Perspectives on the global economic meltdown- (Nov 28 2010)

[Arjun]

It is that oligarchy that Neshant is attacking and rightly so. But that message gets lost in all the rants.

The message to rant ratio in his posts tends to be pretty low. The zombie-like repetition of his pet-phrases is guaranteed to suffocate any message from coming through, even if he had one out there.

Neshant is questioning the very basis and validity of the system which is controlled by bankers who suck up huge amount of wealth from the productive society.

He needs to move to the next level of detail about the specific problems with the 'system'-

- Fiat currency vs. Gold: there is some basis to discuss this which I have no problem with (as long as its not meant to be self-serving talking up of his own holdings in precious metals)
- Fed policy: There is a lot to criticize out here.
- The 'useless middleman industry' (his characterization of the entire financial services industry): We've been through this before. If he has suggestions like you do to better regulate the industry that is welcome, but this ranting about the existence of the industry in itself is completely ridiculous in the absence of any meaningful alternative.

However, on the flip side it is also true that the same bankers took out hundreds of billions out of the banks as bonuses since then. This money might as well be kept as a reserve to shore up the capital base.

Your primary issue is to do with the bonuses on Wall Street. It is fair to restrict the bonuses in the lending-related businesses which were the primary culprits in moving the banks to ask for TARP funding. As you probably know, the real large bonuses on Wall Street are not really on the lending side - it is far higher in investment banking, M&A advisory, trading, PWM & asset management. These businesses were hit, but were never the primary cause for the banks to be near bankruptcy - so I don't see a case for restricting bonuses on the non-lending businesses. If you take Goldman and Morgan Stanley - how much of their income derives from the lending or lending-related segments: the percentage is probably in single digits.

[VikramS]

Arjun
Go read MS' Oct-Nov 2007 earnings report, is all I can say in public. Or read the chapter "A matter of interest" in Lewis' Big Short. The group in question was responsible for 20% of the firm's profits in the preceding few quarters and it was 30-40 people, including ...

There is the market-making side of the business and then there is the firm's own capital investment. TARP went to save the firm's own capital investment. I am not sure what you mean by the lending business but these firms were not direct lenders; they were investors in fixed income backed securities and their derivatives.

And it is wrong to say that because Group A lost money but Group B made money, the govt should bail out Group A but bonuses should contiue for Group B. At the end of the day the firm gets its market reputation and credibility because it is the sum of all the groups. It is the sense of entitlement which Group B is demonstrating is what the 99% percent is complaining about.

And frankly all the bonuses are essentially taking returns away from share-holders. It would have been one thing if these firms were partnerships investing their own capital. Now they are publicly trades firms which borrow from the capital markets, and have a publicly trading equity. For them to take a bulk of the profits as bonuses is essentially stealing from the equity holders. The same money could be returned to the share-holders in the form of special dividends etc or kept on the firms books to reduce leverage.

[Arjun]

Arjun
Go read MS' Oct-Nov 2007 earnings report, is all I can say in public. Or read the chapter "A matter of interest" in Lewis' Big Short. The group in question was responsible for 20% of the firm's profits in the preceding few quarters and it was 30-40 people, including ...

Thanks for the information. The figures are just a little higher than I had imagined...the good thing of course, was Morgan & Goldman never became quite as dependent on the FI side as Lehman, Bear and therefore survived.

And it is wrong to say that because Group A lost money but Group B made money, the govt should bail out Group A but bonuses should continue for Group B. At the end of the day the firm gets its market reputation and credibility because it is the sum of all the groups. It is the sense of entitlement which Group B is demonstrating is what the 99% percent is complaining about.

Its a bit like the good bank, bad bank concept. Clearly the Fixed income / FI derivatives side of the business is the one prone to disasters that necessitate government bailout, and also the one where the government feels obligated to bail them out due to systemic risk concerns. Both of these factors are not present with other Wall Street segments - though revenues tend to be volatile across the board. If other businesses are made to suffer due to the Fixed Income side, potential recruits would start accepting / rejecting roles depending on the extent of exposure the overall firm has to FI...

All these businesses depend on attracting the best talent, and Wall Street talent is as mercenary as the firms in moving for better compensation. So if the US were to impose a diktat, it might be the European or Asian firms that might win out in attracting this talent if they don't operate under similar constraints.

And about the 'sense of entitlement' why should a Sanjay Jha making $100 Mil be any more palatable than investment bankers taking in a few? Why the exclusive focus on Wall Street when it would be better addressed as a cross-industry issue?

And frankly all the bonuses are essentially taking returns away from share-holders. It would have been one thing if these firms were partnerships investing their own capital. Now they are publicly trades firms which borrow from the capital markets, and have a publicly trading equity. For them to take a bulk of the profits as bonuses is essentially stealing from the equity holders. The same money could be returned to the share-holders in the form of special dividends etc or kept on the firms books to reduce leverage.

Wall Street is one place which is quite focused on enhancing shareholder returns! If they are not able to reduce bonus further, it can only be due to a supply-demand issue where quality of talent is at stake. I am not talking about the very top management - which might well collude to enhance their own take-home, but about comps for the bulk of traders / i-bankers / advisors.

[SwamyG]

In its latest edition, HBR has a nice interview with Narayanmurthy. HBR discusses the history of companies in America and their attitude towards workers, environment ityadi. As a show case of "good company" there is one big interview with Infosys Narayanmurthy. In another article they positively mention Mahindra Group as well. Nice to see desi companies being show cased.

[Theo_Fidel]

And frankly all the bonuses are essentially taking returns away from share-holders. It would have been one thing if these firms were partnerships investing their own capital. Now they are publicly trades firms which borrow from the capital markets, and have a publicly trading equity. For them to take a bulk of the profits as bonuses is essentially stealing from the equity holders. The same money could be returned to the share-holders in the form of special dividends etc or kept on the firms books to reduce leverage.

Good point.

Not only that the manner of their earning money was in the 'gambling' portion of the trading arm. Through market timing, derivatives, commodities and betting on/against certain things happening. All the profits went to the banks while the loss end of that very same transaction went to the taxpayer. Best Example was AIG. Two traders bet against each other. The winner got the profit while the loser got bailed out.

The question must be asked where exactly are all these traders extracting value from. There is only so much money and if all the traders are winning month after month who is losing. The answer is the house. That is your money and your retirement savings and your property value. By timing the market they extract money from your shares, by inflating the housing market and then collapsing it it was your property value that ended up in their pocket. They are stealing money from your pocket and using deregulation to hide this from the public.

[Chinmayanand]

"Bankruptcies of governments have,
on the whole,
done less harm to mankind than
their ability to raise loans."


- R.H. Tawney,
Religion and the Rise of Capitalism, 1926

[VikramS]

The talent on WS part is the worst stinking pile of s**t I have heard. Most of the bigger profits are made being able to sell s**t to gullible buy side suckers. Many of the most successful traders are ex-jocks. It does require a certain frame of mind but that frame of mind is acquired primarily by training.

Go talk to any prop shop owner, not the big banks but the independent ones. They will rather hire untrained monkeys and train them than hire someone who has a lot of "bad" experience.

The IB prop or sell side traders are essentially the same lot, they just have a bigger capital base and more tools at their disposal so can swing a bigger d**k.

The smartest go to WS not because of it is the most satisfying job but because it pays outsized rewards. And the street hires the best it can get. However what surprised me the most, that almost everyone wanted to hit a home run and then RETIRE. No one wanted to continue working in the business! All just saw it as an opportunity to take the money as soon as they could and then run.

In contrast here in Silicon Valley we have people who contributed immense to the progress of technology who continue to work hands on and add more value to their companies. They do not want to retire, not because they have to but because they do love their work.

You do see long term employees on the Buy-Side or research side. These are people who are making their decisions based research, and are trying to understand the trends, technology, economy and the big-picture. They enjoy their work. But the compensation here is much less than the IBs.

It is interesting you bring up Sanjay Jha. He did not take tax-payer bail outs nor did he steal from the share-holders. He took a real world company and transformed it into a company which created something which was perceived of value from its existing assets. Those assets were horribly mismanaged and he fixed that to restore some of the brand's glory. His rewards are completely aligned with the share-holders. He did not take 80-90% of the operating profits and distribute it as bonuses. He got rewarded when all other equity holders got rewarded, not at their expense which happens on WS. And he did not take any risks with a tax-payer bailout back-stopping him.

BTW, the CEO compensation issue is also something I wonder about but WS has a big role to play in it since it demands consistent, predictable, smooth profit growth because it makes the job of the analysts easier. Prior to the end of the Cold War the US had a bigger goal in mind and could think longer term. However after the end of the Cold Ware there is no bigger goal to strive for and WS' short term thinking has seeped into all aspects of the US system. This short-term, let me make my buck thinking leads to the problems we are seeing. As long as WS and the equity markets dominate the discourse the US will not get better.

[ramana]

Nightwatch 18 October 2011

Special Comment: NightWatch is a threat analysis commentary based on analytical techniques that were applied successfully for many years in US defense intelligence. That means that the comments that follow are not those of financial analysts.

The threats to the European financial system are systemic, arising from a loss of investor confidence which concerns the financial subsystem of the economy and the inability of debtors to pay their bills which concerns the vitality of the economy itself. The financial subsystem is one of several information subsystems in a nation, which is a processor of information, energy and matter to sustain life. The enforceabilitiy of promises is the foundation of contract law which underpins modern commercial life. Contract law is failing in some sectors of economic activity in Europe and the US.

The potpourri of bank recapitalization, downgrading of sovereign or bank debt and bail out loans reflects the angst of the financial subsystem managers and blends the tools for managing risk, not threat. Those measures do not address stress from systemic economic threat.

Threat is the probability of real damage in a measureable time. Threat arises, in this instance, from the consequence of real damage to the economy by past practices of the financial sector managers and the borrowers themselves.

In international security affairs, the processes for managing threat and for controlling and stabilizing damage are not the same as those for managing risk, which is a hypothetical construct about levels of possible damage. The difference is the difference between possible vs. actual threats, and real damage.

Threat invariably creates crisis which begets actual damage and further escalation. Significant economic damage has already occurred in Europe and the US. The obvious question is what are the damage limitation, damage control, stabilization and normality restoration plans that European and US political and financial leaders are following? These are the stages of crisis management. Thus far, only risk management -- vice crisis management -- proposals appear to be under discussion. No orderly crisis management is apparent on either side of the Atlantic.

In a living system analysis, the financial sector is an information subsystem of the larger economic system that processes information, energy and matter to produce a national economy, the GNP of any state. The financial information system is under stress in Europe, but the energy and matter processing sectors of the European economies have been seriously damaged. Remedies that relieve stress in the financial information systems miscarry as remedies for damage to the energy and matter processing systems.

Bankers and finance ministers do not seem to understand the incongruity. Their focus is on the information system, more than the energy and matter processing systems. They believe that confidence in financial information will result in new stuff. That linkage is tricky and arguably backwards. The normal historic pattern is that innovation in matter and energy production attracts venture capital and success builds investor confidence.

Thus far, the Eurozone parties continue to address risk, but fail to address damage and its multiplier effects on threat. When a solution fails to match a problem, the problem invariably gets worse. As damage grows, the threat of further damage expands, apparently in Malthusian fashion.

What this means is that France and Germany and international bankers, for example, are applying techniques that are mismatched to the underlying problems. They are treating symptoms, not causes. The financial sector is not just at risk, it is under threat because the underlying social economy of multiple European nations has been damaged, which in turn increases the threat to the financial sector, not just the risk.

The result of applying a risk solution to a threat problem is well known: it fails. In this case, the bailout money vanishes in the financial sector; the risks cannot be managed, even by using credit cards to pay credit card bills; the actual debtors will remain unable to pay and they will begin to agitate for systemic changes. This sequence is a no brainer. It leads to revolution.

Also applies to US economy too a large extent.

[Theo_Fidel]

The rich in USA do not fear revolution. They should.

Historically the fall of every society from Easter Island, Anasazi, Maya, etc has ended with the extermination of the elite/rich class.

[Arjun]

The talent on WS part is the worst stinking pile of s**t I have heard. Most of the bigger profits are made being able to sell s**t to gullible buy side suckers. Many of the most successful traders are ex-jocks. It does require a certain frame of mind but that frame of mind is acquired primarily by training.

If you look at the roles on the Street - very broadly you have the 'analytical'- type roles and then you have the sales-oriented roles. The Buy-side, Research & Structuring require analytical skills - and this is pretty much populated by Ivy-Leaguers.

I-Banking, Sales Trading, Wealth management, Advisory services are all predominantly sales / relationship management -type roles. Sure many of these are populated by ex-jocks but ex-jocks from the Ivy League (at least for the bulge bracket). Its not just an issue of ability when you talk about these sales-roles, but more important is the book of business and the relationships that they bring. Not very different from any sales-role in any other industry where it is typically the sales-guys who would be earning more than the operations guys. The reason the banks cannot take a harder-line with these sales guys - is that the guy can simply take his 'book of business' to another firm - say a European or Asian bank if it is the US banks that are required to be the fall guys.

You do see long term employees on the Buy-Side or research side. These are people who are making their decisions based research, and are trying to understand the trends, technology, economy and the big-picture. They enjoy their work. But the compensation here is much less than the IBs.

The compensation on the alternatives side (Hedge funds/ PE) is typically the same as or higher than on the Street.

It is interesting you bring up Sanjay Jha. He did not take tax-payer bail outs nor did he steal from the share-holders. He took a real world company and transformed it into a company which created something which was perceived of value from its existing assets. Those assets were horribly mismanaged and he fixed that to restore some of the brand's glory. His rewards are completely aligned with the share-holders. He did not take 80-90% of the operating profits and distribute it as bonuses. He got rewarded when all other equity holders got rewarded, not at their expense which happens on WS. And he did not take any risks with a tax-payer bailout back-stopping him.

I am talking primarily about the pure Wall Street firms that have not merged with any bank - largely Goldman, Morgan and some of the up-and coming newcomers...Which one of them is on TARP anymore ? None - so the TARP issue does not apply.

Secondly, I disagree with the premise that shareholder-value linked payout is somehow less 'greedy' than performance-linked bonus. Any profits made by firms HAS to go to either the shareholders or to the employees. Typically the share-owing class (at least the ones having signficant holdings) is a far more elite and rich group than the employee-class. Why should making the share-owing class richer be somehow more preferable than paying bonuses to performing employees? You are probably aware that bonuses on the Street are completely linked to performance,to very objective measures such as the book of business brought in or percentage of revenues / profits generated. If a department does not perform - there are basically no bonuses. Inspite of the large bonuses in good times - the typical yardstick on the Street is that total employee costs account for 50% of firm revenues and margins for these firms at around 33% or higher are much higher than any other industry.

BTW, the CEO compensation issue is also something I wonder about but WS has a big role to play in it since it demands consistent, predictable, smooth profit growth because it makes the job of the analysts easier. Prior to the end of the Cold War the US had a bigger goal in mind and could think longer term. However after the end of the Cold Ware there is no bigger goal to strive for and WS' short term thinking has seeped into all aspects of the US system. This short-term, let me make my buck thinking leads to the problems we are seeing. As long as WS and the equity markets dominate the discourse the US will not get better.

I don't think the short-term focus is primarily driven by the analysts. The analysts are proxies for the Buy-side, and the Buy-side wants to invest in firms that show consistent growth. If you or I were looking to invest our hard-earned monies we would land up looking at pretty much the same criteria of consistency (depending on aptitude for risk).

[abhischekcc]

"Bankruptcies of governments have,
on the whole,
done less harm to mankind than
their ability to raise loans."


- R.H. Tawney,
Religion and the Rise of Capitalism, 1926

Lovely

[ramana]

CNN reports:

Hedge Funds have worst quarter since 2008

[ldev]

Nassim Taleb on Bloomberg recently lambasting bank bailouts and compensation - Part 1


Part 2

[VikramS]

Arjun:

You are talking the Wall Street Book.

Howie Hubler, the person responsible for the worst trade EVER, in the history of Wall St., was a jock from Montclair State Univ, not exactly Ivy League. During the peak his group was producing a huge amount of the firm's total profits. And most of it came from some snake oil they had sold to some clueless investors.

There is absolutely no doubt that there is a huge amount of genuine research and investment activity going on.

However, the issue is the compensation structure where the losses are socialized while the profits are spirited away.

And to say that just because Prop screwed up, M&A should not be affected or if S&T screwed up then PWM should not be affected is another symptom of the entitlement virus which infects Wall St. There are very few industries where bonuses are decoupled from the performance of the entire firm, except Wall St where every one seems to be for themselves.

The size of the firm makes a significant difference in bringing credibility; and at the end of the day Wall St. is nothing but a confidence game. If size did not matter then boutique firms would be thriving because many are populated by experts with a lot of experience and connections. The fact that the giants dominate the dealbook is enough proof that the different cogs of the system survive as a whole. The PE firm doing a $20B leveraged buyout needs access to the resource of multiple segments of the firm to close the deal. Tying bonuses to individual performance is the same snake oil salesmanship Neshant accuses the world off.

In the real world, there are a lot of people who work very hard to make their companies successful. However, often the firms fail to reach the level of success folks may have anticipated. This is not because everyone screwed up but because one or two key elements did not line up. Perhaps the market was not ready, or the competition leap-frogged your capability, or the sales team did not have the contacts to close deals. But when the company as a whole does do well, everyone suffers.

It is only on WS that people can claim that I delivered so give me the bonus. If they are so good, they should trade their own capital. Currently WS raises capital from the public markets, siphons the profits, and then runs to the tax-payer when they screw up.

All this talk of TARP being profitable is baloney. All the firms including MS and GS would have been under if AIG was not given a black check worth more than $100B. GS itself was angling to buy out MS during the crisis; it seems Mack was told to sell the firm to GS for $1/share by very powerful people. The fact that he could navigate that pressure was the reason he could stick around even after the big failures at the prop desks.

BTW hedge funds are still buy-side folks. I do not have a problem with them. They raise capital privately, and take a share of the returns. If they fail, the fund shuts down, the investors lose their money and the hedge fund manager has to look for a new gig. It is the big TBTFs I find amazing.

And another real world example: If AAPL acted like Wall-Street, they would be giving almost $250K per employee per year on bonuses since that is what their net earnings per employee were. A lot of real-world companies are sitting on a HUGE amount of cash. They are not blowing that cash on bonuses or flying every one in First Class or dining on $600 per person meals. It is only on Wall Street that the firms siphon away their earnings and then either go under or run to the government for a bail-out.

[Neshant]

The TARP funds carried an interest rate of 5%, & when you include the value of warrants - effective interest rate paid by Goldman shareholders was in excess of 20%. Bottomline -

Please do some reasearch before talking nonsense.

"By repaying its TARP loan, for example, Goldman wriggled out from under the nettlesome compensation limits imposed (read bonuses for CEOs) by TARP, while also conveying an image of financial strength. But this "strength" was illusory. Goldman repaid the TARP loans with funds it procured days earlier from the Federal Reserve. Then, over the ensuing months, Goldman recapitalized its balance sheet by selling tens of billions of Dollars of mortgage-backed securities (read garbage offloaded on taxpayers) to the Fed.

And the public never knew anything about these activities until two weeks ago, when the Fed was forced to reveal them."

Nothing is paid back. It has only been palmed off as losses to the taxpayer. The mountain of mortgage backed crap on Goldman Sachs balance sheet can only have gotten worse not better with real estate prices having continuously gone down. "Profits" don't emerge out of their rear end in an economy where employment numbers are getting worse and debt getting higher. Profits from WHAT?

Why do you think Goldman and Morgan were the earliest to return their funds and were actually pleading with the government to take their TARP funds back ?

Because :

"Earlier this week, President Obama struck back, announcing that the government would limit executive pay for any institution that accepts government financial aid in the future from programs such as the Troubled Asset Relief Program, or TARP.

Fearing that lawmakers will make further demands, it's no surprise that Goldman may want to free itself from more regulatory influence."

The crooks sure "repay" fast when their bonuses get cut.

If it was money for jam there was no way they were going to return it so easily.

Where do you think their profits come from - a money tree? Their profits come from scamming the productive economy. Nobody needs "primary dealers" in the market which buy and sell bonds between the govt & the federal reserve earning roaring "profits" on the spread. There is NOTHING productive that these useless middlemen parasites do for society.

The only thing you are capable of is using these phrases - 'scam', 'useless middleman', 'stock market manipulation', 'money counterfeiting' in endless, mind-numbing permutations. You and

I intend to burn those terms into the collective lame brains of the lieing con artists scammers from the useless middleman industry. I'm just TOO aware of the fradulent nature of the useless middleman industry to be conned so don't even try. Trying to play the sophisticated banking crook with fancy terminology and paper shuffling just does not fly with me. I keep my eye on the money and where it goes and the con artistry of "we repaid you with money stolen from you" just does not work on me.

In case I need to spell it out - the bulk of what is 'financing & banking' today is a fraud perpetrated on productive society. Amen

[Neshant]

Look at this way: The economy is a wheel. It is vital that the wheel keeps turning around in order to keep the nation going. If the wheel gets stuck, the nation like a car gets stuck in its track. Hence you need to get the wheel out of the rut and that may require liberal use of grease.

How about we all grease our wheels by printing up $100 dollar bills on our laser printers and spending that counterfeited money? Or maybe I can grease our wheels by breaking into an elderly neighbour's house and stealing his life savings.

When you boil it down, that's exactly what banking crooks are doing via the Federal Reserve which they setup to offload their gambling losses onto society.

This kind of nonsense analogies need to be thrown out with every keynesian textbook which is really just an excuse to steal from the productive people of society. Its grease up their you know what.

If you want to grease the wheels of the economy, go out and do honest work for money - which is to say don't be a banking & financing con artist crook trying to baffle suckers with fancy terminology, slick talking and paper schemes & scams. Ultimately this "industry" does nothing productive for society. Its utility value is marginal at best and its scam value is legend.

[SwamyG]

The rich in USA do not fear revolution. They should.

They do, that is why they constantly shout through their Faux News and hazaar Radio Talk show hosts. With their proxies they have been able to brain wash some in the country to constantly vote on emotional issues - religion, abortion, war, taxes - robbing paul to pay peter types of analogies. We constantly deride Indians for voting on caste. One should look at the American population, they are crazier - because they have had access to best education money can buy - public education is free, free media (albeit controlled by Government and Corporations), and a freer and "equaller" society. Sad.

[Singha]

worthy quotes from the original wall street movie (gordon gecko fame):

Wake up, will ya, pal? If you're not inside, you're outside, okay? And I'm not talking a $400,000 a year working Wall Street stiff flying first class and being comfortable, I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player, or nothing. Now, you had what it took to get into my office; the real question is whether you got what it takes to stay.
---
Carl: He's using you, kid. He's got your prick in his back pocket, but you're too blind to see it.
Bud: No. What I see is a jealous old machinist who can't stand the fact that his son has become more successful than he has!
Carl: What you see is a guy who never measured a man's success by the size of his wallet!
Bud: That's because you never had the guts to go out into the world and stake your own claim!
[Long pause]
Carl: Boy, if that's the way you feel, I must have done a really lousy job as a father.
----
Carl Fox: Stop going for the easy buck and start producing something with your life. Create, instead of living off the buying and selling of others.

[Arjun]

You are talking the Wall Street Book.

The problem of TBTF and systemic risk would never have occurred if Wall Street had stuck to its traditional roots on the equities side. Its the blurring of lines between Wall Street and Main Street, and specifically the growth of FI/FI derivatives business of Wall Street over the last two decades that's the root of the issue. Clarity regarding the underlying problem is lost by over-generalizing to target 'Wall Street' as a whole.

There are very few industries where bonuses are decoupled from the performance of the entire firm, except Wall St where every one seems to be for themselves.

In EVERY industry, the salesmen get to receive commissions that are totally decoupled from the performance of the entire firm. Its only the operations folks who get much smaller 'bonuses' that vary with firm performance.

If you don't consider the Buy-side, Wall Street is largely a sales game. Its not called the 'Sell-side' without a reason. Wall Street intermediates between Issuers and Investors and therefore it is fundamentally SELLING to both of these parties. In return it obtains commissions from the issuers and investors it services. I-Banking, Sales Trading, Wealth management, Advisory services are all sales /RM- type roles. Structuring is a quasi-sales role. Its only Research that, after the separation from Investment Banking, is a non-Sales role - and no wonder its the only Wall Street occupation seeing compensation falling and getting outsourced.

What are called bonuses on the Street are in reality commission for the deals brought in. The model is not very different from other industries.

The PE firm doing a $20B leveraged buyout needs access to the resource of multiple segments of the firm to close the deal. Tying bonuses to individual performance is the same snake oil salesmanship Neshant accuses the world off.

Typically most of the large firms have a model of 'deal commissions' where the bonus for a particular deal is split among the deal team in some manner. But even here, the biggest reason for getting the deal done is the sales effort on both the issuer and the investor ends. It would be therefore natural for these two sales individuals to receive the bulk of the deal bonus.

The only exception here is with bank-owned securities firms that win deals because of their ability to take part in the lending required for the deal. Therefore, I fully agree that bank-owned securities firms should have bonuses restricted.

A lot of real-world companies are sitting on a HUGE amount of cash. They are not blowing that cash on bonuses or flying every one in First Class or dining on $600 per person meals. It is only on Wall Street that the firms siphon away their earnings and then either go under or run to the government for a bail-out.

Running to the government for a bailout IS the only problem here, the rest of it should not be of anyone's concern other than the shareholders. The reason why shareholders don't see this as a problem is because the gross margins continue to be far in excess of most other industries in good times, and the industry model of 50% going towards employee costs is something they appreciate fully well.

BTW hedge funds are still buy-side folks. I do not have a problem with them. They raise capital privately, and take a share of the returns. If they fail, the fund shuts down, the investors lose their money and the hedge fund manager has to look for a new gig. It is the big TBTFs I find amazing.

On thinking this through, I think Glass Steagall act should be reinstated to separate out banks from securities firms, and banks (not securities firms) SHOULD have restrictions on compensation. Btw, this would also effect GS and MS since they have opted for bank-holding structure, unless they repeal that decision.

[Arjun]

In case I need to spell it out - the bulk of what is 'financing & banking' today is a fraud perpetrated on productive society. Amen

I can reply to your point raised regarding Goldman's repayment - but that would require some serious upgradation of your knowledge of the basics of finance. I don't see a point in wasting my time on this - you can choose to believe that 'all of finance is a scam' & no argument is obviously ever going to convince you.

I prefer dealing with folks who focus on solutions, rather than on moronic rants. But I am sure you will find enough of an audience on BRF from folks whose tolerance levels for your kind of rants are much higher.

[Neshant]

In that I agree with you - it would be a hopeless task trying to con me with fancy banking lingo that the useless middleman industry is anything but a parasite stealing from productive society.

When you reach the level of awareness that I'm at, all the slick talkers in the world trying to disguise their thievery with BS just does not work. I see right through it.

That's the problem - I'm just TOO AWARE.

[Neshant]

Running to the government for a bailout IS the only problem here, the rest of it should not be of anyone's concern other than the shareholders.

My good man you are lost in the jungles of financial lingo BS - too blind to see that the fradulent nature of the useless middleman industry goes far beyond bailouts. That is just the tip of the iceburg.

This is typical of folks who spent all their time trying to con others with fancy lingo into believing the useless middleman industry represents anything other than theft from productive society.

Realise that the root of the problem lies in the fradulent nature of fiat money and the monopoly on its issuance thereof. It is around that which the entire useless middleman industry has grown like a cancer and which sustains and perpetuates its existance to the detriment of productive society. It is through this very means that the bulk of the productive energies of society are extracted & stolen and the system gamed for the benefit of these parasites.

It is thus the concern of ANY & ALL productive members of society that this scam be shut down, not just shareholdes. If you don't understand this, you don't understand anything.

Start by educating yourself instead of being an ignoramus on the issue. I'm posting my favourite video on the issue in the hopes that one day, you too may see the light :

[skumar]

mFdnA5UNmVw

I guess some people on this thread should have been on the side of the Nobel prize winning economists answering questions about the US economy.

[skumar]

Arjun:

It is only on WS that people can claim that I delivered so give me the bonus. If they are so good, they should trade their own capital. Currently WS raises capital from the public markets, siphons the profits, and then runs to the tax-payer when they screw up.

And another real world example: If AAPL acted like Wall-Street, they would be giving almost $250K per employee per year on bonuses since that is what their net earnings per employee were. A lot of real-world companies are sitting on a HUGE amount of cash. They are not blowing that cash on bonuses or flying every one in First Class or dining on $600 per person meals. It is only on Wall Street that the firms siphon away their earnings and then either go under or run to the government for a bail-out.

You are exactly right reiterating a point made often but you could get labelled a commie for that.

[ldev]

Securitization of a bank's assets started the downward spiral to where we are today. Equities were traded on exchanges. Private equity is difficult to trade for a reason. The same reason why OTC products are difficult to trade especially in times like 2008. And to mark them to market especially in times of tight liquidity is a death sentence to banks. It is no wonder that banks are trying to wriggle out of that straitjacket. The tragedy is that at a time when the walls between investment and commercial banking should have been strengthened because of the rapid spread of securitization, they were in fact abolished. No wonder the finance industry is in the mess that it is. But since it was they who lobbied successfully for this abolition, it is only fair that they stew in their own mess and not run to the taxpayer to bail them out. Either they should get out of the business of trading or trading should be confined to exchange listed products. Cannot have a combination of OTC trading and publicly guaranteed banks doing that trading.

[vina]

Running to the government for a bailout IS the only problem here, the rest of it should not be of anyone's concern other than the shareholders. The reason why shareholders don't see this as a problem is because the gross margins continue to be far in excess of most other industries in good times, and the industry model of 50% going towards employee costs is something they appreciate fully well.

Nice. Problem is that the banks lost more money in 2008 than they made in the past few decades put together!. So when they got bailed out, you should have done what gets done in bankruptcy. The share holders get WIPED OUT, bond holders get control of the company (at cents to a dollar), the company gets reorganized under bankruptcy protection and there is a debt to equity swap.

That is the problem I have with the entire TARP business. Sure, the banks were too big to fail and had to be bailed out. But the big question is this Why weren't the share holders wiped out when the TARP loans were given ? . And if anyone says that Goldman was "smarter" than everyone and didn't need TARP, WRONG. They had HUGE counter party risk with AIG and AIG would have taken Goldman down with it, if it hadn't been back stopped. So yeah, Goldman too was bankrupt and it's paid up capital nearly wiped out in 2008.

The way the TARP was done, the existing shareholders in the Investment Banks got bailed out .

[Theo_Fidel]

Vina,

The shareholders had the least to do with this catastrophe of all the guilty parties. The way laws in Massaland are written, shareholders can't even have a board member in place. Large chunks of equity are in the long term possession of the public. Wiping out the shareholders is another way to transfer wealth from the public to the wealthy who always always have superior rights to assets.

The guilty bankers just moved from one firm to the next. The entire lot from Bear Stearns who should have been reduced to destitution are now working in other Money Players taking home $10 million paychecks. Not one paid any price for causing the catastrophe. Learned no lessons at all.

As Vikram put it the underlying problem is is the Quarterly cycle no one can look beyond. It is a game of making the numbers now. There is no sense of responsibility WRT other peoples money. These are not bankers, they are gamblers.

[vina]

The shareholders had the least to do with this catastrophe of all the guilty parties.

Nope. The shareholders would have stopped the banks from playing such dangerous games and if they had their capital wiped out, there would have been some justice in terms of risk and reward. The reason why the shareholders are not climbing on board the banks and sitting on them to get out of these kind of risky behavior is the signal they got from the govt that they would be bailed out. They should have nationalized the banking system when they pumped in the TARP, wiped out the existing share holders and THEN when the system stabilized, IPO'ed the banks again. If you nationalize the big guys and put the rules in place, the scamsters will have no place to move into .

The failure to do that was a big big part of the problem and the root cause of the occupy wall street movement. Well, Bush couldn't have done that maybe, but I dont know why Obama didn't do it either. If he had done that, they could have handled the problem a lot better and fixed the system for good and not the still broken mess that we have now.

[vishvak]

I prefer dealing with folks who focus on solutions, rather than on moronic rants. But I am sure you will find enough of an audience on BRF from folks whose tolerance levels for your kind of rants are much higher.

How about explaining the incorrect ratings by rating agencies and underwriting of bad debt w.r.t. investment lingo.

Let us see how far one can make others understand this huge mess and silence on rating agencies gone wild, with banking lingo.

If the rating agencies are amongst the most important part of investment banking stability, how is this idea of its importance and keeping the rating as correct reflection of risks - acknowledged, appreciated & communicated in the investment lingo?

This could go a long way in finding solutions.

[VikramS]

Running to the government for a bailout IS the only problem here, the rest of it should not be of anyone's concern other than the shareholders. The reason why shareholders don't see this as a problem is because the gross margins continue to be far in excess of most other industries in good times, and the industry model of 50% going towards employee costs is something they appreciate fully well.

BS.

Over the past few decades, thanks to 401Ks and other retirement plans, the control of most of the stock has moved into the hands of institutional investors. They accept whatever WS decides as fair, as fair. So if tomorrow GS/MS decide that 95% of revenues should be give out in bonuses, tax gross-ups, summer rentals in Hamptons, and the sordid activities which supposedly go on there etc., the institutional investors will collectively call it fair.

Wonder why?

You can not bite the hand that feeds you.

Do you want to be cut off from IPOs? Do you want to be cut off from advance warnings and tips about upgrades/downgrades? Do you want to forsake the chance of actually jumping across the road? No, you do not. It is an incestuous oligarchy at its worst.

Do you know what the Gross Margins in the software industry are?
http://seekingalpha.com/article/10166-c ... it-margins

But you do not see the software company workers getting the same bonuses. In many high-tech software companies, what you call the operational side has a very STRONG role in closing sales. When Intel buys software for their chip-design the sales guy is almost like a stenographer. The deals are primarily being driven by technology managers who promise a certain set of features or level of support with the business side exec working on some number which both sides can agree on.

While it is true that even in the software industry some the sale people have a stronger correlation to their individual performance than the operational guys, Wall Street is truly unique in its model in terms of how much it siphons off. While I do agree with you that deal-split etc. happens based on what you bring in, but what you bring in depends a lot on the firm you represent. If the firm was not essential and it were the individuals who mattered, boutiques would be thriving and taking a much bigger share, since they are often led by people who had the stature to go independent and still survive; it is the sum of the parts which the firm presents which makes the deals possible.

BTW shareholders are pretty much at the mercy of the management in most US companies. Very rarely are the shareholders able to facilitate any change. The only exceptions are when activists hedge funds take over some control of the board and then drive change. However, while the likes of Carl Ichan do go after companies in different sectors, they too can do nothing about the TBTFs. After all he too is dependent on the TBTF to finance his next buyout if the credit markets allow it. Why will he want to bite the hand which feeds him?

Though I am not a supporter of government intervention, in the case of the TBTF I would be in favor of legislature putting a cap on compensation for any organization which has a role to play in capital markets (primary dealers), or those who are backed by government funds (FDIC) or recipient of bail out funds (TARP-AIG). Let the profits be distributed back to share-holders or kept in a reserve fund to provide for the rainy day.

[VikramS]

I prefer dealing with folks who focus on solutions, rather than on moronic rants. But I am sure you will find enough of an audience on BRF from folks whose tolerance levels for your kind of rants are much higher.

How about explaining the incorrect ratings by rating agencies and underwriting of bad debt w.r.t. investment lingo.

Let us see how far one can make others understand this huge mess and silence on rating agencies gone wild, with banking lingo.

If the rating agencies are amongst the most important part of investment banking stability, how is this idea of its importance and keeping the rating as correct reflection of risks - acknowledged, appreciated & communicated in the investment lingo?

This could go a long way in finding solutions.

The rating agencies are not staffed by the brightest minds on the street. The bright minds were doing the structuring of ABS; the brighter are restructuring again to create a CDO, and then the brightest (the props) were restructuring the CDO to make it a CDO^2 and Bespoke products.

The rating agencies had no clue about how to truly value these products. They have their models which the structurer were intimately aware of, and which originated in other areas of asset backed space. The supposedly adapted those models for sub-prime MBS forgetting prob-stats 101 that you can not neglect correlation. The rating agencies were assisted by the structurer in adapting the models.

The rating agencies of course are paid by the firm creating the structure. If one particular analyst from the rating agency was smart enough to figure out the mess, and dumb enough to complain, their firm would be likely bypassed or the analysts MD told that he is a pain. OTOH if the smart analyst who saw through the game, went along with the charade, he would have a much greater chance of jumping across the road and start assisting the structurer in their next deal. This could mean an order of magnitude jump in his comp so why wouldnt he go for it?

Of course all this was hidden under a complex umbrella of monte-carlo models, default rate, recovery rate, prepayment curve and what not, making it hard for anyone to understand it unless they truly get their hands dirty. And why would anyone want to get their hands dirty trying to find faults with the biggest profit machines on Wall St?

BTW structurer is the guy or group of people who would take large pools of loans and create new securities out of them with different credit risk and associated interest rate.

Also mark-to-market worked great since the bankers could take home their profits every year, regardless of the long term performance of the underlying portfolio. It is only when mark-to-market started resulting in losses that the laws were changed. Incidentally the issue was not whether the markets were liquid enough to give a fair price to mark to market; the issue was whether the price calculated using the assumptions implied by current trend would allow to any profits to be booked (apart from the bigger issue of the firm remaining solvent after realistic marks).

[svinayak]

VikramS, Can I have your email thx

[vishvak]

The rating agencies are not staffed by the brightest minds on the street. The bright minds were doing the structuring of ABS; the brighter are restructuring again to create a CDO, and then the brightest (the props) were restructuring the CDO to make it a CDO^2 and Bespoke products.

The rating agencies had no clue about how to truly value these products. They have their models which the structurer were intimately aware of, and which originated in other areas of asset backed space. The supposedly adapted those models for sub-prime MBS forgetting prob-stats 101 that you can not neglect correlation. The rating agencies were assisted by the structurer in adapting the models.

The rating agencies of course are paid by the firm creating the structure. If one particular analyst from the rating agency was smart enough to figure out the mess, and dumb enough to complain, their firm would be likely bypassed or the analysts MD told that he is a pain. OTOH if the smart analyst who saw through the game, went along with the charade, he would have a much greater chance of jumping across the road and start assisting the structurer in their next deal. This could mean an order of magnitude jump in his comp so why wouldnt he go for it?

Of course all this was hidden under a complex umbrella of monte-carlo models, default rate, recovery rate, prepayment curve and what not, making it hard for anyone to understand it unless they truly get their hands dirty. And why would anyone want to get their hands dirty trying to find faults with the biggest profit machines on Wall St?

BTW structurer is the guy or group of people who would take large pools of loans and create new securities out of them with different credit risk and associated interest rate.

Also mark-to-market worked great since the bankers could take home their profits every year, regardless of the long term performance of the underlying portfolio. It is only when mark-to-market started resulting in losses that the laws were changed. Incidentally the issue was not whether the markets were liquid enough to give a fair price to mark to market; the issue was whether the price calculated using the assumptions implied by current trend would allow to any profits to be booked (apart from the bigger issue of the firm remaining solvent after realistic marks).

Any comments on the scene in India if convenient? It is great to see some straight talk here.

Why because when I invest, I would like to check and see independent rating agencies here in India, transparency to a great extent, best brains with accurate underwriting and correct ratings, Industry backing to good banking practices, etc. More suggestions welcome.

Earlier times, banking was seen as enabler and not as an industry of its own. With investment lingo applied to an enabler, it has come to all these facets I think for safer investments and to avoid sattebaaji.

[Arjun]

BTW shareholders are pretty much at the mercy of the management in most US companies. Very rarely are the shareholders able to facilitate any change. The only exceptions are when activists hedge funds take over some control of the board and then drive change. However, while the likes of Carl Ichan do go after companies in different sectors, they too can do nothing about the TBTFs. After all he too is dependent on the TBTF to finance his next buyout if the credit markets allow it. Why will he want to bite the hand which feeds him?

Vikram,

If the shareholders are not asking for change in compensation standards in their investee firms, then either they are

(i) smart enough to realize that compensation cost on Wall Street is not really one of the more important factors to be focusing on for creating shareholder value in the industry
OR (ii) stupid enough not to rake up the issue if they indeed believe that the industry standard benchmark of 50% is excessive and is destroying shareholder value

Either way, the shareholders will stand to gain or lose for any such decision, and their own private money is at stake. There is no taxpayer money at stake out here, as long as the government is not backstopping it in any way either through TARP or through some of the funding advantages provided through 'bank' classification.

Also, wrt Carl Icahn or any of the large hedge funds / PE funds - I am not so sure who has the bigger bargaining power wrt the bulge bracket. At the end of the day, the alternative investment funds are among the most lucrative customers for GS/MS, and one single buyout deal involving PE + leveraged loans, junk bonds etc can bring in revenues approaching $100 Mil.

Though I am not a supporter of government intervention, in the case of the TBTF I would be in favor of legislature putting a cap on compensation for any organization which has a role to play in capital markets (primary dealers), or those who are backed by government funds (FDIC) or recipient of bail out funds (TARP-AIG). Let the profits be distributed back to share-holders or kept in a reserve fund to provide for the rainy day.

I agree with your second and third categories. I am assuming FDIC-insured is equivalent to 'bank / bank-holding company' classification. But I would not agree with the first. Are you also including M&A boutiques, hedge funds, small equities shops etc. in your definition of capital market players where compensation needs to be capped?? How is it possible to dictate to any private firm what its comp structure should be and what is the government's locus standii on the issue ?

[Neshant]

How is it possible to dictate to any private firm what its comp structure should be and what is the government's locus standii on the issue ?

Are you trying to bracket the useless middleman industry into the same league as private companies doing honest, productive work in society? They have about as much in common as Bernard Madoff (the ponzi schemer) has with Thomas Edison (the inventor). One is a parasite, the other had a useful role in society.

Until you realise that the fiat money counterfeiting racket was setup to perpetuate the existance of the useless middleman industry, nothing is going to sink into your brain.

The useless middleman industry created the Federal Reserve for that very purpose - to channel the fruits of productive society's labor into the pockets of banking crooks and offload gambling losses onto productive society.

These crook don't deserve a dime because their livelyhood is based on STEALING from productive society.

Any attempt to distract from that issue is just dishonesty.

[Arjun]

Realise that the root of the problem lies in the fradulent nature of fiat money and the monopoly on its issuance thereof. It is around that which the entire useless middleman industry has grown like a cancer and which sustains and perpetuates its existance to the detriment of productive society. It is through this very means that the bulk of the productive energies of society are extracted & stolen and the system gamed for the benefit of these parasites.

Neshant: The Austrian school is widely regarded as a fringe group in academic circles - but as far as I know even the Austrian School has not ventured as far into crack-potism as to suggest that a financial services industry was not required. Are you alone in the weed that you are smoking or is their a group behind it ? Assume you are a member of Freedom Force International - do they subscribe to this belief? Does Edward Griffin do so ? Would be curious to know more...

[Neshant]

The Austrian school is widely regarded as a fringe group in academic circles

Academic circles of course gets a load of grants from the useless middleman industry. There exists a revolving door between politicians and the useless middleman industry as well as academia and the useless middleman industry.

The entire objective is to perpetuate their nonsense & to provide containment for the status quo. The status quo being robbing productive society as well as creating meaningless jargon & lingo to obscure the theft. As such, a whole lot of what is called "financial services" these days is merely a bunch of con artistry. The profession of economics these days runs neck to neck with sourcery, palmistry, astrology and other types of dice rolling activities. The average financial advisor dispensing advice does not know his ass from his elbow about what's going on.

Taking a trip into history, banking might have started off with some utility value once upon a time. It was a place to safely store the surplus fruits of your labor generated through under-consumption and self-sacrifice. However since the advent of fractional reserve banking, money printing aka money counterfeiting, intrinsically worthless fiat money, central banking, clueless & corruptible politicians, financial services aka useless middleman industry, lobbyists to lobby for more fraud, bailouts & bonuses, fancy jargons...etc. its utility value has shrunk to near zero. Its useless middleman value however has become all encompassing.

These days one is hard pressed to describe what useful role these parasites play in society. The technology already exists to link borrower with lender so its hard to see what use these folks have.

Society needs this "industry" as much as we need a hole in the head.

I've presented my solutions many times on here. But first one needs to acknowledge this industry is based on stealing from the productive.

[Arjun]

But first one needs to acknowledge this industry is based on stealing from the productive.

Can't believe how astoundingly juvenile your views are...

The simple fact is that as long as there are savers in this world, they would be looking at ways for effective management of their savings. This implies that there will always exist an institutional 'Buy-side' industry...The existence of an institutional Buy-side implies the existence of an institutional Sell-side to service the Buy-side's requirements.

'Technology exists to link borrower with lender' is yet another example of your living in the heights of delusions... I would be more than happy if Wall Street and Main Street were to be eliminated by technology, but the simple fact is it cannot be done. Why don't you go out as an entrepreneur and make a killing by providing this technology if you can? Take it from me - I know this space inside out and the history of the countless entrepreneurs who have tried their technology solutions in this space. Stop posting nonsense on BRF and go out and do it if you can.

Finally - you haven't answered the question I had posed. Can you point to even a SINGLE academic study or any single individual of repute who actually believes in the thesis that the financial services industry should not exist? Does even your guru, Edward Griffins - believe in it? The simple answer is nobody would - their reputation would be in tatters if they had any views even approaching this level of moronicity.

[Neshant]

The simple fact is that as long as there are savers in this world, they would be looking at ways for effective management of their savings.

Now if this guy actually knew how to get rich by managing money, he would already be rich himself with his so called effective management of his own savings. The reality is his riches come from selling others a load of bullocks when really all he’s doing is gambling with their money and collecting a fee.

Believe or not, if a person is able to sell his services (regardless of how bogus the service is) without having to rip off others, he is part of the PRODUCTIVE economy. That is because others **willingly** (perhaps foolishly is a more appropriate term but willingly nonetheless) part with their money and hand it over to him.

The issue however is beyond this street hustling con-artistry which is not what I’m talking about. The issue is as follows :

If one were to ask, “What is the Federal Reserve”? – you'd get a long winded nonsensical answer from an economist but the answer is really a simple one. It’s a money counterfeiting operation. Why was it brought into existence? Where do the massive profits behind this counterfeiting racket go? What “industry” does it sustain and to who’s detriment/expense is it sustained? If you ever hope to understand anything instead of getting lost in fancy jargon, you should start with such simple questions.

The reason the Federal Reserve was setup was to perpetuate the monopoly of large banks upon which the useless middleman industry has built its existance. The wealth of the productive economy is CONFISCATED aka SIPHONED OFF if you will, through money counterfeiting and this nefarious process is enforced through corrupting & co-opting government into the use of VIOLENCE (read jail, fines, confiscation) to take by force from the productive economy. THAT is the fraud.

Bailouts, bonuses, fractional reserve banking, inflating, offloading losses onto taxpayers, “we need to preserve the secrecy of the federal reserve” while they steal from savers, financing & high-rolling, fancy terminology, stuffing ex-employees into govt and creating revolving doors & lobbyists to promote corruption… are all but symptoms of the fraud. The fraud is the monopoly over issuance of intrinsically worthless money.

Much of what is called “financial services” today derives its profit in various forms from this theft.

To eliminate the Federal Reserve is to eliminate 90% of the useless middleman industry and return the power of money to those who EARN it as opposed to those who counterfeit it and those who game the system for it. It would eliminate massive wealth extraction from the productive economy to fund this ‘industry’.

I don’t know if you watched my favourite video on the Federal Reserve I posted but it would be worth your while to learn of the fraud before doing any more rambling. I’m going to post a few more videos and hopefully you’ll see the light soon.

[ldev]

Great debate going on!!

These "buy side", "sell side", "risk on", "risk off" phrases are fun to hear. Ask yourself a fundamental question. "When they agreed to give up their monopoly in 1913 and enter into this joint venture, what rights have they retained?" Because nobody will willingly give up the monopoly that they had without getting something ironclad in return. I hope that you do not ask who "they" are, or what "monopoly" they had or what this "joint venture" is. Because in the absence of answers to these fundamental questions, the rest is all tactical.