1/14/2010

01-14-10 - Bankers to Blame

It's painfully ironic listening to the politicians demanding apologies from the bankers for this financial crisis. Let me clue you all in : the bankers did nothing wrong. This crisis was almost 100% the fault of politicians.

Bankers are *supposed* to make profit. You see all these retarded reporters and politicians who complain "the bankers saw an imbalance in the market and exploited it for their own profit". No shit! That's what they do! Or "the bankers sold products that were obtuse, complicated, and over-valued". Hey, if you can sell junk paper and find some moron that will buy it for millions, then of course you should do that. (one of the examples that people are citing now is the appearance that Goldman created some bogus securitiesb that they knew were very questionable and risky, sold them, and then got insurance from AIG against their failure; people imply that this was "irresponsible" or "immoral" or some shit; of course not, it's fucking brilliant; Goldman saw that AIG was being a fucking moron and took advantage of it, good play my son! The thing that was irresponsible and immoral was bailing out AIG and making the taxpayer buy those bogus securities at full value).

Now, certainly we can complain that the mortgage market was not properly regulated. Brokers like Countrywide should not have been allowed to issue bad mortgages and package them and resell them without keeping any of the debt on their books. The Maes should not have been using government-backed money to subsidize questionable mortgages. Complicated mortgages and ARMs and such never should have been allowed at all. There should have been more of a safety net to warn lenders about taking risky mortgages. The ratings agencies should have been more responsible for the ridiculously incorrect ratings they were giving to packages of mortgages. etc. etc. Nowhere in here did a banker do wrong. Instead this is pretty much 100% the fault of recent laws that liberalized the rules of the mortgage market.

Investment banks and hedge funds should not have been allowed to take so much leverage or get so big that they were a structural risk to the system. Derivatives and other securities should not be traded on markets without transparency and regulation. But this is not a fault of the bankers, it's a fault of Congress the Fed and the SEC for failing to regulate the system, for hiring regulators straight from Goldman, for taking masses of finance industry lobby money, for jumping straight from Treasury jobs to wall street & vice versa. Bankers of course should try to maximize their profit within the system they are given, the job of government is to structure the system such that they can't do so much harm in their quest for profit. It's just absurd to think that they should be altruistic and think about how their actions affect the median; that would be un-American.

The other thing that shocks me is the lack of vigilance of share holders of finance firms. If Goldman wants to take huge risks that might make it go bankrupt, or pay out huge bonuses from its profits - that's really none of our business (ignoring the issue that companies are allowed to become so big that they are a structural risk if they fail). But it *is* the business of shareholders. If I'm a shareholder, I fucking *own* that company, WTF are they doing? When they do well, they take bonuses and I don't get dividends. When they do badly, my stock value falls. WTF !? I should be demanding that those bonuses are paid out as dividends! And I should be demanding that they not take such great risks with my investment. It's another way that they have of taking big risks, profiting when the risk does well, and passing the loss to someone else when it does badly. WTF happened to active share holders !?

Largely investment bankers should be allowed to fuck around all they want, that's what they're good at. We aready mentioned the problem that they were allowed to get too big. The other problem was that ordinary FDIC insured banks were allowed to get into risky investments. Another was that public funds and pensions got into these risky investments, which meant the public was exposed to these risks. That never should have happened. What went wrong with pension investing? Basically, massive corruption. There are already a few suits underway about this, but they will surely never get accountability. The thing that happened is huge public pensions like the California state employee's pension fund had all this money they needed to invest. They didn't want to do it themselves so they'd hire someone like Merrill to do it for them. They're a financial advisor and fund manager, they're supposed to have expertise and help you invest your fund responsibly. Well, surprise surprise, Merrill would tell them that the best place to put the money was in this package of securities that Merrill had created, or in a special investment vehicle that another department of Merrill was running. Merrill takes a fee as the fund manager, they take a fee on the investment vehicle, and they get capital for their investment wing. And lo, those investments turn out to be far more risky than advertised. Pensions and public funds all over the world were suckered into paying excessive fees and investing in places they never should have invested through these mechanisms. (in reality, public pensions need to be in very safe vehicles that just track GDP with a minimum of fees, things like total stock market index funds).

4 comments:

Aaron said...

Yeah I've heard if you subtract out the fees from investing, over the long term, paying a professional to invest for you is about as good as just putting your money in an indexed fund. After fees no one really beats the indices.

I think one aspect of your analysis that is missing though is the deliberate and intentional infiltration of government by the banking/investment sector. Nearly all economists are or have been associated with the Fed at some point. They all leak into government and end up advising politicians on what to do. Look at someone like Geitner. He's not there by accident. He's an industry insider just flat out running the show.

I do agree that politicians are responsible for not maintaining a regulatory regime that could protect against this failure (or rather, dismantling the ones that were in place before). But, by extension, citizens are to blame for voting for those politicians.

That said, the best thing to do right now is to attack the bankers HARD. They are vulnerable, and they are evil. They weren't just innocently playing the game. They were also (and continue to) game the political system to their advantage. We should hit them everywhere we can.

Obama's (albeit too small) banking tax to help pack back a tiny bit of TARP is a good first step. It;ll raise like 100b. While obviously some of that will be shifted onto consumers, that's not all bad, since we've established that consumers are also at fault.

cbloom said...

So we blame the bankers, politicians and consumers ? ;)

cbloom said...

Another minor interesting thing that's happened is the NY banking cartel has used this as a sneaky way to fuck up Bank of America, which is the non-NY outsider that was getting too big for its britches.

Crises are great opportunities for the powerful to fuck us over in ways they normally couldn't get away with.

See eg. 9/11/2001 which was used as an excuse to strip us of civil liberities and so we can now be eavesdropped on, tortured, extradited to secret prisons, deported for stealing candy bars, etc.

Aaron said...

"So we blame the bankers, politicians and consumers ? ;)"

Yep, and in that order. About 55%, 30% and 15% to blame respectively.

old rants