How I made my friend’s LAWYERS a quick $15,000.00. My friend is still living in his trailer.
The reality is that the best and brightest students from HYSP, etc. go not to Moody’s or S&P but to investment banks. They design hugely complex products that not even everyone at their own bank understands, and then they get these products rated by a ratings service (employing less capable individuals) who they could chose not to use in the future. If you seriously think it’s realistic to expect even professional investors to have the time and ability to unwind synthetic CDOs and be able to identify the underlying mortgages that have been tranched and re-tranched, and then check borrower incomes and do complete due diligence on these products then I don’t believe you’re being completely honest. If this was the market expectation for investors in these products, banks would have been foolish to create them at all. The ratings services are essential to create the market. And while some variance from the ratings is to be expected, you don’t expect an individual AAA security to perform like junk bonds, let alone an entire class of securities to do so.
And that’s even ignoring the bad-faith the banks demonstrated in internally trashing these products while promoting them to clients.
Again, moral hazard isn’t limited to originators. LCFIs/SIFIs are, virtually by definition, too big to fail. This creates huge moral hazard, as they have the implicit guarantee of state protection.
That seems an odd place to point the finger. Certainly other jurisdictions with greater regulation and Glass-Steagall style laws have done much, much better than US banks. The US government, to the best of my knowledge, isn’t participating in the creation of the sorts of inscrutable synthetic offerings that destroyed the economy.
There’s no doubt that people who work at investment banks are very smart and very hard working. But I think they place too much belief in their ability to accurately quantify and manage risk through increasing complexity and increasingly complex risk modeling. The rise of quants, Black-Scholes, and synthetic CDOs allowing you to polish turd mortgages into AAA products are examples of this reliance on extremely complex and largely untested solutions that make them feel more comfortable taking positions that might be considered highly risky under traditional analysis.
And I don’t think people were so angry about bankers profiting off of the crisis so much as for creating the crisis in the first place.
I’m glad I’m nowhere near being on this list. It’s the kiss of death. I liked your earlier comment about just flinging shit because that’s what you do. I’m on board with that statement. It’s the fucking INTERNET for krysesake. Do you ever read Youtube and news site comments from the proletariat? Fuck me with a hammer sideways, NOOoooooo …with slow motion running away… that’s not shit, that’s pure hateshit. Ignoramus hateshit. I just throw regular garden variety shit. That’s fun.
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Yeah, he’s a poo poo head nya nya nya nya na nya there I said it no crossies no takebacks.
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it’s unpleasant, unproductive and messy.
But, someone has to do it. 
I personally think Cowicide is one of the worst posters here
Cow is worthless shit.
significantly less knowledgable than he seems to think.
Cow don’t know shit.
He’s quick to insult people who disagree with him
Cow is insulting shit.
seems to think that making snide but irrelevant comments is an appropriate form of discourse.
That little shit!
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I’m glad you finally weighed in. We were about to have an all-out no-holds-barred war of attrition.
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Explain to us how a dishonest dogwalker or interior decorator does as much harm as a banker. Further, explain how aspirational sociopaths choose careers based on just whatever man instead of the most remunerative paths available. Jordan Belfort didn’t get into finance out of his love of arithmetic.
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There’s 2 days left. Who will get the last word?
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However, I do know many bankers, of both the commercial and investment variety, and I will take a randomly selected one of them any day over a randomly selected person from one of many other professions. By virtue of my familiarity with these markets and individuals I do end up developing kind of a peeve about people who use them as scapegoats for problems caused primarily by governments or others outside of the financial industry.
Because your deep insight into every other profession lets you compare them all against each other in terms of ethics, right?
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Apologies for the delay. I hit my reply limit.
[quote=“bwv812, post:107, topic:34594”]
And while some variance from the ratings is to be expected, you don’t expect an individual AAA security to perform like junk bonds, let alone an entire class of securities to do so.
And that’s even ignoring the bad-faith the banks demonstrated in internally trashing these products while promoting them to clients.[/quote]
True enough. The ratings agencies screwed the pooch. Still, I believe the ultimate responsibility for understanding the risks of assets should remain with the money managers. Understanding and managing those risks is their full-time job and they are supposed to be really smart. CDO’s have a certain amount of complication to them, and also a lack of transparency, so I think trusting the ratings agency was more than a bit naive on their part. All this is clear in retrospect, I guess. At the time it appears that neither asset managers nor the ratings agency had much of a clue.
I don’t doubt that there were some within the banks that thought these securities were crap and no doubt there is a lot of evidence to that effect, but I think the fact that the banks had a ton of it on their books indicates that disdain for the was not universal internally. If the banks were really hocking garbage and profiting like crazy, I wouldn’t have expected them to be the ones facing bankruptcy and begging for bail-outs.
I agree on your moral hazard comment. If you take a look at what I wrote, it was the same as what you said.
I guess here we see why you and I differ. I agree that it was private banks that created complex CDO’s. Because of the messed up ratings unexpected people ended up holding the hot potato. Money got shifted around relative to where it would have been otherwise, but by no means were the CDO’s themselves the cause of the financial crisis–the same amount of money would have been lost due to defaults and stuff. The financial crisis had one true cause: a massive housing bubble.
Between the easy money from the Fed, actions by HUD (lowering standards for conforming loans, for example), the mortgage tax subsidy, the housing agencies, the whole concept of separating the loan originator from the people who ultimately hold the loan, and many other government actions, I think the US government is a very natural place to look. In fact, even since the popping of the bubble, the government has tried to re-form it by propping up housing prices through subsidies, transfer payments, and anything else they have at their disposal. I suppose this is because propping up housing prices enriches the wealthy and the aged at the expense of the young and the poor. The former two groups are much more politically active.
Oh yeah, and all these companies faced bankruptcy because they were levered way up. Why do firms take on massive debt instead of using equity financing or something else that doesn’t cause bankruptcy? Because the government incentivizes debt by not taxing interest payments while it taxes all other forms of payout. Not to mention they hope that the government will bail them out, so they are happy to take risks. All government’s fault.
Anyway, the fact that our financial system was tangled up with CDS’s and was confused about the value of CDO’s only added to the effects of the financial crisis, primarily by harming the financial sector itself. But I wouldn’t call either of these the underlying cause.
Ultimately the bubble, and then the crisis, was made up of many interlocked players, like gears. Real estate agents encouraging speculative behavior, greedy consumers trying to make easy money by speculating on real estate, mortgage companies making loans to just anyone, banks putting a bow on those loans and selling them off, bond insurers biting off more than they could chew, ratings agencies putting their stamp of approval on it all, asset managers thinking they had found a nice little free lunch and buying it up without checking it out, construction companies that interpreted high prices as legitimate demand instead of a speculative bubble. They were all part of the machine, but the agent who put them together, poured gas in, and drove it off the cliff was the government. Or maybe the people, ultimately the government does what they want.
Good point. Dogwalkers and decorators don’t do much, good or bad. To do a good comparison, you have to find someone influential. Politicians. CEO’s. High powered lawyers. Judges. Hospital owners. All these guys do a lot of good in the world, but also a lot of evil. Personally I think bankers do well by comparison. Of course, it’s impossible to quantify this stuff, so I’m happy to respect differing opinions on the subject. My main point is that bankers are not the big bad guys, nor more evil than others we might compare them with.
Here’s an example comment from earlier in the thread, for your reference. It’s kind of the one that I was speaking to originally.
You hear this kind of garbage at lot on the internet and after a while it gets real annoying.
Virtually the entire point of CDOs is that they are so complex that you can’t perform full due diligence. If you could trace back your AAA security to the underlying mortgages, you would see that there is no way it could be AAA under conventional standards. The AAA rating is artificial, based on the repeated tranching and retranching of aggregated mortgages until you’ve reached a point where the AAA securities theoretically represent small, creditworthy slices of a diversity of underlying mortgages. How long do you honestly think it would take for a money manager to do due diligence on any given synthetic CDO? If it was easy, presumably it would also be easy for ratings agencies to rate them accurately.
Well, you largely blamed mortgage originators for falling prey to moral hazard, not the banks themselves.
Come on. Without these “messed up ratings” there would be no market for these complex securities, no incentive to create them, and no fees for the banks. The banks knew they needed to create investment-grade ratings. The securities they created were designed to do exactly that: create investment-grade securities out of junk mortgages. The pressure on ratings institutes was obvious. These securities were created because they had huge profit potential for the banks. To ensure a continuous stream of profit, the banks needed to ensure there was a steady stream of mortgages to securitize. Mortgage originators responded to this demand, and banks didn’t care how the mortgages were obtained so long as they were able to repackage and sell them while taking their cut as middlemen.
Yes, the US policy of encouraging home ownership contributed to this, but the US is acting firmly in the Anglo (and thus Commonwealth) tradition in it’s home-ownership policies. Tax incentives are common. I agree that origination policies are pretty weird in relation to the rest of the world, but so is the balkanized banking industry in the US with its historically regional banking institutions: but this patchwork system arose not because of big (federal) government but because of weak federal government and state-based federalism that resulted in state protectionism when it came to banking. Arguably stronger regulation would be more effective.
So basically you’re saying that many of the actors on the non-government side of the equation were motivated by greed, ignored risks because of moral hazard, acted unethically, and created securities that obscured true risk, and yet despite these huge failings it was the government that is really to blame because of their good-faith interest rates and tax policies. Let me know how you think the financial sector would have reacted if the government had jacked up interest rates, removed home-owner tax breaks, made mortgages more difficult to obtain, banned third-party loan origination, regulated the ratings agencies (even if only requiring rotation like they did with auditors post-Enron), and more broadly eliminated the tax deduction for interest payments. Given that you’ve repeatedly said you think increased government regulation is the problem, I would be curious.
And I kind of suspect that when you blame “the people” for the government’s failings, we should be really blaming not the poor and uneducated (which you agree with) or even those who own homes and have mortgages (who you think are largely to blame), but Wall Street and the outsize influence they, their lobbyists, and their campaign/PAC contributions have on the political process.
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Yes, the people are ultimately to blame in a democracy. Most often, poor and uneducated people and those seeking to help them are the cause of problems in the direction the government goes. The financial crisis came about in large part because populist politicians on both sides wanted to get poor people into their own houses. Now that the crisis is over (or should I say, fully realized), the government is propping up housing prices, which benefits the old and wealthy and hurts the poor. They are also pushing down rates and expanding the money supply while on the other hand massively contracting the money supply by paying interest on reserve accounts. No one ever said government is consistent.
Lobbyists, PAC’s, etc are clearly contributors to problems as well. But again, it was government that made the rules on those issues. They set up the system so that in order to do well, you must spend money on lobbyists who seek to subvert the good of the whole for the benefit of the special interest. Anyone who doesn’t play by that rule doesn’t get to keep playing for long. Does that mean the players are at fault or the one who set up the game?
it was government that made the rules on those issues.
Agreed, but we should also consider that corporatists who have taken over a lot of our government basically write their own rules by proxy. Also, just because someone can get away with something because of fudged rules, that doesn’t make it the right thing to do. Unless we are to say self-responsibility and corporate self-responsibility for actions are irrelevant simply because one can hide behind some crafty paperwork and legalese. We’ve tried that and we’re in a horrible mess today because of it.
Does that mean the players are at fault or the one who set up the game?
Both are at fault, in my opinion, for the reasons I gave above.
Lobbyists, PAC’s, etc are clearly contributors to problems as well.
Agreed, and I hope you’ll join those of us who are struggling to get to the root of that issue here:
I really don’t get this. You say that sometimes more regulation may be good, and sometimes less, and sometimes just different regulation. And you don’t know what is optimal, but you do know that the moral duty lies with the government, and not private actors (i.e., the players), since they created the game. And yet, at the same time you say that it is the people (i.e., the players) who are responsible for government policies. So even though the players set the policies, don’t blame the players: blame their intermediary, the government.
But if the government is going to be blamed for any failure, and private actors are going to be excused for all of their actions (even when illegal, such as the mortgage fraud that contributed to the crisis), why shouldn’t the government micro-manage and heavily regulate all aspects of the financial world? Give the players much less room in which to maneuver and they’ll be able to cause much less trouble.
Yeah, I remember the bottom 80% of income-earners lobbying strenuously for the repeal of Glass-Steagall. And financing the Citizens United appeals up to the Supreme Court.
When were securities created? Was it the government who created securities? I have my doubts on both contentions. Securities certainly predate the US and even European settlement of the New World, and government regulation of securities and government-issued securites have little in common with the complex offerings that led to the crisis.
Nobody is forcing corporations to incorporate, but they do so because the government gives them numerous advantages when they adopt the corporate form. Limited liability being a prime example: individual people do not enjoy limited liability. Do you also encourage removing the protections of the corporate form? Heck, even corporations can avoid corporate taxation if they elect to be S-corporation, which enjoy pass-through taxation. Sure, there are limits to what can qualify as an S-corp, but being taxed at the corporate level is always a choice.
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I just thought it was an ad for that guys book?
to me you sound like someone who disrespects every single question asked of him. You may or may not be a great orator, but you suck at conversation.
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That’s a complex question. I don’t particularly see why taxation and limited liability must be connected. You could certainly remove corporate taxation without any need to address the limited liability features.
Actually I’ve kind of deviated from my original intent here. Creating a utopia from the armchair that will stand up to intense logical scrutiny is a difficult problem and I don’t think I’m up to the challenge. I really only came here to say that bankers are not evil, or at least it doesn’t make sense to hate on them. As an additional comment, it does make sense to critizise and hate on the government. Why? Because we have some control over the government, for one thing. Bankers and other economic agents are going to do what they think is best for them irrespective of masturbatory hate tirates on the internet. However, government actually might respond, and government is in a position to change the situation for the better.
My view is that given the power of government and its tendency to be taken over by special interests, stupid people, or power-mongers it is very healthy to view everything government does with a critical eye and never give it the benefit of the doubt. Bad things that happen often are the government’s fault. Bad things that individuals do are pretty much out of our control, and often a result of the regulatory and legal environment in which they find themselves.
That’s my big picture reason for blaming government for these types of problems.
I’m glad that you’ve signed up with Lessig, @Cowicide. I have, too.
Here’s my little QA:
Q. Do I believe everything he is planning is going to work?
A. Let’s say that I have a healthy skepticism.
Q. Are you betting the farm on him?
A. Let’s say that I have a healthy skepticism.
Q. Are you just going to keep repeating the same damn thing in all the answers?
A. No, I’ll try to change it up.
Q. How much did you give him?
A. $10.
Q. Really, you think that ten bucks is going to “change the system”?
A. I’m willing to do my part. If other people want to join in, then my ten bucks will multiply by the number of people he can recruit to his cause. If the cause seems worthy after this first round, I’ll double my next donation to $20 and wash/rinse/repeat.
Q. What about the people who say Lessig is going to fail?
A. What about them? He might and he might not. At some point, some sympathetic richie riches will notice, or he will strike another chord and make a little headway. Eventually, the conditions will align right and the House and Senate will not be dominated by corporatists, or the corporatist position will be weakened in favor of sustainability. It will happen at some point. I don’t know when. It might only be a brief window of a lame-duck Congress. When it happens, we’ll be ready to strike with new legislation rolling back the old, useless laws that keep the hypocrites in power. Maybe even slip in a Constitutional amendment or two. Who knows. The point is that without building the base of people who want the reforms and putting at least a few sympathetic reps in DC, we won’t be ready when the time comes to act. We’ll still be organizing, and then the moment will pass. I don’t want to let that happen and ten bucks is the least I can do.
Hell, I might even vote in the national elections next time. We will see.
