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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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US has some of the the lowest capital gains tax rate in the world since 2003. Do you think that's fair?
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On March 04 2012 14:15 Otolia wrote:
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.
It seems you don't know what you are talking about. If a bank lends money to someone to start a business and collects interest on that loan since the business is successful, it is not creating money out of the work of somebody else. Its work was to lend the money to that person in particular as opposed to someone else who would have had an unsuccessful venture. Obviously all the profits from the new successful business are not solely due to the entrepreneur because he or she relied on the capital provided by the bank.
It is unfortunate that with all the problems finance creates for our society the vast majority of people still choose to believe in their crackpot ideas about what is wrong and how to solve it, whether it's StorkHwaiting's conspiracy theory nonsense or Talin's confusion about how the most basic elements of the economy work, or Ron Paul's wish to abolish the Federal Reserve. These distractions de-legitimize real attempts to bring about change, and serve to distract from the real issues that can be solved.
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On March 04 2012 14:44 searcher wrote:Show nested quote +On March 04 2012 14:15 Otolia wrote:
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. It seems you don't know what you are talking about. If a bank lends money to someone to start a business and collects interest on that loan since the business is successful, it is not creating money out of the work of somebody else. Its work was to lend the money to that person in particular as opposed to someone else who would have had an unsuccessful venture. Obviously all the profits from the new successful business are not solely due to the entrepreneur because he or she relied on the capital provided by the bank. It is unfortunate that with all the problems finance creates for our society the vast majority of people still choose to believe in their crackpot ideas about what is wrong and how to solve it, whether it's StorkHwaiting's conspiracy theory nonsense or Talin's confusion about how the most basic elements of the economy work, or Ron Paul's wish to abolish the Federal Reserve. These distractions de-legitimize real attempts to bring about change, and serve to distract from the real issues that can be solved.
Except under fractional banking you aren't really risking any money since
1) you don't have the money you lend out in reserves, so you make profit on money you don't even have (with compounded interest, a crime on it's own)
2) you privatize the profits but when banks fuck up and shit goes down the drain, you socialize the losses and taxpayers bail you out.
Modern banking is pretty much a scam on humanity, no matter how legit the brainwashing you've underwent in school made you think it is. I've seen it first hand when I completed my bachelors (Intl Political Econ).
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I did corporate finance in college, and am still quite interested in the topic despite now being in another field. Hope you keep writing.
One thing I would like to ask your opinion is: you say that finance is not a zero-sum game. I agree in the case of investment in enterprises. But for currency trading or derivative trading would you say they are zero-sum?
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thedeadhaji
39489 Posts
On March 04 2012 14:37 Primadog wrote:
US has some of the the lowest capital gains tax rate in the world since 2003. Do you think that's fair?
Being in the high tech industry, I'd personally be worried about the impact it would have on Venture Capital funding.
Some history:
The maximum capital gains tax rate was 25% until the late 1960s, when Congress increased the rate to 40%. The rate was boosted again in 1975 to 49%. During that time, venture-capital investment fell well below $500 million a year. "The impact . . . was devastating," Zschau and his House colleagues said in their letter to Reagan on Tuesday. "The venture capital needed to start and finance the growth of young companies all but dried up and caused many companies to stop growing, go deeply in debt, or--in the case of technology companies--sell or license their inventions to foreign competitors." By contrast, government figures show that, when the capital gains rate was cut to 28% in 1978, new capital investments exceeded $1 billion in 18 months. After a further tax rate cut to 20% in 1983, new capital investments reached $4.1 billion. The government figures also showed that, while the capital gains tax rate declined, total revenue from capital gains taxes climbed from $8.1 billion in 1977 to $11.9 billion in 1979, the first year of the reductions. http://articles.latimes.com/1985-02-15/business/fi-3341_1_gains-tax
I'm not sure what kind of effect an increase in the capital gains tax would have on (a) VC funding, and also (b) equity investment overall. A small hike would probably have a relatively small effect, but a large one could definitely see capital flow affected. Not sure what the exact consequence would be, but there's no way there'd be zero effect. It changes the risk/reward profile of equity to one degree or another, and that will inevitably be accompanied by a reaction in the market. Whether the effect is clearly observable amid the market noise, or whether the effect would be large or small, I have no way of knowing.
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On March 04 2012 14:44 searcher wrote:Show nested quote +On March 04 2012 14:15 Otolia wrote:
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. It seems you don't know what you are talking about. If a bank lends money to someone to start a business and collects interest on that loan since the business is successful, it is not creating money out of the work of somebody else. Its work was to lend the money to that person in particular as opposed to someone else who would have had an unsuccessful venture. Obviously all the profits from the new successful business are not solely due to the entrepreneur because he or she relied on the capital provided by the bank. It is unfortunate that with all the problems finance creates for our society the vast majority of people still choose to believe in their crackpot ideas about what is wrong and how to solve it, whether it's StorkHwaiting's conspiracy theory nonsense or Talin's confusion about how the most basic elements of the economy work, or Ron Paul's wish to abolish the Federal Reserve. These distractions de-legitimize real attempts to bring about change, and serve to distract from the real issues that can be solved.
I thank you for your attempt at patronizing. However I'm going to give you a few pointers : All you references you compare me to are totally irrelevant to me because as it's said beside my pseudo, I'm french; the basis of money lending is to profit from the work of somebody else by allowing them to do something they couldn't do without your money. The sole work of the lender is to determine if the venture is sure, profitable etc. It is work in itself but it's not creating anything. It does not add value to something that is produced. It's merely an evaluation. However that's only a part of finance and certainly not the part people loathe; the part people hate is speculative trading.
I am, by no means, an expert on finance, the laws and its intricacies. Still I know how hard it is build a coherent model for a complex system. Economy and particularly financial market is modeled through complex systems. It really astonishing to hear a lot of people stating they 'understand' how the market works when some of the most brilliant scientist of our time spend decades studying much simpler complex systems without ever pretending to know how it works except under the condition they have run tests on.
Knowing what you don't know is the first towards enlightenment.
Edit : typos
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On March 04 2012 14:44 searcher wrote:
It is unfortunate that with all the problems finance creates for our society the vast majority of people still choose to believe in their crackpot ideas about what is wrong and how to solve it, whether it's StorkHwaiting's conspiracy theory nonsense or Talin's confusion about how the most basic elements of the economy work, or Ron Paul's wish to abolish the Federal Reserve. These distractions de-legitimize real attempts to bring about change, and serve to distract from the real issues that can be solved.
Stork and sicnarf are the two people who displayed the highest level of comprehension of the word "money" in this thread. Sadly sicnarf (and Otolia) seems contamined by an unhealthy and reactive view on life (i.e: Pseudo marxist theories) and Stork's troubles with his own Chinese American identity cloud his judgement. Nah evil yankees are not conspiring against China, most politicians are just genuine idealists/idiots/incompetents. The current mess is not the result of a plot.
The rest is pseudo maths lol.
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On March 04 2012 18:20 Otolia wrote:
I thank you for your attempt at patronizing. However I'm going to give you a few pointers : All you references you compare me to are totally irrelevant to me because as it's said beside my pseudo, I'm french; the basis of money lending is to profit from the work of somebody else by allowing them to do something they couldn't do without your money. The sole work of the lender is to determine if the venture is sure, profitable etc. It is work in itself but it's not creating anything. It does not add value to something that is produced. It's merely an evaluation. However that's only a part of finance and certainly not the part people loathe; the part people hate is speculative trading.
I am, by no means, an expert on finance, the laws and its intricacies. Still I know how hard it is build a coherent model for a complex system. Economy and particularly financial market is modeled through complex systems. It really astonishing to hear a lot of people stating they 'understand' how the market works when some of the most brilliant scientist of our time spend decades studying much simpler complex systems without ever pretending to know how it works except under the condition they have run tests on.
Knowing what you don't know is the first towards enlightenment.
I think this post provides quite a bit of fodder for discussion, so let's break it down point by point.
All you references you compare me to are totally irrelevant to me because as it's said beside my pseudo, I'm french
So what? The French are somehow outside the realm of comparison and criticism?
the basis of money lending is to profit from the work of somebody else by allowing them to do something they couldn't do without your money. The sole work of the lender is to determine if the venture is sure, profitable etc. It is work in itself but it's not creating anything. It does not add value to something that is produced. It's merely an evaluation.
This is a very narrow view of what a bank actually does. Primarily, yes, the purpose is to lend money that allows somebody else to do something they couldn't otherwise do. However, it is not simply "evaluation". Evaluation is always the first step, but once a bank determines that the borrower is credit worthy, a relationship is developed between the bank and the borrower. This relationship involves everything from managing payroll to guaranteeing payments made by foreign suppliers. Beyond that, bankers have the ability (and the prerogative, since success of the company translates into us getting paid) to offer assistance with industry specific information, potential acquisition targets, and other financial information that would otherwise be unavailable to the company.
Think about it like a nice restaurant. Most restaurants don't grow the vegetables or slaughter the cows, but we pay more for fine dining since the restaurant has access to ingredients that we don't have sitting around the house, the chef has expertise that exceeds ours, and the waiters deliver it all with a smile and the assurance that our evening will be taken care of. Is that not valuable?
However that's only a part of finance and certainly not the part people loathe; the part people hate is speculative trading.
Loathing an entire industry because of a small facet of it just because that's what you see on the news is no better than loathing a religion because some fanatics do despicable things. Please elevate your level of discourse.
I am, by no means, an expert on finance, the laws and its intricacies. Still I know how hard it is build a coherent model for a complex system. Economy and particularly financial market is modeled through complex systems. It really astonishing to hear a lot of people stating they 'understand' how the market works when some of the most brilliant scientist of our time spend decades studying much simpler complex systems without ever pretending to know how it works except under the condition they have run tests on.
This was stated in the OP:
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.
Not understanding the entirety of a system does not mean that the system is malignant or not worthy of trying to understand to the best of our capabilities. The most brilliant physicist in the world does not fully understand the physics of the universe, but do we not defer to his expertise in questions of physics? Dismissing all experts in finance because no one truly knows everything is tantamount to the abandonment of knowledge acquisition.
A note for this and future responses: I may disagree with you whole-heartedly on your opinions, but I'll only ever lose respect for someone who insists upon identifiably false information. You're free and clear in that regard :p
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On March 04 2012 17:59 targ wrote:
I did corporate finance in college, and am still quite interested in the topic despite now being in another field. Hope you keep writing.
One thing I would like to ask your opinion is: you say that finance is not a zero-sum game. I agree in the case of investment in enterprises. But for currency trading or derivative trading would you say they are zero-sum?
Currency and derivative trading are done (generally speaking) for two reasons: speculation and hedging. I think speculation (what everyone seems to hate) is a zero sum game; you're either on the right side of the variance or you're not. Hedging, on the other hand, is how pretty much every global or multi-national company manages their currency and interest rate risk.
For those who aren't familiar with it, think about hedging like guaranteeing an exchange rate or locking in an interest rate. To make their cash flow more consistent and their projections more accurate, most companies are willing to pay a premium to the current rate in case of drastic change.
Interest rate example: Interest is generally calculated based on how much money you have loaned out multiplied by a percentage (ex. a $100,000 loan with a 5% all-in interest rate would be $5,000 per year of interest). The interest rate itself is usually split into two parts: the base rate and the spread to base. Simplified answer: the base rate is variable, meaning that it changes with the market. Today it might be 1%, next month it could be 1.5%, next year maybe 2%. The spread is constant: no matter what the base rate is, it will always be the same. So your total interest rate = base rate (variable) + spread (fixed).
Hedging your interest rate means buying a derivative that locks in your interest rate at a certain level; if the market base rate is 1%, you can pay a premium every year so that it never rises above 1.5%.
Currency example Essentially the same concept. If you're a company that produces goods in the U.S. and ships them to France, the exchange rate has a significant impact on how much you make. If you price your goods based on the euro being worth $1.30 and it drops to $1.17, you effectively just received 10% less in revenue. So to mitigate that risk, you buy a derivative that effectively "locks in" your exchange rate.
In this way, derivatives and currency hedges are positive sum; the bank makes money by taking on the risk, while the company benefits from consistent cash flow.
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On March 04 2012 16:55 sicnarf wrote:
Except under fractional banking you aren't really risking any money since
1) you don't have the money you lend out in reserves, so you make profit on money you don't even have (with compounded interest, a crime on it's own)
2) you privatize the profits but when banks fuck up and shit goes down the drain, you socialize the losses and taxpayers bail you out.
Modern banking is pretty much a scam on humanity, no matter how legit the brainwashing you've underwent in school made you think it is. I've seen it first hand when I completed my bachelors (Intl Political Econ).
I hope you understand why the two bolded statements are hilarious.
1) Compounded interest happens only when the interest is capitalized. It happens in your credit card account when you made purchases for which you couldn't even afford the interest payment, which is the borrower's fault, not the banker's. If you buy something you can't afford, don't blame the banker.
2) Except in extreme cases, banks are 100% responsible for non-performing loans. If a borrower defaults, banks will take the collateral, which often is worth less than the remaining amount outstanding. The loss goes straight to our bottom line. I'm not going to discuss the pros and cons of the bank bail outs based on a naked, emotional statement. Present your argument like an intelligent person and I'll respond more respectfully.
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Sounds like derivatives are effectively insurance for corporate risks. Insurance industry are heavily regulated to make sure they have sufficient asset for what they underwrite, is this true for derivatives?
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On March 05 2012 14:45 Primadog wrote:
Sounds like derivatives are effectively insurance for corporate risks. Insurance industry are heavily regulated to make sure they have sufficient asset for what they underwrite, is this true for derivatives?
Yes, they're effectively insurance, and no, they are not heavily regulated, which is a huge problem. The other huge problem is that most of those tasked with creating regulatory legislation (i.e. congressmen and senators) don't understand derivatives, which is made clear whenever they speak about them.
In terms of financial statements, all outstanding loans, letters of credit, etc. are included on a bank's balance sheet. Derivatives and hedges are not, though they're summarized later on in quarterly and annual reporting (SEC forms 10-Q and 10-K). This opens the door for significant risk, though I fear that poorly informed regulation may cause unintended negative consequences worse than the status quo.
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On March 04 2012 09:14 contraSol wrote:Show nested quote +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.
many things in this thread confused me, to say the least. But this? How did you come up with this pseudonumbers? How about variance?
Also, what is the point of your post? I mean, saying "finance is a game" is kind of like saying "life is a game". It is true, in a way, but doesn't bring much.
What are your views on the necessary (or not?) reforms about finance? Seeing that the biggest (or at least the most listened to) analysists fail big time every couple of years (or more frequently), how reliable is the whole thing? Or, put it in another way, seeing how much it cost to regular Joes when banks fail (or "lose the game"), how good are the banks to our society?
A more precise question I've had for a while: we build functional planes. but we don't try to build planes made of planes, that would be the size of Spain, just because we're allowed to, and to try to carry more people, right? because it would crash. In the same way, we have small/local banks, that work just fine in lending to local businesses, create jobs, etc. So, why do we have huge banks, that bet on financial products, made of financial products, that analysists fail to understand? What are the things these big banks are the only one capable of doing? is worth it?
I am not really an expert in finance, so I'm mostly full of questions, with no answers Thanks in advance.
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On March 05 2012 16:53 Yenticha wrote:Show nested quote +On March 04 2012 09:14 contraSol wrote: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. many things in this thread confused me, to say the least. But this? How did you come up with this pseudonumbers? How about variance? Also, what is the point of your post? I mean, saying "finance is a game" is kind of like saying "life is a game". It is true, in a way, but doesn't bring much. What are your views on the necessary (or not?) reforms about finance? Seeing that the biggest (or at least the most listened to) analysists fail big time every couple of years (or more frequently), how reliable is the whole thing? Or, put it in another way, seeing how much it cost to regular Joes when banks fail (or "lose the game"), how good are the banks to our society? A more precise question I've had for a while: we build functional planes. but we don't try to build planes made of planes, that would be the size of Spain, just because we're allowed to, and to try to carry more people, right? because it would crash. In the same way, we have small/local banks, that work just fine in lending to local businesses, create jobs, etc. So, why do we have huge banks, that bet on financial products, made of financial products, that analysists fail to understand? What are the things these big banks are the only one capable of doing? is worth it? I am not really an expert in finance, so I'm mostly full of questions, with no answers Thanks in advance.
I'm going to jump in here as well. I'm an Econs/Finance major in my final year right and and would like to see how accurate my view of things are.
Those numbers are the same because 0.1*100 = 10 and 0.000001*1000000 = 10. It's a purely statistical exercise that's often done in economics to highlight human irrationality when it comes to making decisions.
The investment banking profession has been around for a long time, for reference I'd suggest reading The Ascent of Money by Niall Ferguson. Basically, without investment banks or their like I'd think it would be safe to say we would not be where we are today. Admittedly, the boom-bust cycle seems to be becoming bigger and not smaller (in terms of magnitude, but I think that's a reflection on the increased integration of financial systems more than anything). Without it, we're back to something close to the stoneage in terms of credit.
As for the mistakes that caused the GFC ... Well, to address your point in particular about analysts' failure to understand what they were dealing with and the gobsmacking assumptions that went into them. I think that's a fault that reflects modern economics more than anything: that is, the tendency to make simplifying assumptions which while useful for interpretation and construction of models, we forget that they are that, assumptions. I would hazard a guess that a major reason for the snowballing effect of the CDO, CDO^2, CDO^3 business and the way they were marketed and sold rested on the assumption that house prices will never fall. Someone can correct me if I'm wrong. In my personal opinion I think that some more rules/regulations are required when it comes to the usage of derivatives. I see nothing wrong with using them for hedging, so long as they can be backed up by short party. That said, I think moving towards a more transparent system for derivatives would be better, but I understand that having an open exchange system for the big derivative contracts is pointless because there are so few market makers.
Ok I'm going to stop here in case I'm misguided.
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On March 04 2012 14:37 Primadog wrote:
US has some of the the lowest capital gains tax rate in the world since 2003. Do you think that's fair?
I think it's quite fair. Considering the risks involved, people who are willing to keep their capital in the market for extended periods of time ought to be rewarded.
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Those numbers are the same because 0.1*100 = 10 and 0.000001*1000000 = 10. It's a purely statistical exercise that's often done in economics to highlight human irrationality when it comes to making decisions.
Just to say that I DO know this. To avoid further misunderstanding, I got my Msc in financial eng/optimization/electrical engineering. This means I know almost nothing about how finance works, but that I do know what an average means
I was just pointing at the fact that variance should NOT be overlooked. So many people just look at the mean when they deal with big data, this is depressing.
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@elt, you're not misguided at all, please post more
@Yenticha, the purpose of this post is to establish a framework for thinking about finance. It's pretty much the same thing as saying that life is a game, but I think the distinction matters, because it develops a clear objective (creating wealth, or scoring points, if you will), establishes a standpoint to discuss the game's rules (regulation), and allows for discussion of substantive theory in a manner that isn't textbook-style dry (through analogies to other games that most of us at TL understand). In short, this blog is not meant to stand alone.
The rest of your questions will be answered more thoroughly in later blog posts. I think the next one will be on the bailouts.
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EPT
