Ian On The Red Dot

The reason why I don’t trust finance people and actually hate them.

Less than a week after the federal government offered an $85 billion bailout to insurance giant AIG, the company held a week-long retreat for its executives at the luxury St. Regis Resort in Monarch Beach, Calif., running up a tab of $440,000, Rep. Henry Waxman (D-Calif.) said today at the the opening of a House committee hearing about the near-failure of the insurance giant.

Showing a photograph of the resort, Waxman said the executives spent $200,000 for rooms, $150,000 for meals and $23,000 for the spa.

They are modern day robbers. Human greed is such a beautiful thing to see.

Heard the news? Don’t pity the bankers. They already had the good life, one bloated with excess. They got their fat pay checks and huge bonuses. They are the ones who thumbed the nose at workers from industry, thinking they were the titans of the world as they strode all across Wall Street (and Shenton Way).

Remember this? They even had the gall to call the site “POCKETCHANGENYC“.

In New York City you are defined by what you do and the dating world has to follow the same rules. The claim “I am in finance” is a heavily weighted statement. Men understand the effect of it and women can define their personalities based on their response to that single declaration. Women in fashion need men who can facilitate their pre-30 marriage/retirement plan, and men in finance need women who will allow them to leverage their career in their dating equity. In a bar these two populations have to siphon through multiple unwanted encounters to find each other, FashionMeetsFinance facilitates destiny by purifying the dating pool bringing together only the most appealing populations in the New York dating game.

No. It is the ordinary workers in those companies who now suffer. The ordinary shareholder who bought into a lie. The people who saved. The people who got pushed unwise investment products.

Those are the people who really got fucked.

Update: A summary of the crisis:

From geoff:

May I take a stab at the banking crisis:

Quant: You know if we could turn risk into a number or set of numbers then we can sell it off and take our commission. The great thing about making it into numbers is that computers use numbers.

Bank: Computers are smart!

Quant: Okay because we use computers we can do a whole lot of equations really fast, it means we can sell even more products! That’s where we get our money!

Bank: Me like money!

Employee: Wait a minute, we never did anything like this before, and there’s a reason we never did, we can’t quantify risk like that! Plus what if they lie? Everyone knows that securities are the last thing in the world that will follow a rigid, mathematical structure. How do these models account for a lack of liquidity? You can’t hedge against that.

Bank: Money!$$$

Quant: Money!$$$$$$$$

Bank: $$$$

Quant: $$$$

Employee: Wait a minute, how do you hedge against the theta in mortgages? The time decay doesn’t work the same it does in fixed income securities, how do you match up liabilities to assets in these fancy products? Cash flows aren’t as predictable when people repay their mortgages.

Bank: $$$$?

Quant: $$$ +$$$ = $$$$$$$

From the Wikipedia entry:

The Dow Jones Industrial Average (NYSE: DJI), also called the DJIA, Dow 30, or informally the Dow Jones or The Dow) is one of several stock market indices created by nineteenth century Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Dow compiled the index as a way to gauge the performance of the industrial component of America’s stock markets. It is the second oldest continuing U.S. market index, after the Dow Jones Transportation Average, which Dow also created.

The average consists of 30 of the largest and most widely held public companies in the United States. The “industrial” portion of the name is largely historical—many of the 30 modern components have little to do with heavy industry. The average is price-weighted. To compensate for the effects of stock splits and other adjustments, it is currently a scaled average, not the actual average of the prices of its component stocks—the sum of the component prices is divided by a divisor, which changes whenever one of the component stocks has a stock split or stock dividend, to generate the value of the index. Since the divisor is currently less than one, the value of the index is higher than the sum of the component prices.

New York Times has an article about Americans getting into debt.

What is smelly is this:

But behind the big increase in consumer debt is a major shift in the way lenders approach their business. In earlier years, actually being repaid by borrowers was crucial to lenders. Now, because so much consumer debt is packaged into securities and sold to investors, repayment of the loans takes on less importance to those lenders than the fees and charges generated when loans are made.

Guess who are buying those bad consumer debt in the form of securities?

Retail investors and indirectly, the people who save.

When the securities go bad, those who sell it owe you nothing. But they can come after you for your loans and interests.

Hmmm…

I think the finance industry is just one big system to fleece money from the masses to funnel it to the few. It is a game setup from the start to benefit only a few players. There is no such thing as a level playing field.

I took Economics for my A Levels. I did well enough in the first year when the subject material was covering microeconomics related stuff like marginal utility to be offered a S Paper in Economics. I thought Economics was something I had interest in until I started studying macroeconomics and attending S Paper Econs lectures.

I won’t say I lost interest. Rather, I tried to run away and hide from the system we were living in. I wanted to go under a rock and not try to understand what I felt was a totally screwed up system. I didn’t want to face the facts about the system we were in. It was scary stuff.

A lot of things just didn’t make sense to me then. I could understand what the textbooks were saying. I could understand what the S Paper lecturers were trying to highlight. But what really got to me was how in the end, the individual was powerless to change a system that is so messed up that it has led to excesses and suffering. I couldn’t fathom how we even allowed ourselves to be led down a road that was powered by the greed and fear of humans, a system that pandered to the worse in humans.

It was only when I started working, and even then slightly apprehensively, that I began to regain interest in such stuff.

I can’t run away from this system. I am tangled in this web. I probably can’t change it. I jolly well better learn as much I can about this system and understand it, if not to profit from it, at least not to be made a patsy.

Doing nothing is a position taken.

And so, yesterday, I got myself a CDP account. I don’t intend to trade, speculate or invest. Yet.

But to me, getting the account is like getting a driver’s license. You get it even if you don’t expect to use it because you never know when it might come in handy.

I got it as an acknowledgment that whether I like it or not, this is a game (i.e. financial machinations of this world) I have to play, either as an active participant or a defensive one.

Anyway, something worried me when I was opening the account. Half of the people at the customer service counters or waiting for their turn were elderly folks around the age of my grandma. I’m obviously using guesstimation here.

I’m not sure why they were there. They could be there for a myriad of reasons but it just worries me that the elderly is involved in anything related to the stock market. It just doesn’t seem like the wise thing to do considering they have a shorter time horizon.

What was also interesting was how some of these elderly folks were accompanied by younger looking individuals. I would guess that these individuals were around my age. I have my own conclusions about these individuals and none of it is good.

Anyway, yeah. Yesterday was one more step.

I’m not a banker, economist or in any profession directly related to the finance industry so I might not understand everything that is going on and my interpretation of events might be way off-base, but it would seem to me that something is really rotten in the finance industry.

Firstly, we know that people working in the finance industry earn a relatively, if not absurdly ridiculously, high compensation compared to professionals in other industries.

When a certain bank like Bear Stearns is doing badly, what happens? A government body steps in to bail it out. Now, I understand why they say they need to do it – to prevent the whole system from collapsing.

Bush Supports Fed’s Actions, but Critics Quickly Find Fault

Officials says that people involved with Bear Stearns didn’t get away easy – shareholder value was wiped out. Yet, that is a rather inaccurate picture – some people involved with Bear Stearns did get away with something in terms of salary and bonus compensation. These are the bankers. Unless they used their compensation to buy shares in the company, what they earned was pretty much safe when shareholder value got wiped out. Funny thing is, they get to keep their compensation for the work that got the bank in the position to experience a collapse.

Who bears the cost?

From: Rescue Puts Credibility of the Fed on the Line

And no one knows how much the Fed could lose if the borrowers fail to repay their loans or whether hundreds of billions of dollars will ultimately have to come from taxpayers to shield the nation’s financial system from ruin.

If the rescue effort fails, taxpayers could indirectly wind up having to assume part of the cost. Tax revenue does not pay for the Federal Reserve’s operations, including the rescue effort, because the Fed earns income from its trading operations.

But the Fed does pay the Treasury a regular stream of money every year out of its trading profits, lowering the amount it needs to borrow from outsiders. If the new borrowers on Wall Street are unable to repay, and if the market value of the securities they pledge as collateral continues to drop, the losses will come out of the Fed’s payments to the Treasury.

Why is the Fed doing what it is doing?

From: Plunge Averted, Markets Look Ahead Uneasily

“They stand committed to protect the system,” said Richard S. Fuld Jr., the chairman and chief executive of Lehman Brothers

Which system is being protected? Is it the one where people can be reckless with other people’s money to earn high compensation for themselves without worrying about any consequences when things go south?

From: When a Safety Net Can Lead to Risky Behavior

It describes the possibility that people will take foolish risks when they believe that they will be protected from the consequences of their decisions. In this case, the critics are worried that investment firms will repeat their recent run of reckless investments, based on a belief that the government will bail them out again.

The classic examples of moral hazard involve insurance. When people can insure themselves against a bad event, like a car accident, they may become more willing to engage in dangerous behavior that could lead to that event.

Seems like it to me.

Just finished reading the book “Mobs, Messiahs, and Markets“. It is a great read and I’ll definitely have to read it again not just because there is so much material to digest but because the writing is deliciously beautiful and brimming with wit.

The book sheds light on the shenanigans that are currently happening in the world as well as some from the past. The one thing I learned from the book is to think for one’s self. Yet, the book cautions against logical thinking because there is a tendency for us to do it wrongly. We use our thinking to help validate what we want – our brain is the slave to our emotions and desires. Also, there is the danger of thinking we know a lot about a subject matter, if not everything which can lead to disaster.

A healthy dose of skepticism and humility is needed when the gears in our brain start turning.

Investing tips from the book:

1. Don’t Go Looking For Trouble.

You don’t always need to be either a seller or a buyer. Sometimes doing nothing can be good. Although holding cash is actually doing something.

2. Don’t Expect The Market To Give A Sucker An Even Break.

The little guys lose consistently. They pay too much to the financial industry in fees, commissions, and spreads. The market isn’t a level playing field.

3. Don’t Be A Patsy (i.e. a person who is gullible and easy to take advantage of).

Don’t try to figure out what the market is doing by deferring to experts. Always remember that you are guessing and because you are guessing, make sure the odds are in your favor. Don’t buy high expecting to sell it when it gets higher because the market has been going up. Remember to buy low.

4. Never Get Too Far From The Facts.

5. Never Buy Tuna Unless It’s On Sale.

6. Never Buy What Someone Else Really Wants To Sell.

7. Never Buy What Everyone Else Is Rushing To Buy.

8. Gold.

I’m not doing justice by just listing the points above but this is more for my own notes than anything else. I borrowed the book from Tampines Library so the book is in the system. Try to borrow it if you get the chance. I’m definitely going to buy this book to add to my collection once Borders has a discount.

The one fault I have against this book is that it has introduced the phrase ‘public spectacle’ into my vocabulary. I find myself using it quite often now in my conversations with people.

Public Spectacle = Lies -> Farce -> Disaster.

Some associated links:

This is the blog that is associated with the book – Mobs, Messiahs, and Markets. It hasn’t been updated since October 2007 so to read more from the authors, going to their blogs might be another recourse.

I managed to find the blog for only one of the authors Lila Rajiva – The Mind-Body Politic.

Couldn’t find the blog for Bill Bonner so I’m just going to link to the site for his daily newsletter – The Daily Reckoning.