the finance industry / wall street

Not sure what to think about that, honestly. Seems like a guy who's self-reflective about being a general destructive shitheel on Wall Street, and is trying to go the opposite way. But the damage is already done, isn't it? I suppose it's better than being totally unrepentant. That line about him making more in a year than his mother made her entire life being inconcievably unfair rings true, as the sentiment usually does. I'm not saying he needs to burn all his assets and live in a monastery, but of course you can do what you want now when you have millions in the bank and your future grandchildren are pretty much taken care of for their lives. Still, at least seems like an honest piece.

I always sense a little bit of "everyone look at what a good boy I am" in these repentant op-ed pieces, like the same impulse that drove him to seek the "feedback" of money now drives him to seek the feedback of approval. Still, better the latter I guess.

i think lots of ppl probably get "enough" money, which is a big chunk, and eventually have that realization one way or another -- "I can do whatever I want, I'm set" and go do something else, typically with less fanfare.

Its typically known as a "fuck you number".

otoh there's the famous wall street folktale wherein one trader says to the other "You know man, if I ever made ten million, I'd just fucking quit right there," and the other says "that's why you'll never make ten million

so you'll never make the big bucks without an infinite sense of greed?

Read Michael Lewis's first book, now reading Barbarians at the Gate. Disappointed in the first, I was expecting more depth into what life was like as a trader/salesman in that era; BatG hasn't gotten to the real drama yet.

man if you didn't love liar's poker i dunno. apparently lewis' next one is about high-frequency trading, supposed to be out sometime this year.

Yeah Liar's Poker is a stone cold classic

I've read BatG, it's more tame

If you're expecting WoWS type level excess, Liar's Poker is as close as you're probably gonna get

xp, right, I think that's the idea, that it takes bottomless hunger for money to make large amounts of money, at least as a trader. My mom went to high school with a guy who made fuck you level money as I guess sort of a quant/hf guy and isn't like that -- quit to take care of his kids, doesn't believe in tax avoidance strategies, etc. But that's probably not all that common.

funny thing--we started a jacobin reading group here in DC, and a bunch of CFPB ppl were there.

a bunch of CFPB ppl

Capitalists For Police Brutality?

https://www.youtube.com/watch?v=AuqemytQ5QA

Capitalists For Police Brutality?

― Aimless, Wednesday, January 22, 2014 6:39 PM (7 minutes ago) Bookmark Flag Post Permalink

http://surefiredata.com/wp-content/uploads/2012/12/CFPB-image1-e1354816067595.png

This is a really fucking interesting article
https://www.jacobinmag.com/2014/02/the-rent-is-too-damn-high-2/

I need to give it some more thought/chew on it a bit.

for a pleb like me, it just reads broadly as "soooo much corruption in real estate markets but what are ya gonna do? nobody listens to Elizabeth Warren"

ok i bet those charts are sorta dumb. like here you have a ratio of "rent" to gross investment then well if the number goes up, then either "rent" went up or gross investment went down.

Now we just had an economic crisis. the big thing that happened is ppl stopped investing because everything was tumbling in value, and also the value of investments decreased.

Here's a chart thru the end of 2010 which i think basically matches the chart they have, showing just that: http://research.stlouisfed.org/fred2/graph/?g=shr

so that accounts for the big upward spike at the end of the chart. I bet if they had a few more years we'd see some changes a investment picked back up again.

So there's a general upward trend and there's arguments to be made about that, but the situation the chart displays can be accounted for by other means.

But you might want to know why "rent" doesn't decrease proportionately to gross investment. There could be good reasons but I'd want to know what they are.

like this points to the growth of the finance sector thu the 80s, and that makes sense. but the recent portion bears some interpretation (the huge blip in the 'net' investment line makes this double clear).

the main reason rent doesn't decrease proportional to gross investment is inertia. like these are huge sectors of the economy. just because we had a huge economic contraction for a span of years doesn't mean that these companies just shut down.

cash moves in and out of markets quickly, companies don't grow and shrink at the same pace usually. in any case, a better comparison if one is made at all would probably be something about rent vs. capital flows not absolute investment

the more I think about it, I'm also not sure the way they're doing "gross" and "net" investment makes sense either, and I'm also not sure if looking at a "per dollar DIRECTED (invested)" figure makes sense.

clover otm re: inertia, it's rocket vs feather

also i think the fact that finance as a sector gets a certain chunk of money is a bit point-missing because that accounts not just for fees paid to brokers, or money managers taking 2-5% off the top, but also the amount actually held by these firms. So say like GM makes a profit building cars or whatever. Now of that profit, a chunk gets paid out in dividends. And of the gross profit, a chunk gets paid out in returns on bonds GM has floated in the past. So some of those dividends and coupon payments go to financial firms that hold stocks and bonds, and they get marked as profit.

But this isn't different than that going to Johnathan D. Rich Person III, who bought that stuff himself.

Its not like finance "took" that profit from somewhere else. Its just that these firms are sitting on cash and invested it.

Consider also that maybe GM does well and the stock goes up in value (and the bonds go up too because the rating improves or whatever). Now again the holder accrues value they can book as profit. But nothing actually happened! Value was just "created". Until they sell out of those positions, nobody actually took profit there.

You don't have like "good industries that make things" on the one hand and "evil banks that don't make things" on the other and like if money flows to the latter then that means that that's taken from the former in some sense. finance has a very specific relationship with other sectors of the economy.

finance has a very specific relationship with other sectors of the economy.

a vital relationship, and at scale perhaps the most important relationship with other sectors of the economy

vital is pushing it. i realize my above was imprecise too. i should have said "good capital that invests in productive industry vs. evil capital that operates via finance" because the point is finance capital is just another route to the same place.

You don't have like "good industries that make things" on the one hand and "evil banks that don't make things" on the other and like if money flows to the latter then that means that that's taken from the former in some sense. finance has a very specific relationship with other sectors of the economy.

― eric banana (s.clover), Wednesday, February 19, 2014 5:36 PM Bookmark Flag Post Permalink

I think you're right to an extent. The article was more trying to make the argument that Wall Street is somehow extracting much more payment from everyone for the same arguable services than it used to. I'm not sure the methodology it used really makes sense though.

But what wall street "does" is actually a lot of different things of what I would say are widely varying degrees of usefulness (or harmfulness) to a capitalist economy. It's certainly important to the efficient allocation of capital and all that, and at the same time it's laughable to suggest that that's all they do, and I wonder if it's even a majority of what they do. Would be fascinating to see very detailed research showing a breakdown of the activities of the banking sector.

finance capital is just another route to the same place.

Could you explain this a bit?

Yes, please explain

Also, the runup to the financial crisis is probably one of the greatest examples in history of massively, horribly INEFFICIENT, WRONGHEADED allocation of capital. And that came on the heels of the dotcom boom and bust. So the last few decades have not been a very good argument for our banking system being good at allocating capital.

Not really sure about that, given the amount of wealth that has been "created" as a result of our banking system (and by "banking system" what are we talking about as components thereof? Not really sure where to begin and end.)

The article was more trying to make the argument that Wall Street is somehow extracting much more payment from everyone for the same arguable services than it used to.

There's an interesting recent article from Larry Summers on inequality that seems to contradict that:

It is certainly true that there has been a dramatic increase in the number of highly paid people in finance over the last generation. Recent studies reveal that most of the increase has resulted from an increase in the value of assets under management. (The percentage of assets that financiers take in fees has remained roughly constant.) Perhaps some policy could be found that would reduce these fees but the beneficiaries would be the owners of financial assets – a group that consists mainly of very wealthy people.

http://larrysummers.com/america%E2%80%89risks%E2%80%89becoming%E2%80%89a%E2%80%89downton%E2%80%89abbey%E2%80%89economy/

One would think that the crash of 2008 would have reduced management fees (2/20 and the like) but it didn't.

And it's not just wealthy people paying those fees. The real money in management fees is paid by institutions, who rarely negotiate for anything but standard rates.

Yeah I was gonna say "um, pension funds?" And then I figured oh well it's larry summers and he probably knows his shit, so is it possible that there's really more money under management from wealthy individuals than pension funds? But that doesn't fucking seem right, so I say Larry Summers is being disingenuous, so fuck that guy.

I'd be stunned if there was more money under management from wealthy individuals. In fact, I can almost guarantee that there is no way that is true.

But I think what Larry is saying is what I alluded to--management fees as a percentage of assets hasn't changed. For example, most management fees are 1-2% no matter the increase or decrease in assets and that hasn't changed in decades. What I think Larry is saying is that assets have grown, not the raw percentage fee. He's probably saying that assets have grown, and thus there are either a) more managers making 1-2%, b) the same number of managers making 1-2% but their compensation rose commiserate with asset value, or c) a combination of both. Or am I reading that wrong?

I think it's fair to say that financial asset management fees are *disproportionately* paid by wealthy people. Sure there are big pension funds but how many individual people do those funds represent? So a reduction in financial fees will help your average rich dude a lot more than your average middle-class dude.

xp

If I did this right, this chart shows the ratio of financial assets in the US vs. GDP since the 1950s:

http://research.stlouisfed.org/fred2/graph/?g=sjI

The ratio grew slowly from around 1.3x to around 1.8x from the '50s to the early '80s, then it took off and never looked back. Since the Great Recession it's stabilized at around 4.5x. So yes, it appears that the amount of financial assets have grown dramatically relative to the size of the economy since the early '80s.

probably can attribute that to growing global economy, increase in efficiency, and other stuff (monetary policies?) ?

and it still doesn't explain why a) rich people don't demand lower management fees and b) pension managers don't demand lower fees

I'm sure they do take fees into account when choosing managers, but that's probably a lower consideration than reliability, competence, track record, etc. You don't necessarily want to entrust your pension fund to the lowest bidder.

AFAIK management fees are pretty much a non issue.

Even at places like CALPERS.

probably can attribute that to growing global economy, increase in efficiency, and other stuff (monetary policies?) ?

Yeah, it's a pretty interesting question actually. I don't know what determines the "right" level of financial assets relative to the size of the economy. Definitely a part of it is the big bull run in stocks starting from the mid-80s as well as increase in housing prices and related mortgage debt as well as increasing government debt.

probably can attribute that to growing global economy, increase in efficiency, and other stuff (monetary policies?) ?

― anything but a martyr (dandydonweiner), Thursday, February 20, 2014 8:21 PM (23 minutes ago) Bookmark Flag Post Permalink

derivativezzzzzzzzzzzzzzzzzzzzzzzzzzzzz

http://www.dailyfinance.com/2010/06/09/risk-quadrillion-derivatives-market-gdp/

Yeah, derivatives are probably not included in that 4.5x figure I estimated above. That's another whole source of financial fees.

are hedge funds?

hmm not sure what that graph actually includes. Could include derivatives, hedge funds, and other financial businesses

I dug this up from a footnote in the report that graph is based on:

Financial business includes depository institutions, insurance companies and pension funds, monetary authority, and other financial institutions.

So it's not clear if that includes hedge fund assets that aren't being invested by other financial businesses (such as pension funds).

This is an interesting, somewhat relevant Wikipedia article:

http://en.wikipedia.org/wiki/Financialization

so to expand on the above because it was apparently confusing, if some financial holding company holds say $1M in GM bonds, then it has those bonds on its books as an asset, and it marks coupons received as profit. But GM also has that $1M on its books, as a current reserve of cash (although of course it has amortized future payments as an outstanding liability). So if there are many bonds held by many financial institutions, that _is_ one way cash is directed from places where it sits around to companies that want cash to do stuff. But the net effect of this is to make it look like there's more cash floating around in toto, since the bondholder and the bond recipient both "have" that money, sorta. This is related to the "money multiplier" effect ppl talk about.

So if you look at a financial institution's book profits or assets, they're not "coming" from somewhere else, they're just numbers on paper. what "comes" from somewhere else is the profits fully taken that flow out of the circulating economy to elsewhere. otherwise, that's really just not how finance works, which is not a normative value judgement, just a claim about how one understands accounting.

Ok similarly this "total financial assets" thing looks really impressive, right, but then google for a source and get this

http://www.federalreserve.gov/releases/z1/current/accessible/l107.htm

So this A) gives a breakdown of the composition of those assets and B) also has a figure with a suspiciously similar number for "total financial liabilities"! So whoops, unless you net those out you're looking at a very meaningless number because if I promise to give you $100 dollars tomorrow and you promise to give me $100 dollars tomorrow then we both now have $200 dollars in assets (whereas, before, we presumably each only had the $100 we promised to give -- but if we timed it right we didn't need anything at all). But if we do the same thing with $1000 dollars, now we have $2000 dollars in assets.

so yes one does need to look at numbers in context.

oh and yeah about half that number does seem to be derivatives, classified as "credit market instruments". no surprise there really

When does GM start to calculate the return of principal as a liability