3/17/2009

03-17-09 - The Wrong Blame

As usual the retards that are finally up in arms about our financial disaster have started getting the blame all wrong.

The Daily Show segment about short sellers really pissed me off. (the fact that they mocked the random short seller guy and actually seriously listened to the crazy Overstock.com loony-toon guy is ridiculous). My god, short sellers don't bring down the companies. The companies are failing. Short sellers *might* occasionally help prick the bubble of inflated stocks that are going up purely based on momentum and collective belief in a fantasy.

There actually was a country that legislated that stocks could only go up. You were only allowed to sell stock for equal or greater value. (someone help me find a reference to that). Obviously that's retarded. Keeping bad companies afloat should not be our goal. Taking all the fluidity out of markets is not the goal either.

One bad aspect of the whole short sell / trading thing is how twitchy and over-reactive people have gotten. Not just day traders but professional brokers. Some good news comes in and stocks shoot up way past their real value. Bad news (like a bunch of shorts) comes in and stocks shoot way down. That's obviously bad.

If you're going to get mad about some practices in trading, there are plenty of things to be up in arms about. An obvious one is the intentional spreading of information (false or not) to affect stock prices, which has become quite standard and is borderline illegal and definitely unethical. The collusion at big banks between the investment bank part that offers a certain stock and the brokers and analysts that recommend that same stock is another.

Another very common practice to get mad about is the way the hedge funds stalk the major indexes. Quite a few of the large hedge funds now basically act as friction on the market. Any time the market wants to move anywhere, they take a piece. They act as an energy drag, sucking off a bit for themselves. This works basically because all the large mutual funds track certain indexes. A huge amount of the total stock ownership is through these large mutual funds. The indexes and the funds take some time to react to things, so when something happens, they have to announce it, and then it takes them a while to get things done. The mutual funds often have the problem that they have so much money to move that it takes them a long time to buy or sell the stock they're after.

The simplest and most obvious case occurs with the S&P 500 (or the DJIA). Whenever a stock is added or removed from the list of companies in the index, all the many huge funds that track that index must sell one stock and buy another. These huge quick computer-automated hedge funds jump in and buy up the stock that the funds need to get into, then sell it to them for a higher price. This is basically like if you walk into the grocery store and announce that you're buying apples, and some asshole runs over and buys all the apples and then offers to sell them to you for double the price.

These is just literally stealing money from long term investors. I'm sure there are lots of other practices like this that I don't understand, but plain old short selling is not one of them.

The other retarded fixation of the media was the whole corporate jet issue, and more generally just slight excesses of spending, like million dollar parties and whatnot. It's ridiculous on so many levels. First of all, it's a fucking drop in the bucket. It's not even a huge waste of money because it saves them time and whatnot. Second, the idea that the rich should stop spending lavishly or be embarassed about spending now is completely backward and will only make things worse if they tighten the purse strings. Third, the fuck-tard executives are getting paid way more than that in salary and bonuses and options; in fact there have been a few cases where some executive redecorated his office with a million dollar bidet and the media got all excited, so he just paid for it with his own salary. What? How is that better?

The recent AIG bonuses brings up a related point - yes, it's a bit ridiculous that they're paying out huge bonuses after receiving hundreds of billions of bailout money - but it's our own fucking fault. We just gave away a trillion dollars to all these fucking crooks with absolutely *ZERO* strings attached. No regulation, no requirement about how it be used. Of course they're just going to pocket it, why would they pump it into their failing business? That's what they're good at - giving themselves profits, that's their job to some extent. It's the fucking government's fault for giving out that money without regulation. Now congress and the media gets in a big tizzy and calls them in and says "hey, waaa you're not spending it how we wanted" and the executives are just like "meh, fuck you, you gave us the cash, I'm buying a new yacht".

I think the focus on the hedge funds like Bear Sterns or investment banks like Merrill is a bit out of place too. We should have just ignored them. It's perfectly fine for a hedge fund to take huge risks and sometimes lose on those bets - but we have to just let them fail! There is basically zero public interest in those companies. The invest the money of rich people and big institutions - they're not regulated and have got to just be allowed to fail. In the future we don't need tighter regulation of funds - we need to pledge to never bail them out. That might mean limitting how big they can be and also perhaps limiting how much regulated institutions can invest in them. Basically never want them to be "too big to fail".

The other myth that's being spread by the popular media is that all these poor homeowners are just victims in the crisis. Nonsense, in fact they're a large part of the problem. Now certainly a few people were victimized, given really bad mortgage deals that they didn't understand, and they just wanted a place to live and weren't speculating. But tons of people knew exactly what was going on. They were intentionally buying way out of their means because they wanted to get rich on real estate. They intentionally got neg-am loans because it allowed them to leverage up. They were speculating, they were watching TV shows about flipping properties. Most people knew we were in a bubble and kept buying anyway. In theory I don't blame them, they saw a profit opportunity and took it, but that doesn't mean we should now feel sorry for them or protect them or bail them out. However the reality is that US law has lots of favorable protections for mortgages, and speculating on investments that are protected by the government is definitely unethical and really should be illegal.

Basically my view is that there are two reasonable extremes : (1) completely free market with zero protections and little regulation, or (2) safe protected market with lots of regulation. Either one is okay (morally), but the thing that has gotten us in so much shit is our semi-protected semi-regulated market in which people can speculate and then have their risk covered by the government. That is fucked up. Also the illusion that things are regulated when they really aren't, and the ability of financial institutions to cross the dividing line between the safe market (in US law, a "bank" with FDIC insurace is supposed to be very safe and have plenty of capital and not take too much risk - similarly a mortgage is supposed to be a very safe type of loan that can be covered by the value of the property).

The big problem I see in general is that companies and individuals profits weren't tied to the deals they were making. Mortgage brokers for example were only motivated to do as many deals as possible, because they take a commision on each deal, and then just resell the actual mortgage, so they get none of the risk from the actual property. This gives them zero motivation to actual do a good deal or even turn down borrowers that are bad risks.

It seems like we need some kind of law to make profits more tied to actions. What we don't need is a bunch of micro-regulations about exactly what constitutes a safe mortgage or a good borrower or whatever. Unfortunately that's the way the US government tends to solve problems. It's much better to let the free market work and decide for itself who's a good borrower - the problem is just the mismatch of reward from actions.

Mortgages in particular seem pretty easy to fix. If mortgages could only be issued by institutions that backed the mortgage themself, it would all be fixed right there. Now they don't want to offer bad loans because they are backing the loan and they have to eat the default. Brokers no longer get paid just on volume, but rather from the actual return of the mortgages they offer. No more trading mortgages, no more government Mae subsidies backing the industry. Seems very simple and obvious and I don't really see a downside.

Another example is the credit rating companies. They have a complete conflict of interest and no motivation to rate things right. In fact their motivation is just to over-rate everything because that makes people happy and makes them issue more securities, so you get more business. The easy way to fix this is just to eliminate all of these made up abstract nominal credit ratings. Boom. Instead, the credit rating companies offer insurance on the securities. The value doesn't necessarily come in anyway *buying* that insurance, but simply seeing the price of it gives you the effective rating. That is, the price of the insurance on a given asset *is* the rating of how safe it is. If the rating is wrong, then the insurer can lose money because of the mistake. Thus they are motivated to give it the right rating. And it's in absolute directly measurable units - dollars.

Instead we'll probably have some fucking huge mess of laws about how the rating companies have to work, what exactly constitutes each of the rating scales, blah blah blah. That's terrible. Huge mess of regulation on top of a basically corrupt system is the wrong way to do things. Instead dig up the system and make it non-corrupt. Use the free market, but force the free market to work correctly - that is, make pricing honest and make the people taking the profit take the risk.

I like the idea of forcing people to price things as a way of enforcing honesty. Like if a trader recommends a certain stock - boom you have to buy it. If you recommend shit, you will lose money. Thus you are motivated to only recommend things that are actually good. You could make a law like anyone publicly recommending a stock has to buy it and hold it for at least a year.

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