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What Good is Wall Street?
November 22, 2010 7:11 PM   Subscribe

What Good is Wall Street? Think of all the profits produced by businesses operating in the U.S. as a cake. Twenty-five years ago, the slice taken by financial firms was about a seventh of the whole. Last year, it was more than a quarter. (In 2006, at the peak of the boom, it was about a third.) In other words, during a period in which American companies have created iPhones, Home Depot, and Lipitor, the best place to work has been in an industry that doesn’t design, build, or sell a single tangible thing.
posted by shivohum (102 comments total) 18 users marked this as a favorite

 
The right way to divide the cake is to have the financial firms divide it and then for us to pick the slice we want.
posted by storybored at 7:22 PM on November 22, 2010 [11 favorites]


Well you can't have your capitalism and eat it too.
posted by hal_c_on at 7:23 PM on November 22, 2010 [2 favorites]


The serious answer is fairly straightforward. It's in the consumers' hands-- stop playing the stock market roulette wheel, stop buying mutual funds and stop buying houses using 10-to1 leverage. The key to a healthy financial sector: caloric restriction.
posted by storybored at 7:26 PM on November 22, 2010 [1 favorite]


Wall Street finances those things. It takes money, lent or made by selling off shares of those companies.

I grew up with a dad who was a corporation lawyer for a Fortune 250 company. I wanted to be a lawyer too, so on a vacation,I asked my dad if I could look at his papers. He said sure. The first document was a one page loan document for $250,000,000. I was aghast. I asked him if the company (Zenith, the TV people) was buying another company. He laughed. "That's quarterly operating cash." Companies must invest now and operate now to make money in very uneven clumps.

It is not an exaggeration to say that nearly every product you touch, every store you go into, every book you buy and every cell phone you talk on was made possible by modern corporate finance.

This is not to say that there aren't huge problems. There are too many dangers in terms of instability. Also, our economic system does not reward work enough. Although risk must be rewarded, if we do not pay our workers a big enough share of economic reward, the economy will do poorly.

Having said that, corporate finance is massively intertwined with our current way of life. There is no other paradigm with the capability to make our world run at this time.
posted by Ironmouth at 7:28 PM on November 22, 2010 [23 favorites]


That's weird, Counterpunch.org just posted an introspective work of short fiction by Jonathan Franzen.
posted by theodolite at 7:28 PM on November 22, 2010 [2 favorites]


There are many possible stories of functional capitalism. What we have is one of them. But it might not be that functional, if functional means sustainable. Those other possible stories? We'll not likely be able to explore them (the further downhill the water is flowing, the harder to change its direction).
posted by yesster at 7:41 PM on November 22, 2010 [2 favorites]


It is not an exaggeration to say that nearly every product you touch, every store you go into, every book you buy and every cell phone you talk on was made possible by modern corporate finance.

The lady doth protest too much, methinks.
posted by RajahKing at 7:47 PM on November 22, 2010 [2 favorites]


every book you buy and every cell phone you talk on was made possible by modern corporate finance

Well, I did just read Too Big To Fail, so point taken.
posted by Combustible Edison Lighthouse at 7:50 PM on November 22, 2010 [1 favorite]


You don't know very much about the lady, methinks.
posted by smoke at 7:51 PM on November 22, 2010 [7 favorites]



•Wall Street, investment bankers, and social good
•What we can learn from procrastination
•The Presidential memoirs of George W. Bush, review
•Facebook co-founder Mark Zuckerberg opens up
•The Spotted Pig, April Bloomfield, and gastropubs
posted by clavdivs at 7:51 PM on November 22, 2010


Wall Street finances those things.

And that's all well and good; that's a noble purpose.

The problem is that they've struck off in a billion other side bets. Microsecond trading, exotic paper parlay betting, fucking fee, after fee, after fee... They are way too busy raking in all their little grabs and side wagers to actually be a functional help anymore.

A looooooot of these people need to go to jail.
posted by Benny Andajetz at 7:51 PM on November 22, 2010 [11 favorites]


Wall Street finances used to finanace those things.

Fixed that for you.
These days they're out for one thing and one thing only - bonues. At all costs. And fuck whoever stands in the way of year over year increase.
posted by T.D. Strange at 7:55 PM on November 22, 2010 [2 favorites]


Let them eat cake pie.
posted by Blazecock Pileon at 8:01 PM on November 22, 2010 [1 favorite]


Wall Street bonuses are great for raising your blood pressure, but they're an irrelevant drop in the ocean compared to the amount of money Wall Street invests every day, enabling companies companies to design, build and sell tangible things.
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 8:05 PM on November 22, 2010 [1 favorite]


bonues. At all costs

heh
posted by various at 8:08 PM on November 22, 2010


The lady doth protest too much, methinks.

I suspect Ironmouth is right.

Wall Street may be as much an enemy to us as the Pentagon. But the world we live in imposes the necessity of having both in some form.

That said, if the form we have isn't stopped, we're finished as a three-tier economy.
posted by Joe Beese at 8:15 PM on November 22, 2010 [2 favorites]


Meanwhile, back at the ranch...
posted by anigbrowl at 8:15 PM on November 22, 2010 [1 favorite]


Do you remember when Google when IPO? They set up a Dutch Auction and ended up paying less than 3% in fees.

They were big enough that they knew that they could set the terms. I'm guessing the reason we haven't heard about this type of IPO happening again is that there is no way that the bankers and financial firms are going to let any other company get away with it.
posted by eye of newt at 8:15 PM on November 22, 2010 [1 favorite]


I like to think of it like this. Imagine if somehow Poker had a net positive payout, that is, if 8 started playing poker with $100 each, at the end of the game there would be $800.80 total, but of course that wouldn't be distributed evenly, the best player would take the money. (Let's assume that there's a max % payout per day or something, giving you 5% APY if you play every weekday).

In that case, lots of people would want to play poker, and it would seem like it was socially valuable. And lots of people would play super-safe games. But not everyone. Eventually people would realize that they could just pool their money and give it to the best players to play against each-other, and give that person a cut of the profit. People would form teams and companies to do it.

Now, it would make sense for the teams to get the very best players they possibly can. The smartest people would go into poker playing and so forth.

But here's the thing. While for the individual or team, you want the best players ever, for the entire system it doesn't matter at all how good the players are. The benefit for everyone is the same.

You could easily just get 8 people together to play a really boring game with the cards facing up and using set rules and all people would have to do to play would be to memorize the rules.

I think that's kind of what's going on with wallstreet. Each company and each individual trader does everything they can to get an edge. Crazy mathematical models, powerful computers, brilliant people, etc. But here's the thing:

none of that is necessary for the function wall street provides to society: distributing capital.

There's a real question as to whether or not fees and commissions eat away at the actual profit people should be getting on their money, especially with 'funds of funds' and that kind of thing.
Wall Street bonuses are great for raising your blood pressure, but they're an irrelevant drop in the ocean compared to the amount of money Wall Street invests every day, enabling companies companies to design, build and sell tangible things.
Goldman Sachs bonus pool for '10 was 16 billion dollars. That's with a market cap of $82 billion. In other words, Goldman paid out 19% of it's entire corporate value in bonuses in 2010. They have about $735 billion under management, so that means they paid out 2.1% of all the money that has been entrusted to them as bonuses. That's not really a drop in the bucket.
posted by delmoi at 8:21 PM on November 22, 2010 [56 favorites]


It is not an exaggeration to say that nearly every product you touch, every store you go into, every book you buy and every cell phone you talk on was made possible by modern corporate finance.
No, it was made possible by finance. The "modern" part, that's just how wallstreet managed to figure out how to steal as much of the profits as they could. Something like 20% of all corporate profits in the US go to wallstreet. And remember, profits come after bonuses.

I bet you could replace 99% of all wallstreet does with computers programmed to distribute capital as effectively as possible, rather then make as much profit for owner.
posted by delmoi at 8:27 PM on November 22, 2010 [16 favorites]


The fact that Wall Street also performs useful functions does nothing to change the fact that, left unchecked, greed can lead it to begin functioning in societally and economically catastrophic ways. We're not at the mercy of any inevitable long-term economic cycle--except in the sense that we're doomed to repeat previous mistakes we don't learn from. And of course, the general rule that all things that begin, at some point end.

Yes, well-regulated, responsible banks are good for society. Rampant speculation and fraud--negligent practices like packaging the same mortgage into multiple securities for resale because you couldn't be bothered to follow the right record-keeping procedures (or because you saw an opportunity to take home a fatter bonus)--are not good for society. Sure, we don't have to throw out the baby with the bathwater, but for God's sake, let's throw out the bathwater.
posted by saulgoodman at 8:32 PM on November 22, 2010 [9 favorites]


On Wall Street pay is the problem, again
posted by various at 8:54 PM on November 22, 2010


This is mostly a symptom of an over-leveraged system. When the entire economy is operating on n-th degree leverage, the money guys take a proportionally larger cut. When the leverage goes down, the proportion the house takes goes down. Yet another data point in the bankruptcy of America, sadly.
posted by unSane at 8:56 PM on November 22, 2010 [3 favorites]


It is my understanding, as a fairly uninformed person, that what these markets provide is "liquidity". What I do not understand is how much liquidity is enough. If you can make several trades -per second-, which I understand is not at all a rapid rate, are not the investments liquid enough?

This question tends to my real question, which is - how much liquidity should we be paying for, and is the amount extant excessive?
posted by jet_silver at 8:59 PM on November 22, 2010


Interesting perspective delmoi.

Personally I'm under the impression that the finance industry in the US may be a bit similar to the cocaine industry in Columbia in the sense that there's so much money going on in it that everybody who's influential and threatens it gets a cut. (Well,, in Columbia you get killed, so the comparison only holds remotely)

Another complication might be in the fact that countries will be loath to reign in international investment banking for fear of losing out on the investments and the windfall. Finance is war by other means. And nobody easily sticks to smaller guns.

A third complication for the US, I imagine, is that the national ideology is strongly geared in favour of pillage finance. Personally I think government can be a tool in moulding a society according to what the people of that society value. As such government, legislation, etc would be the tool to keep unwanted effects of pillage finance in check. But that triggers ideological phrases such as 'do you hate our freedom' and 'communism' etc.

Btw I think democrats should do a much better job of creating a strong ideological narrative around their values with phrases that have similar strength as those ones.
I almost typed 'alternative narrative'. But that would be wrong because being 'alternative' it would be secondary to the conservative narrative.

Btw this reminds me of the economic rhineland model vs the anglo-saxon model as I was taught in school. The Netherlands has been moving from the rhineland model towards the anglo-saxon model as old rich dutch companies were torn apart and sold for scraps internationally by international investment funds.
An investment banker would say that those actions were good in the sense that they remove waste.
From a (european?) societal perspective that is an immoral thing to say because companies are not only money machines but also persona (cf legal personality) in the societies where they operate. With all the rights and obligations of being a good citizen that that entails.
To put it differently; what they call waste can have value to a society.

My new narrative; 'pillage finance'.

Ah well. 6 am. Time to go to work.
posted by joost de vries at 8:59 PM on November 22, 2010 [5 favorites]


There are many possible stories of functional capitalism. What we have is one of them. But it might not be that functional, if functional means sustainable. Those other possible stories? We'll not likely be able to explore them (the further downhill the water is flowing, the harder to change its direction).

Eventually, the system will not be functional and the paradigm will change.

I bet you could replace 99% of all wallstreet does with computers programmed to distribute capital as effectively as possible, rather then make as much profit for owner.

But then, why would the owner lend the capital to someone for the alleged "efficient use?" And who decides what's "efficient" in the first place. Efficient requires a value judgment as to what the goods of the society are. There is no "most effcient use of capital."

That's what capitalisim is supposed to do. By diverting the capital to places where the most profit can be earned, it is, theoretically diverting it to the most effcient use--the use that creates the most wealth.

As for the computers, they control the vast majority of the capital in the world today. And they don't program themselves. That's where the managers come in.

My dad used to ride into work with his boss, the general counsel--the son of a Dutch communist garbage collector. Leftists that they were, they'd discuss what they would do when the revolution came on the way up.
posted by Ironmouth at 9:08 PM on November 22, 2010


The serious answer is fairly straightforward. It's in the consumers' hands-- stop playing the stock market roulette wheel, stop buying mutual funds and stop buying houses using 10-to1 leverage. The key to a healthy financial sector: caloric restriction.

The consumers are a drop in the bucket. The largest single investing entity in the US is CALPERS, the state employee's pension fund.

And how does not using money to make more help anyone?

What we need is a progressive income tax designed to reward working and policies designed to increase real wages relative to inflation.
posted by Ironmouth at 9:12 PM on November 22, 2010 [4 favorites]


John Lanchester in the LRB has been good on this - his fable in this piece about eWidget and Goodwidget shows how the markets often destroy value:
Thus, although Goodwidget actually sells more widgets and makes more money than eWidget – it made £500 million last year – because it seems to have less potential for growth, its shares are, in terms of their earnings, cheaper. The shares are priced at ten times their earnings, giving the company a market capitalisation of £5 billion. Goodwidget, despite earning more than twice as much as eWidget, is worth only half as much on the stock market. All money is not created equal. The money earned by Goodwidget is worth much less than the money earned by eWidget. This is one of those points of stock-market logic which seems surreal, nonsensical and wholly counterintuitive to civilians, but which to market participants is as familiar as beans on toast. (An example: when AOL took over Time Warner, the old media company supplied 70 per cent of the profit-stream, but ended up with 45 per cent of the merged firm, because AOL’s market cap was so much bigger. How successfully did that play out? Well, at the time of the merger, the new combined company’s market capitalisation was $350 billion. Today it’s $28.8 billion. That’s $321.2 billion in value gone with the wind. I say again, for anti-capitalists, merger = fiesta.)
posted by Abiezer at 10:28 PM on November 22, 2010 [2 favorites]


I think Wall Street does perform a useful function. The major problem is not bonuses per se, but incentive alignment. If you give me $100 and put me at a poker table and say "You can keep half of anything over $100 you have at the end of the day." Even assuming I'm a good player, I will take unnecessary risks because that is how I'm rewarded. I get the same if you break even as if you lose everything, so I'll go for doubling up.

I think CEOs and CFOs should be required to escrow most of their compensation for 5-10 years which is at risk if their firm fails.
posted by justkevin at 10:32 PM on November 22, 2010 [2 favorites]


It's times like these where I wish I had both a rifle and a wall.
posted by Sphinx at 10:33 PM on November 22, 2010 [2 favorites]


Thus, although Goodwidget actually sells more widgets and makes more money than eWidget – it made £500 million last year – because it seems to have less potential for growth, its shares are, in terms of their earnings, cheaper. The shares are priced at ten times their earnings, giving the company a market capitalisation of £5 billion. Goodwidget, despite earning more than twice as much as eWidget, is worth only half as much on the stock market.

Its called the time value of money and it is at the core of joint-stock corporations and finance. 1% of something with a growth potential of 100,000 is worth less that 1% of something with a growth potential of 1,000,000.

But that's valuation and therein lies the rub.
posted by Ironmouth at 10:34 PM on November 22, 2010 [1 favorite]


I guess I don't get it, can't wall street just turn the same (or similar) analysis powers it already uses for market speculation on itself to prove or disprove whether the massive increase in the financial industry has resulted in improved acceleration of the US economy? That way we can stop talking in ideals and start talking in numbers. I mean, I have similar thoughts to the the author of this article, but that is not necessarily a compliment, because I have done no research and have little background in economics.

Not that I would readily believe a single study from a finance institution about itself, especially given finance institutions incredible aptitude for prediction, but I would like to see real research done on this, not just another piece meant to make us angry, or another economist's oversimplified predictions.
posted by tmthyrss at 10:35 PM on November 22, 2010


But then, why would the owner lend the capital to someone for the alleged "efficient use?" And who decides what's "efficient" in the first place.
The same reason people invest in index funds: They would get profit off economic growth as a whole. I don't have a problem with rich people speculating with their money, my question what's with the huge industry built on speculating with other people's money?
Efficient requires a value judgment as to what the goods of the society are. There is no "most effcient use of capital."
Of course it requires a value judgment. What's wrong with value judgments.
That's what capitalisim is supposed to do. By diverting the capital to places where the most profit can be earned, it is, theoretically diverting it to the most effcient use--the use that creates the most wealth.
Well, that's obviously a value judgment itself. In particular it values the creation of wealth without regards to its distribution, but second of all, is it even true? The bubbles and crashes we've seen are pretty clear indicators that markets can be irrational and full of cognitive biases (Like assuming that AAA rated stuff is good without analyzing the underlying quality of the assets). The economy is operating way under potential right now, and 10% unemployment is.

And anyway, just because a lot of people believe what you say about capitalism doesn't necessarily make it true. Especially since there are all sorts of government regulations that make the system worse in order to benefit the huge banks. CALPERS is actually a good example of that: The government mandates that employees give up a chunk of their wealth to be managed, but also decides who gets to manage it. The monopoly that ratings agencies have is another problem (although I think there was some addressing of that in the new financial regulation)
As for the computers, they control the vast majority of the capital in the world today. And they don't program themselves. That's where the managers come in.


The only challenge comes from the fact that they are trying to out-game each other. In CS terminology it's a multi-agent environment where different algorithms compete with each other. But absent competition the programming would be much less challenging, first of all.
The consumers are a drop in the bucket. The largest single investing entity in the US is CALPERS, the state employee's pension fund.

And how does not using money to make more help anyone?
Why not let individual employees choose who manages their money, or allow them to make their own investment decisions rather then letting one person or group do all the management. Again this is the problem I'm talking about. The money is owned by California state employees, but it's actually managed by wallstreet for their own gain. There's a disconnect between the people who own the assets and the people who actually manage them.
posted by delmoi at 10:37 PM on November 22, 2010 [2 favorites]


none of that is necessary for the function wall street provides to society: distributing capital.

I'm sorry, but this is completely wrong. If investors do their job poorly, the poor return on investment mean that your bank accounts generate less interest, your pension grows more slowly, etc. If venture capital is poorly allocated, jobs are created that almost immediately disappear (when the companies lose money) along with contracts that cannot be fulfilled, and so on. So, the effects of poor investment are poor growth and instability.

This statement is ridiculous given the criticism of the irrational investment behind every bubble.
posted by esprit de l'escalier at 10:41 PM on November 22, 2010 [2 favorites]


>It's times like these where I wish I had both a rifle and a wall.

No need for wishes! Thanks to the magic of capitalism, you can get both online with a credit card.
posted by chavenet at 10:48 PM on November 22, 2010 [1 favorite]


If venture capital is poorly allocated, jobs are created that almost immediately disappear

Well, it depends. If a VC has two choices, one company that will grow and provide a 100% ROI, and another that won't grow but will just exist forever without turning a profit, if he invests in the unprofitable business the jobs will stay forever, but he won't get his money back.
posted by delmoi at 10:53 PM on November 22, 2010


Well, it depends. If a VC has two choices, one company that will grow and provide a 100% ROI, and another that won't grow but will just exist forever without turning a profit, if he invests in the unprofitable business the jobs will stay forever, but he won't get his money back.

What if the company loses money?
posted by esprit de l'escalier at 10:54 PM on November 22, 2010


What if the company loses money?

That's not part of the hypothetical.
posted by delmoi at 11:03 PM on November 22, 2010


I thought your point was that "for the entire system it doesn't matter at all how good the players are." Bad investors invest in companies that will lose money.
posted by esprit de l'escalier at 12:05 AM on November 23, 2010


I thought the definition of "good" within a given system was meaningless if not attributed by or to the system itself. Bad horses put the cart before themselves.
posted by 7segment at 12:27 AM on November 23, 2010


I thought your point was that "for the entire system it doesn't matter at all how good the players are." Bad investors invest in companies that will lose money.

Right my point was that the worse they are, the less money they will make. If you make $0, you're not a good investor. But you haven't lost any money either. There can still be lots of inefficiency in free market systems.
posted by delmoi at 4:11 AM on November 23, 2010


Also, here's General Free Market Hugger Megan McArdle talking about the pervasiveness, popularity, and success of central planning (in the form of subsidies) in modern China. The idea that "The market is the best way to do this" is a belief that's not really based anything empirical, it's just a religious fixation people have.
posted by delmoi at 4:16 AM on November 23, 2010 [1 favorite]


I had a post back a few months ago about the work of Paul Woolley and his Centre for the Study of Capital Market Dysfunctionality

"The Future of Finance"


They are doing gods work.
posted by JPD at 5:21 AM on November 23, 2010 [3 favorites]


Old dude reminiscing...
There was a time when Wall Street was this mysterious playground for the very wealthy. Regular working people never gave it a thought. Didn't have to. They were building pensions at their place of work, paying in to Social Security, and, as much as they could, were putting savings away at their local bank. Wall Street (or "playing the market" as it was called) was something your rick uncle did. The nightly news gave a little 10=second mention as to how the Dow Jones did for the week in the middle of the Friday night broadcast. The system worked. The system was stable, accountable, and understandable.

Then, things started changing.

The concept of a pension began to fade. In its place were all manner of retirement products, all tied tightly to the stock market. And these plans required employee contributions. Suddenly, workers found themselves having to become aware of this baffling thing called Wall Street. Next, banks gave-up on common savings accounts, preferring to push depositors into products that, too, were tied to the market.

The next move came as employers started eliminating even the market-based retirement products (or eliminating their contribution to them) Workers increasingly found themselves required to expose themselves even more to Wall Street's fangs. Required to understand systems that even the day-to-day players often are taxed to fully explain.

And, now, Wall Street stories lead the news. Night-after-night. We're treated to continuous tickers on our screens. And workers are looking at the very real possibility that their last piece of their retirement puzzle that has remained free of Wall Street's grasp, Social Security, could be handed-over to the vagaries of market forces in the near future.

Frankly, I'm surprised Wall Street accounts for just a quarter of profits. But, I'm sure they'll improve on that in short time.

Now, get off my lawn.
posted by Thorzdad at 5:30 AM on November 23, 2010 [10 favorites]


Lololol @ "we need Wall Street so we can make stuff". RTFA.

The crash destroyed every penny of wealth Wall Street created since the last one (tech stocks). Further, actually directing capital to companies creating useful is an increasingly minor part of "modern" Wall Street. It's kind of the whole problem people have been talking about since c. 2008, in case some of you haven't noticed. Don't worry though, people have changed and things are different this time.
posted by r_nebblesworthII at 5:39 AM on November 23, 2010 [2 favorites]


yeah - as others have said - yes there is a legit role for the financial markets but maybe, maybe a third of all capital markets employees are engaged in those businesses. And they tend to not be those garnering the most obscene paychecks (note - I said most obscene, they are still amazingly overpaid for the value they provide)
posted by JPD at 6:14 AM on November 23, 2010


If you make $0, you're not a good investor. But you haven't lost any money either. There can still be lots of inefficiency in free market systems.

Actually, no. This is a great illustration of how finance works and will provide an explanation of the time value of money. If you make 0$ you have lost the money you could have made if you put it into an investment with steady returns--an investment with a continuing return. If you pull your investment after a few years of making no money, you've lost the 5% you could have made just dumping it into a bank account.

To understand how and why we got here you have to understand the basic economics behind the system. Money not making money is losing money.
posted by Ironmouth at 6:38 AM on November 23, 2010 [2 favorites]


I guess I don't get it, can't wall street just turn the same (or similar) analysis powers it already uses for market speculation on itself to prove or disprove whether the massive increase in the financial industry has resulted in improved acceleration of the US economy?
Why would they do that?

Wall Street isn't about making money for the US its about making money for the holders of capital. That's why it has to be well-regulated, so a few people don't bring the rest of us down.
posted by Ironmouth at 6:45 AM on November 23, 2010


Wall Street isn't about making money for the US its about making money for the holders of capital. That's why it has to be well-regulated, so a few people don't bring the rest of us down.

If only Congress hadn't been purchased by Wall Street in the 1990's, we might live in a world where regulation was possible.
posted by T.D. Strange at 6:56 AM on November 23, 2010


If only Congress hadn't been purchased by Wall Street in the 1990's, we might live in a world where regulation was possible.


People like to say this, but in reality the road to deregulation began in 1970's when trading commissions were deregulated at the very latest. Most of the big "innovations" that really kicked people in the ass this time around were created in the 1980's.
posted by JPD at 7:10 AM on November 23, 2010


Wall Street bonuses are ...an irrelevant drop in the ocean compared to the amount of money Wall Street invests every day, enabling companies companies to design, build and sell tangible things.

A drop is about 50 microlitres - there are 20,000 in each litre of water. A cubic kilometre of water contains 20,000 trillion drops of water and there are about 80 million cubic kilometres of water in the relatively small Atlantic.

The percentage of a company's profits paid out in bonuses is known as its "Compensation Ratio". In 2010 these varied from about about 30% for the Royal Bank of Scotland to just over 60% for Morgan Stanley.

OK - I am looking at profits rather than trying to measure the amount invested in the production of "tangible things". But can we agree that those bonus reflect a little more than a typical "drop".
posted by rongorongo at 7:11 AM on November 23, 2010 [1 favorite]


Wall Street . . . is about making money for the holders of capital.

Here is our problem: You've got the arrow pointing the wrong way.

The value to society of finance is raising money for commercial activities: finding, growing, extracting, and building things.

Making money is the incentive for holders of capital to invest in these activities.

Reversing the arrow is like saying that the purpose of automobiles is to burn gasoline. (I suppose you could make that case given the current structure of things.)

We all benefit when the system is optimized for drawing investment dollars to sound commercial activities, rather than for maximizing investor ROI.

Until we fix this perception, we won't be able to fix the problem.
posted by Herodios at 7:19 AM on November 23, 2010 [6 favorites]


Wall Street isn't about making money for the US its about making money for the holders of capital. That's why it has to be well-regulated, so a few people don't bring the rest of us down.

If only Congress hadn't been purchased by Wall Street in the 1990's, we might live in a world where regulation was possible.


This is hyperbole. The capital markets are highly regulated. However, the regulations did not keep up with the development of new investment vehicles. That's why derivatives needed to be regulated and the Congress failed. Here's a great overview. And the problems go back to the 1980s. But the main problem was the Commodity Futures Modernization Act of 2000.

It is important to know the facts on these matters. I did focus on securities regulation in law school and worked as a student observer (wasn't observing shit in the litigation unit was busting ass!) at the Securities and Exchange Commission in my final year of law school. My father worked for more than 10 years at the SEC and then as a assistant general counsel for a large Fortune 250 industrial corporation with heavy finance needs.

It is important that we know the facts and not trade in hyperbole on these issues. An informed public is the greatest asset we have in working to ensure that regulation is correct. Just saying "Congress was bought" has a lot of problems. First it overstates and simplifies the problem and leads good people to believe that nothing can be done, so why try. Second, it makes it hard for people to contact their congress persons and the regulatory agencies because you are not informed. Get informed. Get out there. Have your voice heard.
posted by Ironmouth at 7:25 AM on November 23, 2010 [3 favorites]


shivohum: "Think of all the profits produced by businesses operating in the U.S. as a cake. Twenty-five years ago, the slice taken by financial firms was about a seventh of the whole. Last year, it was more than a quarter."

The data behind this claim:

In 1985: total domestic corporate profits were $294.4B; financial firms accounted for $44.8B, or 15.2% of the total.

In 2009: total domestic corporate profits were $905.7B; financial firms accounted for $242.4B, or 26.8% of the total.

So, yeah, financial firms' profits have grown faster than non-financial firms' profits; to the tune of about 7.3%/year vs 4.2%/year.
posted by Perplexity at 8:10 AM on November 23, 2010


(Forgot my source citation: Bureau of Economic Analysis NIPA Tables, 6.16A/B/C/D)
posted by Perplexity at 8:12 AM on November 23, 2010


Actually an even more horrific data piece from the BLS is the wages for finance workers relative to their educational cohort. Its like a 45 degree angle from 1970-2007. Really drives home the impact of deregulation.
posted by JPD at 8:24 AM on November 23, 2010


> Having said that, corporate finance is massively intertwined with our current way of life. There is no other paradigm with the capability to make our world run at this time.

"Paradigm: a philosophical and theoretical framework of a scientific school or discipline within which theories, laws, and generalizations and the experiments performed in support of them are formulated; broadly : a philosophical or theoretical framework of any kind."

I don't think "corporate finance" can really be called "a paradigm," any more than the power grid is. (And I think what you're referring to is really "the capital markets" as "corporate finance" is a tiny subset of what "Wall Street" does and doesn't even cover the aftermarkets, let alone derivatives.)

But no one is disputing that corporate finance is almost as necessary as electric power, water or sanitation to run our modern life (I say "almost" as there are countries such as North Korea that function, barely, without corporate finance.)

What the article is claiming is that the financial services sector takes far, far more of the pie than is justified by their contribution to the economy - and worse, that as the financial services sector rewards themselves more, everyone else suffers.

Consider that this sector took home record profits almost every year through the 00s - during a time when they were in fact destroying unbelievable amounts of value for everyone else.

Consider that many of their undertakings during this time appeared to be deliberate scams, stratagems designed to separate large companies or nations from billions of dollars by deliberately concealing horrific risks.

If the markets were really "efficient" then investment banks would lose money on deals almost as often as they made money.

No one here, no one at all, is arguing for the abolition of capital markets. We're simply claiming that they should be receiving the same sorts of rewards as other utilities like water, power, or sanitation - and that they desperately need heavy regulation, not because we are in favour of regulation (because we are not, not at all) but because decades of massive incompetence and deceit have shown that the players in these markets are deeply irresponsible, incompetent, and dishonest, and are endangering the economies of the entire world.
posted by lupus_yonderboy at 9:34 AM on November 23, 2010 [11 favorites]


> This question tends to my real question, which is - how much liquidity should we be paying for, and is the amount extant excessive?

jetsilver, this is a fascinating topic and one I wish I had time to write more about today.

My claim is that we've been paying increasingly large amounts of money for increasingly small increments in liquidity, but worse, that liquidity past a certain levels is actually bad for the economy for a large number of reasons, but basically because it allows you to sell "any old crap", and because it encourages trading and an ultra-short-term horizon over investing and a medium- to long-term horizon.
posted by lupus_yonderboy at 9:45 AM on November 23, 2010


> The capital markets are highly regulated.

Yes, but also very poorly regulated. When I was a young kid on Wall Street, there was the knowledge that if you did something illegal you would almost certainly go to jail for it.

We were surprised that Michael Milken was breaking the rules, but no one was surprised when the SEC swooped down and put them all in jail. The fact that Drexel (where I was working at the time) had to pay such huge fines that it was forced to shut down was no great surprise, either.

Milken deserved jail, absolutely, but what he did was NOTHING compared to the crimes that Goldman has admitted to committing, and received only a slap on the wrist for - a $60 million fine means, "Go out and do it again."

Even worse, as Ironmouth said, the most problematic areas such as derivatives appear to be almost entirely unregulated.

Mr. Obama's creation of "yet another regulatory agency" is one of the stupidest things I ever heard. The SEC is extremely powerful, and suffers only because they have difficulty recruiting talent (because they can't pay what an investment bank can). They have rule-making power, they have a serious investigations division, they have jurisdiction over almost all the troubled areas, and there are many other regulatory organizations that cover the remaining areas like straight banking and insurance.
posted by lupus_yonderboy at 9:56 AM on November 23, 2010 [1 favorite]


Why not let individual employees choose who manages their money, or allow them to make their own investment decisions rather then letting one person or group do all the management. Again this is the problem I'm talking about. The money is owned by California state employees, but it's actually managed by wallstreet for their own gain. There's a disconnect between the people who own the assets and the people who actually manage them.

Mostly because although it is "their" money, the payout is an obligation that is ultimately guaranteed by the government, that is to say, tax payers. Taxpayers don't want to be on the hook if the individual decides to put his entire retirement fund in, say, Lehman bonds. CALPERS is (theoretically) better at managing money than the average individual California state employee.

Absent that safety net, there's no reason why government pensions shouldn't go the way of private pensions, that is to say, 401k's rather than defined payouts. No doubt it would save California a whole lot in the long run. But would it fly with the state employees? In my experience, that guaranteed pension is a major reason to work for the government in the first place. Can't blame Wall Street for that.
posted by IndigoJones at 10:14 AM on November 23, 2010


delmoi: " Why not let individual employees choose who manages their money, or allow them to make their own investment decisions rather then letting one person or group do all the management"

How the fuck are people who don't know how to pick stocks supposed to pick people who can pick stocks? The pension fund should be ideal for this; as an employer, the state should have resources to hire, evaluate, and fire investment managers than you or I. And by guaranteeing a rate of return, the incentive is on the state and PBGC to do the due diligence.
posted by pwnguin at 10:35 AM on November 23, 2010


> How the fuck are people who don't know how to pick stocks supposed to pick people who can pick stocks?

I don't know medicine, but I pick a doctor for myself.

In an honest market, CALPERS et al would actually be a good idea. The theory is that there's a trained professional managing your pension money, and so they can do better than the rest of the market, and protect you from rapacious investment banks.

In practice, there is much evidence that pension fund managers do on average no better than the market. You'd probably expect almost this result since pension funds make up a huge chunk of the markets they are in, but then comes the result that there is no correlation between the performance of a fund manager from year to year relative to the rest of his competitors. (There's a little asterisk here, because there are a very small number of individuals, less than a dozen, who have shown they can consistently beat the market year after year - however, your pension fund simply won't be getting these people.)

To restate, there's no evidence at all that any pension fund managers systematically improve the performance of their portfolios one iota (with the asterisk noted above).

When I worked with these people, there was an additional factor that these guys are mediocre - because if they were good, they'd go to Wall Street for the real money. What happens is that the investment banks wine and dine these hicks and show them a good time and then they buy whatever crap the banks have for sale.

(Yes, I got out of that business many years ago for a large number of non-monetary reasons...)
posted by lupus_yonderboy at 10:47 AM on November 23, 2010


If a VC has two choices, one company that will grow and provide a 100% ROI, and another that won't grow but will just exist forever without turning a profit, if he invests in the unprofitable business the jobs will stay forever, but he won't get his money back.

What does this company make, unicorn treats? Companies that never make a profit eventually either go bust or get bought up and stripped of their non-productive assets. The number of companies that just go on breaking even year after year while providing decent wages and paying their bills is zero. You can't say that capital that goes to such a company isn't poorly allocated, because no company runs like that in the real world. Any company that hangs around for a long time without ever making a profit is only doing so because it is being subsidized by either taxpayers or over-optimistic investors. A firm with no obvious reason to exist is not delivering any kind of job security.

If you make $0, you're not a good investor. But you haven't lost any money either.

This is an absurdly naive view. You're a nice guy Delmoi, but you should disqualify yourself from any threads on finance or economics until you've done some study of the basics. You have lost the money you could have made by collecting interest on the money in the bank, and over time you may also have lost money via inflation - in other words, you have paid an opportunity cost. You are mistaking the nominal return for the real return. In nominal terms, wages for the average US worker have risen considerably over the last decade. In real terms, they've fallen. This sort of economic illiteracy is exactly what allowed the boom to take place.

Herodius, The value to society of finance is raising money for commercial activities: finding, growing, extracting, and building things. Making money is the incentive for holders of capital to invest in these activities.

The value to society of commercial activities are things. Making money is the incentive for finders, growers, extractors, and builders of things to invest their time in those activities. Not the only incentive, of course - some kinds of innovation or contribution are done for free, usually by experts who truly enjoy their field of work. But much of the time people like getting paid. It's not like the rest of society is unmotivated by money, now is it? I know people who would paint art for free, or invent things for free, or solve interesting problems for free. But I can't think of a lot of people who do plumbing for free or because they love handling your household wastes, nor many people who would go and work in a pipe factory for free, or people whose mission in life is to deliver pipe from the factory to the home anyone who needs it. These people are in it for the money every bit as much as the silkiest venture capitalist.

Lupus yonderboy: Mr. Obama's creation of "yet another regulatory agency" is one of the stupidest things I ever heard.

Well, the CFPA is meant to address abuses in retail banking/credit, of the sort that have hurt main street and Residential street very directly. The SEC, as you know, oversees investment banking and not retail operations. Retail banking is in theory overseen by the OCC, which has arguably been the target of regulatory capture in recent years.

In any case, although the SEC is indeed powerful, it can only bring civil rather than criminal charges. Which is why it's remarkable that nobody has had a word to say about the fact that the FBI is raiding several hedge funds in what appears to be the biggest insider trading investigation ever.
posted by anigbrowl at 10:51 AM on November 23, 2010 [2 favorites]


> In any case, although the SEC is indeed powerful, it can only bring civil rather than criminal charges.

A formality, the SEC presents the evidence to a Federal DA who brings the case, and to jail they go, like Milken or Boesky.

> nobody has had a word to say about the fact that the FBI is raiding several hedge funds in what appears to be the biggest insider trading investigation ever.

Not really much to say, is there? - and while I consider insider trading a serious crime and hope if they are convicted they serve serious sentences, these crimes pale in comparison to those of the large investment banks.

If you explain to your average man on the street what insider trading is, which is getting information about a company before anyone else does and using that to buy or sell their shares, they will say, "But I thought that's how you were supposed to make money on Wall Street!" Your insider trader makes his evil profits by getting ahead of legitimate investors - so many people take a small loss or make a little less than they would. This is criminal, and unchecked would drive people out of the markets - but the recent market hijinks are of a different order of magnitude of damage, millions of people losing their homes or livelihoods.

The various derivatives scandals are out-and-out fraud in my book, banks knowingly selling shit as gold. Why we aren't seeing dozens if not hundreds of high executives doing a perp walk is beyond me - due diligence isn't just a good idea, it's the law, and this is far beyond even that, this is deliberately lying about your own securities.
posted by lupus_yonderboy at 11:31 AM on November 23, 2010 [1 favorite]


A firm with no obvious reason to exist is not delivering any kind of job security.

So - producing a useful item and employing people to make and sell it is not an "obvious reason to exist"? I believe your description of the thinking on Wall Street is accurate, Ironmouth, and I really appreciate your comments - but isn't this kind of thinking problematic?
posted by not_that_epiphanius at 11:37 AM on November 23, 2010


Whoops, not Ironmouth at all.

Will be more careful next time.
posted by not_that_epiphanius at 11:38 AM on November 23, 2010


delmoi: " Why not let individual employees choose who manages their money, or allow them to make their own investment decisions rather then letting one person or group do all the management"

pwnguin: How the fuck are people who don't know how to pick stocks supposed to pick people who can pick stocks? The pension fund should be ideal for this; as an employer, the state should have resources to hire, evaluate, and fire investment managers than you or I. And by guaranteeing a rate of return, the incentive is on the state and PBGC to do the due diligence.


I agree with delmoi here. People who buy mutual funds are picking people who pick stocks. The most obvious things to look at is past returns and investment strategy. Better to leave the market free so that people can make the most out of their money.
posted by esprit de l'escalier at 12:16 PM on November 23, 2010


What the article is claiming is that the financial services sector takes far, far more of the pie than is justified by their contribution to the economy - and worse, that as the financial services sector rewards themselves more, everyone else suffers

You can't order firms to pay people less.
posted by Ironmouth at 12:17 PM on November 23, 2010


You can't order firms to pay people less.

Besides, even if you could, if you did so without changing the economic incentive that existed to encourage them to be overpaid to begin with, firms would just find a way around the order and overpay whoever they wanted under the table or in way that follows the letter of the law while breaking the spirit of it.
posted by VTX at 12:25 PM on November 23, 2010


Your insider trader makes his evil profits by getting ahead of legitimate investors - so many people take a small loss or make a little less than they would. This is criminal, and unchecked would drive people out of the markets - but the recent market hijinks are of a different order of magnitude of damage, millions of people losing their homes or livelihoods.

Technically, the imparter of the information has a fiduciary duty not to reveal it. If I figure out that somebody is up to something by external info I have no fiduciary access, that's not insider trading. If I'm a lawyer for a law firm that is working on a securities release and I trade upon that info, then that's insider trading. Its wrong for a person to trade on such info from another party too.
posted by Ironmouth at 12:25 PM on November 23, 2010


So - producing a useful item and employing people to make and sell it is not an "obvious reason to exist"?

Delmoi posited a company that 'will just exist forever without turning a profit.' Why do you assume that such a company would necessarily be producing something useful? You could be useless and unprofitable. If a company is selling something useful, isn't it reasonable to expect that it could make money doing so, ie turn a profit? If adding a profit margin to the sale price causes people to stop buying, then the product can't be that useful, can it?

I don't work in the finance world and have no particular desire to boost it. But this kind of thinking is just basic economics, and would be just as true of Wall Street disappeared tomorrow. What I find problematic is the belief that companies exist for the benefit of their customers, and that there is something bad going on if they accumulate any money. I find it even more problematic that people think that because some investors and bankers are predatory, all investment is predatory as a result, and that investors are somehow bad for wanting to get their investment back and make a profit. I mean, you speak of some hypothetical useful product, which I presume consumers find it profitable to buy. And you speak of employing people, which I presume involves paying them enough money to enjoy a decent standard of living, so that the employees find it profitable to work there. Yet you find it problematic that the investors want to profit as well, as though their ability to put up a million bucks to build the factory is somehow undeserving of a reward, as if they should be ashamed for having or knowing where to get such sums of money in the first place.

When I was in high school, I visited the Soviet Union for a week as a part of a student exchange program. This was around 1986, just after Gorbachev had come to power. One of the most interesting experiences of the trip was visiting GUM, Moscow's giant version of a department store. There were long lines for some things that were in short supply, while other things that were oversupplied were literally piled up in heaps. They were useful things, and people were employed in their production and sale, but those heaps of unwanted goods represented a waste of economic resources. Ultimately, that's a major factor in why the USSR went bust. The capitalistic idea that a company should be profitable is rooted in the reality that production still consumes resources, so if there is no market for the products then you need to make something else or let go of the resources.
posted by anigbrowl at 12:40 PM on November 23, 2010


F.I.R.E.

Finance
Insurance
Real Estate

These industries are creating very little of value, but sucking up far too much of the talent, resources, and profits of this nation. While it's true that corporate finance 'makes things possible', it also creates a system where the financiers become the power brokers rather then the processers.
posted by cell divide at 12:42 PM on November 23, 2010


That's weird, Counterpunch.org just posted an introspective work of short fiction by Jonathan Franzen.

Ten Ideas to Starve the Wall Street Beast

Race and Economics
posted by mrgrimm at 1:03 PM on November 23, 2010


> You can't order firms to pay people less.

You're a grown-up, Ironmouth, so surely you can predict what I'm about to say?

If the firms didn't make so much money, they would have to pay people less.

If the firms strictly obeyed the securities laws, they would make a lot less money.

If the government aggressively enforced the securities laws, firms would obey them more.

If regulations were passed to favour a truly efficient market then these firms would also make a lot less money - because every penny paid to a Wall Street firm means a penny must be taken out of some financial transaction somewhere and therefore reduces efficiency.
posted by lupus_yonderboy at 1:27 PM on November 23, 2010


You're a grown-up, Ironmouth, so surely you can predict what I'm about to say?

If the firms didn't make so much money, they would have to pay people less.

If the firms strictly obeyed the securities laws, they would make a lot less money.

If the government aggressively enforced the securities laws, firms would obey them more.

If regulations were passed to favour a truly efficient market then these firms would also make a lot less money - because every penny paid to a Wall Street firm means a penny must be taken out of some financial transaction somewhere and therefore reduces efficiency.


If the firms strictly obeyed the securities laws? which laws? how much impact would "strictly" obeying have on the bottom line?

The vast majority of what wall street does is perfectly legal. What got Wall Street in trouble was legal. Stupid, but legal.

What type of regulations are you discussing regarding favoring a truly efficient market? What are your concrete, specific proposed changes and how would said changes actually lower profits for wall street?

Its more about the problem of value investing, more than anything else. it encourages a short-term focus. Nobody's investing for dividends anymore. Although I suspect that will change.
posted by Ironmouth at 1:42 PM on November 23, 2010


> The number of companies that just go on breaking even year after year while providing decent wages and paying their bills is zero.

I'm a little baffled by this statement. Take my local deli - it's a business - I don't think there are any owners who aren't also workers there, so I imagine that that's exactly what happens.

I assume you're talking about large, publicly-traded businesses (even though the vast majority of business aren't) but even then, the idea that "it's not profitable, shut it down" is not necessarily rational from a larger perspective.

No one here is advocating centrally-planned economies or Soviet-style business - indeed, I think bringing the Soviet Union into an economic thread is equivalent to Godwining any other thread.

A country like Germany has a much more enlightened attitude than the United States. They understand that putting a lot of skilled people out of work and instantly devaluing all their skills at the same time has serious ripple effects throughout the economy.

A trained, middle-class worker is an awesome asset for a country. The United States does not understand this and throws away these assets as worthless. Germany does everything they can to find a smooth path for workers to continue being productive.
posted by lupus_yonderboy at 1:44 PM on November 23, 2010 [2 favorites]


Its more about the problem of value investing, more than anything else. it encourages a short-term focus.

no. no it doesn't mean that. that is not what "value investing" means by any possible stretch of the imagination.
posted by JPD at 1:44 PM on November 23, 2010 [1 favorite]


How the fuck are people who don't know how to pick stocks supposed to pick people who can pick stocks?
What? Lots and lots of companies have retirement programs that allow people to pick from a variety of investment vehicles. It's not uncommon. If you actually believe in the free market, then how can you not believe that people should be able to choose where to invest their money?

Here's the problem. I'm not a big believer in the free market, but right now what we have isn't a free market anyway, it's a corrupt market. One of the biggest sources of corruption is people forced to invest their money without having any control over it.

If the issue is a guarantee, California could simply issue bonds to its employees (like a company issuing stock options) that would pay out a defined benefit over their retirement.
The pension fund should be ideal for this; as an employer, the state should have resources to hire
Should, but does it? Remember coingate? State governments can be pretty fucking corrupt stupid. The incentives are all off. Or how the Bush administration invested most of the money for the Pension Benefit Guaranty Corporation into the stock market right before the crash.

Forced retirement programs aren't the only issue, though. There's a huge amount of distortions and other things brought about by poorly thought out, or simply paid-for regulation.

A free market that was actually freed would do a lot better then one where the major financial institutions have a stranglehold on the government.
You can't order firms to pay people less.
Why not? Make salary caps part of the SEC certification. If we can tell these companies what to do with their email I don't see why we can't cap their pay. If they move overseas, let 'em go. You're not going to see the government bail out a foreign bank.
Why do you assume that such a company would necessarily be producing something useful? You could be useless and unprofitable.
Just like you can make a profit doing something useless, like mutual fund managers who's fees end up causing the fund to under perform the market long term. Or High-frequency traders. Or granting AAA certifications to garbage. Etc. That's kind of beside the point.
posted by delmoi at 1:49 PM on November 23, 2010 [1 favorite]


eh there is a big difference between "breaking even" from an accounting perspective and the rationality or irrationality of closing a business down.

For example look at that deli perspective - the business might just break even, but if the family is able to live off of it, then rationally they wouldn't close down. Now they might not borrow money to expand because they know they couldn't payback the loan and feed themselves, but that's not the same thing.
posted by JPD at 1:50 PM on November 23, 2010


Oh and just to clarify here, my main idea for combating the rampant profiteering is to commoditze finance. Allow the free market to function properly by removing distortions that favor mega-banks, and people will likely switch to banks with lower fees. Or ones with better marketing. Whatever.

The other thing would be to make financial transactions as mechanical and computerized as possible. A company that needs $200 million for quarterly operating costs should be able to have that done automatically by computer, with little human involvement. Again, if there is sufficient competition, the interest rates should go pretty low. You could have banks electronically bid on the contract, for example.

Finally, you could impose a salary cap on employees of financial institutions.
posted by delmoi at 1:54 PM on November 23, 2010 [1 favorite]


Lots and lots of companies have retirement programs that allow people to pick from a variety of investment vehicles. It's not uncommon. If you actually believe in the free market, then how can you not believe that people should be able to choose where to invest their money?



Actually a big trend of the moment in the Defined Contribution space is "simplifying" the investment options. Partially because the case law is not totally clear if the plan sponsor(employer) can be held liable for someone blowing themselves up with innappropriate investment choices.

To Delmoi's point on pensions - running a Defined Benefit pension plan is inherently very different from someone managing their own 401k. It would cost plan sponsors much more to hand everyone a pile of money every year and say "invest this" then it would for them to say "we'll pay you this when you get this old".
posted by JPD at 1:55 PM on November 23, 2010


Delmoi - The things you want to change are actually pretty much commoditized already. Salary caps never work in anything. And I'm pretty sure they'd be unconstitutional unless they were agreed to via collective bargaining.
posted by JPD at 1:57 PM on November 23, 2010


> If the firms strictly obeyed the securities laws? which laws? how much impact would "strictly" obeying have on the bottom line?
> The vast majority of what wall street does is perfectly legal. What got Wall Street in trouble was legal. Stupid, but legal.

I beg to differ - under my admittedly decade-plus old understanding of the securities laws, a great deal of what transpired was in fact not just illegal but criminal.

Firms deliberately and systematically misrepresented the values of assets that they traded. Goldman and other large firms have admitted behaviour that had to involve individuals committing felonies, and (almost) no one has been charged.

Institutional clients were always presumed to be "big enough to take care of themselves". This meant that you showed them all the data, but if anything went wrong, the responsibility was their.

I am absolutely sure that it is not the case that this extends to deliberately misleading your clients, expecting to later argue that they should have figured out your dishonesty.

As for the concrete proposals, I'd immediately suggest re-instating Glass-Steagall, dramatically raising capital requirements and haircuts (i.e. the percentage of a security you can finance with with repos, repurchase agreements), imposing an absolute ban on frivolous program trades (i.e. if you try too many trades, too far out of the money, you're shut-off for a day), a tax of 0.01% on all securities transactions, and a truth-in-advertising law that requires brokers and other financial professionals to make "best efforts" to present a complete and accurate picture of any transaction that they are trying to sell you on, or else go to jail, as well as a "full disclosure" law that required investment banks to reveal their positions in pretty well all securities at pretty well all times.

As someone who worked on a trading floor myself, I'm aware that that last one is pretty draconian - unfortunately, the list of deliberate malfeasances is so long that traders have shown that they do not deserve the protection of privacy.

And I also feel that several investment banks, starting with Goldman, should immediately be shut down under the RICO statutes and their management and senior employees charged with the numerous felonies that even a cursory examination of their books and practices would undoubtedly uncover.

(And if we were wrong, well, we'd apologize and leave them to fix their own damned doors - just like what would happen to me if the police raided me by accident.)

I believe that none of these changes would have the slightest effect on the average individual, would allow the US treasury to recover billions in criminal profits, and truly make the markets efficient with respect to your average guy. I also think these would crush the investment banks without really affecting the access to capital for any real business.
posted by lupus_yonderboy at 2:04 PM on November 23, 2010 [4 favorites]


What? Lots and lots of companies have retirement programs that allow people to pick from a variety of investment vehicles. It's not uncommon. If you actually believe in the free market, then how can you not believe that people should be able to choose where to invest their money?

Here's an example: I don't like any of the funds offered to us by my company's 401k manager (Morgan Stanley). Since I don't want to put my money into companies I don't like (which is nearly impossible (for me) to do with mutual funds), I instead put my money into the only non-mutual fund option available, a "money market" account that has paid about 1% per year since 2003.

It turns out that 85% of that money market was invested in CDOs. Surprised face.

What I would like would be to put all that money in my credit union, who then loans the money out to local citizens at reasonable rates. That seems to be impossible (though I am trying to roll some money out of my 401k into my IRA, which I then can put into CDs at my credit union. That seems possible ...)
posted by mrgrimm at 2:05 PM on November 23, 2010


You can't order firms to pay people less.

Why not? Make salary caps part of the SEC certification. If we can tell these companies what to do with their email I don't see why we can't cap their pay. If they move overseas, let 'em go. You're not going to see the government bail out a foreign bank.


Because it is unconstitutional. Upon what power in the constitution would you ground such a law?

Generally, freedom of contract supreme court decisions would cover this.

And what SEC "certification" are you speaking of?
posted by Ironmouth at 2:32 PM on November 23, 2010


As for the concrete proposals, I'd immediately suggest re-instating Glass-Steagall, dramatically raising capital requirements and haircuts (i.e. the percentage of a security you can finance with with repos, repurchase agreements), imposing an absolute ban on frivolous program trades (i.e. if you try too many trades, too far out of the money, you're shut-off for a day), a tax of 0.01% on all securities transactions, and a truth-in-advertising law that requires brokers and other financial professionals to make "best efforts" to present a complete and accurate picture of any transaction that they are trying to sell you on, or else go to jail, as well as a "full disclosure" law that required investment banks to reveal their positions in pretty well all securities at pretty well all times.

Actually, I agree with most of this, 99% really. To whom should the disclosure be? Customers? The general public? I could see a general disclosure being problematic but one to customers being required.

The securitized mortgages may have been 10b-5 violations when they were being sold to consumers.

> The capital markets are highly regulated.

Yes, but also very poorly regulated. When I was a young kid on Wall Street, there was the knowledge that if you did something illegal you would almost certainly go to jail for it.

We were surprised that Michael Milken was breaking the rules, but no one was surprised when the SEC swooped down and put them all in jail. The fact that Drexel (where I was working at the time) had to pay such huge fines that it was forced to shut down was no great surprise, either.

Milken deserved jail, absolutely, but what he did was NOTHING compared to the crimes that Goldman has admitted to committing, and received only a slap on the wrist for - a $60 million fine means, "Go out and do it again."

Even worse, as Ironmouth said, the most problematic areas such as derivatives appear to be almost entirely unregulated.

Mr. Obama's creation of "yet another regulatory agency" is one of the stupidest things I ever heard. The SEC is extremely powerful, and suffers only because they have difficulty recruiting talent (because they can't pay what an investment bank can). They have rule-making power, they have a serious investigations division, they have jurisdiction over almost all the troubled areas, and there are many other regulatory organizations that cover the remaining areas like straight banking and insurance.


Agreed there. The SEC's budget was boosted considerably in the first few years of Bush II, but they spent a lot on the new HQ. It didn't seem too crowded in there. But the litigation section of the Enforcement Division seemed woefully understaffed and there had been several scandals which I can't discuss involving personnel which had weakened some of the Regional Offices. Much of the laws already exist, but nobody wants to spend tax dollars on anything.
posted by Ironmouth at 2:37 PM on November 23, 2010


delmoi: " Should, but does it? Remember coingate? State governments can be pretty fucking corrupt stupid. The incentives are all off. Or how the Bush administration invested most of the money for the Pension Benefit Guaranty Corporation into the stock market right before the crash. "

The old joke "The Republicans are the party that says government doesn't work and then they get elected and prove it" seems to apply here. I guess the major failing is that we ultimately hold citizens responsible rather than the people who failed to apply meaningful oversight. On the other hand, citizens selected these people to represent them and employees still have rights. Wikipedia suggests that Ohio repealed a law restricting what investments could be held, and that seems like dumb deregulation.

But there are similar scandals all the time in the private sector. Ponzi schemes, CDO underwriting conflicts of interest, brokers pushing .com stocks their analysts have pumped, ETFs with amazingly high failure to deliver rates, and even more mundane stuff like mutual funds that turn over too much and TV shows designed to turn investors into commission paying traders.
posted by pwnguin at 3:18 PM on November 23, 2010


during a period in which American companies have created iPhones, Home Depot, and Lipitor,

We should be excited about The Home Depot? Seriously?
posted by limeonaire at 6:26 PM on November 23, 2010 [1 favorite]


Milken deserved jail, absolutely, but what he did was NOTHING compared to the crimes that Goldman has admitted to committing, and received only a slap on the wrist for - a $60 million fine means, "Go out and do it again."

550 million. Not 60 million.
posted by ch1x0r at 6:55 PM on November 23, 2010


"...the ‘big boy’ concept,” Schlosstein explained. “You are dealing with sophisticated investors who can do their own due diligence."

This, and some of the other great discussion in this thread make me think that this has basically led to a sort of IQ arms race.

If I'm say, Goldman Sachs and I want to sell some investment to another firm that I know is bad for Firm B and good for me (or even good for Firm B but, if priced wrong, even better for me), I hire some smart people to make a really complicated security and try to sell it to Firm B. Firm B has to hire some more really smart people to try and price the thing. Next time, to get Firm B to buy into my deal, I have to hire even smarter people to make an even more complicated security and Firm B has to hire even smarter people to try and figure it out and so on. Both firms have to pay their smart folks more and more to attract and keep them.

"...a truth-in-advertising law that requires brokers and other financial professionals to make "best efforts" to present a complete and accurate picture of any transaction that they are trying to sell you on, or else go to jail, as well as a "full disclosure" law that required investment banks to reveal their positions in pretty well all securities at pretty well all times."

This at least keeps Firm B from having to spend quite as much. It take as much mental horsepower to find the flaws in the pricing methods someone else has developed as it does to develop pricing methods for a security that hasn't been designed in-house.


I had a finance professor that made an especially astute observation. Investment vehicles aren't like other products. If you're Ford and you design and manufacture a car and then put it up for sale and it flops, Ford is left with a huge investment in the factory, materials, unsold inventory, etc. If an investment firm like Goldman Sachs creates a new security and it flops, they haven't really incurred any costs. It takes some paper and some costs in administration to get ready to sell a security and you can maybe count the salary of the people who spent time creating it as a loss since they could have spent time creating something profitable. It doesn't cost them anything to try new products and fail but it does take up a lot of mental horsepower for other firms to so much as evaluate those investments and decide not to buy them.
posted by VTX at 7:29 PM on November 23, 2010


> The number of companies that just go on breaking even year after year while providing decent wages and paying their bills is zero.
I'm a little baffled by this statement. Take my local deli - it's a business - I don't think there are any owners who aren't also workers there, so I imagine that that's exactly what happens.


Do you really think the owner/workers at your local deli are just bumping along, taking home a decent wage for a deli manager ($50-75k, according to salary surveys), and ending every financial year with a net of about $0?

I find that hard to believe for multiple reasons. first, all the equipment and so forth required to run a deli costs at least 6 figures, plus delis are very location-dependent businesses so you need to be able to sign a long lease on some good commercial property in a busy location. It's also expensive to be open - I remember a mid-size burger joint where I once worked as a cook, and I think just opening the doors each morning cost about $2,000. That's most of a million a year if you're open 7 days a week, probably a lot more if you're in a downtown area or a very large city like NY. If they don't have external investors, then chances are they financed the setup of their business with some sort of loan - either from a bank, or by lending to themselves. Unless they're utterly clueless, nobody runs such a business as an extension of their personal finances because of the liability issues. So if they're left with $0 every year after all their obligations are met and they pay themselves reasonable wages, I'd say they're not very good businessmen because they have no margin for error.

However they financed it, at some point they expect to have paid off the cost of their initial investment in premises and equipment. Suppose they turn around tomorrow and the accountant says 'oh, that last payment - that's it! Your startup loan is done! From now on you no longer have to pay the bank $250,000 per year, you can do whatever you like with that money.' Well then I'd say they're making a $250k annual profit, no? So they are no longer just breaking even, they are now profitable. They could pay themselves disproportionately large salaries, or they might choose to invest some of the money back into the business....presumably with intention of making more money. Or they might open another branch in a different neighborhood, or go on a cruise and hire professional deli managers to run operations on a daily basis.

But the biggest reason I doubt the idea that your local deli just breaks even year after year is that hardly anyone is willing to take on the risk, liability, and headaches of opening and running a business just so they can make at or somewhat above the industry average for operational work ('decent wages'). People open a business because they want to make money. Making, say, $80k a year as a deli manager is pretty good in the deli industry, but it's hardly worth building your life around. There are a lot of jobs where you could make that income and leave your work at the workplace. If you open your very own deli and sign all those leases, loans, licenses, permit applications, and so on it's because you want to make rather more than you could by just being an employee. I went looking on some business sale sites to get an idea of how much it would cost me to buy a deli in New York City and the answer is at least a quarter of a million, double that for something with good numbers and no obvious red flags (lease expiring within 6 months, sketchy location etc.).

I mean, the rule of thumb for a small neighborhood coffee shop here in SF is that if it's not generating $100k/yr profit by year 3 of operation, something is terribly wrong. By profit I mean net cash flow after wages, including your own hourly wage. Gross revenue is usually 3-4 times that, since coffee shops are a pretty high-margin business. I'm sure you know such basic things - this explanation is more for the curious who may not have any business knowledge. TL;DR the point of running a business is to make some money. A business that can barely keep its doors open is not sustaining the community.
posted by anigbrowl at 9:14 PM on November 23, 2010


Godammit forgot to preview again. I meant to add for L-Y that I entirely agree with the idea of putting Glass-Steagall and other regulations back 20 years or more and making finance a less glamorous and exciting industry in which to work. But there is a limit to how much stability you can get from rule enforcement; as with technology, once the genie is out of the bottle it's hard to un-know the things that work, or ignore the fact that competitors will exploit regulatory freedoms in other markets. If you just put a set of super-restrictive regulations on Wall Street without any broader strategic context, then the big-money deals will just get made in London or Tokyo or some place instead.
posted by anigbrowl at 9:25 PM on November 23, 2010


Delmoi: The other thing would be to make financial transactions as mechanical and computerized as possible. A company that needs $200 million for quarterly operating costs should be able to have that done automatically by computer, with little human involvement. Again, if there is sufficient competition, the interest rates should go pretty low. You could have banks electronically bid on the contract, for example.

Congratulations. You've invented...derivatives. Specifically, you've come up with the idea of the credit default swap. What you propose is exactly the system whose unexpected implosion is now known as the 2008 financial crisis. Maybe if you spent a bit less time reading Rolling Stone or Huffington Post or wherever you get your financial news, and a bit more time studying how these things work then you would be able to discuss them more productively.

You don't have to go to business school or hire expensive professional advisers to understand the basics of finance. Reading the Wall Street Journal or Financial Times and being willing to put in some study time learning about unfamiliar technical things is quite sufficient. The SEC itself offers a lot of educational resources.
posted by anigbrowl at 10:50 PM on November 23, 2010


To Delmoi's point on pensions - running a Defined Benefit pension plan is inherently very different from someone managing their own 401k. It would cost plan sponsors much more to hand everyone a pile of money every year and say "invest this" then it would for them to say "we'll pay you this when you get this old".
It just seems to me that there is a huge conflict of interest in having a state take everyone's retirement money and invest it for them. If it's a guaranteed benefit that you get regardless of the performance of the portfolio, then why not just do it the same way you do social security: By paying future benefits with future taxes. SS has worked for decades that way (and it's not in any danger of collapsing, despite the rhetoric for the republicans)
It turns out that 85% of that money market was invested in CDOs. Surprised face.

What I would like would be to put all that money in my credit union, who then loans the money out to local citizens at reasonable rates. That seems to be impossible (though I am trying to roll some money out of my 401k into my IRA, which I then can put into CDs at my credit union. That seems possible ...)
This is exactly what I mean: I think you should be able to invest your retirement money in anything. If you want to just put it in a CD, or even just invest it in a friends business, you should be able to do that too. Want to buy gold? Why not? If people are forced to buy products, how is it a free market?

Of course, that means unfortunately that some people are going to gamble their money away buying put options on volatile stocks or something. So it's a good thing we have social security!
Because it is unconstitutional. Upon what power in the constitution would you ground such a law?
What's the constitutional power used to force people to buy healthcare? I'm sure you could figure something out. You certainly need a license to invest other people's money.
Congratulations. You've invented...derivatives. Specifically, you've come up with the idea of the credit default swap. What you propose is exactly the system whose unexpected implosion is now known as the 2008 financial crisis.
What a bizarre statement I'm really confused how you go from "borrow money automatically" and "Competition would drive interests rates low" to "Credit default swaps". Since credit default swaps aren't necessarily automatic, is it the competition thing?

Are credit default swaps the only security/finance mechanism you know of where competition reduces the price or something? It's just a weird statement. I know how a CDS works, and it has nothing to do with what I wrote, except that people could theoretically buy them on the loans they make. It's like I described a car and you suddenly said "You've basically just described car insurance!!!" Totally off the wall.

The problem with CDSes is that they are totally unregulated.
posted by delmoi at 12:15 AM on November 24, 2010


'Borrow money automatically'? From who, the computer? Is this the same computer that's drafting the contract, or another one that just conjures money into existence? Perhaps they're made by the perpetually unprofitable but eternally solvent company you hypothesized earlier...
posted by anigbrowl at 2:20 AM on November 24, 2010


It just seems to me that there is a huge conflict of interest in having a state take everyone's retirement money and invest it for them. If it's a guaranteed benefit that you get regardless of the performance of the portfolio, then why not just do it the same way you do social security: By paying future benefits with future taxes. SS has worked for decades that way (and it's not in any danger of collapsing, despite the rhetoric for the republicans)

SS can do that because the guarantor can also print money. States can't.

Also I don't see how just the act of running a defined benefit plan is a conflict of interest. Yes there are shitty sponsors who don't run them correctly, but hell there are defined contribution plans that do the same thing. I mean I cannot for the life of me understand why allowing people to buy company stock for their 401k is still permitted.
posted by JPD at 3:50 AM on November 24, 2010


It just seems to me that there is a huge conflict of interest in having a state take everyone's retirement money and invest it for them. If it's a guaranteed benefit that you get regardless of the performance of the portfolio, then why not just do it the same way you do social security: By paying future benefits with future taxes. SS has worked for decades that way (and it's not in any danger of collapsing, despite the rhetoric for the republicans)

If you pay future benefits with future contributions, you're assuming that you'll always maintain a large enough workforce that the company will be able to afford it. With social security, the assumption is that the population will continue to grow so there will always be more paying in than taking out. Failing that, the government has the power to tax, print money, or both. Companies especially can't do that and they shouldn't have to count on having the same size work-force. States can tax some but it doesn't have the same infinite solvency that the Federal Government does.

The other big issue with defined benefit plans is that they show up on the balance sheet as a liability. With labor heavy companies, this liability can come to dominate their balance sheet. To me, this is one of the main reasons that defined benefit plans have gone away. If I own a company and my choices are pay for my employee's retirment later but have to manage this enormous liability that you can't restructure or pay less now, expense it, and be done with it forever, I'll take defined contribution every time.

The solution is pretty simple. You can simply give employee's with a 401k the option to have a defined benefit plan run by a separate trust. The company expenses their contributions to the trust the same as if they were doing it to a 401k and the employees who've opted in do the same. The trust basically runs as a mutual fund and is paid to look out for the best interests of their customers. It isn't that different than investing in a mutual fund through your 401k but it takes the burden of learning about investments out of the hands of the employee and gives them the same warm fuzzy feeling that a pension does. The trust will also still continue to function as long as there are employees who qualify or will qualifyfor benefits even if the company closes its doors. Frankly, I don't want to have to count of the future solvency of my employer to be able to retire.

The handy thing would be if made the inclusion of the option to do an in-service roll-over from a 401k/403b to an IRA manditory. Some companies offer this already. That way, I can have my 401k and if I know what I'm doing, I don't have to wait until I leave the company to get complete control of my retirment investing.
posted by VTX at 6:15 AM on November 24, 2010


Do you really think the owner/workers at your local deli are just bumping along, taking home a decent wage for a deli manager ($50-75k, according to salary surveys), and ending every financial year with a net of about $0?

I personally know lots of small business owners who are doing exactly this.

Remember, if you're a sole-proprietor, you still get paid whether your business is profitable or only breaking even. So there's an obvious immediate return to the real people actually doing the work even if management doesn't have to siphon off some of the fair market compensation for the labor for the purpose of redistributing it in the form of profits. But salary--the actual financial compensation for doing work--is viewed only as a cost of doing business, not a form of profit.

Even businesses that just break even can make lots of money for the people who run them. In fact, many businesses that do just break even do so exactly because instead of cutting into salaries in order to accumulate profits for investors or owners, they just pay their workers more.
posted by saulgoodman at 7:49 AM on November 24, 2010 [3 favorites]


I view the growth of the financial sector and the cultural trend toward devaluing real (as opposed to speculative) investment as a major contributor to the general wage stagnation we've seen over the past couple of decades.
posted by saulgoodman at 7:52 AM on November 24, 2010


JPD: "I mean I cannot for the life of me understand why allowing people to buy company stock for their 401k is still permitted."

As I understand it, the 401k was originally used by highly compensated executives who's compensation is partially in company stock, in order to match management's incentives with shareholders'. I guess it was ruled unfair to give these people tax sheltered income and deny the workers the same advantages, so executive limits are defined by overall workforce participation rates.

I can see that loading the general employee population with stock is a large risk, but I'm not sure how you prevent them from investing in the company, require executives to do so, and not violate fairness.
posted by pwnguin at 8:23 AM on November 24, 2010


They've since changed the tax laws so execs loading up their 401k's with stock is no longer tax advantaged the way it used to be so this isn't an issue. You do still have firms that choose to match contributions in stock - but once that vests the employees can diversify.
posted by JPD at 9:44 AM on November 24, 2010


'Borrow money automatically'? From who, the computer? Is this the same computer that's drafting the contract, or another one that just conjures money into existence? Perhaps they're made by the perpetually unprofitable but eternally solvent company you hypothesized earlier
People would borrow the money from lenders.

Also I notice you didn't even bother to try to explain what the hell you meant about my proposal being nothing at all like CDS.

The system would work like any other exchange, computers can buy and sell stocks today, no problem.
If you pay future benefits with future contributions, you're assuming that you'll always maintain a large enough workforce that the company will be able to afford it. With social security, the assumption is that the population will continue to grow so there will always be more paying in than taking out. Failing that, the government has the power to tax, print money, or both. Companies especially can't do that and they shouldn't
We were talking about CALPERS, which is run by the state of California. It's true that California can't print money. But Social Security isn't supposed too cause money to be printed either. SS buys federal bonds and uses that to pay out benefits. California could do the same thing, buy state bonds and use that to pay out.

Or, as I said just give people direct control over their retirement. That would get rid of the conflict of interest. The state could direct people to super-safe investments if they aren't interested in doing it themselves.
posted by delmoi at 3:02 PM on November 25, 2010


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