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Hello TL, and welcome to the beginning of a decidedly mediocre venture. It’s been a while since I’ve written at length, most recently as a poker pro at a small site called pokerspace.com. Since, I’ve stopped playing the game I loved (thanks, Eric Holder -_-), and moved on to a new game that’s proving to be equally, if not more fascinating: finance. There exists a subset of the population that, upon hearing “finance” and “game” in the same sentence, is offended and jumps to accusations about the “1%” treating Main St. like another property on its personal Monopoly board. In actuality, that’s completely true, but please allow me to elaborate.
First, an answer to the valid and necessary question: “Who is this asshole who speaks like he knows something?” In short:
• Corporate Banking analyst at a fairly conservative bank’s Los Angeles office. (Translation: I spend 12 hours a day analyzing financial statements, market trends, and risk factors for companies with total revenues >$250m)
• Graduated with a BSBA in statistics (which will become apparent in future posts)
• I am not the 1%. That implies annual income >$270k or net worth >$6m.
• I had nothing to do with your great aunt’s mortgage default. Those are the retail bankers working in branches, and honestly speaking, retail bankers tend to be more incompetent than immoral. Do your own research before financing any large purchase.
• Parenthesis, Inc. should sponsor this blog.
Obviously, I do not speak for the entirety of the U.S. financial industry, nor do I know everything about it. It’s a gigantic, complex system; if there was one person on this planet who truly understood the interactions of every facet of it, financial crises (like the one we’re dealing with) would be significantly less drastic. I will, however, do my best to discuss only the subjects within my realm of knowledge, and defer to experts on issues beyond my ability. Ok – that’s the last you’ll have to read about your less-than-humble writer.
Second, a definition of assumptions is crucial on topics where there are plenty of material points and very rational positions to deal with. Nothing devolves into semantics quite as well as financial and economic debate.
1. Game, defined by the Oxford English Dictionary: a form of competitive activity or sport played according to rules.
2. Finance, according to the same source, is “the management of large amounts of money, especially by governments or large companies.”
Good, now we’re talking about the same thing. Back to the actual discussion.
A reiteration: finance is a game. There are rules, sometimes clear, sometimes murky, often bizarre but mostly necessary, defined by the industry’s governing bodies (SEC, OCC, etc.); you don’t have to be a banker to know it’s competitive. However, unlike poker, it is not a zero-sum game (actually, poker is a negative-sum game considering rake, but moving on), meaning that when someone wins, it does not follow that someone else must lose. The opposite generally occurs: banks make money by facilitating capital to solvent companies (in the form of stock offerings, loans, lines of credit, etc.), who in turn profit by using that capital to expand, acquire, develop new products, and pay suppliers and staff, among other uses. Expansion generates jobs, and Main St. benefits. In this grossly oversimplified scenario, everyone wins.
Conversely, upon the realization that the creditworthiness of businesses and consumers is weaker than projected (See: FY 2007), credit tightens, corporations find it more difficult to acquire cheap capital in order to expand and/or operate, costs are cut, and Joe Smith is laid off. Obviously, much of the fault lies with the banks that underwrote highly speculative loans, but that’s another blog topic. In this scenario, everyone loses. Before giving into the vindictive Occupier thoughts, though, consider the outcome of further punishment of banks. The objective of our game is to make money, and as Middle America took a hit, so did we. The markets, our supreme regulator, imposed its swift discipline before legislators in Washington understood what was going on, and long before the art history majors raised tents in Zuccotti Park. Further penalization exacerbates the problem, slowing growth and the loosening of credit. There are other changes that need to occur, but once again, that’s enough information for another blog.
Returning to the Monopoly analogy, yes, it makes sense to see Main St. as another property on the game board. If you’ve ever played the board game, you know that developing properties (with houses and hotels) is the only way to win. Development creates employment, employment increases cash flow, and cash flow spurs the local economy, which creates more cash flow. You may not identify with the impersonal world view, but my sincere hope is that you read this far and took the following away: that you can trust bankers. Maybe not to provide care to the homeless or peace and love to the world, but you can trust that our motive is constant: to win the game. Thinking in those terms, you’ll rarely be surprised.
Regards,
CS
  
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BSBA in statistics? Jeez does that mean regression models are your best friend?
When I finished my stats course I thought I was done with it but boy was I wrong... A banking analyst is pretty much more of a specific title for a financial analyst isn't it? Or does it just depend on your occupation? I've always wondered exactly how much all the stuff in those statistics courses are actually used in the real world.
Well written blog about stuff I'm studying about- so I like it. I'm curious to see how others will react @_@.
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@Snuggles, regressions are a tool I use, among many others. In the real world, equations aren't all that important, it's all ability to interpret and explain the results that expensive programs spit out 
Yes, I'm a financial analyst, my department is Corporate Banking, which means that we deal with companies above a certain revenue size. In my bank, it's above $250m, though that differs from bank to bank.
@haji, this blog was intended to be an introduction for what's coming in the future. I alluded to quite a few different topics that I'll be talking about in more detail; since this doubled as an introductory post to what I plan on making an extended series, I didn't want its length to scare away 100% of potential readers. Some vagueness is deliberate, since ideally I'd like to generate a conversation rather than to impose my views on readers, though future posts will be more traditionally laid out.
As far as terminology goes, my goal is to speak to audiences that care about the subject matter. The two specific subsets are: 1) those who already know, and might be able to fill in incomplete detail and/or correct my misconceptions, and 2) those who want to learn, and will therefore look up terms they don't understand. If I had to define everything, it would make each post 5k words >_<
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The problem is even when people know, that bankers only want to "win the game". They need certain skills to evaluate if their interest is equal to the interest of the banker. A very small amount of people has that knowledge.
Take for example an investor who wants to invest some money.
1) After hearing about the investor's preferences the bank consultant tells him to buy a discount certificate.
2) The consultant tells the customer to buy certificate X
There is no real reason for the consultant to give wrong advice in the first step. In the second step however the interest of the customer (to get the cheapest product) differs from the banker's interest (sell the product which brings the biggest revenue) and there is no chance for the investor to know if X is overpriced.
This is only an example but situations like that can occur very often because the products (not only talking about structured products) get more and more complex. So there is some truth in what you say but just the knowledge that bankers only want to win their game won't help a lot of people to "win their own game".
Concerning bigger corporations I completely agree with you.
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@Dont-Panic, you're spot on. That's why it's important to do research beforehand and find out how a financial advisor makes his money. Most advisors make money based on Assets Under Management (AUM), meaning that they have direct interest only in 1) keeping your assets (a.k.a. your cash) invested, and 2) increasing the value of your assets (and therefore his fees). That aligns his interests with yours. If, instead of an advisor, you go straight to a broker, who doesn't want to be stuck with too much exposure to XYZ investment, he has interests that don't align. Unless you know exactly what you're doing, rendering the broker's advice irrelevent, paying the often high fees for a financial advisor is probably the way to go.
I'll go into more detail on my hatred of consumers who don't do the research then place the blame on bankers in later posts
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Very interesting read, if not confusing at times. :p
I'm considering majoring in Finance next year, so I shall keep an eye out for your blogs.
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It's not really a rule based game in the traditional sense if you can petition to have the rules changed to your advantage.
Full disclosure: I'm the kind of average reader haji refers to as it's not entirely clear to me what your point is.
BTW on the issue on semantics, you talk about "punishing the banks" but you never really told us exactly what you mean by that.
There are some further assumptions in your post that seem unfounded to me but I'd rather not flood the thread with them, especially as I'm not sure they are relevant to what you actually want to say.
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On March 04 2012 06:26 contraSol wrote:+ Show Spoiler +Hello TL, and welcome to the beginning of a decidedly mediocre venture. It’s been a while since I’ve written at length, most recently as a poker pro at a small site called pokerspace.com. Since, I’ve stopped playing the game I loved (thanks, Eric Holder -_-), and moved on to a new game that’s proving to be equally, if not more fascinating: finance. There exists a subset of the population that, upon hearing “finance” and “game” in the same sentence, is offended and jumps to accusations about the “1%” treating Main St. like another property on its personal Monopoly board. In actuality, that’s completely true, but please allow me to elaborate. First, an answer to the valid and necessary question: “Who is this asshole who speaks like he knows something?” In short: • Corporate Banking analyst at a fairly conservative bank’s Los Angeles office. (Translation: I spend 12 hours a day analyzing financial statements, market trends, and risk factors for companies with total revenues >$250m) • Graduated with a BSBA in statistics (which will become apparent in future posts) • I am not the 1%. That implies annual income >$270k or net worth >$6m. • I had nothing to do with your great aunt’s mortgage default. Those are the retail bankers working in branches, and honestly speaking, retail bankers tend to be more incompetent than immoral. Do your own research before financing any large purchase. • Parenthesis, Inc. should sponsor this blog. Obviously, I do not speak for the entirety of the U.S. financial industry, nor do I know everything about it. It’s a gigantic, complex system; if there was one person on this planet who truly understood the interactions of every facet of it, financial crises (like the one we’re dealing with) would be significantly less drastic. I will, however, do my best to discuss only the subjects within my realm of knowledge, and defer to experts on issues beyond my ability. Ok – that’s the last you’ll have to read about your less-than-humble writer. Second, a definition of assumptions is crucial on topics where there are plenty of material points and very rational positions to deal with. Nothing devolves into semantics quite as well as financial and economic debate. 1. Game, defined by the Oxford English Dictionary: a form of competitive activity or sport played according to rules. 2. Finance, according to the same source, is “the management of large amounts of money, especially by governments or large companies.” Good, now we’re talking about the same thing. Back to the actual discussion. A reiteration: finance is a game. There are rules, sometimes clear, sometimes murky, often bizarre but mostly necessary, defined by the industry’s governing bodies (SEC, OCC, etc.); you don’t have to be a banker to know it’s competitive. However, unlike poker, it is not a zero-sum game (actually, poker is a negative-sum game considering rake, but moving on), meaning that when someone wins, it does not follow that someone else must lose. The opposite generally occurs: banks make money by facilitating capital to solvent companies (in the form of stock offerings, loans, lines of credit, etc.), who in turn profit by using that capital to expand, acquire, develop new products, and pay suppliers and staff, among other uses. Expansion generates jobs, and Main St. benefits. In this grossly oversimplified scenario, everyone wins. Conversely, upon the realization that the creditworthiness of businesses and consumers is weaker than projected (See: FY 2007), credit tightens, corporations find it more difficult to acquire cheap capital in order to expand and/or operate, costs are cut, and Joe Smith is laid off. Obviously, much of the fault lies with the banks that underwrote highly speculative loans, but that’s another blog topic. In this scenario, everyone loses. Before giving into the vindictive Occupier thoughts, though, consider the outcome of further punishment of banks. The objective of our game is to make money, and as Middle America took a hit, so did we. The markets, our supreme regulator, imposed its swift discipline before legislators in Washington understood what was going on, and long before the art history majors raised tents in Zuccotti Park. Further penalization exacerbates the problem, slowing growth and the loosening of credit. There are other changes that need to occur, but once again, that’s enough information for another blog. Returning to the Monopoly analogy, yes, it makes sense to see Main St. as another property on the game board. If you’ve ever played the board game, you know that developing properties (with houses and hotels) is the only way to win. Development creates employment, employment increases cash flow, and cash flow spurs the local economy, which creates more cash flow. You may not identify with the impersonal world view, but my sincere hope is that you read this far and took the following away: that you can trust bankers. Maybe not to provide care to the homeless or peace and love to the world, but you can trust that our motive is constant: to win the game. Thinking in those terms, you’ll rarely be surprised. Regards, CS
You mean everybody wins until the point where somebody screws up and makes the wrong decision - such as company developing a bad product, or several in a row, for example. Correct me if I am mistaken, but in reality people make mistakes and wrong decisions. They make a ton of them, in fact. And since no game rewards mistakes - quite the contrary - many do end up losing the game. Simulate any competitive system long enough, and enough people will make enough bad decisions to ensure that there is only one true winner.
If you still truly believe that everyone wins, consider the bigger picture - while one country or a group of them may benefit as a whole, on the other side of the world there are countries which have had their resources exploited for centuries and suffer still. There is no competition in which everyone wins. Somebody always loses in a game - in fact, on a large enough scale, majority of people always do.
The environment you describe also encourages every entity within the system to play safe, or at the very least cautious. This results in companies developing products that people will buy, but not necessarily products that people want, let alone the products that people need (whether they like it or not). See, you may be playing a game - but the people represented by numbers in your game do not. They are naive and easily manipulable, not due to some inherent stupidity,
but simply because they do not wish to participate in a game, on any level, yet you do not give them a way to opt out of it. That is not very fair, is it?
There are entire industries built around the idea of convincing people to think in ways which are profitable to a company by any means necessary. Your game encourages this. Your game discourages solving problems if the solution is not profitable, because nobody in the said game with the ability and resources to solve a problem dares to make a "wrong" move - and in said environment, that decision makes perfect sense.
Finally, why are we even playing this game, or allowing you to play it? This system is not bestowed upon us by our nature, or a God, or whichever other higher power people might choose to believe in. It's an entirely human device, built around the concept of elitist powermongering without unnecessary bloodshed (which is ultimately too fickle and risky to rely upon), but with equally effective tools. So many other social systems and devices have been replaced when they became obsolete and the masses realized the system does not serve the society well, it is extremely arrogant to believe this one will end any other way. When the problems you cannot solve without breaking the rules become too overbearing to ignore and you can no longer weather the storm, the game ends, and it very likely ends in tears.
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I trust bankers about as far as I can throw them. I believe all that's been going on so far is a conspiracy to help devalue the US currency so it leads to the eventual collapse of the dollar and the creation of a new currency. Everyone knows the petrodollar system and the US economic hegemony of the 20th century is coming to an end, so America is just preparing to hit the reset button and get away with as much as they can before the poo hurtles into the proverbial fan.
I think I will be one of the few that is NOT surprised when all this comes to pass.
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I'll try to be clearer in the future -- as I said, I spend 12 hours a day doing this, which can really morph a perspective of generally understood terminology.
@hypercube, rule changes have happened in almost every game that has existed for more than a generation. Look to any sport or any card game for proof. Hell, unit nerfs in starcraft are effectively rule changes, petitioned for by players who thought their race was getting shafted.
"Punishing banks" was a cry from the Occupy Wall St. movement, in which (I think) they meant tax the banks/make them pay for the financial crisis.
@Talin, your line of thought made a whole lot of sense until the conclusions you draw in the last paragraph. Yes, bad decisions happen frequently... look at American car manufacturers. They produced terrible products for 20 years, causing the demise of a large city when they failed to adapt to competition from foreign firms who could produce better vehicles for less. Those who do not adapt, lose. Simple as that. This particular system has been in place long before the first human wielded a tool: it's called evolution. Those species that adapted to changing conditions survived and flourished, while those who didn't went extinct. This system IS bestowed upon us from nature; we're just playing it on a different level now than in the times of our [human or single-celled] ancestors. If a person chooses to eschew rationality and real effort in favor of a higher power that will solve problems for them, great. That's individual freedom.
I don't believe it causes everyone to play it safe. It causes the smart players to think in terms of risk and reward; otherwise, would Bill Gates and Mark Zuckerberg have dropped out of Harvard, a university that essentially guarantees gainful employment, to start businesses in undeveloped industries? I would agree that many people adopt a risk-averse strategy to the game they probably don't even know they're playing, but I would argue that those people are rewarded commensurate with the risks they take, and I think it's perfectly fair. Should the guy with no special talent punching a time clock every day be compensated as much as someone with rare ability, qualifications, and a strong work ethic?
Speaking of problems, solving problems is one of the main drivers of profit. Manually washing dishes takes hours? Washing machine invented, washing machines sold, profit. If the solution is not profitable, implementing it would cause more problems (e.g. the inability to solve future problems, since you expended all resources solving the first one), so it behooves companies to find a new, profitable way.
I would appreciate it if your future replies excluded straw men like "elitist powermongerers and "bloodshed"; they're polarizing and more often than not result in argument rather than debate.
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What do you think of the black swan? Taleb is extremely critical of specifically this kind of analogy (markets to games) because games have known bounded limits and known rules whereas (he argues) markets tend to be defined by large events that are well outside of the generally accepted ruleset and outside of the limits considered probable by those rulesets.
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On March 04 2012 08:58 UniversalSnip wrote:
What do you think of the black swan? Taleb is extremely critical of specifically this kind of analogy (markets to games) because games have known bounded limits and known rules whereas (he argues) markets tend to be defined by large events that are well outside of the generally accepted ruleset and outside of the limits considered probable by those rulesets.
Good point. Taleb is brilliant, and throughout his book he gives great examples of poor preparation for and reactions to such events. I would assert that these events are part of the game, and decisionmakers need to do better in considering them as part of the risk. A 1% chance of losing $100 is the same as a 0.000001% chance of losing $1m. If we consider the former and not the latter just because it's relatively unlikely, we're not playing optimally.
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On March 04 2012 08:58 contraSol wrote:
I'll try to be clearer in the future -- as I said, I spend 12 hours a day doing this, which can really morph a perspective of generally understood terminology.
@hypercube, rule changes have happened in almost every game that has existed for more than a generation. Look to any sport or any card game for proof. Hell, unit nerfs in starcraft are effectively rule changes, petitioned for by players who thought their race was getting shafted.
Not while the game is going on, no.
"Punishing banks" was a cry from the Occupy Wall St. movement, in which (I think) they meant tax the banks/make them pay for the financial crisis.
Now I'm confused. You said we shouldn't give in to "punishing the banks", but now you're saying you're not sure what they meant by that? Or is your main point simply that the banks shouldn't pay more tax they do now? Or that maybe we should tax them more but not out of animosity?
As best as I can tell (although you neglected to clarify) your point is that banking or finance is good for society. But that's an awfully general statement. It doesn't help us decide what kind of rules protect their positive influence while minimizing the systemic risk they seem to create.
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On March 04 2012 09:16 hypercube wrote:
As best as I can tell (although you neglected to clarify) your point is that banking or finance is good for society. But that's an awfully general statement. It doesn't help us decide what kind of rules protect their positive influence while minimizing the systemic risk they seem to create.
Clarifying that point, along with recommending regulation (which I agree is 100% necessary), would take an encyclopedia. I'll do my best by making more specific points in future blogs in order to get at small pieces of it.
As far as the "punishing banks" statement goes, I've seen a group occupiers with signs suggesting higher taxation of banks. Since their movement wasn't exactly coherent, I'm hesitant to make a firm statement on what they really believe. The way we tax the financial sector is a subject that deserves its own discussion.
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On March 04 2012 09:27 contraSol wrote:Show nested quote +On March 04 2012 09:16 hypercube wrote:
As best as I can tell (although you neglected to clarify) your point is that banking or finance is good for society. But that's an awfully general statement. It doesn't help us decide what kind of rules protect their positive influence while minimizing the systemic risk they seem to create. Clarifying that point, along with recommending regulation (which I agree is 100% necessary), would take an encyclopedia. I'll do my best by making more specific points in future blogs in order to get at small pieces of it. As far as the "punishing banks" statement goes, I've seen a group occupiers with signs suggesting higher taxation of banks. Since their movement wasn't exactly coherent, I'm hesitant to make a firm statement on what they really believe. The way we tax the financial sector is a subject that deserves its own article.
That's cool. But as long as you're not sure what they want there's no point in cautioning against them. Who knows, maybe they want the same thing, you do. 
Anyway, don't want to be too antagonistic, I'm actually looking forward to reading your posts in the future. Just felt like there was a bit of us vs them mentality going on, maybe without good reason.
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Oh, I see. I was cautioning against excessive, reactionary taxation of the banks, not Occupiers and all they stand for.
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this really cleared up the confusion i was really having with corporate greed and my hate for capitalism, thanks for elaborating on the subject!
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Slightly off-topic, I'm gonna finish my math major about a year and a half early and I was thinking of picking up a stat minor while I'm at it, are there any classes that are particularly helpful in your line of work? I've done two courses in hypothesis testing and a good amount of probability theory.
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You summarize it well : "It is not a zero-sum game". Meaning that you are trying to create money out of the work of somebody else. I think it tells you my take on that.
I'm curious though, do you think you know how a market works ?
Edit : I'm adding this because my intentions were unclear. You have a particular opinion and seem to be assertive on certain things. My question is there to judge if I can trust your opinion.
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EPT
