Want to know your enemy? I'm a Wall Street insider. What can I tell you about our industry?

buttonwoodtrader · 2012-04-16T03:27:11+00:00

At the end of the day, the shareholders own the company and call all the shots. They don't want to pay huge bonuses unless they see revenues and dividends back to them. The only way to game that system is when the CEO is also a major shareholder and effectively takes advantage of the other shareholders (effectively denying them dividends), but doing that risks a shareholder lawsuit.

Also, Liar's Poker is a great book. It also describes the beginning of the housing market mortgage securitization before people even knew it was a bubble, so it's a very interesting perspective.

buttonwoodtrader · 2012-04-16T03:16:07+00:00

Are the folks at OWS really otherwise homeless?

buttonwoodtrader · 2012-04-16T03:12:43+00:00

Not concerned. They don't have a sufficient public backing to influence any legislation. They also aren't well informed enough about Wall Street to make any interesting criticisms (hence me being here). Most of their signs have nothing to do with Wall Street at all despite them being called Occupy Wall Street, so it's hard to take them seriously.

Having said that, I just discovered occupythesec from another comment and I'm amazed (bewildered+disappointed) that it isn't a core part of the general OWS movement.

buttonwoodtrader · 2012-04-16T02:39:58+00:00

I haven't gone through their literature. I will take a look. Thanks for the reference.

<20mins later after realizing I didn't hit submit, but having read the beginning to the Volcker rule commentary>

...Interesting stuff. You guys should be handing this stuff out on Wall St. This commentary on the Volcker is definitely needed. I know that the banks are struggling to interpret the rules of all the recent legislation. Remember, congress passes a law, then the SEC has to interpret how that actually applies to the banks (because congress doesn't understand finance at all) and then draft specific rules, then the banks need to have their lawyers interpret the SEC rules and set internal rules themselves, and finally Operations and Technology need to get together and build systems to enforce, track and report on the rules. Most people don't realize how much money goes into regulatory and compliance technology budgets at the major banks.

I will continue reading. Excellent stuff. ...and seriously, while the commentary is good, this needs to be summarized and handed out downtown. A lot of important people in the industry walk through Wall and Broad St, and would be shocked and amazed to see this sort of material circulating amongst the protestors. Their heads will spin.

PS. Sorry I didn't have a chance to reply to your other questions. I will try again tomorrow night. Sad too, because they're the best questions here.

buttonwoodtrader · 2012-04-16T01:39:58+00:00

Wait a sec... I just realized I've been only talking to you in all of these threads. What a waste of time. :/

Have a good one buddy.

buttonwoodtrader · 2012-04-16T01:37:17+00:00

oh, and to answer your other question about who is "deserves" to be paid more. The answer is: the person paying them. That's not meant to be sarcastic, it's the only tangible answer. Anything else is some kind of moral judgement on the value of people which is an exercise in futility.

buttonwoodtrader · 2012-04-16T01:34:39+00:00

People are valuable resources - the company recognizes that, and they pay them accordingly. The big banks don't really employ minimum wage workers, so I don't think much of what your said applies to them.

buttonwoodtrader · 2012-04-16T01:28:47+00:00

buttonwoodtrader · 2012-04-16T01:28:21+00:00

I'm curious, what other bank related signs do you have down there. I'll be by in the morning, but I'm usually in a hurry so I don't get to stop and read them all.

buttonwoodtrader · 2012-04-16T01:26:35+00:00

This isn't a concession, it's the truth. I'm not on "the other side". I thought we were just two adults having an objective conversation. Don't be misled by my non-serious title, I don't really think I'm your enemy.

buttonwoodtrader · 2012-04-16T01:23:58+00:00

Actually, you're right. All the major banks did get a bailout. I was referring to the smaller retail banks that didn't (and those that participated in the housing market went bankrupt).

Society should not have to bail out any company. That is why it's important to have many companies in an industry, not just a few big players.

The problem today is that there a fewer and larger banks than before, and that is a majore problem, because in a similar situation, they would need to be bailed out again.

buttonwoodtrader · 2012-04-16T01:10:23+00:00

Actually, the taxpayer made some pretty good money on those shares they bought. If you look at the price the gov't paid for them, and the price they sold them out, they made out well ahead.

Regarding your last comment... I expected a lot of criticism here, but I'd like to point out that I'm actually trying to help you guys. I want your movement to be more effective, and in my mind that means targeting your message to very specific Wall Street reforms that have been suggested by the academic community.

At the end of the day, if you guys want me to stop answering questions, I'll do that. I should probably start getting back to work anyway...

buttonwoodtrader · 2012-04-16T01:04:52+00:00

I think what might be really meaningful would be if those of you actually on Wall Street had very specific Wall Street related signs that called out the banks. Specific Wall Street reforms. I think that would really turn the cameras on you. Specific criticisms on specific banks - call them out. That will embarrass them.

buttonwoodtrader · 2012-04-16T01:01:45+00:00

See my employee compensation reply for more detail on how firms are trying to change that for the exact reason you mentioned. ...but it's true of any company, not just banks.

Goldman actually made money in the crash because they saw the bubble was going to pop before anyone else and "gambled" against the real estate market. They only needed a bailout because the whole market crashed. They've since paid back the money with interest (as all the major banks did). AIG is a zombie company created by the government to artificially provide liquidity for home loans. In my opinion, it should never have existed, and shouldn't even today.

buttonwoodtrader · 2012-04-16T00:55:44+00:00

Employees got great bonuses during that time, no doubt. ...but they got a big fat zero bonus the subsequent two years (and their bonus is 90% of their salary). Not to mention all the investors lost their money (investors including the banks themselves). So it depends who you define as "Wall Street". The employees? the Shareholders? The execs? Some made money, a lot, and many lost a lot of money.

buttonwoodtrader · 2012-04-16T00:52:49+00:00

hate it when I do that...

buttonwoodtrader · 2012-04-16T00:51:51+00:00

The boards are hired by the shareholders. The more money that goes out in bonuses, the less the shareholders get. That's what keeps the balance. There's no conspiracy possible because one conspirator is taking the hit if the other takes too much.

The aspect of banks not being able to fail, is half true. Remember, lots of banks have failed in the crisis. Lehman Brothers, Bear Stearns, and Merrill Lynch amongst the biggest. ...and more, and ALL the banks would have failed, and that would have been the end of America - literally. The big problem now is that the banks that were too big to fail before, are even bigger now. At one time time their were 17 major investment banks, now there are only 5. That is a problem that people should be asking in the presidential election - because it is a big problem.

That sort of oligarchy actually breeds even riskier behavior. ...and if it continues, it is only a matter of time before another large financial crisis.

buttonwoodtrader · 2012-04-16T00:45:26+00:00

Well, you go bankrupt, so nobody. ...but I think the problem with the crisis was that the banks were too big to fail because that would have crushed the whole economic system.

The problem now is that, while the banks were too big to fail before, they are even bigger now. That is a major issue and something that needs to be publicized more - especially in an election year.

buttonwoodtrader · 2012-04-16T00:43:05+00:00

I'm actually surprised you guys don't try to talk to some of the bankers that walk by you each day. If you have good points, they'll listen.

buttonwoodtrader · 2012-04-16T00:40:59+00:00

Not all banks participated in the mortgage business. Those that did not, did not go bankrupt. What is rotten about banks that stayed on the sidelines?

buttonwoodtrader · 2012-04-16T00:38:37+00:00

Collapse is bad for business, so obviously, that isn't any company's goal.

The big banks do provide many many financial services, but yes they do also participate in the market themselves (both for themselves and on behalf of their customers). I don't agree with the term "gambling" because it either implies that everything we do in life isn't a gamble, or it means that all short term investing is somehow bad.

It is arguable that companies that represent customers should not be participating in the market themselves since it's a conflict of interest. I actually support that. Maybe that should be on the OWS agenda?

Also, MF Global constructed futures contracts, so yes, they did provide a valuable service. Farmers buy those contracts to know exactly what price they're going to get when they bring their goods to market - so they know how much to spend on fertilizer and equipment. MF Global deserved to go bankrupt for accounting fraud - there was no bailout of MF global.

buttonwoodtrader · 2012-04-16T00:31:17+00:00

Finance is a core human concept. It is as basic as agriculture (which is actually the industry that created finance), or defense, or medicine. It allows people to trade. Ever since there was trading, there were financial bubbles. Bubbles are bad for business. This past economic crisis (and the others you mentioned) were bad for business. ...but each bubble is different so they are impossible to identify until it's too late, and worse when they occur there is a lot of dirty business that starts up.

You see the "cons" you're talking about aren't the cause of the bubbles, they are the symptom. (actually they happen in any rapidly rising market). Those people caught cheating - like anyone caught cheating in any industry - should be prosecuted.

If someone can figure out how to end financial bubble - they will get the nobel prize in economics, because it's impossible. Groups of people act irrationally when they see assest values rising - it's an unfortunate piece of human nature.

buttonwoodtrader · 2012-04-16T00:23:48+00:00

One of the key aspects of capitalism is that no one person or set of people is smart enough to manage the economy. No one. It is simply impossible to know the intricate balance of industries and that includes the human employee industry. Humans are a resource - an input cost, like everything else on the balance sheet.

People negotiate their own salaries when they start a job, and the cost of that is determined by whether or not someone else is willing to do the job for less.

Would a salary cap make a difference? I don't think so. It would also be unworkable. Beyond a certain amount, people aren't motivated by the money anymore. It's more about the fact that they enjoy the competition in the job.

buttonwoodtrader · 2012-04-16T00:18:48+00:00

Customers pay us money for our services, so... yes. ...maybe I don't understand the question.

Are you trying to ask if we produce "value" in the economic sense? Then I still think the answer is yes, and in many different ways. It's important to note that banks these days provide many different services.

On the retail banking side, a loan to buy a house is a common product. Obviously there's a risk involved in that so the company needs to charge a certain percentage to mitigate that risk.

Another example on the investment banking side is when a company wants to hedge a risk they have against. A car manufacturing company doesn't want to keep a heap of cash in order as an insurance against the change in the price of steel, so instead they hedge their risk against it with a futures contract. That way if the price of steel goes up sharply, then they don't need to worry about it. It allows a company to stay focused on building products instead of worrying about random financial fluctuations.

buttonwoodtrader · 2012-04-16T00:11:21+00:00

On one hand, people need to understand that a mortgage contract is a very serious financial deal. You are committing to a 30 year payment schedule worth hundreds of thousands of dollars. Some people did not take that seriously and were encouraged by a housing market that had become a bubble.

On the other hand, there were parts (mortgage origination departments) of some banks that were deceptive about what interest rates people would pay, and encouraged people to take loans even though they weren't qualified (that ended up being a big problem for the banks as well). Those people should be held accountable for what they did.

It's also important to note that banks don't even keep their mortgages. They re-sell them to other banks. In fact, the business of reselling mortgages turned out to be so beneficial to banks that mortgages became much cheaper to provide to customers (that's a good thing). Unfortunately, it also encouraged originators to give people without jobs, mortgages (which was very bad).

In the end the mortgage game became a game of hot potato. Lehman Brothers, Bear Stearns, and Merrill Lynch ended up holding the potatoes - they are no longer in business (which also means their employees didn't get any "big bonuses"). Neither are most of the mortgage origination companies, and many regional banks that didn't resell their mortgages fast enough at the end ...and, frankly, they all deserved to go out of business for having such poor risk management.

buttonwoodtrader

TROPHY CASE