Azazello1313 Posted October 28, 2011 Share Posted October 28, 2011 this is terrific the whole thing is definitely worth reading, and there's grist for everyone's mill. one excerpt: If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets. And to be sure, the high incomes in finance should give us all pause. The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices. Most of the time investors will do well by this strategy, since big, unexpected moves are outliers by definition. Traders will earn above-average returns in good times. In bad times they won’t suffer fully when catastrophic returns come in, as sooner or later is bound to happen, because the downside of these bets is partly socialized onto the Treasury, the Federal Reserve and, of course, the taxpayers and the unemployed. To understand how this strategy works, consider an example from sports betting. The NBA’s Washington Wizards are a perennially hapless team that rarely gets beyond the first round of the playoffs, if they make the playoffs at all. This year the odds of the Wizards winning the NBA title will likely clock in at longer than a hundred to one. I could, as a gambling strategy, bet against the Wizards and other low-quality teams each year. Most years I would earn a decent profit, and it would feel like I was earning money for virtually nothing. The Los Angeles Lakers or Boston Celtics or some other quality team would win the title again and I would collect some surplus from my bets. For many years I would earn excess returns relative to the market as a whole. Yet such bets are not wise over the long run. Every now and then a surprise team does win the title and in those years I would lose a huge amount of money. Even the Washington Wizards (under their previous name, the Capital Bullets) won the title in 1977–78 despite compiling a so-so 44–38 record during the regular season, by marching through the playoffs in spectacular fashion. So if you bet against unlikely events, most of the time you will look smart and have the money to validate the appearance. Periodically, however, you will look very bad. Does that kind of pattern sound familiar? It happens in finance, too. Betting against a big decline in home prices is analogous to betting against the Wizards. Every now and then such a bet will blow up in your face, though in most years that trading activity will generate above-average profits and big bonuses for the traders and CEOs. To this mix we can add the fact that many money managers are investing other people’s money. If you plan to stay with an investment bank for ten years or less, most of the people playing this investing strategy will make out very well most of the time. Everyone’s time horizon is a bit limited and you will bring in some nice years of extra returns and reap nice bonuses. And let’s say the whole thing does blow up in your face? What’s the worst that can happen? Your bosses fire you, but you will still have millions in the bank and that MBA from Harvard or Wharton. For the people actually investing the money, there’s barely any downside risk other than having to quit the party early. Furthermore, if everyone else made more or less the same mistake (very surprising major events, such as a busted housing market, affect virtually everybody), you’re hardly disgraced. You might even get rehired at another investment bank, or maybe a hedge fund, within months or even weeks. Moreover, smart shareholders will acquiesce to or even encourage these gambles. They gain on the upside, while the downside, past the point of bankruptcy, is borne by the firm’s creditors. And will the bondholders object? Well, they might have a difficult time monitoring the internal trading operations of financial institutions. Of course, the firm’s trading book cannot be open to competitors, and that means it cannot be open to bondholders (or even most shareholders) either. So what, exactly, will they have in hand to object to? Perhaps more important, government bailouts minimize the damage to creditors on the downside. Neither the Treasury nor the Fed allowed creditors to take any losses from the collapse of the major banks during the financial crisis. The U.S. government guaranteed these loans, either explicitly or implicitly. Guaranteeing the debt also encourages equity holders to take more risk. While current bailouts have not in general maintained equity values, and while share prices have often fallen to near zero following the bust of a major bank, the bailouts still give the bank a lifeline. Instead of the bank being destroyed, sometimes those equity prices do climb back out of the hole. This is true of the major surviving banks in the United States, and even AIG is paying back its bailout. For better or worse, we’re handing out free options on recovery, and that encourages banks to take more risk in the first place. Quote Link to comment Share on other sites More sharing options...
MojoMan Posted October 28, 2011 Share Posted October 28, 2011 (edited) Very interesting. If there are undeservedly rich people, are there deservedly poor people? Edited October 29, 2011 by MojoMan Quote Link to comment Share on other sites More sharing options...
Ursa Majoris Posted October 29, 2011 Share Posted October 29, 2011 this is terrific the whole thing is definitely worth reading, and there's grist for everyone's mill. one excerpt: Banks are hierarchical structures, thus there are obvious remedies to be put in place. Simply promise that if they take a risk that goes south causing destruction and damage to the economy in general, one in ten of management above a certain level will be selected by ballot and shot. It is appropriate that with the great rewards associated with great risk comes the possibility of great downside. Let's force the bankers to put real skin in the game - their own. Such a solution would allow them to continue exactly as before as long as they have the balls. Not only that, the amusement to be afforded the general public in watching a squirming, crying, begging banker whose ballot has been selected being dragged out to the middle of a football field to be dispatched would make a fortune from pay-per-view, the proceeds of which could be used to partially rectify the financial losses of the bankers victims. It's a win-win! Well, except for the selected bankers but who really gives two chits about them anyway? Quote Link to comment Share on other sites More sharing options...
BeeR Posted October 29, 2011 Share Posted October 29, 2011 Banks are hierarchical structures, thus there are obvious remedies to be put in place. Simply promise that if they take a risk that goes south causing destruction and damage to the economy in general, one in ten of management above a certain level will be selected by ballot and shot. There's the problem. Not nearly enough PERSONAL accountability among managers/execs/etc. POFSs hiding behind the corporate structure and that goes way beyond banks. Quote Link to comment Share on other sites More sharing options...
Ditkaless Wonders Posted October 29, 2011 Share Posted October 29, 2011 Banks are hierarchical structures, thus there are obvious remedies to be put in place. Simply promise that if they take a risk that goes south causing destruction and damage to the economy in general, one in ten of management above a certain level will be selected by ballot and shot. It is appropriate that with the great rewards associated with great risk comes the possibility of great downside. Let's force the bankers to put real skin in the game - their own. Such a solution would allow them to continue exactly as before as long as they have the balls. Not only that, the amusement to be afforded the general public in watching a squirming, crying, begging banker whose ballot has been selected being dragged out to the middle of a football field to be dispatched would make a fortune from pay-per-view, the proceeds of which could be used to partially rectify the financial losses of the bankers victims. It's a win-win! Well, except for the selected bankers but who really gives two chits about them anyway? I can get behind this. I think it might also be appropriate to grind their bloated corpses up for pet food and tuo turn their trophy spouses out until they are no longer a trophy. Quote Link to comment Share on other sites More sharing options...
Azazello1313 Posted October 29, 2011 Author Share Posted October 29, 2011 Banks are hierarchical structures, thus there are obvious remedies to be put in place. Simply promise that if they take a risk that goes south causing destruction and damage to the economy in general, one in ten of management above a certain level will be selected by ballot and shot. It is appropriate that with the great rewards associated with great risk comes the possibility of great downside. Let's force the bankers to put real skin in the game - their own. Such a solution would allow them to continue exactly as before as long as they have the balls. Not only that, the amusement to be afforded the general public in watching a squirming, crying, begging banker whose ballot has been selected being dragged out to the middle of a football field to be dispatched would make a fortune from pay-per-view, the proceeds of which could be used to partially rectify the financial losses of the bankers victims. It's a win-win! Well, except for the selected bankers but who really gives two chits about them anyway? well, that or we could let them lose money rather than subsidizing their risk at no expense. any regulation should be focused on making sure that no one entity can become "too big to fail", and they have to eat their own chit when/if the time comes. Quote Link to comment Share on other sites More sharing options...
Perchoutofwater Posted October 29, 2011 Share Posted October 29, 2011 Banks are hierarchical structures, thus there are obvious remedies to be put in place. Simply promise that if they take a risk that goes south causing destruction and damage to the economy in general, one in ten of management above a certain level will be selected by ballot and shot. It is appropriate that with the great rewards associated with great risk comes the possibility of great downside. Let's force the bankers to put real skin in the game - their own. Such a solution would allow them to continue exactly as before as long as they have the balls. Not only that, the amusement to be afforded the general public in watching a squirming, crying, begging banker whose ballot has been selected being dragged out to the middle of a football field to be dispatched would make a fortune from pay-per-view, the proceeds of which could be used to partially rectify the financial losses of the bankers victims. It's a win-win! Well, except for the selected bankers but who really gives two chits about them anyway? How many of those risks would they have taken if not for government intervention via the CRA, Freddie, and Fannie? Don't get me wrong, the government is not the only one to blame, I still blame the bankers as well, but it seems that some, particularly those with more liberal leanings completely gloss over or forget about the part that the government played in this. I also feel that next time any company fails it should be allowed to fail, I don't care what it is. We need to stop interfering with capitalism, the government needs to stop picking winners and losers, and people need to start having to pay for the bad decisions they make in life, whether it be the CEO, the stockholder, or the wino on the street. Quote Link to comment Share on other sites More sharing options...
wiegie Posted October 29, 2011 Share Posted October 29, 2011 If there are undeservedly rich people, are there deservedly poor people? absolutely Quote Link to comment Share on other sites More sharing options...
westvirginia Posted October 31, 2011 Share Posted October 31, 2011 Banks are hierarchical structures, thus there are obvious remedies to be put in place. Simply promise that if they take a risk that goes south causing destruction and damage to the economy in general, one in ten of management above a certain level will be selected by ballot and shot. It is appropriate that with the great rewards associated with great risk comes the possibility of great downside. Let's force the bankers to put real skin in the game - their own. Such a solution would allow them to continue exactly as before as long as they have the balls. Not only that, the amusement to be afforded the general public in watching a squirming, crying, begging banker whose ballot has been selected being dragged out to the middle of a football field to be dispatched would make a fortune from pay-per-view, the proceeds of which could be used to partially rectify the financial losses of the bankers victims. It's a win-win! Well, except for the selected bankers but who really gives two chits about them anyway? Can we do this with politicians too? If so, I'm in dude! Quote Link to comment Share on other sites More sharing options...
SEC=UGA Posted October 31, 2011 Share Posted October 31, 2011 Can we do this with politicians too? If so, I'm in dude! I've always enjoyed a good, well deserved, killing. Quote Link to comment Share on other sites More sharing options...
Azazello1313 Posted October 31, 2011 Author Share Posted October 31, 2011 Can we do this with politicians too? If so, I'm in dude! hmm, watching barney franks, the various executives of fannie and freddie, the CEOs of goldman, AIG, citi, etc. all being led to the gallows....damn I could almost get behind that. Quote Link to comment Share on other sites More sharing options...
Jimmy Neutron Posted October 31, 2011 Share Posted October 31, 2011 Can we do this with politicians too? If so, I'm in dude! Yup - gotta string up 3 politicians that enable the WS corruption for every crooked banker and CEO. Hang 'em high. Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.