb its losses. If a large bank collapses, they might be able to cover losses, but only if it is an isolated incident, (like Washington Mutual). However if there was ever a large run on the banks (like in 1929), they could only renumerate small a fraction of insured deposits (at most 2% in 2017).

> if there was ever a large run on the banks (like in 1929), they could only renumerate small a fraction of insured deposits (at most 2% in 2017)

The FDIC (a) cannot "cram down" [1], (b) has the ability to borrow $500 billion from the U.S. Treasury [2] and (c) is backed by the "full faith and credit" of the U.S. Government [3]. A decision to "renumerate small a fraction [sic] of insured deposits" would be a political call. It's certainly not a "could only" scenario.

[1] https://en.wikipedia.org/wiki/Cram_down

[2] https://www.fdic.gov/news/news/press/2009/pr09153.html

[3] https://www.fdic.gov/deposit/deposits/

(a) What alternative would they have, besides closing the banks? (b) Still only a small fraction of insured deposits. (c) Contingent on its ability to govern. How long would that last in such a scenario?

> What alternative would they have, besides closing the banks?

Receivership [0]. Note that if your bank closes, the FDIC still sends you your money.

> How long would that last in such a scenario?

The FDIC has about $7 trillion in insured deposits [1].

In the crisis, between TARP [2] and TALF [3], the federal government printed $1.5 trillion. (About $1.8 trillion in 2017 dollars [4].) Meanwhile, the Fed bought $4.5 trillion in assets through its quantitative easing programmes [5].

Adjusting for inflation, we probably saw close to $7 trillion in fiscal and monetary stimulus.

[0] https://www.fdic.gov/about/strategic/strategic/receivership....

[1] https://www.fdic.gov/bank/statistical/stats/2017jun/fdic.pdf

[2] https://en.m.wikipedia.org/wiki/Troubled_Asset_Relief_Progra...

[3] https://en.m.wikipedia.org/wiki/Term_Asset-Backed_Securities...

[4] https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1.50&year1=200...

[5] https://en.m.wikipedia.org/wiki/Quantitative_easing

Naive question but couldnt they just print more money?

> a product which claims a guaranteed rate of return, yet the deposits are invested in securities, loans, other risky investments

Like an exchange-traded note (ETN) [1]? There's nothing inherently fraudulent about asset-liability mismatches. From a certain perspective, that describes every corporate bond issuance.

[1] http://www.investopedia.com/terms/e/etn.asp

It's ten pages long. Read more than one paragraph.

Sure.

I put together a summary of the main points here: https://www.rba.gov.au/publications/bulletin/2015/jun/pdf/bu...

Not fraud. Banks use proxies as a legal loophole to sell unguaranteed investment products that are off the books (i.e. Attractive opportunities they're not allowed to pursue directly). The main side-effect is that clients perceive them as guaranteed and diversified, though they are not actively claiming to be so. The WMP sellers just aren't being transparent, and it is unclear what will happen on a default since the government has a history of stepping in with bailouts.

Anyone else not trust pdfs?

Most government websites still use PDFs to distribute information. This is also true in Canada.

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