“It is useless to attempt to reason a man out of a thing he was never reasoned into”

Jonathan Swift
"The Democrats have moved to the right, and the right has moved into a mental hospital." - Bill Maher
"The city is crowded my friends are away and I'm on my own
It's too hot to handle so I gotta get up and go

It's a cruel ... cruel summer"

Saturday, March 28, 2009

Let me Remove The Scabs From Your Eyes, Jedi Padawn

I was gonna drop this in comments, but it got too long, LOL.

Paul Krugman got it right in his latest column:

"Underlying the glamorous new world of finance was the process of securitization. Loans no longer stayed with the lender. Instead, they were sold on to others, who sliced, diced and puréed individual debts to synthesize new assets. Subprime mortgages, credit card debts, car loans — all went into the financial system’s juicer. Out the other end, supposedly, came sweet-tasting AAA investments. And financial wizards were lavishly rewarded for overseeing the process.

But the wizards were frauds, whether they knew it or not, and their magic turned out to be no more than a collection of cheap stage tricks. Above all, the key promise of securitization — that it would make the financial system more robust by spreading risk more widely — turned out to be a lie. Banks used securitization to increase their risk, not reduce it, and in the process they made the economy more, not less, vulnerable to financial disruption
. "

There are numerous examples of innovators in this country from Henry Ford to Michael Dell. They created something quantifiable in the real world that changed the way we lived. Vision, guts, some good breaks, and a few tough breaks. Many smart and great business people right in our backyard who take risks, and become successful.

This post is not about them . . .

Leaving out old schoolers like Buffett and Soros, it is luck and connections in high finance. I have worked with many, many, many, many, many, people in Boston and the eastern financial corridor.

I was just about the only kid who worked his way through college who was in an executive position, the vast majority went to finishing schools and ivy league. Never met another person from WTAMU, LOL. Just sayin'.

Parents had the connections passed on to them, now the kids, etc. Keep in mind that these financial institutions were a century or more old, many of the mutual fund co's at least half a century. Insurance 120 years.

With the rare exception, these freshly minted MBA's I worked with from Wharton, Harvard, et al had only one goal . . . coming up with a way to leave corporate world and open their own money management firm or hedge fund ASAP.

Not because they were super bright, or could create a smarter way to take volatility out of investing, but because they could make 50 calls and raise a couple of hundred million dollars from Dad's friends. Most importantly . . . they could make vast amounts of $$$ with the 2 and 20 rule. And they were taught in grad school that fiscal innovation (complicated shennanigans) was the way to a personal Xanadu. Not to help the average anyone invest through smart due diligence, but for the same blueblood crowd who were already loaded.

The 2 and 20 rule is simple . . . a hedge fund manager charges 2% of the assets and gets 20% of the profits. The best part? A giant hole in the tax code that allows them to treat a substantial chunk of their compensation as capital gains, taxed at 15% rather than the 35% rate that applies to ordinary mortals' income like us.

Know what else is cool? No regulation! No pesky government lowlings from a Texas Tech or a South Central Louisiana State, with no idea about how the invisible hand of the market works (eyeroll), trying to look over your shoulders. You could devise any bullshit numbers you want, sell phantom stock short without covering, or pull a Bernie Madoff. No one was gonna call you out.

Another cool thing was the proliferation of offshore stock exchanges, a secondary market if you will, where you could pull any crazy stunt you wanted. Don't worry, the market is self-correcting. LOL.

AIG had such an entity called the AIGFP. Bear Sterns, Lehman, Merrill . . .

Our taxes are bailing out these shits. There are thousands of hedge funds, and thousands of third party money managers.

They talk up performance, but how the hell would you know? They have no transparency, so can you sort through complex derivatives, naked options, covered call option chains, convertible bond options yourself?

We need to get back to several things:

1. Trustbust and break up investment firms, banks, and insurance companies into separate entities. Now. Great Rachel Maddow video on this HERE

2. Banking should get back to being boring.

3. Hedges have to show serious transparency, or they get seized and liquidated. Money managers go directly to jail.

Just a few thoughts on a Saturday morning.

-Prodigal Son