Banksters to public: “Who ya gonna believe, me or your own lyin’ eyes?”

Ah, but the MOTU can and do regulate themselves. They just don’t do it in the public interest and apparently aren’t even smart or ethical enough to regulate in their own shareholders’ and creditors’ long-run interests. But not to worry, in bailout land with a captured government, they don’t have to worry about that, so problem solved!

The Masters of the Universe are always right and brilliant. The make money hand over fist when they make it, and they get it back from the taxpayers when they lose money. Do you know any other business people who are that successful?

Given the current economic beliefs and regulatory attitudes amongst the ruling classes in this country, these people are “savvy businessmen.” No one who can make regulation happen wants to do so and everyone who can effect taxpayer funded bailouts is ready to do so. Where’s the downside for these businessmen? Not a consequence in sight. If you are in a position to take advantage, you’d be a fool not to. And everyone who keeps the system running along as it does either does take advantage or will in future. Count on it.

The system has huge, incalculable, really, rewards for the players. And no risks. None. The higher you are in the hierarchy, the more impervious your protection.

Efficient market theory is correct most of the time, but it cannot control the malevolent actions of those who achieve positions of great power and influence.

Ggreenspan, Paulson, and Dimon have now all publicly professed that what they “missed” wass that “housing prices would not go up forever.” Nobody familiar with markets would ever makes the mistake of thinking a market goes up forever. But they saw huge short-term benefits for themsselves by deliberately misleading their audience and their market followers, so they did it anyway. In fact, the market eventually did what it was supposed to do by bringing prices back where they belonged.

Similarly, the rally of last year was wrongly predicated on artificial govt stimulus, and the market will now again bring prices back where they belong, about 8500-9000 on the Dow.

“The efficient market hypothesis depends on market players acting rationally”
____

The accrued empirical evidence to the contrary is a veritable Himalayan Range. Moreover, “rationality” beyond a short-term strategy of (I)win/(you)lose assumes transparency of accurate objective information enabling “rational” market participants to vote their “value preferences” with their money. Their own money.

Michael Milkin long ago observed “in the gap between perception and reality, there’s money to be made.”

Yeah, at the expense of the dupes.

You’d think that Greenspan and his brethren in business had never grasped the meaning of this word:

greed (grēd)
n. An excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth: “Many . . . attach to competition the stigma of selfish greed” (Henry Fawcett).

Source: Houghton Mifflin’s The American Heritage® Dictionary of the English Language, Fourth Edition

They bit, hook-line-sinker, at the notion that greed is good.

It’s not; there’s a reason why avarice is considered a deadly sin in Christianity. The Ten Commandments which shaped both Christian and Judaic tenets contains more than one prohibition against coveting and worshiping something other than God (hello, followers of financial gods). Hinduism’s Chandogya Upanishad and Bhagavad Gita both contain warnings against greed. Islam’s Qur’an teaches that greed distracts the faithful from God. And desire, including avaricious greed, is considered the fundamental root of all that is wrong with the world by Buddhists.

If greed is so universally wrong and widely considered evil, why do Wall Streeters think they can exercise unfettered greed without any restraint? If greed is so dangerous that warnings against it appear so frequently around the world through religion and culture, why does Wall Street not grasp the necessity of regulation and transparency to guard against it?

Jamie Dimon of JPMorgan Chase admits his company didn’t do a stress test on its portfolio that included the possibility that housing prices would fall. Blindsided, no doubt.

So ‘blindsided’ is the new synonym for ‘plausible deniability’?

If we don’t do those tests, we won’t have any evidence lying around that we knew this stuff was crap. That way, we can say we were ‘blindsided’.

I guess it’s working out for them…

“nobody could have anticipated” becomes an ever-more-popular gambit for dodging responsibility. In fact, any market guy who says any market will go up forever is a complete fool or an abject liar. These guys aren’t fools.

It is based on something called the Sharpe Ratio, which is a simple ratio of historical data, so it offers a wonderful lack of reality in predicting the future.

Thank you, masaccio! I needed a belly-laugh and am still chortling ;-))

I’m always a big fan of ‘lack of reality’ when trying to predict the future, myself 8 ^ ))

Yep.
They are either fools, in which case they have no business being allowed to manage Other People’s Money, or else they are liars.
I don’t see anything in-between.
And trust me, I’ve been trying to explain it away more gently for almost two years now…

Negligence would be a better word.

Especially after 1973/4, 1980/82, and 1989/92.

They’re not fools, and Synoia, they weren’t negligent, either. They were simply and deliberately advancing their personal interests at the expense of all the fools who trusted them to be honest.

It is false that financial businesses will regulate themselves. In fact, they are planning to keep things just as they are, and to take explicit advantage of their size to create even more destructive derivatives. These are the people the President calls “savvy businessmen.”

And even in the quotation from the stats prof at Cambridge, we get so much focus on the nuances of this or that statistical method but what we don’t ever seem to get is a big-picture synopsis of the fact that we’ve allowed these ‘quants’ to create, manipulate, and extravagantly profit from an entire new ‘layer’ of economic activity.

This claims to have ‘value’ because it ‘creates capital’, which it then claims to ‘distribute efficiently’ – a la the EMH.

IN fact, this is a casino layer, driven by quantitative methods + computing technology + network that can transfer enormous wealth at the speed of optic fiber.

How that ‘creates wealth’ for anyone other than the people who write math formulas, or sell this nonsense, escapes me entirely.

The basic truth is that most people in the markets are too stupid or too lazy to do their own thinking about complicated matters, so instead they hope to make money by copying the analyses of others who they perceive to be “experts.” This creates a situation where the experts can become the key players in a huge con job. The markets operate to let the smart make money off the dumb.

To the extent that the dumb were hoping to make big easy money without earning it thru hard work, they are not innocent, either. You can’t con an honest man.

Lloyd Blankfein needs to learn to leave innovation to productive people like our scientists, engineers and artists.

As for the Cult of Sir Alan Greenspan(aka the mainstream economic profession), it just won’t die. It’s like they are zombies.

The only solution may be a full quarantine of mainstream economists. Lock them each in thier own padded cell.

Here’s what I always have trouble understanding. Why is it that the Right (of which I’m pretty sure most of the MoU would count themselves) are always about “Law N Order” when it comes to individual behavior, more than willing to throw the book at individual folks for essentially petty crimes (three strikes, the WoD, as two examples), yet they somehow believe that when employed by corporations, those same people become angels and utterly above reproach?

Will someone please explain that magic to me? It must involve expensive clothes or something.

IOKIYAAR.

Corporatist Republicans and corporatist Democrats allow this Wall Street fraud to go on year after year after year. Nothing but traitors to the American people. These two whore parties have destroyed our nation !

Pro Wall Street Senators like Chris Dodd and Judd Greg and now trying to stop the passed House bill to Audit THE FED because they receive Wall Street money.

To hell with Audit THE FED, ABOLISH THE FED. Nothing more than parasite bankers LIVING OFF OF US and making our country BANKRUPT !

Depiction of typical MOTU risk management technique (Dan O’Herlihy)

I worked in subprime risk management from 2000 to 2005 (privately held nationally chartered credit card issuer). I still recall acutely from that time when the Bu’ush administration, at the height of its arrogant unfettered power, sent memos around to the various regulatory agencies to be distributed at the worker bee level, apprising them that any regulatory actions found to have caused a regulated business any “loss of profit” would be considered cause for civil action against the individual employee involved the the promulgation.

I’m not making that up.

These are the people the President calls “savvy businessmen.”

Savvy Businessmen my ass!
But It is true that they have already ripped the whole country off and it will take years for us to recover from their schemes.
I loved the response to the Glass-Steagall act… Quaint.. We must at least go that far back to regulation if nor a whole further to put a stop to the banks gambling with depositors money!! And then the tax payers bailing them out! Let them fail and hold the management accountable and a bunch of very public perp walks would help!!

The truly great myth of free markets is that people acting in their self-interest magically works for the collective good. People who are solely motivated by self-interest hate competition and will do everything possible to stifle it. The system is rotten to the core.

As the sports world discovered a few millennium ago, competition is great when it’s well regulated.

It sure looks as if enough bad money may push things to a boiling point and call some of the questions that you raise into public view. In other words, the size of the problems now facing the EU and other economic entities may be so expensive that the social and cultural beliefs that protected them may be starting to break down, because now it’s not simply us bailing them out, it’s Europeans, and other nation-states.

And looking into things, it’s the black money, the off-books agreements, the hidden-from-regulators accounts that appear to be starting to catch up with MOTU.

Yesterday’s Financial Times had some rather alarming news about the Greek debt, and here’s a bit from yesterday’s NYT:

As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.

In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.

Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.

So this system has worked well because politicians got what they wanted – they got to keep publics happy while not taxing what was actually being spent, pushing obligations off-books and into the future out of the eye of regulators. And bankers made money off these deals, and they paid politicians, who then needed the help of the bankers…

But suddenly, all of us started getting bills in the mail for things that we did not know about and had not knowingly agreed to… so we started ending up on blogs, and newspaper sites, and other places trying to figure out what lay behind the bad economic behavior we are/were being asked to pay for…and now, Europeans are starting to get bills for things they didn’t know about either…

And when the whole system starts to melt down then that whole bit about ‘efficient markets’ has to be called into question.

And as vegasboomer@6 points out, that whole idea about markets having such great information opens up a lot of holes for a lot of people to take economic advantage of — at great profit.

This situation with Greece is a clear sign that markets do NOT have perfect information.
How tax havens, black money, and off-books accounting provide any ‘market’ with ‘perfect information’ is laughable.

The next question then becomes: how do markets and political systems treat the very people who helped hide information for the sake of private wealth extraction?

And I don’t have the answers to that question.
Nor does anyone, yet.

Wow.
Just…. wow.

I assume The Godfather himself would have sent around memos like that if he were in charge of subprime loans, as well.

As I did not point out clearly enough in my quote of you @24, a system that claims to have ‘free information’ and ‘open markets’ is a veil designed to blind people to the way that things actually work. Those who know how they really work, where the holes and dark pools are, can make a great deal of money off those dark places.

Wow, that is one heck of a story you have there.

Don’t forget that the last person who seriously tried to abolish the Fed ended up with a bullet in his head.

Bring back the 94% top tax braket.

We may not be able lock up our well connected Wallstreet darlings but we could tax the bejesus out of those sweethearts.

If they only made 6 cents for every dollar the stole… well why bother. They’d be better off going back to snatching purses and keeping the profits under the table.

I believe you.

I still haven’t figured out why anyone would think of Shrub as any kind of businessman, successful or not. He’s a con-man, really, and probably hasn’t been completely truthful with anyone since he was a child.

My bank got bought by a large Wall St. “bad paper” firm in 2004. My boss subsequently explained to us the marching orders. In a word: “securitization.” (i.e., bundle up credit card accounts and sell ‘em on Wall St. as “SDOs,” washing your hands of the risk while pocketing the fees).

I just intuitively felt that this shit was gonna come to no good. I was right. I quit in 2005. Couldn’t stomach it.

See my posts “Tranche Warfare,” “The Dukes of Moral Hazard,” and “Investigate Wall Street?“

A photocopy of that would be useful.

it is absolutely impossible businesses can “regulate themseselves”, they are NOT interested in “survival”, nor are they interested in “the health of their institution”

they are interested in a bigger paycheck, today’s mirage is all that matters, if they earn a bigger paycheck by proposing a mirage then that’s exactly what they will do

who gives a flying CRAP if their “innovation” is “styfled”, we WANT their kind of innovation “styfled”

This banker group sounds like Harold Ford Jr crowd.

Maybe…, “efficient market theory is correct most of the time” but it seems the ‘invisible hand’ is often attached to the arm of a pickpocket.

Did you by some miracle keep a copy of this memo or some other evidence?

The mistake many make is in expecting the market mechanism to operate as a precision machine. It doesn’t, and people can deliberately distort prices by withholding pertinent info or by putting out deliberate misinfo. But even then, the distortions can only have temporary effect. Eventually, the rest of the market players figure out what the truth is, and bring prices back where they belong. Of course, those who engineer the distortions can make enormous killings while the distortions last, and the unwary can get their heads cut off.

That is precisely the point Eugene Fama made. The market will correct itself once the delusion of risk management, bubble, or fraud is exposed. Why would you base an economic theory on the idea that eventually things will clear up? The point of an hypothesis that leads to disaster is not clear to me.

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“rationality” beyond a short-term strategy of (I)win/(you)lose assumes transparency of accurate objective information

And the major prevalent ‘accurate objective information’ is that somebody else, not you, can make your investments fall off a cliff to be worth nothing when it’s in THEIR interest.

So, given that risk it would behoove every investor to insure everything 100% with someone whom you know will pay. And, since there is nobody who will (or can) pay (just ask AIG, the world’s biggest insurance firm), there is little reason to risk anything for longer than a day.

Does that sum up the stock markets today?

Well, that’s not really a good situation and with better financial industry regulations it might not remain that way. I know the Wall Streeters say they can get around anything, but last time they took decades to whittle away at regulations and in Washington it took Republicans to go along with them before they got it all and THEN crashed the market & economy.

If we can reform things, so the top executives don’t get everything for short-term performance, then they’ll clearly change their behavior to profit however it’s offered. That’s their God-given right to the “pursuit of happiness” (or unrealized childhood problems) and their duty as a corp CEO.

So ‘blindsided’ is the new synonym for ‘plausible deniability’?

Kinda like “nobody could have predicted they would use CDSs as weapons of mass destruction” /s

their personal interests at the expense of all the fools who trusted them to be honest.

If the system places their interests above their stockholders or their country’s or anybody else’s, then which do you think they’re going to look after?

In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.

Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.

So this system has worked well because politicians got what they wanted – they got to keep publics happy while not taxing what was actually being spent, pushing obligations off-books and into the future out of the eye of regulators.

How different is that than the U.S. gov’t borrowing Soc. Sec. funds for current expenditures and giving them IOUs in exchange? Current cash for long-term (after the current politicians are out of office) debts to be paid back by someone else.

Do ya think the U.S. public is really aware of how much Soc. Sec. money has been stolen, er borrowed? And it’s implications?

“The market will correct itself once the delusion of risk management, bubble, or fraud is exposed. Why would you base an economic theory on the idea that eventually things will clear up?”

Very True – the idea is to do good risk management on the front end.

It is the actuaries that provide the value added that comes from risk management – but “the banks” do not employ actuaries. Even the investment banks like JPMorgan who do have actuaries force them to limit their contribution to that of any other quant – namely to limit the contribution to that of any person with a reasonable post BS background in statistics and database mining. The 10 years of business training/exams required to be an actuary are not wanted since no one wants to hear a discussion of the credit risk/liquidity risk of the entity on the other side of a transaction, or of the bad tail results, or to see a professional evaluation of the input assumptions that were in the model that came up with the value of what you are buying. The game is to sell via the number of PHD’s you have on staff – and God forbid do not allow the instruments to be standardized and put on exchanges where they will trade for $9.99 rather than generating fees of 2.5% of transaction total nominal (or if you are lucky -real)value.

I should note that when insurance actuaries try to talk of these things to the fellow from Wall Street hired to run the investment department because of his connections on the Street, the Investment guy will scream and demand to be free of actuaries – claiming the experts he hires from the Street are all he needs (Jerry at the Met Life comes to mind – fellow who cost me my department as under him the stock at 69 in Nov 2007 became a 30 dollar stock – the 69 was inflated by reporting investment results that were not real – but it was a solid $50 stock value operation).

Markets are about info. In recent years there has been an explosion in the amount of info available, along with a concentration in the outlets of that info in fewer and fewer corporate- and industry-dominated outlets. That facilitates the ability to distort the info flow. But the basic rules of supply and demand, and of buy low and sell high (and vice versa) still hold true.

Recognizing extremes of price and going the opposite way still works well, both short and long term. What has become more difficult is to make midterm decisions of a trend-following nature, because that is where distorted info flow has its greatest effects.

I have greaat respect for you and your work that I have read here, but cannot go into the details here because my fingers will wear out. My perspective is that of one who has been trading S&P 500 futures on a daily basis for 15 years.