the finance industry / wall street

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

i think they're marked in its books as a liability right away if you net it out. but remember they also mark e.g. the book value of their plants, etc as an asset.

like you don't actually typically want a really fat # at the bottom of your balance sheet (though you want to be comfortably in the black) because it indicates yr sitting on cash you don't know what to do with.

Who in this thread really understands GAAP

oh i forgot to mention in the above with the finance company holding bonds. if they are a pension fund they're doing it straight up, but like e.g. if they are a hedge fund or trading desk then they are doing it on margin quite often against assets held elsewhere. so that's another way in which for better or worse these sorts of practices make it effectively appear like there is "more" money than otherwise.

They don't call it "generally accepted" for no reason--accounting is often (always?) at the behest of its owner because it typically serves many variables and strategies.

I'd guess that most HFs or desk stuff is almost always on margins but maybe I'm way wrong. Regulation/reporting on HFs is comparatively limited, right?

well if yr a public company with a public balance sheet you only have so many ways you're (legally) allowed to carve things up.

Yeah, generally when you hire a Big 4 you're hiring their reputation as an accountant who won't pull an Arthur Andersen

But see what their Asian subs are doing + injunction against Asian subs of Big 4 by a SEC judge

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.

― eric banana (s.clover), Friday, February 21, 2014 9:28 AM Bookmark Flag Post Permalink

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

― eric banana (s.clover), Friday, February 21, 2014 9:30 AM Bookmark Flag Post Permalink

Right, and this is a pretty good explanation of why the total "notional" value of derivatives is pretty meaningless, and why scare stories about "five bagazillion dollars in derivatives!" are kind of meaningless.

well if yr a public company with a public balance sheet you only have so many ways you're (legally) allowed to carve things up.

right but HFs are ever public companies?

xp

(and by that I don't mean how public companies account for their participation in a HF)

A: no

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

I'm not sure the point here. Sure, when it comes to debt instruments and derivatives, one company's asset is another company's liability. (It's a bit different if you're talking about equity - stock outstanding is not a liability, it's invested capital.) The point I was trying to make was just to look at the asset side of the equation - specifically the assets of financial businesses. This is just to give a rough idea of the size of assets being managed by financial businesses in aggregate, in an effort to understand the fees that are paid for managing those assets and how they've grown faster than the economy as a whole. It does seem that the amount of those assets in the aggregate has grown faster than GDP.

oh and yeah about half that number does seem to be derivatives, classified as "credit market instruments"

I think that line item comprises mainly debt, not derivatives.

on the latter, note you also have lines for "Financial business; corporate and foreign bonds; asset" and "Financial business; other loans and advances; asset" so that would cover most sources of debt i know of. credit instruments usually is a catchall for slightly difft stuff, typically derivatives.

on the former, yeah i guess i wasn't really arguing against you so much as the above-linked article that kicked this stuff off still. my one potential disagreement is that fees paid for managing assets are paid by people with "real money" i.e. pension funds etc. so total assets under management matter less in terms of this than "capital under management".

I can't find a standard definition of "credit market instruments" fwiw. There are lots of complex special rules for derivatives accounting in GAAP though, including rules that were added in the runup to and aftermath of the financial crisis.

Not that House Republican Dave Camp's tax law changes package had a chance anyway, but Wall Street has made clear they don't like it

http://www.politico.com/story/2014/02/wall-street-republicans-dave-camp-bank-tax-reform-104065.html

Wall Street is warning Washington Republicans: The money spigot is turning off.
Rep. Dave Camp’s tax proposal — which jacked up taxes on banks and threatens the bottom line of some major private equity players in New York — has infuriated donors in high finance.
Private equity and investment firms in New York are telling key Republican players in D.C. that commitments for big-dollar fundraising have been “canceled for the foreseeable future,” according to one GOP lobbyist with knowledge of the conversations….
Big banks want to turn Republicans against the bank tax. The situation puts the party at risk of seeing a reliable source of campaign cash dry up right in the middle of a critical election year.
The tax proposal itself is not even expected to get a vote in the House, since it’s so unpopular among most Republicans. That Wall Street would react so ferociously to a dead-end bill is a reminder of how hard a powerful player is willing to fight to protect its interests in Washington

This is fucking ridiculous. It's great that Katsuyama created the IEX, but why the fuck is this type of front-running even legal at all? High-frequency trading is just straight-up thievery.

saw that on 60 Minutes. Here's how they defend high-frequency trading, which SEC regulators are now looking at but have not addressed.

http://www.bloomberg.com/news/2014-03-30/high-frequency-traders-ripping-off-investors-michael-lewis-says.html

Traders rushed to defend their strategies.

“While there are bad actors in every industry, the game is not rigged in the favor of professional traders who employ HFT to execute their strategies,” Peter Nabicht, senior adviser to the Modern Markets Initiative trade group and former chief technology officer at high-frequency-trading firm Allston Trading, wrote in an e-mail.

“Rather, they work hard to compete with each other to bring liquidity to the markets, benefiting average investors,” he added. “Continued debate about the next evolution of market structure is needed and welcome, provided the debate is based on fact and resulting actions are reasoned, ensuring average investors continue to benefit from the transparency and efficiency enabled by inevitable technological advances.”

'liquidity, innovation, balanced portfolio, hedging, VAR'

etc etc we are gambling leave us alone and shut the fuck up

high frequency traders are barely gambling, they're more skimming. Cynical me says that the purpose of securities regulations is to maintain the pretense of a fair stock market so the dumb money doesn't get scared off. If this story has enough legs, something will be done about HFT for that reason, but the average person's chances of doing well in the market won't get much better.

Cuz the markets need sub-millisecond liquidity? So it can finally keep up with my ability to make informed investment decisions in 500 microseconds? That is such fucking bullshit.

And yeah, what these assholes are doing isn't even gambling anymore. It's skimming, and if they ever actually do somehow lose money, the Fed steps in to bail them out.

well, I haven't heard of a high-speed firm getting a bailout, no. They can lose money though -- I think it usually happens if they either fuck up or get bested by some other HFT firm.

i hope they all lose all their fucking money