"In the Beginning"... just kidding.
Wall Street brokerage houses cannot make money in perfectly transparent and liquid markets. The reason is simple: Liquid and transparent markets do NOT NEED A MARKET MAKER for the most part; they need technology that links buyers and sellers together and a mechanism to "clear" the trades (clear means guaranteeing payment and/or delivery. In my 2 decades + in financial services, a time in which I was CEO of a NASD Member Broker/Dealer for over a decade, I was NEVER stiffed, renegged, DK'd on a trade by an industry participant. NEVER. Rather remarkable when you consider the fact that every thing is done over the phone without lawyers and contracts. Notice that I qualified this statement. Members of the general public would, on occasion, enter into a trade that they did not honor. From my perspective, Wall Street's word of honor was of more value than the public's).
Goldman Sachs cannot make money providing services in the equity market as an "Agent"... what little is to be made, will be made by the exchanges. Sure, Goldman et al can sell their research... but not for much. Same with the Treasury market. Too liquid, too transparent. What these firms NEED to do, if they want to make outsized returns, is CREATE illiquid and non-transparent markets where the market NEEDS them to "make a market" in the security. The more complex and opaque, the better for the market maker.
Mortgage backed securities, and before them "Junk Bonds", were an excellent vehicle for this... and CDS's were a taylor made, heaven sent product. One of the smartest guys on Wall Street, ME, could not make hay out of the stock market as an agent OR a principal. In an illiquid and opaque market where I was the "Axe" and the "Hose"? My dog would be able to print money ALL DAY LONG.
One of the primary reasons Hedge Funds came into existence and their numbers have exploded... and the number of Broker/Dealers shrinks year after year... is that people with real talent left brokerages where they were nothing more than agents to become hedge funds where they could participate in the profits (the other reason is that much of the onerous, even silly, regulation cannot be inflicted upon them in these organizations).
In the end, people have rightly asked if all of this paper shuffling has been a benefit for our society. Good question. The U.S.'s primary export is the US$ and the financial services that arise from that export paradigm. What happens when that is taken away from us and we are all forced to work in real production jobs for much less compensation?
I think the question is moot. Resource constraints in general, and energy in particular, will dictate the end game.
Of course, there is another issue. As we all witnessed with AIG, any big player in the CDS market that is unable to honor its side of the trade can send the entire system into collapse. Given that, and the fact that the CDS market has not been able to demonstrate just how important it is to the capital formation process, it is reasonable to question everything about this market.
10 comments:
There is indeed justification to question the investment industry as to just what the hell they were all thinking when they made disappear inconvenient rules like Glass-Steagal, and created these "damned-if-I-know-how-they-work" credit default swaps (CDS) and colateralized debt obligations (CDO). I'm very sorry that the simple trading of a share of ATT stock betwen two investors is so damaging to your profit margins. But as far as benefitting the country, I think the 1950s proved that we all benefit by simple investing in real companies, and losses mean just that .. losses.
The gulf between the rich and poor in this country has never been this large than since the 1920s, and we all know what happened after that. If the investment industry, with its cowboys and suspender-class can't find enough action to entertain them, I would suggest trying some of those ADD drugs to calm them down, before we destroy this country with purposeful, relentless complexity designed for one thing: to steal peoples' money.
I hate rules. I ignore instruction manuals. I hate having anyone tell me what to do. I'm not a big fan of cops, or even parents. :) I work for the Federal government which has millions of pages of rules, and God knows how anyone keeps track of them. But if we don't return to some form of investment simplicity (stocks, bonds, cash, that's it) and start enforcing the miserable clear-as-mud laws, this country, financially, will eventually come to an end.
If this country ends financially then this country will be truely dead then, just like the USSR is dead.
We don't have to end financially... but the fix is NOT increasing the SS and MEdicare retirement age to 75 or 80 while still confiscating those taxes...
More soon
With a financial system that is corrupted toward the benefitting of a few at the expense of the many, yes, the financial system will devolve just like in some Commy backwater, and the country along with it.
China will never be a great nation as long as their government/financial system remains as corrupt as it is now.
There are only two ways to make money; production and plunder. One benefits society and the other destroys it.
Dex!
You overwhelm me, young man.
"After all, the chief business of the American people is business."
- El Presidente Calvin Coolidge
Silent Cal did his part as VP and then prez to protect such business overseas by sending American soldiers, sailors, and marines off to kill and intimidate foreigners in their home countries.
Nicaragua. A small US force, serving as a legation guard and seeking to promote peace and stability, remained until August 5, 1925. Gringos returned from May 7 to June 5, 1926 when the coup d'état of General Chamorro aroused revolutionary activities leading to the landing of American marines to protect the interests of the United States. Uncle sugar felt it had to send in the goons after that too; United States forces came and went intermittently from August 27, 1926 until January 3, 1933.
China. Between April 1922 and November 1923, Marines were landed five times to protect Americans during periods of unrest. September 1924 Marines were landed to protect Americans and other foreigners in Shanghai during Chinese factional hostilities. From January 15 to August 29 1925 fighting of Chinese factions accompanied by riots and demonstrations in Shanghai brought the landing of American forces to protect lives and property in the International Settlement. August and September 1926. The Nationalist attack on Hankow brought the landing of American naval forces to protect American citizens. A small guard was maintained at the consulate general even after September 16, when the rest of the forces were withdrawn. Likewise, when Nationalist forces captured Kiukiang, naval forces were landed for the protection of foreigners November 4 to 6. February 1927. Fighting at Shanghai caused American naval forces and marines to be increased. In March a naval guard was stationed at American consulate at Nanking after Nationalist forces captured the city. American and British destroyers later used shell fire to protect Americans and other foreigners. Subsequently additional forces of marines and naval forces were stationed in the vicinity of Shanghai and Tientsin. In 1927, the United States had 5,670 troops ashore in China and 44 naval vessels in its waters.
Dominican Republic. From May 1916 to September 1924. American naval forces maintained order during a period of chronic and threatened insurrection.
Cuba. US forces protected American interests during insurrection and subsequent unsettled conditions. Most of the United States armed forces left Cuba by August 1919, but two companies remained at Camaguey until February 1922.
Russia. February 16, 1920, to November 19, 1922. A Marine guard was sent to protect the United States radio station and property on Russian Island, Bay of Vladivostok.
Panama and Costa Rica. American naval squadrons demonstrated in April 1921 on both sides of the Isthmus to prevent war between the two countries over a boundary dispute. From October 12 to 23 1925 Strikes and rent riots led to the landing of about 600 American troops in Panama to keep order and protect American interests.
Turkey. September and October 1922. A landing force was sent ashore with consent of both Greek and Turkish authorities, to protect American lives and property when the Turkish nationalists entered İzmir.
Honduras. February 28 to March 31, September 10 to 15 1924. U.S. forces protected American lives and interests during election hostilities. Uncle Sugar got even more generous from April 19 to 21 1925 when U.S. forces protected foreigners at La Ceiba during a political upheaval.
source: US government http://www.au.af.mil/au/awc/awcgate/crs/rl30172.htm
American Production and Plunder has been going on for a long time. I wonder what will be the next episode of American P&P.
Plunder is the practice of taking things from other men’s hands without just compensation (slavery/socialism/communism). There is only two ways to effect production; freedom to profit and coercion.
“We all declare for liberty; but in using the same word we do not all mean the same thing. With some the word liberty may mean for each man to do as he pleases with himself, and the product of his labor; while with others, the same word may mean for some men to do as they please with other men, and the product of other men’s labor. Here are two, not only different, but incompatible things, called by the same name-liberty. And it follows that each of the things is, by the respective parties, called by two different and incompatible names-Liberty and Tyranny.”
-Abraham Lincoln
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