I expect the government to allow so-called free market capitalists to fail when they fail. Lehman was emphatically NOT staffed by the best and brightest -- it collapsed.

All the other big banks should have been allowed to collapse as well, rather than be bailed out by a staggering infusion of free government money and hidden bailouts like the proppping of AIG. (And don't get on about how the money was paid back - TARP was just one portion of the bailout, the Fed discount window was hugely important as banks bellied up to borrow at a discount and then lend the money right back to the govt at higher rates by buying treasury bonds.)

If that had been allowed to happen, your use of the term "free market" might have some validity in abstract terms. In the case of Wall Street, that term is inappropriate in virtually every sense.

If you're making $1M-$10M a year, the downside to a 5% or 10% chance of your employer going bankrupt is not so large that you're going to reduce your income to prevent that. And if you are, they'll just replace you with someone who is less "risk averse."

What we should expect is for banks to protect themselves as businesses by changing compensation to account for long term risk. And if they fail to do that organically, we should acknowledge that the market is failing in a dangerous way and more regulation around compensation is needed.

If you don't let big banks fail, then nobody ever has to worry about counterparty risk, and they won't keep an eye on each other to see if one bank is taking too much risk or backing too many bets.

If I had some sort of magical power to enact this kind of reversal to where ibanks were once again partnerships, I'd do it in a heartbeat.

We quite correctly should expect governments to (have) ensured that these corporations could be allowed to collapse, indeed they (bravely) did with Lehman, just AIG was worse.

We also should expect that if you give someone 10-40 years salary each year, then that bonus really really should be well aligned with the stockholders own goals, or they will act in their own best interest (correctly).

The only thing that turned a disaster into a once in a century clusterfk was being unable to let them collapse.

So thats surely the public policy takeaway here.

I might refinance my house to a lower rate, but I would be lying if I said I "paid off" my house. I paid back one lender by borrowing from another, that's all.

But... I can't find the info I thought I had bookmarked some time ago outlining if/when this happened.

EDIT: http://online.wsj.com/article/SB1000142405297020413820457660...

"More than half of $4 billion in federal funds disbursed this year to spur small-business lending by community banks was used to repay bailout funds that the banks received under the government's Troubled Asset Relief Program.

The Small Business Lending Fund was meant to raise capital at smaller banks, which tend to lend more heavily to small businesses, in the hopes of jump-starting growth and employment. But instead of directly lending to small businesses, many of the banks used the money to rid themselves of higher-cost TARP debt and tougher restrictions."

"Lehman collapsing" might be unrelated to "individuals at Lehman succeeding". You make a big gamble and if you succeed, there is big bonus. If you lose, there are no financial penalties (at worst, you lose your job which should not be a big deal for someone who has already made millions. Like, Dick Fuld). In fact, in absence of regulations like bonus clawback or multi-year bonus vesting, folks on Wall St. seem to have behaved in a completely rational way until 2008 crash.

"moral hazard" / "agency problem"

If a public pension fund went down with it should it have gotten tax payer money? How about GE? Was the intervention in the short term commercial paper market appropriate? Incidentally this is the one intervention that I still feel was absolutely necessary.

While I can hate on the banks as much as the next person there would have been real consequences to letting them fail and I don't think that most people would have gone along with it. If JP Morgan had fallen into bankruptcy and companies (regular ones) that bank there had been unable to make payroll since there cash (and cash convertibles) were frozen there would have been chaos.

This started with small interventions like the latin american debt crisis and now that the genie is out of the bottle its not going back in.

Exactly. Wall street and investment have wonderful effects -- funneling money towards companies that can use it in amazingly productive ways. It provides an incredibly valuable service.

But the flip side is exactly this, that pension funds, ordinary investors, etc. wind up getting screwed.

I, for one, don't realy see the problem with Wall St. in itself, but rather -- who on earth is allowing the managers of pension funds to "gamble" with their money like this? Why should retirement accounts get invested in anything but government bonds and index funds? Employees get duped because they "trust" their company to take care of their pension, or "trust" their financial advisor to give them good advice.

At heart, I think it boils down to a fundamental misguided notion, prevalent in America at least, that investment is good, that you can grow your money, that you can outwit the stock market -- when the reality is, that for 99% of people, investment is just playing the lottery, and over the long run, Goldman etc. is going to win, because they're smarter than you. Just like, in the long run, the lottery always wins.

Step 1: Pension return rates get "set" during boom time highs.

Step 2: Boom times end, the pension fund is grossly under funded, and the manager needs to find ways to get excess return beyond what the typical fixed income and equity products can offer.

Step 3: Pension Managers reach for "alternative investments", hoping for higher returns that can offset lackluster market returns.

Employees shouldn't be forced to but their compensation in a lottery managed by someone else with fraudulent promises of returns.

Here (somewhere near the end) Mr. Blank says that this is what got the silicon valley rolling. When pension funds were allowed to invest, control of the valley switched from the military to the VC funds http://www.youtube.com/watch?v=ZTC_RxWN_xo

Probably another reason is that bonds and index funds do not yield enough to keep the pension funds going; people now live a longer life on average, so they need to pay more on each pension; so its all screwed up.

Everything is screwed up; now that probably that has something to do with the fact that energy prices & commodities are high; there is less energy to go round, so other creative means are found to create 'wealth'; these tricks increasingly have something to do with extracting something from pocket A and transferring it to pocket B.

If you work in the government you might want to avoid your pension being in your own government bonds because you don't want all your eggs in one basket.

If you're an immigrant who plans to retire back to your home country you might want to limit you exposure to currency risk.

It's not just about betting on being better than the market, it's about aligning your investments (pension or otherwise) with your personal situation and objectives.

It's not a zero sum game between you & Goldman. In a growing economy everyone can win by investing.

[1] http://www.isda.org/statistics/recent.html#2010mid

Also see:

http://www.nakedcapitalism.com/2013/03/worldwide-derivatives...

You might as well say that buying milk is a zero sum game, because the milk is either over or under priced. That's just wrong. Financial securities have more to them than just their price.

To put it simpler, a terminated CDS contract does not mean there is a loss of wealth equal to its notional, whereas a stock price going to zero in the equities market literally means you just lost the complete amount you invested.

Not to sound offensive, but I've heard this comparison way to many times and it just doesn't add up in terms of prices - most swaps, for instance, have their fixed leg in the single digits in relation to their notional.

[1] http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a...

[2] http://www.investopedia.com/articles/economics/09/lehman-bro...

Completely false. Wealth is not fixed. There can be two winners, which often happens.

Although, if you take the view that corporations are pillaging America and its taxpayers, then owning stock maybe just the hedge you need. If those corporations' managers aren't pillaging the corporations.

To me, the worst part (again, as an ignorant), is that the argument seems practically untestable. They say that if we prevent or regulate these complex trading instruments and schemes, then the sky will fall. But, to me, it just smells of religion.

But your talking about two different issues, the liquidity issue mainly applies to exchange traded assets while more complex instruments tend to be OTC (i.e. custom agreements).

With liquidity you can be a sophisticated buyer and still be willing to pay for it. For example look at when MtGox was lagging by 600 seconds when bitcoin was in freefall, many buyers would happily have paid a hefty fee to be able to trade out of their position instantly without having to worry about what the price would be when the transaction was finally able to get through.

Some of these people are high-net-worth individuals. I sometimes ask them why, instead of trading, they don't take that money and invest it in new research or technology or product development or services. At least then, there would be jobs created, technological progress, more money exchanging hands. But, to them, it doesn't make sense to do that; they make much higher returns, more quickly through trading.

To me, a lot of this money seems to be 'locked up' in liquidity trading, that would otherwise be doing good things for the economy and human progress. Right now, it doesn't seem like the traders have incentive to do other things with the money.

When a friend of mine 'clicks a button' and makes a few million from a trade, how is that adding equivalent 'value' to the overall economy than if he would have taken that money and invested it in a new start-up? Again, this is my total ignorance, but something doesn't seem right. To an ignorant person like me, it just seems like wealth exchanging hands, but how is clicking a button better than employing hundreds of people?

Let's talk fundamentals: if we didn't have an equity/bond market it'd be much much harder for companies to raise money for growth and investment. If we didn't have an IPO market you wouldn't have company exits - the most common forms of company exits are IPO or sale to a listed company. Without exits it wouldn't be economical for VCs to invest in startups.

All of these things are interconnected, having liquid public markets play a huge part in economic growth by both directly and indirectly financing the growth-makers.

Trading is a legitimately socially useful business, but it's winner-take-all. Yes, they provide liquidity and, in doing so, capture proportionately small amounts of money that other principals don't care about. If you need to move $25 million, are you going to notice a difference of a few hundred dollars that an arbitrageur collects (by taking the other side of a bid he judged to be 0.37 cents high? No. You want your trade to go off. Principals would lose money to the bid-ask spread no matter who's in the market; arbitrageurs narrow it by competing against each other.

So why do traders make so much money? Because they're better or more useful than software engineers? No. Because they steal it? No, not that either. Software engineers are seen by the business as cost centers, even in 90+ percent of startups and even at Google (closed allocation).

For traders, it's a different story. If Bob is a little better than Mark, Bob will get 100% of the business and Mark will get nothing. At this point, to do arbitrage you need to be thinking about microseconds. If Bob can execute in 75 mcs and Mark takes 100 mcs, then Bob is going to get all the trades. Trading shops must be meritocracies because they have no other option. If they can't hire good traders, then there's no reason to keep working.

Because trading is winner-take-all, trading houses put a lot of money back into compensation: 40 to 50 percent profit sharing (in a way that, outside of direct P&L roles, is subject to politically fucked-up performance just like everything else) is the norm. That'd be like a typical software company paying $250k-500k bonuses.

If we, as software engineers, want to make trading money (not the 5-10m outliers, but 250-1M, then we need to think about profit sharing-- http://michaelochurch.wordpress.com/2013/03/26/gervais-macle... -- instead of this startup equity that pays off in the distance future, and is subject to horrible terms). I believe that we, as a group, could be making what we're actually worth, but we'd have to convince businesses that we're as essential to their operations as traders are to trading houses and, thus far, we haven't done so.

If Bob were to be kidnapped by aliens, would society be poorer for it?

What traders do adds a lot of value to society. The difference between 75 and 100 mcs is irrelevant. Ultimately, trading is converging on a circle-jerk of machines throwing numbers at each other, but the world is better off with that circle-jerk, and really doesn't care whether it's Bob or Mark who wins.

Trading is the last commodity job.

However, traders don't make more money than computer programmers or professors because they're more important to society (that's clearly not true) but because of the employer/management filter. For traders, the organization is so sensitive to small differences in individual performance as to justify extreme compensation. Software engineers are worth just as much to the world, but employers still see them as cost centers because, while engineers actually have their employers just as much by the balls, it's not as visceral as it is with traders.

If you think of economic input/output relationships as S-shaped curves (I've dealt with this a lot in exploring convexity and concavity of labor) then trading is an area where the precision/scale parameter has gone to infinity and it looks almost like a step function.

Then something needs to change so it stops "working" that way.

The IPO (initial public offering), isn't necessarily the stocks only public offering, so the trade of stock on the market provides the firm the capacity to raise additional capital via further public offerings. (The demonstrated ability of the firm to do this may also influence its ability to raise money through other financing means.)

Liquidity isn't free, and no one is forced to buy liquidity (unless your money is managed by an incompetent/corrupt manager due layers and layers of your employer-sponsored pension contracted to a bank....)

"Caveat emptor" applies heavily in b2b transactions be they financial or otherwise. If you're buying a product then you need to spend money to hire sophisticated buyers, because if your buyers are dumber than the sales-people you're buying from they're going to be fleeced.

This is true if your buying a financial asset, a car or an enterprise software licence.

Just because Oracle sells into companies that could just as well have used postgres that doesn't mean that Oracle aren't producing anything of value, it just means they're taking advantage of the buyer being less sophisticated than they are.

Oracle doesn't sell software. They sell risk reduction. Someone to sue or blame.

Once you understand that, you see how brilliantly they've achieved product/market fit in a way many people here can only dream of.

The dev team says they can just use this "postgres" but the sales person said he'd seen this situation a lot of times before and that dev team was too inexperienced with "serious software" to know they needed to use a proper database rather than a toy one that people use when learning because it's free.

(not to pick on Oracle for any particular reason; this is common in enterprise sales at all levels)

But postgres didn't have any horizontal scaling (multi-CPU master cluster) story until last year.

The suing part is purely fictional.

If you hand-roll your own solution for (almost) free using open source components, you're the one who gets fired when it goes down.

If you buy an enterprise-level solution from Vendor XYZ, with a requisite expensive support contract, they fucked up when it goes down, and you are safe because goodness, who'd have thought an internationally renowned firm like Vendor XYZ would ever break? Besides, thanks to our expensive support contract, they're on top of it.

Microsoft, Oracle, Accenture, they all share one thing in common: their product more CYA for middle managers than anything else.

I have similar thoughts about management consulting - it's CYA for high-level execs. You rubber-stamp a risky move with a respected firm so that if the shit hits the fan the firm (and yourself) are insulated from the backlash.

http://en.wikipedia.org/wiki/Fear,_uncertainty_and_doubt

It's safety for the middle manager who can point a finger when his boss comes screaming down the hall when the servers go down.

Interesting. I've heard the exact same description for Red Hat.

I don't agree with this fully. Your statement implies that "Freely" means "with complete abandon to any sort of soundly regulated and protected system designed to prevent fraud, corruption, exploitation... " -- Also, acquiescing to the "well the system is fucked by design, why are we upset that they exploit the structure of the system" is a cop-out to the fact that their actions are wrong and need to be fixed.

To quote the magnanimous G. Costanza: "WE ARE LIVING IN A SOCIETY, HERE!!!"

That's part of the narrative I'm talking about. We tell ourselves: "It's only because of fraud, corruption, and exploitation" that all this money is flowing from main street to wall street.

The statement was that "We like the idea of letting everyone transact freely, but we are uncomfortable with the "winner take all" implication of that policy"

But this is not true. We are not uncomfortable with free transactions resulting in winning - we are uncomfortable with "free" being the state of the system whereby the winner is able to do so because there is no oversight over the WAY in which these winnings are achieved.

namely, that one side of the transaction is exploiting their position of data/information superiority for their benefit and as a result, those who are under the delusion that they have a chance of making out well in the transaction suffer the reality of being the victim of having less data/information/sophistication.

We all want "FREE" transactions - but we want them on a level playing field.

THe fact is that there is no level playing field when it comes to the pinnacle of the monetary system.

The system is DESIGNED to not be in anyone's favor but wall street.

Further, they have worked very very hard at tremendous expense to ensure that the regulatory system, bodies and laws are all skewed in their favor!

Ignorance has so badly corrupted the minds of the world that even the understanding of the term Free is lost on most.

There can be an hour long rant on how exactly unfree every one truly is due to debt-slavery.

My point is that there are a lot of things short of fraud that we consider "meritocracy" (and having superior information and superior analysis usually falls into that category), but those things systematically stack transactions in favor of the parties that can afford to buy them. Even if you have zero fraud, zero lobbying, etc, you'd still see wealth flowing to Wall Street from Main Street.

I am not saying that using or having a better position of data or information is wrong or illegal. I am saying that how they got there in the first place, and what they have done to ensure its perpetuity for them is what is illegal/wrong/exploitative and abused.

The worst criminals of the bunch are those in supposed positions of regulatory authority that are really there to protect the interests of big money.

This includes GS employees setup as Obama's economic advisory.

(Note: often people make the mistake of saying "well do you expect him not to hire/appoint people with intimate knowledge of how the financial system works?" -- No, I expect him to hire/appoint people with express knowledge of how the system works and how it is exploited and abused so that they can identify and go after criminal fraudulent activity.

When you hire/appoint those BENEFITING from the actions of the industry - it protects the criminal/exploitative activity!)

Because we force them to, through 401k's and the like.

My point is that it's not just that the big guys have better programs...they have better programs and better data and it's frequently the data that makes the difference.

There's a popular saying on Wall Street: YBGIBG. It means "you'll be gone, I'll be gone"... by the time the scam gets exposed, the folks who perpetuated will have received their bonuses and be long gone.

That's how you get Alan Greenspan, thought by some to be a sophisticated thinker, flabbergasted that the events of 2006-2008 were even possible.

" 'The investments are weak.' The fucking investments are weak? You're weak. I've been in this business fifteen years... "

Me, I'm busy with the hand over fist endeavor.

Also, I don't think most Americans care about how free from regulation the financial sector is. Most people have a feeling that Wall Street is screwing over everybody and there's nothing they can do about it.

I'm not exactly sure who you mean by "we," either. Hacker News commenters?

I'm not sure that's true. If Wall Street really had some super lobbying power Dodd-Frank and Sarbanes-Oxley wouldn't have passed in their current forms. Regulating Wall Street is a pretty easy position to take if you're a politician.

Regarding Dodd-Frank, many people, myself included, believe that that bill was watered down considerably, largely due to the pressure of Wall Street lobbyists. In fact, in the end, a number of Wall Street groups ended up supporting the legislation, largely because they were concerned that if Dodd-Frank didn't pass, then new, more strict regulations would be proposed in the future.

Wall Street contributes gobs of money to campaigns and has some of the most powerful lobbyists in Washington. Considering how unpopular they were in the recession fallout, the fact that the only major retribution was Dodd-Frank is a testament to how much influence the wield.

I think most people agree that over-regulation is a bad thing. What I take issue with is when political groups and lobbyists scream 'regulation makes us less competitive' anytime regulation is mentioned. The fact is it might increase the costs of doing business a little bit, but it also might mean that my air and water aren't horribly polluted (see Beijing air quality) or that I can count on my retirement account actually being there when I need it. I feel like one side is trying to find a good balance, while the other is being completely obstructionist. The end result is watered down regulatory policies that increase the complexity and costs of doing business, while at the same time, being completely ineffective. One major issue with this result is that this greatly benefits entrenched players, as they are already adept at navigating complex regulatory environments (which keep out new entrants) but in the end, they aren't actually affected by the regulations in any meaningful way.

Then our last (hopelessly corrupt) government decided to guarentee all of the bank liabilities when the crap hit the fan. The EU decided that one of these banks was never going to pay back the money (Anglo Irish), and so the money the government had given them went on the national debt. The markets panicked, the IMF were called in, and here we are.

Arguing that it was primarily due to low taxes is somewhat incorrect, while if the tax base had been more diverse the current deficit would have been less bad, we were still really screwed by the nationalisation of banking losses.

I usually don't call for increased salaries for government workers, but the people regulating Wall Street probably need to be making near-mid-six-figure salaries. Otherwise the ones who are good at their job will just get hired away by Wall Street.

What this shows is that Wall Street has America by the balls, and as long as they don't squeeze too tightly, there aren't going to be any restrictions on their behavior.

I've seen some analysis that says that if you back out government interventions, investment banks have basically been net zero / net negative for their equity holders since they stopped being partnerships and started going public.

>Why are we surprised that they disproportionately get the better end of every transaction?

Because normally, competition in the marketplace thins out such "easy" profit margins, and something is keeping that normal process from happening here. After all, you don't see such exploitation of the unsophisticated in, say, sale of breakfast cereal, where excessive profit margins draw in competitors.

It's because those people are expensive and that means having to charge a higher management fee.

And what do consumers tend to base investment choices on ? - management fees. High management fees mean that consumers won't pick that fund.

Consumers can't tell how sophisticated their pension fund managers are so they'll just pick a cheap upfront cost which (potentially) because of poor management will cost them a lot more in the long term.

This is also why state pensions like to jam money into alternative investments like hedge funds and venture. They're chasing yield.