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Sunday, Nov 8, 2009
I keep hearing discussion of moral hazard in insurance terms relating to the financial markets, but no-one mentions the biggest moral hazard, that bankers and executives are being paid to do deals -- period, regardless of overall quality. So if they sell a lot of overpriced debt, mis-rated, or push an M&A that is a loser for the companies involved, or a buyout that simply asset strips and then IPOs a company with long term problems they "make out like bandits." There is a moral hazard, doing lousy deals gets you payed, maybe more than if you did a good deal, and certainly its easier than finding a good deal to sell...
In fact, gambling is an analogy that is constantly used in economics textbooks.
John Maynard Keynes -- arguably the father of much of modern economics -- wrote in the 1930s that financial markets are like "beauty contests" where punters would bet on who, after all opinions had been tallied, was going to be deemed the most beautiful girl.
So, he went on to say, people didn't invest in stocks or instruments that seemed to them to be the most "beautiful" -- but rather placed their money on "what average opinion expects average opinion to be".
This is a fundamental insight. So fundamental that many economic events of the last 70 years cannot be understood without understanding the basic truth that Keynes revealed with this specific gambling analogy.
Andrew Leonard's sports betting analogy is accurate, apt, and useful.
I'd like to see a law requiring every mortgage broker to pay
back their commission, plus expenses, for each failed loan.
When a car dealership makes bad decisions, they go out of business, so what.
But when so called respected institutions(banks), get into trouble, it's time for a taxpayer bailout. Even an idiot like me saw this coming from the beginning. Banks are fully responsible for this, and they deserve to eat shit and go to jail. Banks like these, that ignored common sense, don't have the balls to take it on the chin; sort of like a whining car dealer if I may say so. Can someone tell me, why do these large scale financial bloodlettings always seem to happen on a republican watch?
I mean, over 30 years, asset allocation accounts for 95% of your returns. So little dislocations like these should be irrelevant to most investors with a long term horizon and a correct understanding of risk. I mean that's Buffett's and Fama's and French's approach. It's based on 100 years of data. It's as close as science as you'll ever get when it comes to the financial markets. Most of us, the chumps with their index funds, should not even care about these strictly financial events. The thing is, the big guys on Wall St - and I mean, the really BIG GUYS, Goldman Sachs - are in trouble because they abdicated any sense of risk management discipline. In a way, I love it that the fat cats at Goldman would have been much better off with their money in an index fund rather than in Goldman's internal hedge fund (the legendary Global Alpha, as it is called, is only opened to senior level employees and High Net Worth Clients - and was down 16% last year, and another 30% so far this year - warf warf warf). There is a way to achieve 13%/year with a level of risk slightly lower than the S&P500. But it only works over 25-30 years. And that is extremely boring, right. No financial press, no Bloomberg terminals, no cold-calling stockbrokers, no outrageous mutual fund fees. Hell, I'm even going to give it to you guys - google Fama and French, and then google Dimensional Funds. Tada. No more market anxiety.
F R A U D!!!!!
Even though I’m sure that these clever scam artists have had plenty of wealthy lawyers help them cover their tracks, there has to be a lot of fraud involved with this whole mess. I’m not nearly informed enough to tell you the specifics although one small and simple example would be the Internet companies that helped lone applicants prove jobs and income that didn’t exist including even pretending to be the employer.
The Securities and Exchange Commission needs to do a full investigation and Congress needs to hold a lot of hearings and make these poor excuses for humans testify to their obscene role.
F R A U D!!!!!
Strictly speaking, a derivative is a financial doohickey whose value derives from some underlying asset. A mortgage loan is an asset.
Please be aware that Strictly speaking is term with a well-defined meaning. A classic example from linguistics is to compare the sentences
Technically, Richard Nixon was a Quaker.
Strictly Speaking, Richard Nixon was a Quaker.
The first sentence is true, because Nixon satisfied the dictionary definition of Quaker. The second sentence is not true, because strictly speaking adds additional requirements; in the case of Quakers, it adds an ethical approach and world view that Nixon did not share.
And strictly speaking, a derivative is not a doohickey. It is a financial instrument. Can we be grownups here, please?
A pool of mortgage loans grouped together into a security that can be traded on markets is a derivative. . . . Derivatives belong to what should be called -- but never is -- the unreal economy, a place where speculators make bets about what will happen in the real economy.
A securitized pool of mortgage loans may be a derivative, but more importantly it is a basket or portfolio security. Investing in one mortgage involves the risk that the borrower will default. Investing in a pool of mortgages diversifies that risk. It is socially useful and beneficial to allow investors to reduce their risk by diversifying. It is no more “unreal” than investing in a mutual fund instead of picking individual stocks. And all financial investment involves making bets about the financial future.
. . . collateralized debt obligation. . . . Don't worry about the name. Call it an extra-special funky doohickey if you like. It's not important.
It is important. Words are for communicating. Serious authors, editors, magazines, and websites use real names for things.
Wall Street calls these slices "tranches," but that seems to be a word that makes the brains of normal people freeze up, so we'll ignore it.
Do you have any evidence that the word tranch causes problems for “normal people”?
But it becomes a much more severe problem when you're trying to figure what is going wrong when the trains start derailing.
I thought we were talking about financial investments, or mortgage-backed securities. We also brought in sports metaphors. Where did trains come from? And what is the metaphor supposed to mean? Trains derailing is analogous to what, exactly, in the financial world?
. . . the same games that Wall Street played with subprime are likely being played in every sector of the economy.
Every sector, huh? What is your evidence for that?
Much of the initial coverage about Fort Hood turned out to be wrong. Is there anything wrong with that?
The accountability imposed by another country for the CIA's kidnapping and torture reveals much about our own.
Fox News' morning show plays to type, talking about whether Muslims in the Army should face "special debriefings"
The survivor and author is upset about comparisons some on the right are making to genocide
Once seen as a lunatic fringe, reactionary anti-women groups are courting respectability
Salon headlines in your mailbox
