Tag Archives: wall street

Wall Street Is A Casino

Posted on April 29, 2010 | Leave a comment

Two articles came out in the past week comparing Wall Street to a casino, pointing out that much of the activities of the big investment banks – like the synthetic CDO at the heart of the Goldman fraud case – provide no real value to society and are simply ways to bet on the direction of an event. In this case, the event was housing prices, but the articles ask how that bet is really any different than betting on the outcome of a baseball game or a roulette wheel.

What is particularly interesting is the source of these articles. One was an op-ed in the hyper-conservative Wall Street Journal, co-written by Niall Ferguson, a Harvard professor who is generally quite conservative, and Ted Forstmann, an equally conservative private equity financier. The other article was written by Andrew Ross Sorkin in his NY Times Dealbook. The Times is, of course, quite liberal, but Sorkin makes his living (quite lucrative, according to reports) by having great sources on Wall Street, and generally speaking you don’t keep those sources by insulting them in print.

For conservatives to publish against their leanings, and for ambitious journalists to publish against their career prospects, is a pretty big deal. They must have felt very strongly about the casino aspect of Wall Street to write those articles.

Just in! Here is Eliot Spitzer’s take on Wall Street as casino. You may discount him due to his hooker addiction, but he hits the nail on the head (so to speak) here.

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NY Times Copies Me. Again.

Posted on March 21, 2010 | Leave a comment

This time on the theme that much of Wall Street innovation does not actually benefit society. I’ve written about that here, here and here. And in today’s Times Magazine, they note that the current Wall Street trading mentality more closely resembles a casino than the capital allocation function that Wall Street was founded to perform. I commented on the Times’ prior copying of me here.

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Where Does Wall Street Add Value?

Posted on March 16, 2010 | 2 comments

I had lunch today with a guy I share office space with. He is a partner at a small investment bank and has spent his entire career at various investment banks, helping companies raise capital. He is part of Wall Street, and Wall Street pays for his house and his kids’ private schools. And yet even this insider, when our conversation turned to proprietary trading and hedge fund, he remarked “What do those guys really add to society? They don’t build anything. They don’t allocate capital. They just make money from gaming the market.”

It’s true. When we discussed Renaissance Technologies’ 45% annual return since 1988, I noted that there are 90 PhDs, mostly in physics and computer science, working there. Think of the great things those guys might invent if they were trying to grow something other than their bank accounts.

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Posted in Business, Technology, Trends

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Wall Street: “Trust Us.” Me: “No!”

Posted on January 18, 2010 | 4 comments

Last week the Wall Street Journal wrote an article on the SEC‘s efforts to ban “naked access,” which is a system whereby big stock traders are given direct access to brokers’ computers so that they can trade faster. The SEC fears that this could be destabilizing to markets. Wall Street says that naked access improves liquidity. They also say that “high-speed trading firms are sophisticated and have risk-management tools that limit the likelihood of destabilizing trades.”

Haven’t we heard that song before? Wall Street said that they were sophisticated traders of mortgage-backed securities, and that their risk-management models would keep them from getting in trouble. We know how that turned out. I’m no expert on naked access, but I know that when Wall Street says “trust us,” I make sure they haven’t just stolen my wallet.

Along the same lines, here is an article in Slate describing how Wall Street has always complained about regulations that ended up helping the industry.

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Shareholder Governance and Technology

Posted on January 12, 2010 | 2 comments

In many of the discussions about executive compensation and Wall Street bonuses, it has been noted that shareholders are, theoretically, supposed to exercise some control, at least via election of directors. However, retail investors rarely take the time to read their proxy statements, let alone vote. This morning Eliot Spitzer (yes, that Eliot Spitzer) wrote an article in Slate listing several websites that are trying to use technology to both educate shareholders and to inspire them to get active and take control of the companies they own.

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Financial Regulation Does Not Hinder Growth

Posted on December 17, 2009 | 1 comment

David Wessel of the Wall Street Journal wrote a column today in which he proposes that the US has to choose between economic stability and economic growth. I am usually on board with Wessel, who does not follow the Journal’s usual slash and burn libertarianism, but in this case I think he’s wrong. His dichotomy is false.

The regulation that Wessel is discussing is financial regulation to curb the boom and bust cycle that we have just lived through. He asks whether “wise government rule to prevent market excesses” would also prevent the dynamic innovation that fuels economic growth. I answer emphatically NO.

As I noted yesterday, financial innovation is unrelated to business innovation. In yesterday’s post, I pointed out that the companies driving recent growth – the Googles of the world – have not depending on the innovations coming out of Wall Street. But today I will go even further. Between World War II and the S&L crisis, we had a long period of mostly financial stability, without the crises we’ve seen since then, and with a regulatory regime that had general consensus on Wall Street and in Washington. That long period of stability didn’t hinder economic growth; in fact, as the graph below shows it was one of the greatest growth periods in our nation.  Notice how much higher the growth is (the red lines) before the S&L crisis in the mid-1980’s.

Growth in GDP

Growth in GDP after WWII

I would argue that not only did financial stability and economic growth coexist during this period, but that the stability was actually helping the growth. After all, it’s a lot easier for companies to plan and budget if the financial markets are not booming and busting. And potential entrepreneurs are more likely to take the leap and start a new business if they aren’t worried about their retirement savings disappearing in a Wall Street flame-out.

So let’s not worry about financial regulation slowing down growth. Let’s focus on smart regulation that will spur growth.

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Paul Volcker on Financial Regulation

Posted on December 16, 2009 | Leave a comment

Speaking of reasonable voices when it comes to financial regulation (see my post below), Paul Volcker is coming out strong for a much more rigorous set of regulations. Volcker ran the Federal Reserve before Alan Greenspan, and was considered a guru while Greenspan was still ladling Ayn Rand’s soup on Saturday nights.

Here is a link to an interview Volcker gave to the WSJ, and here is a link to a New Republic article by Simon Johnson about that interview.

The money quote from Volcker: “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy.”

Again, that is a voice of reason. We all agree that capital markets are important to the economy, and that some financial innovation is a good thing. For example, developing ways for big companies to hedge their raw materials risks can help the economy. But developing ever more complicated derivatives and securities which are backed by securities which are backed by securities which are backed by assets?  How do those innovations help the economy?

This last point is the one that puts the lie to free market ideologues. They say that financial innovation is key to fueling the American economy. But financial innovation has nothing to do with the economy outside of Wall Street. Think about the great engines of American growth that these ideologues love to mention: Wal-Mart, Apple, Home Depot, Google or Tommy Hilfiger. They all grew large and hired thousands of people without building their business on credit default swaps or mortgage backed securities. None of them care about the hundredth of a penny reduction in spread that dark pool trading creates. Real innovation in the American economy is disassociated with Wall Street. The only thing that Wall Street innovation drives is Wall Street pay packages.

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Reason & Financial Regulation

Posted on December 15, 2009 | 2 comments

National Affairs recently ran an article on financial markets and regulation that was the most clear-headed, non-ideological commentary I have seen. The author, Nicole Gelinas, makes five main points:

  1. Capital markets are important because they allocate a key resource (money!) among various projects and sources
  2. A free market of buyers and sellers, or lenders and borrowers, is the most efficient form of capital market
  3. Some regulation is essential to the smooth working of a free market
  4. This includes regulation of leverage, speculation and complicated instruments
  5. Explicit or implicit government guarantees (eg. too big to fail) distort the free market

But read the article yourself. It’s not long, and it’s awesome.

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Anger at Wall Street Grows

Posted on December 9, 2009 | 1 comment

Just a few links to articles showing how fed up folks are getting with Wall Street.

  • The NY Times with a column from a former corporate lawyer calling for a windfall profits tax on Goldman Sachs
  • Salon telling Wall Street to “just shut up” and advocating limits to lobbying by financial firms
  • A new regulatory manifesto by a fed up investment banker
  • And just for fun, an attack on private equity’s quest for capital gains tax treatment

It’s starting to look like enough people are fed up that something might happen. Of course, the financial industry has already spent $350 million this year on lobbying, setting a record, and we know that politicians listen to money more than they listen to voters.

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Geithner Blew It On AIG

Posted on November 24, 2009 | Leave a comment

Eliot Spitzer took Treasury Secretary Timothy Geithner to task in Slate yesterday, accusing him of incompetence in handling the AIG bailout, particularly the full payment to swap counterparties like Goldman Sachs. Spitzer’s basic position is that since the government had all the money, it should have played hardball and forced everyone to take a haircut, which is standard practice in workout situations.

As Spitzer says, “The entity providing financing to a near-bankrupt institution must always seek contributions from everyone else at risk.” He further notes ““In a workout context, the entity with cash—here, the government—can set the terms, and the other parties can either accept those terms or walk over to bankruptcy court.” Spitzer also references the auto company bailouts, in which the government did play hardball and forced all parties to make concessions.

Regular Thoughtbasket readers will recall my supportive comments (read them here and here) of the government’s aggressive position during the auto bailouts, and so it shouldn’t surprise you to learn that I agree with Spitzer here. Geithner should have been far more forceful in making everybody feel some pain for doing business with AIG. As Spitzer says:

“Pressuring Goldman and the other counterparties to offer concessions would have forced them to absorb the consequences of making suspect deals with an insurance company that was essentially a Ponzi scheme. Forcing them to give concessions would have been one small step toward ending the moral hazard the Fed had allowed to flourish for years.”

This seems like a good opportunity to point out the risk of having career bureaucrats deal with business situations like this. Geithner was out of his league going head to head with Wall Street. Geithner has only worked in governmental positions, except for a couple of years at Kissinger Associates, which is essentially a government position. On the other hand, the guys who ran the auto negotiations, Steve Rattner and Ron Bloom, have significant real-world experience, as investment bankers and, in the case of Bloom, negotiating workouts of failing steel companies. This is why any government agency that deals with business needs to have at least some businesspeople in high-level positions.

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