I read something in Slate once, which generally makes it true. The writer was once charged with securities fraud, but that’s kinda par for the financial industry. He did some math and it seemed to make sense. Henry Blodget’s general argument in the Wall Street Self Defense Manual was that investors would make more money just buying index funds rather than gambling on the stock market. The worst option of all was paying other people to gamble for you (as in stock brokers, investment bankers, etc). You get a decent return on the nikang stock market, you probably lose if you try to beat the system, and you pay someone to lose if you go through a broker. Which is why I always suspected that the financial industry wasn’t wearing pants. And today I read about the history of Wall Street in the New York Times, confirming the lack of pants, making it doubly true.
Also read another, article called Wall Street RIP. Money quote:
â€œThe swashbuckling days of Wall Street firmsâ€™ trading, essentially turning themselves into giant hedge funds, are over. Turns out they werenâ€™t that good,â€ said Andrew Kessler, a former hedge fund manager. â€œYouâ€™re no longer going to see middle-level folks pulling in seven- and multiple-seven-dollar figures that no one can figure out exactly what they did for that.â€
but to quote Ron Chernow for the history Op-Ed,
Beneath the razzle-dazzle of trading desks and the wizardry of esoteric finance lay the inescapable fact that these firms had shed their original reason for being: providing capital to American business.
In the sunless maze of Lower Manhattan, the old Wall Street houses were miniature temples of finance. Elite, all-male and lily-white, rife with snobbery and bigotry, they didnâ€™t bother to hang a shingle outside, and the tacit message to pedestrians was clear: keep on walking. This reflected the banksâ€™ patented formula of serving only the most creditworthy clients: industrialized nations, blue-chip corporations and wealthy individuals.
My basic understanding is that in order to get or sell shitloads of money you had to go through a trusted connect, like Sotheby’s for art auctions or stuff. Over time, however, multinationals and competition made anointment in the temples of finance less necessary.
Then came the 80s and cocaine and these vestigal houses went totally apeshit with junk bonds, internet stocks and – now – mortgages from people who should never have be given mortgages. I’ve inquired about mortgages before, from banks. You have to have a guaranteed income of X, and then they calculate the percentage of X you can feasibly pay, and then they tell you how much mortgage you can get. Subprime mortgages mean giving money to people who fail this basic test. T o quote the Wiki:
In the United States, mortgage lending specifically, the term “subprime” refers to loans that do not meet Fannie Mae or Freddie Mac guidelines. This is generally due to one of a combination of factors, including credit status of the borrower, income and job history, and income to mortgage payment ratio…
A subprime loan may have less room for financial difficulties of the borrower, which can lead to late payments and defaults.
And ‘can’ in this case means ‘does’. People that fail that income/payment ratio test (among other things) tend to be unable to pay. That’s what the test is for. To avoid bad loans. Instead, these financial companies wrapped these turd sandwiches in newspaper and resold them as derivatives. And them Joe Oklahoma couldn’t pay and now the entire international credit market is fucked. That is important because legitimate business/people who want credit can’t get it.
Anyways, I read a bit of the bailout memo, and it’s hilarious. You get this section:
6. Maximum Amount of Authorized Purchases.
The Secretaryâ€™s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.
Followed by this one:
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Luckily that’s been redrafted, but I still wonder how this magical money will plug the dyke, seeing as it – prima facie – just involves buying mortgage bundles that people still can’t pay. Why doesn’t the government just buy the house?
And then what’s extra fucked is that its the former head of Goldman Sachs (Henry Paulson) who’s asking the government for $700 billion to bail out the institutions. If you’re keeping track at home, that much money will buy 3.5 million mortgages at $200,000 apiece. Via Bloomberg I got a number of about 2.2 million US homes at risk of foreclosure. So you could theoretically buy back most of those mortgages (or a hybrid). Not that those people made great decisions either. But fuck.
In 8 years George W. Bush has managed to fritter away every military, economic and moral advantage America had. Hopefully people will vote for a new party to put Humpty Dumpty back together.