They rely on complexity and deception, particularly in swaps and derivatives.

Three Card Monte writ large

I love Three Card Monte. A number of years ago, we took our kids to see Michael Jackson on tour at a football stadium. I took one kid to the restroom, and saw a couple of guys running the game on a some ignorant mark. Smooth as glass, they took twenty bucks off the guy while we ostentatiously didn’t watch.

Masaccio, I thought Rayne’s post on Trillin’s article was brilliant.
As is this post.

Every single point you make is important and astute.

Sometimes I think that Sen Dick Durbin, who stood on the floor of the US Senate last spring when he could not get a ’second’ to his amendment and stated, “The banks own this place” is one of the gutsiest people in this nation.

Congress and the Obama administration ought to realize that more of us each week are connecting dots, after looking at what happened to mutual fund savings, retirement accounts, etc, etc. I don’t think there’s going to be any sympathy for siding with people who wail about all this being ‘too complicated’ to dig into, figure out, and fix.

That’s what the rest of us have to do in our jobs: Congress can damn well do its.

Thanks for another terrifically good piece.

readerOfTeaLeaves, thanks. I could write this post with a new set of examples every single day, because every day there is a story in the WSJ or the NYT or in McClatchey about corrupt business practices. Congress and the administration aren’t even trying to deal with this onslaught. They act like each separate fraud is the work of an out of control rogue, instead of the standard operating procedure of American style capitalism. They tell us we only need to tweak the existing regulatory structure and everything will be just fine.

I really worry that we do not currently have the ability to govern ourselves.

Perhaps part of the reason that engineers and other science types are getting into the financial world is that these people are required to do so in their corporate positions. Program managers that should be doing technical engineering work must do technical accounting work with a minimum of training: a few one day seminars, at best. As the engineering jobs in this country transfer outside the nation, these science types feel that financial work can’t be that hard, after all, “it’s not rocket science.” The science people move to financial work and start looking for ways to make money. Just in case you are wondering, the engineering graduates that I worked with were, by and large, very conservative, free market people, but angry at the job displacement.

You can’t run a Meritocracy if the Leadership has no idea what the workers do. And yes workers do sometimes get crazy impractical ideas and need to be restrained sometimes. (I have several ex bosses willing to laugh about that now:).

I’m not talking about those guys, I’m talking about these guys, and their friends here, and all the similar guys who work on Wall Street.

The second bad thing is the way financial elites make money. Floyd Norris gives a good picture in this column. They charge high fees, and hidden fees. To justify those fees, they have to produce huge returns, which they do by leverage. They rely on complexity and deception, particularly in swaps and derivatives. Wall Street has become more concentrated. All of these things are dangerous to the rest of society, which has to bail those incompetents out when they fail.

We need to stop this banks need to get used to normal profits again. Hedgefunds without leverage I think they might not be around anymore. If WallStreet does not like it well suppose they do win and nothing gets done odds are WallStreet will need another bailout only we will be to poor to give them one.

Fine post. A minor aside: has’nt the point been made that these “smart guys” coming out of college and heading for Wall Street were saddled with enormous student loan debt, which could almost never be repaid working in a real job where they actually did something for society? The Reagan era marked the beginning of the assault on affordable access to higher education. Your post is evidence of another, little noticed, chicken coming home to roost.

Also, you mentioned Robert Schiller. Did you see him today on Fareed Zakaria’s show? Speaking on income inequality, he tiptoed oh so carefully near the subject of Revolution if something isn’t done to narrow the gap between the have’s and have nots in this country. Schiller even used the word.

I am intrigued because I have been predicting that we would reach this point for some time now. Your post is further evidence that we are in, or close to, the death spiral. Our institutions no longer have the capacity to rectify even the most naked abuse and corruption. Any thoughts?

Why aren’t the banks investing in green power it would take decades to convert our power grid 100% green the fuel is free and there is no pollution a decades long green power bubble would give the banks decades of profits.
Instead they all want a Cap and Trade exchange so they can charge fees.
Like third world countries will stop poor farmers from cutting down their forests and first world countries won’t cheat on how much pollute.
Cap and Trade is a useless exchange where both parties pretend to have an honest exchange the banks charge a commission and the Government will look the other way.
How long can Cap and Trade last as a fictional exchange ignored and cheated on by all involved parties?

BEWARE OF GEEKS WITH FORMULAS – Warren Buffett

When Empires stop making stuff and instead turn to finance the Empire is in decline. Finance implies something that is to be Made needs financing. When Finance starts financing itself and less actual stuff is made your eating your seed corn.

The financial sector is corrupt to the bone.

yet, progressives imagine they have taken wedding vows to the Democratic Party, and must support them through thick and thin, and this same Democratic Party acts as a government operative for Wall Street and Goldman Sachs!

as Matt Tabibi mentions: Wall Street actually has even more power and influence under (D) administrations.

Yes, there is a difference. Wall Street has MORE influence under Democratic administrations.
GS (Goldman Sachs) was Obama’s #1 private contributor. It gave 4 dollars to Democratic congressional candidates for every 1 to Republicans last year. This has been their history long-term. The Democrats very clearly bank their financial strategy on raising money from the financial services industry, and it’s been that way going back to at least 96, with the Rubin era

Too many people think they have too much to lose, so they cling to what they have and resist change. It would be a real revolution if we could get a real tax increase on the rich.

Your alternative to the admittedly spineless democrats is exactly what? Nader?

Mr. Bush’s crippling of the federal bureaucracy, his hiring of zealots and Cheney’s gutting of its formal and informal networks made Andrew Jackson’s manipulation of the bureaucracy seem timid by comparison, affected the SEC as much as the DoJ, the EPA and the FDA.

Pretty much everything other than the Secret Security Service was made as dysfunctional as possible, from hiring lobbyists to run them and to rewrite regulations in industry’s favor, to firing or forcing the resignations of talented staff and replacing them with Brooks Bros. rioters and Federalist Society extremists.

Since the SS’s job was to protect the president and Mr. Bush, they were hired and trained and resourced well. For what they couldn’t or wouldn’t do, Mr. Cheney had his personal Praetorian Guard of special ops forces.

I’m probably missing something here. (I usually do.) However, I find it baffling that people aren’t storming Capitol Hill to demand full-blown hearings on the obvious criminality that has taken place. I’m talking hearings with an open timeline, open budget, full subpoena power, special counsels – The Works. And speaking of criminals, here’s a good read from McClatchy…

Also, if you want to burn a little time, go here:

“Too many people think they have too much to lose, so they cling to what they have and resist change. It would be a real revolution if we could get a real tax increase on the rich.”

Multitudes have already lost what they have and multitudes more probably will.
Only in a nation as right-leaning and supplicating as America would a simple tax increase on the hyper wealthy be considered a “real revolution.”

No, that’s not the revolution that Schiller (and me) is talking about. All I’m getting at is that increasingly, on blogs, in conversations, and now even in rare moments on traditional media, the Rev word is being whispered. Part of it is just momentary frustration. But greater numbers have been awakened, rudely to the fact that nothing is going to change. The saw is cutting close to the bone. Mass larceny is the norm. Family members fall ill and die and the family is bankrupt. Massive efforts are mounted to reform the ruinous healthcare morass and all their efforts result in . . . nothing. In fact, worse than nothing. The U.S. gov’t has proven itself a wholly owned subsidiary of giant financial puppeteers.

Many sense a compounding of errors that is beyond the ability of “the system” to remedy.

Thanks for the interesting post.
Just one thing to add: The Madoff scandal could be the best thing that happens to the SEC–if it’s used in the right way. And if _we_ learn the right lesson from it.
The SEC needs money, support and decent regulatory laws to do their work properly.
You quoted the Times article, I think:
“In one e-mail message, a senior lawyer in the agency’s New York office said he thought “we should get out of the business of burning resources to chase Ponzi schemes.”
I think however, that you are losing some of the context. This e-mail of all things is NOT what upsets me. It sounds like an overwhelmed employee at the SEC trying to put his finger in the dam. Some things are easier to investigate–and lead to results more quickly. Ponzi schemes may very well not fall into this category.
It is well known (well maybe not well enough known!) that during the Bush years, lots of important work got shunted, ignored, underfunded.
I think the SEC should be held accountable for their actions or lack thereof.
I just don’t think we have enough information on them. What happened to funding? What other ways were there powers and abilities undercut in the Bush years?
It’s a mistake to put the overworked lawyers and investigators at the SEC in the same category as the Goldman-Government folks who spend their careers in the revolving door.

jmo, worth a read: H. L. Mencken, Cultural Elitism, and the Democratic Party

My experience with the SEC goes back to 1980 and the early years of Reagan and his designated hatchetman John Shad. Most of the competent people quit because they were being pulled off fraud and corruption cases and put on truly useless work. That was reduced under Clinton, but the SEC never recovered. Under the worthless Christopher Cox, the SEC was reduced to a shadow of its former self. There may be a few competent people left, but I doubt it.

The Madoff failure is atrocious. I described it very briefly, but the plain fact is that any competent person would have uncovered the fraud after that interview. This reeks of corruption. Madoff had a lot of friends in high places all over the street.

Thanks for the clarification.

If a bunch of physicists are working for Goldman Sachs, it means they aren’t doing physics.

Part of the problem is that science and engineering don’t pay well, as necessary as they are to our society. (My father retired in 1979, after forty years as an engineer, and still was making less than $30,000 a year. Even allowing for inflation, it’s still five-figure pay today.)

Amazing isn’t it? The only people making decent pay are the bumblers on Wall Street and the egomaniacs in the boardroom. Oh, and the rich.

The Wall Street investment banks were always partnerships, until the 80’s. Once they were operating with other peoples money and reputation became simply a matter of how rich you were the table was set for what came later. It is actually surprising it took The Street so long to adopt the corporate form. After all they had spend a century establishing it as the most powerful model of organization ever conceived. It was pretty stupid of them not to realize the stupendous advantages of having no personal liability for anything. Oh sure, the old white shoes era was scummy but it was gentile. They did have the historic memory that they once wrecked the country after all. They were never pigs. They knew limits.