Does Wall Street Need to Be Able to Fail?

[jackace]

http://finance.yahoo.com/tech-...F,^IXIP,^DJIA,^GSPC,GM

There is a video on the same page talking about the problem and how finance is now so intertwined in our economy that if we let it fail our entire system fails. The person in the video says something needs to be done so finance can fail and not bring everyone else down with it.

Personally I think the only other option (if we are not willing to let finance fail) is to HEAVILY regulate everything they do and the profits they can make.

 

[SleepWalkerX]

It comes down to Freedom vs. Socialism. I prefer Freedom. Appeal the Federal Reserve Act and quit letting banks make money backed by debt.

 

[LegendKiller]

Without finance you cannot have capitalism, it's as simple as that. Considering the foundation of "capitalism" is CAPITAL, which is invested money, it's pretty fricking easy to understand they are linked.

It's bullshit that it breaks down to freedom vs socialism. Socialism is a maligned term intended to scare people, but when it comes down to it, nobody is an island. The effects of capitalism are often socialist, since the will affect everybody in some form or another. Distribution of cost, caused by acts of an individual or company, are widespread and often. One way or another, whether through intervention to keep the economy going, or letting it fail and distribute the cost, it will happen.

I do agree it needs to be regulated, just put back what we had before and augment it with additional constraints around derivatives.

 

[jackace]

Originally posted by: LegendKiller
Without finance you cannot have capitalism, it's as simple as that. Considering the foundation of "capitalism" is CAPITAL, which is invested money, it's pretty fricking easy to understand they are linked.

It's bullshit that it breaks down to freedom vs socialism. Socialism is a maligned term intended to scare people, but when it comes down to it, nobody is an island. The effects of capitalism are often socialist, since the will affect everybody in some form or another. Distribution of cost, caused by acts of an individual or company, are widespread and often. One way or another, whether through intervention to keep the economy going, or letting it fail and distribute the cost, it will happen.

I do agree it needs to be regulated, just put back what we had before and augment it with additional constraints around derivatives.

The problem I see as an outsider is the major players in the industry know they are too big to fail and they have better economies of scale and leverage then any other industry in our entire economy. They have us "by the balls" to put it in layman terms. They control most of the capital in our system. Our only options are to allow them to fail when they screw up, or we regulate everything they do including their profits. These banks and large financial institutions have a monopoly on the capital markets. Their is no longer a realistic way to compete with these companies. They either need to be broken up into smaller entities or they need to be heavily regulated (including prices they can charge, types of products they can offer, profits, etc) just like utility companies who also have a government induced monopoly.

 

[BigDH01]

Originally posted by: LegendKiller
Without finance you cannot have capitalism, it's as simple as that. Considering the foundation of "capitalism" is CAPITAL, which is invested money, it's pretty fricking easy to understand they are linked.

It's bullshit that it breaks down to freedom vs socialism. Socialism is a maligned term intended to scare people, but when it comes down to it, nobody is an island. The effects of capitalism are often socialist, since the will affect everybody in some form or another. Distribution of cost, caused by acts of an individual or company, are widespread and often. One way or another, whether through intervention to keep the economy going, or letting it fail and distribute the cost, it will happen.

I do agree it needs to be regulated, just put back what we had before and augment it with additional constraints around derivatives.

Pretty much agree with this. Socialism is a term used to frighten people into believing that markets shouldn't be regulated.

"You want to regulate the markets? You socialist."

However, the bailout wasn't a socialist move. It didn't promote egalitarianism and will ultimately benefit those with a great deal to lose more than a person will little to lose. The only way to prevent this from happening again is to put in place strict regulation based on lessons learned here. I believe this means more stringent capital/leverage requirements as well as looking at the possibilities that some of our large corporations are simply too large. When they can literally hold the world hostage, they yield too much power.

I think Capitalism is a grand idea, especially when this country was founded and most business was local. What do you do now when many businesses have revenues and expenditures greater than many countries' GDPs? And while game theory might teach us that in duopoly models, prices quickly fall to the cost of production, this is not necessarily the case in the real world. In the real world, corporations form cartels. What do you do when one or two corporations control a single product and the cost of entry to produce said product is simply too great for new competition to enter? What happens if they decide to fix their prices artificially high? This is what ultimately happens in Capitalism. This is why we need regulation and oversight.

Communism doesn't work if people aren't motivated to work. Capitalism won't work if people become too greedy and ignore common sense. What we're seeing today (federalizing of banks, insurance companies, etc) is the result of excess greed toppling Capitalism. If the government doesn't have a massive intervention, the entire system will fail (not that I have an issue with that). Ultimately, our style of Capitalism is doomed to failure unless people start realizing that greed cannot be their only motivator for their actions (this applies to executives, homeowners, politicians, etc).

It's like one of my favorite lines from Wall St. To paraphrase: "Don't forget that the money we create and invest here creates jobs and science." Maybe people need to start thinking along these lines again instead of treating their homes, assets, and equities as their next big fat paycheck.

 

[jackace]

Originally posted by: BigDH01

Originally posted by: LegendKiller
Without finance you cannot have capitalism, it's as simple as that. Considering the foundation of "capitalism" is CAPITAL, which is invested money, it's pretty fricking easy to understand they are linked.

It's bullshit that it breaks down to freedom vs socialism. Socialism is a maligned term intended to scare people, but when it comes down to it, nobody is an island. The effects of capitalism are often socialist, since the will affect everybody in some form or another. Distribution of cost, caused by acts of an individual or company, are widespread and often. One way or another, whether through intervention to keep the economy going, or letting it fail and distribute the cost, it will happen.

I do agree it needs to be regulated, just put back what we had before and augment it with additional constraints around derivatives.

Pretty much agree with this. Socialism is a term used to frighten people into believing that markets shouldn't be regulated.

"You want to regulate the markets? You socialist."

However, the bailout wasn't a socialist move. It didn't promote egalitarianism and will ultimately benefit those with a great deal to lose more than a person will little to lose. The only way to prevent this from happening again is to put in place strict regulation based on lessons learned here. I believe this means more stringent capital/leverage requirements as well as looking at the possibilities that some of our large corporations are simply too large. When they can literally hold the world hostage, they yield too much power.

I think Capitalism is a grand idea, especially when this country was founded and most business was local. What do you do now when many businesses have revenues and expenditures greater than many countries' GDPs? And while game theory might teach us that in duopoly models, prices quickly fall to the cost of production, this is not necessarily the case in the real world. In the real world, corporations form cartels. What do you do when one or two corporations control a single product and the cost of entry to produce said product is simply too great for new competition to enter? What happens if they decide to fix their prices artificially high? This is what ultimately happens in Capitalism. This is why we need regulation and oversight.

Communism doesn't work if people aren't motivated to work. Capitalism won't work if people become too greedy and ignore common sense. What we're seeing today (federalizing of banks, insurance companies, etc) is the result of excess greed toppling Capitalism. If the government doesn't have a massive intervention, the entire system will fail (not that I have an issue with that). Ultimately, our style of Capitalism is doomed to failure unless people start realizing that greed cannot be their only motivator for their actions (this applies to executives, homeowners, politicians, etc).

It's like one of my favorite lines from Wall St. To paraphrase: "Don't forget that the money we create and invest here creates jobs and science." Maybe people need to start thinking along these lines again instead of treating their homes, assets, and equities as their next big fat paycheck.

I agree with everything you said. No one is saying companies should not be able to make a profit, but the greed and excess on Wall St, and other large corporations have put our entire system at risk. There needs to be much more regulation to keep greed from taking over.

 

[LegendKiller]

Originally posted by: jackace

Originally posted by: LegendKiller
Without finance you cannot have capitalism, it's as simple as that. Considering the foundation of "capitalism" is CAPITAL, which is invested money, it's pretty fricking easy to understand they are linked.

It's bullshit that it breaks down to freedom vs socialism. Socialism is a maligned term intended to scare people, but when it comes down to it, nobody is an island. The effects of capitalism are often socialist, since the will affect everybody in some form or another. Distribution of cost, caused by acts of an individual or company, are widespread and often. One way or another, whether through intervention to keep the economy going, or letting it fail and distribute the cost, it will happen.

I do agree it needs to be regulated, just put back what we had before and augment it with additional constraints around derivatives.

The problem I see as an outsider is the major players in the industry know they are too big to fail and they have better economies of scale and leverage then any other industry in our entire economy. They have us "by the balls" to put it in layman terms. They control most of the capital in our system. Our only options are to allow them to fail when they screw up, or we regulate everything they do including their profits. These banks and large financial institutions have a monopoly on the capital markets. Their is no longer a realistic way to compete with these companies. They either need to be broken up into smaller entities or they need to be heavily regulated (including prices they can charge, types of products they can offer, profits, etc) just like utility companies who also have a government induced monopoly.

The problem is that there was no major oversight for a lot of these guys.

In order for me to get a deal done I have to get it approved by a credit committee. The guy that I have to get to, convince, and receive approval from, BEFORE credit committee is a fricking hard ass. He is exacting, detailed, and extremely conservative. You have to PROVE you should get the deal and the bank is protected.

On top of that, it then goes to 3 international credit committees, where I have to do the same damn thing. It's fricking hard, but then again, it forces us to get the best deal possible, protect the bank as much as possible, and ensure we make money while doing it.

The big problem was, rating agencies weren't as exacting, they compromised their standards. People bought on compromised rating standards. On top of that banks were allowed to take on too much compromised investments. Then, their reporting was compromised through inadequate standards, whether reduced, or non-existing in the evolution of finance.

Overall, it was a huge fuckup in oversight that will need to be fixed.

------------------


What's funny is that the rescue plan was to STOP the socialism of the losses, since *ALL* people would have borne the cost of the problem, internationally, so 6bn people would have SOCIALLY borne the cost of our mistakes.

So, in saying that they don't like socialism, they are advocating socialism.

 

[Jaskalas]

How do you invest in a healthy company when its competition has 100s of billions from the government? Do you follow the healthy money, or do you follow the government bailout money?

With Paulson playing god over which companies are consumed or fail, there cannot be any stability or confidence in the market.

 

[LegendKiller]

Originally posted by: Jaskalas
How do you invest in a healthy company when its competition has 100s of billions from the government? Do you follow the healthy money, or do you follow the government bailout money?

With Paulson playing god over which companies are consumed or fail, there cannot be any stability or confidence in the market.

I agree that it is inconsistant. LEH should never have been allowed to fail.

 

[Jaskalas]

When you stop people from failing, you do it at the expense of others - you stop success from standing out above the failure and I suspect that factor by itself will destroy the economy.

 

[LegendKiller]

Originally posted by: Jaskalas
When you stop people from failing, you do it at the expense of others - you stop success from standing out above the failure and I suspect that factor by itself will destroy the economy.

And, when you allow them to fail, you do it at the expense of others.

Either way, there is a huge cost borne by society.

Is allowing "new" companies to come forward, at the cost of economic viability, worth it?

So far, not having a reasurring and consistant policy has cost taxpayers $2TR in wealth. Soon it'll be costing us GDP.

Socialized costs, all of it. For what? To say you have a darwinian financial system?

 

[racolvin]

I would say that they must be allowed to fail but solid regulation would contain the failure. They have to have some operating wiggle room to be able to maneuver but the regulations should keep them within boundaries that would make their failure a mostly (can't do it completely) isolated event.

First and foremost this idea of "derivatives", "collateralized debt obligations", "credit default swaps" and other totally unregulated investment vehicles needs to be destroyed. If they want to buy and sell mortgages, feel free. But creating out of thin air a tradeable security that can have such a massive impact yet be done on Post-It note for documentation is a recipe for failure. Wall Street traders were allowed to get WAY too creative in how to move other peoples money around and leverage it to such extremes that the crash was inevitable.

 

[jackace]

Originally posted by: LegendKiller

Originally posted by: Jaskalas
When you stop people from failing, you do it at the expense of others - you stop success from standing out above the failure and I suspect that factor by itself will destroy the economy.

And, when you allow them to fail, you do it at the expense of others.

Either way, there is a huge cost borne by society.

Is allowing "new" companies to come forward, at the cost of economic viability, worth it?

So far, not having a reasurring and consistant policy has cost taxpayers $2TR in wealth. Soon it'll be costing us GDP.

Socialized costs, all of it. For what? To say you have a darwinian financial system?

I understand what you are saying and how we all feel the pain and suffer if these companies fail, but honestly we should never have been in a situation where these companies failing brings down the entire system.

It's either that or the system needs to be similar to the one we have with utility companies, where everything is out in plain view, products offered are regulated, prices charge are regulated, profits are regulated, etc. To do anything else erodes confidence in the entire system. People and companies not receiving the government bail-outs are left to fend for themselves and the companies getting government help can still do w/e they want and charge w/e prices they want. The barriers to entry for new competition is so high at this point (even more so with the bail-out money) that new competition is just not realistic.

 

[LegendKiller]

Originally posted by: racolvin
I would say that they must be allowed to fail but solid regulation would contain the failure. They have to have some operating wiggle room to be able to maneuver but the regulations should keep them within boundaries that would make their failure a mostly (can't do it completely) isolated event.

First and foremost this idea of "derivatives", "collateralized debt obligations", "credit default swaps" and other totally unregulated investment vehicles needs to be destroyed. If they want to buy and sell mortgages, feel free. But creating out of thin air a tradeable security that can have such a massive impact yet be done on Post-It note for documentation is a recipe for failure. Wall Street traders were allowed to get WAY too creative in how to move other peoples money around and leverage it to such extremes that the crash was inevitable.

There is nothing wrong with CDOs or anything else. Ever read an indenture for a securitized pool of mortgages? It's usually about a 200 page document.

 

[StageLeft]

I understand what you are saying and how we all feel the pain and suffer if these companies fail, but honestly we should never have been in a situation where these companies failing brings down the entire system.

IMO if something is so big that its failure puts the country in dire jeopardy, it should be nationalized. Otherwise, you plainly have the oft-paroted "privatize gains/socialize losses".

 

[racolvin]

Originally posted by: LegendKiller

There is nothing wrong with CDOs or anything else. Ever read an indenture for a securitized pool of mortgages? It's usually about a 200 page document.

Nope, I'm not a lawyer so I would never have occasion to do so. That doesn't change my feeling on it however. If it isn't set up as an "approved" and regulated financial instrument then it shouldn't exist. Feel free to call me reactionary or whatever but from the news and radio reports (I'm an NPR guy if that matters) I get these instruments were created out of whole cloth by the investment banking community with no oversight other than their own. Credit Default Swaps are done on a phone call or a napkin and the organizations that take these "bets" aren't regulated at all - no capital reserve requirements, nothing - for what is essentially an insurance policy.

I'm sorry but Wall Street should not equal the Wild Wild West when it comes money that doesn't belong to them (my 401k or my tax dollars, etc). It's precisely that Wild West attitude (partially enabled by the lack of regulation by the government) on the part of Wall Street that allowed them to turn a$70B annoyance into a $700B+ collapse.

 

[brandonbull]

Originally posted by: LegendKiller

Originally posted by: Jaskalas
When you stop people from failing, you do it at the expense of others - you stop success from standing out above the failure and I suspect that factor by itself will destroy the economy.

And, when you allow them to fail, you do it at the expense of others.

Either way, there is a huge cost borne by society.

Is allowing "new" companies to come forward, at the cost of economic viability, worth it?

So far, not having a reasurring and consistant policy has cost taxpayers $2TR in wealth. Soon it'll be costing us GDP.

Socialized costs, all of it. For what? To say you have a darwinian financial system?

How much of that $2TR in wealth was actual cash losses?

 

[LegendKiller]

Originally posted by: racolvin

Originally posted by: LegendKiller

There is nothing wrong with CDOs or anything else. Ever read an indenture for a securitized pool of mortgages? It's usually about a 200 page document.

Nope, I'm not a lawyer so I would never have occasion to do so. That doesn't change my feeling on it however. If it isn't set up as an "approved" and regulated financial instrument then it shouldn't exist. Feel free to call me reactionary or whatever but from the news and radio reports (I'm an NPR guy if that matters) I get these instruments were created out of whole cloth by the investment banking community with no oversight other than their own. Credit Default Swaps are done on a phone call or a napkin and the organizations that take these "bets" aren't regulated at all - no capital reserve requirements, nothing - for what is essentially an insurance policy.

I'm sorry but Wall Street should not equal the Wild Wild West when it comes money that doesn't belong to them (my 401k or my tax dollars, etc). It's precisely that Wild West attitude (partially enabled by the lack of regulation by the government) on the part of Wall Street that allowed them to turn a$70B annoyance into a $700B+ collapse.

I am not a lawyer either, you don't have to be to understand the docs. RMBS are regulated instruments. Now CDS, on the other hand, aren't to a large extent. However, there is the ISDA, which has oversight over them, and they are relatively standardized.

RMBS or securitization in general, do have capital requirements, I know that very well. CDS, AFAIK, do also.

I agree that this has been blown out of proportion by greed. I work on WS and I hate how it's turned out. I've railed against it since I got into this area of work (having only been on WS for about 2 years), 6 years ago.

 

[LegendKiller]

Originally posted by: brandonbull

Originally posted by: LegendKiller

Originally posted by: Jaskalas
When you stop people from failing, you do it at the expense of others - you stop success from standing out above the failure and I suspect that factor by itself will destroy the economy.

And, when you allow them to fail, you do it at the expense of others.

Either way, there is a huge cost borne by society.

Is allowing "new" companies to come forward, at the cost of economic viability, worth it?

So far, not having a reasurring and consistant policy has cost taxpayers $2TR in wealth. Soon it'll be costing us GDP.

Socialized costs, all of it. For what? To say you have a darwinian financial system?

How much of that $2TR in wealth was actual cash losses?

How much would have been lost if it were allowed to fail? Cash or not, it is a loss that could become cash regardless.

 

[ElFenix]

would that 2 trillion have ever been around had gramm and rubin not repealed part of glass-steagull? (the euros have had similar banking laws for decades and US banks were losing out to the less-regulated competition)


further, JP Morgan and Chase Manhattan never could have merged under the old laws, and it's hard to say that any bank has done a better job navigating this storm. they also could not have taken over bear stearns, BoA couldn't have bought Merrill, etc.


there were a few banks who got addicted to the income of high risk investments, or who didn't properly evaluate the risk, or ignored it, which was compounded by some fraud on the part of mortgage brokers.


anyway, you can't outlaw bad management. and you can't prospectively determine what management will be bad.

 

[rchiu]

People really focus on the wrong thing. Everyone is talking about if this bailout is morally wrong. Who the F' cares? It's about cost/benefit, and if the bailout will make us better off. If we had any alternative to all the big banks and the services they provide to us, of course we should just let them go bankrupt for their own mistakes. But we don't have alternatives and the service they provide to every aspect of our economy is critical. Without a bailout and the banks fail, we all suffer.

If this were big 3 US automakers. We got plenty of other automakers lined up to take their place in the market, so there is absolutely no reason to bail them out.

 

[BigDH01]

Originally posted by: rchiu
People really focus on the wrong thing. Everyone is talking about if this bailout is morally wrong. Who the F' cares? It's about cost/benefit, and if the bailout will make us better off. If we had any alternative to all the big banks and the services they provide to us, of course we should just let them go bankrupt for their own mistakes. But we don't have alternatives and the service they provide to every aspect of our economy is critical. Without a bailout and the banks fail, we all suffer.

If this were big 3 US automakers. We got plenty of other automakers lined up to take their place in the market, so there is absolutely no reason to bail them out.

Perfect example of the attitude that is destroying our country. Who cares if it is morally wrong if we profit, right? Who cares what precedent it sets and who gets hurt, I want mine.

 

[rchiu]

Originally posted by: BigDH01

Originally posted by: rchiu
People really focus on the wrong thing. Everyone is talking about if this bailout is morally wrong. Who the F' cares? It's about cost/benefit, and if the bailout will make us better off. If we had any alternative to all the big banks and the services they provide to us, of course we should just let them go bankrupt for their own mistakes. But we don't have alternatives and the service they provide to every aspect of our economy is critical. Without a bailout and the banks fail, we all suffer.

If this were big 3 US automakers. We got plenty of other automakers lined up to take their place in the market, so there is absolutely no reason to bail them out.

Perfect example of the attitude that is destroying our country. Who cares if it is morally wrong if we profit, right? Who cares what precedent it sets and who gets hurt, I want mine.

well if you want to use your own pocket money, your own job and your income to teach people a lesson, well be my guest. Unfortunately we are all in this mess, and it's my pocket money, my job and my income on the line too and I want actions that will take care of me, my family and my kids.

 

[JS80]

Originally posted by: LegendKiller

Originally posted by: Jaskalas
How do you invest in a healthy company when its competition has 100s of billions from the government? Do you follow the healthy money, or do you follow the government bailout money?

With Paulson playing god over which companies are consumed or fail, there cannot be any stability or confidence in the market.

I agree that it is inconsistant. LEH should never have been allowed to fail.

I think they were sending a message to wall st that, yes we will allow you to fail so don't think a bailout will save you, vs "hey look govt will save us anyway." My guess is it was to deter moral hazard. But I don't think it was very effective, nor was it a smart thing to do.

I think threatening jail time and fines equal to compensation received for allowing your firm to go bk would suffice that.

 

[ElFenix]

Originally posted by: JS80
I think threatening jail time and fines equal to compensation received for allowing your firm to go bk would suffice that.

then no one would ever take a worthwhile chance. you'd still have bankruptcies, too.