The financial geniuses were never smarter. Remember that next time you hear arguments

Parent Cafe
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<p>"The seeds of today’s disaster were sown in the 1980s, when financial services began a pattern of growth that may only now have come to an end. In a recent study Martin Barnes of BCA Research, a Canadian economic-research firm, traces the rise of the American financial-services industry’s share of total corporate profits, from 10% in the early 1980s to 40% at its peak last year (see chart 1). Its share of stockmarket value grew from 6% to 19%. These proportions look all the more striking—even unsustainable—when you note that financial services account for only 15% of corporate America’s gross value added and a mere 5% of private-sector jobs.</p>

<p>At first this growth was built on the solid foundations of rising asset prices. The 18 years to 2000 witnessed an unparalleled bull market for shares and bonds. As the world’s central banks tamed inflation, interest rates fell and asset prices rose (see chart 2). Corporate restructuring, wage competition and a revolution in information technology boosted profits. A typical portfolio of shares, bonds and cash gave real annual yields of over 14%, calculates Mr Barnes, almost four times the norm of earlier decades. Financial-service firms made hay. The number of equity mutual funds in America rose more than fourfold.</p>

<p>But something changed in 2001, when the dotcom bubble burst. America’s GDP growth since then has been weaker than in any cycle since the 1950s, barring the double-dip recovery in 1980-81. Stephen King and Ian Morris of HSBC point out that growth in consumer spending, total investment and exports in this cycle has been correspondingly feeble.</p>

<p>Yet, like Wile E. Coyote running over the edge of a cliff, financial services kept on going. A service industry that, in effect, exists to help people write, trade and manage financial claims on future cashflows raced ahead of the real economy, even as the ground beneath it fell away.</p>

<p>The industry has defied gravity by using debt, securitisation and proprietary trading to boost fee income and profits. Investors hungry for yield have willingly gone along. "</p>

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<p>Bear Stearns is not alone in the use of leverage.</p>

<p>From the Economis article…</p>

<p>“This process has turned investment banks into debt machines that trade heavily on their own accounts. Goldman Sachs is using about $40 billion of equity as the foundation for $1.1 trillion of assets. At Merrill Lynch, the most leveraged, $1 trillion of assets is teetering on around $30 billion of equity. In rising markets, gearing like that creates stellar returns on equity. When markets are in peril, a small fall in asset values can wipe shareholders out.”</p>

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<p>garland: I think they were kind of dim here, and I think that the latest bubble reflects a new (and obviously somewhat flawed) lack of strategic emphasis on the fundamentals of portfolios like that vs. the numeric calculations attached to them. It’s kind of a perspective issue - how many Wall Street brokers do you think were thinking about situations like thisoldman’s story below when making these investments? I bet few.</p>

<p>I just really, really don’t buy the “they’re all evil and calculating and horrible and ruined the economy for their own gains” stuff. I think it’s very easy to say crap like that and feel all angry and righteous, but that kind of thing is rarely realistic, and certainly isn’t in this case.</p>

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<p>“I just really, really don’t buy the “they’re all evil and calculating and horrible and ruined the economy for their own gains” stuff. I think it’s very easy to say crap like that and feel all angry and righteous, but that kind of thing is rarely realistic, and certainly isn’t in this case.”</p>

<p>They are not all evil, etc., but as a group they are very near-term oriented and very self-centered. Wall Street is concerned with what is best for Wall Street. What is good for Wall Street is not always good for the majority of citizens of the USA.</p>

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<p>Not to suggest that they’re actively out to screw anyone, but…</p>

<p>When did a businessman’s responsibility become to anyone other than themselves? It’s nice when business leaders are socially conscious, but their first responsibility is to their shareholders, not to America.</p>

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<p>“When did a businessman’s responsibility become to anyone other than themselves?”</p>

<p>Around the time of the Constitution, when commonwealths and states starting issuing corporate charters for companies in exchange for serving the public interest.</p>

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<p>“When did a businessman’s responsibility become to anyone other than themselves?”</p>

<p>As soon as they ask for taxpayer support in any way.</p>

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<p>The day they became a parent, and should have realized that the inheritance they left their children was less the number of dollars in their estate than the quality of the world their children would grow up in and raise their children in. Social responsibility is a pragmatic decision.</p>

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<p><a href=“http://www.nytimes.com/2008/03/23/business/23regulate.html?_r=1&th&emc=th&oref=slogin[/url]”>http://www.nytimes.com/2008/03/23/business/23regulate.html?_r=1&th&emc=th&oref=slogin&lt;/a&gt;&lt;/p&gt;

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<p>Who created this monster?</p>

<p><a href=“http://www.nytimes.com/2008/03/23/business/23how.html?pagewanted=1&ei=5087&em&en=824454ed41d66cdf&ex=1206417600[/url]”>http://www.nytimes.com/2008/03/23/business/23how.html?pagewanted=1&ei=5087&em&en=824454ed41d66cdf&ex=1206417600&lt;/a&gt;&lt;/p&gt;

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<p>What a surprise. The pragmatic liberals are trying to find the appropriate level of regulation that will ensure efficient and honest financial markets, and the ideologues of the right are bleating about the evils of regulation “stifling innovation”. You’d have thought that after we’ve “innovated” our financial affairs into trillion dollar meltdowns and bankruptcies over and over again a little common sense would take hold.</p>

<p>This is why I say the ideological right wing of today is like the “New Left” of the 60’s and 70’s. No amount of real world experience is allowed to penetrate the ideological barricades. Regulation = bad. Always. It doesn’t matter that deregulated industries melt down over and over. The real world is a “special case.”</p>

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<p>"It doesn’t matter that deregulated industries melt down over and over. The real world is a “special case.”</p>

<p>Free markets always blow up. Always. That’s not a political statement. It’s just a statement of fact. It amazes me to hear and read the rhetoric that denies this too.</p>

<p>“Bear Stearns’s vast portfolio of these instruments was among the main reasons for the bank’s collapse, but derivatives are buried in the accounts of just about every Wall Street firm, as well as major commercial banks like Citigroup and JPMorgan Chase. What’s more, these exotic investments have been exported all over the globe, causing losses in places as distant from Wall Street as a small Norwegian town north of the Arctic Circle.”</p>

<p>Finally, last week, with Wall Street about to take a direct hit, the Fed stepped in and bailed out Bear Stearns. </p>

<p>It remains unclear, exactly, what doomsday scenario Federal Reserve officials consider themselves to have averted. Some on Wall Street say the fear was that a collapse of Bear could take other banks, including possibly Lehman Brothers or Merrill Lynch, with it. Others say the concern was that Bear, which held $30 billion in mortgage-related assets, would cause further deterioration in that beleaguered market.</p>

<p>Still others say the primary reason the Fed moved so quickly was to divert an even bigger crisis: a meltdown in an arcane yet huge market known as credit default swaps. Like C.D.O.’s, which few outside of Wall Street had ever heard about before last summer, the credit default swaps market is conducted entirely behind the scenes and is not regulated. </p>

<p>Nonetheless, the market’s growth has exploded exponentially since Long-Term Capital almost went under. Today, the outstanding value of the swaps stands at more than $45.5 trillion, up from $900 billion in 2001. The contracts act like insurance policies designed to cover losses to banks and bondholders when companies fail to pay their debts. It’s a market that also remains largely untested. "</p>

<p>45.5 TRILLION DOLLARS…45.5 TRILLION DOLLARS…</p>

<p>Wall Street is like the person that can’t control his eating and will eat whatever is put in front of him until he dies.</p>

<p>And Alan Greenspan, who I have complained about for 10 years, could never get enough free markets. He is going down in history as an incompetent. To think, somebody wrote a book about this guy and called it “Maestro”.</p>

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<p>Some people might legitimately believe that it was JPMorgan Chase that was “bailed out”, as they were a major counterparty with Bear on a large amount of swaps. As it is, they appear to be the “rescuer”. </p>

<p>I think it should be noted that if the fed had let these jerks fall on their face (for doing what they teach you not to do in Finance 101) the thread would simply have a different complaint.</p>

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<p>“I think it should be noted that if the fed had let these jerks fall on their face (for doing what they teach you not to do in Finance 101) the thread would simply have a different complaint.”</p>

<p>Well, I have been complaining about this crap since LTCM was bailed out in 1998 so somebody else would have had to start the thread with a different complaint…;)</p>

<p>Oh…and one of the guys who ran LTCM, he is blowing up again.</p>

<p><a href=“Bloomberg Politics - Bloomberg”>Bloomberg Politics - Bloomberg;

<p>And here are the fund managers hoping the Fed buys mortgages so their assets under management increase in price…</p>

<p><a href=“Bloomberg Politics - Bloomberg”>Bloomberg Politics - Bloomberg;

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<p>“Free markets always blow up. Always. That’s not a political statement. It’s just a statement of fact.”</p>

<p>Actually, Adam Smith first came up with that formulation, in that “bad” actors (actually, “natural” actors under capitalism) would always use every means at their disposal to undercut the competition. That’s why corporate socialism (with behavior first described by Engels) was such an advance.</p>