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This is one of those questions where a rebuttal and an explanation would be extremely long, and would also have to work against your biases/beliefs. I hope some

This is one of those questions where a rebuttal and an explanation would be extremely long, and would also have to work against your biases/beliefs. I hope someone more eloquent than me comes along. In short it's a complicated matter, with tough constraints. For one, yes banks do concentrate wealth a lot more than Facebook and google. HFT/prop desks/Cdo desks and the firms PE and IB arms are extremely well paid. They concentrate wealth very effectively. They are doing something wrong, and from the emails which have come out its clear that the extent of it is literally unbelievable. As in the wrongdoing is so obvious, that people can't believe it's happening and move on. I cant offer you too many links, because I don't keep a list of all the evidence the banks churn out, but the recent libor trader emails are a great start. You can follow that up by reading about the magnetar trade, or abacus - where Goldman Sachs sold their customers a CDO all the while shorting it because they knew it sucked. Edit: After that the emails where they forged ownership documents of mortgages would be illuminating. The mechanisms are failing us, and the financial industry is extremely good at dancing on the edge of the words, but completely outside of the spirit of regulation. Further regulation has been reduced, most notably glass steagal in 1999. We are actually seeing the crisis because of a proliferation of financial institutions and instruments caused directly by deregulation. Which is exactly what you are asking for. (edit: this also brings us to the edge of what we can discuss in general terms - you could mean deregulating so that we get a 100 bank of America's) At the same time the regulators have been understaffed and weakened, so malicious actions are easier to get away with. On top of all this, there is a chasm of understanding between a lay person and the rituals of wall street. It was news to me that if the sec says its going to take a bank to court, it means the banks usually will settle. The sec has few resources, so they choose cases where they know they can make an impact and not waste effort/respirces. when they do tell someone they are in their cross hairs, it's enough for people to realize "ok, we better dial it down". If they say they will take you to court, it translates as "the sec knows they have evidence against you, likely sufficient to get a judgement" To this most banks immediately plea bargain so that they pay a fine, take measures to correct it, and importantly - don't have to publicly admit to wrongdoing. Banks work very hard to make sure they don't have to say they broke the law. Only Goldman recently was arrogant enough to fight the sec and they lost. It was one of th largest fines in the sec's history, and yet it was a drop in the ocean for GS. This matters because wall street is treated and reported in the main stream press using normal language. The reality of what's going on if translated better is hair raising. As people are commenting "anyone with a Bloomberg terminal in 2006, knew that libor was being manipulated" Edit: honestly once you talk to a few traders or just keep up to date with finance news it starts becoming revolting. Many things are open secrets but are artfully reasoned away each day. Also, banks is a huge term for what they do.

svdad 14y ago
Full disclosure: I worked on a Magnetar trade; not the one that was in the press, but another deal basically identical. And I bought, sold and analyzed Abacus. All of these transactions are explicitly caveat emptor. My grandma couldn't go out and buy a piece of ABACUS 2007-ACA; sales are restricted to "qualified investors". Of course we all know that's basically meaningless, at least the assumption that "qualified investors" always understand what they're doing. I know from experience that "qualified investors" in this kind of deal mostly don't do any serious due diligence. [On Abacus, it was practically impossible anyway. There were O(1,000,000) loans underlying the deal and there is no way you'd have been able to get the loan details for even a significant fraction.] But I wonder whether we're expecting more from GS/MS/etc. than we expect from our local car dealer, and whether the remedy should be any different. That is, everyone is told to be suspicious of used car dealers, so you poke around, kick the tires, look for leaks, get a mechanic to look it over, read the repair records, etc. before you buy. If it still turns out to be a lemon, and you discover the dealer told you something explicitly false about the car, you have a legal remedy; otherwise (IANAL) I don't think you do. But you have a social/market remedy, i.e. don't buy from that dealer again and tell your friends not to buy from that dealer again. Likewise, if you find a dealer who always tells it straight and prices it fair, you go back to that dealer the next time and tell your friends about him. Why isn't that the right remedy for these CDO deals as well? Sure, if GS said something provably false about the deal, there's a fraud case. But if (as I suspect is more accurate) they just sold it for what it was (namely an extraordinarly complex and impossible-to-price derivative financial instrument, offering an attractively high risk-weighted rate of return), and the buyers didn't bother (or have the computational resources, as almost none of them did) to do their own pricing analysis, is that the fault of GS? If you buy a CDO and lose your shirt, well, don't buy CDOs again and maybe don't buy from GS if you didn't like how they sold it.
- ajtulloch 14y ago
  Well said. I'm an ex-quant, and one thing that is supremely irritating about discussions of Abacus is the inability of people to distinguish between acting as a fiduciary and acting as a market maker. When a counterparty calls GS up for a quote on the JPY/USD cross, they don't care one iota what GS's internal positioning is, or where GS thinks the JPY/USD will be in 3mths time, or any other number of things. These are sophisticated counterparties (as you pointed out) who 1) know that GS doesn't owe them a fiduciary duty, and 2) don't expect it to. It seems like theres a whole population of people out there who think that GS is playing some sort of trusted financial advisor role in OTC derivative trades, when in fact it's in a bidding war between 4 other banks to get you the lowest rate. That's the case in Abacus as well, AFAICT. If you don't want to trade thinly traded opaque credit derivatives, don't trade them. No-one is forcing you to. But if you don't understand your risks, you trade, and your position moves against you, don't blame your counterparty. Blame yourself.

svdad 14y ago

Full disclosure: I worked on a Magnetar trade; not the one that was in the press, but another deal basically identical. And I bought, sold and analyzed Abacus. All of these transactions are explicitly caveat emptor. My grandma couldn't go out and buy a piece of ABACUS 2007-ACA; sales are restricted to "qualified investors". Of course we all know that's basically meaningless, at least the assumption that "qualified investors" always understand what they're doing. I know from experience that "qualified investors" in this kind of deal mostly don't do any serious due diligence. [On Abacus, it was practically impossible anyway. There were O(1,000,000) loans underlying the deal and there is no way you'd have been able to get the loan details for even a significant fraction.] But I wonder whether we're expecting more from GS/MS/etc. than we expect from our local car dealer, and whether the remedy should be any different. That is, everyone is told to be suspicious of used car dealers, so you poke around, kick the tires, look for leaks, get a mechanic to look it over, read the repair records, etc. before you buy. If it still turns out to be a lemon, and you discover the dealer told you something explicitly false about the car, you have a legal remedy; otherwise (IANAL) I don't think you do. But you have a social/market remedy, i.e. don't buy from that dealer again and tell your friends not to buy from that dealer again. Likewise, if you find a dealer who always tells it straight and prices it fair, you go back to that dealer the next time and tell your friends about him. Why isn't that the right remedy for these CDO deals as well? Sure, if GS said something provably false about the deal, there's a fraud case. But if (as I suspect is more accurate) they just sold it for what it was (namely an extraordinarly complex and impossible-to-price derivative financial instrument, offering an attractively high risk-weighted rate of return), and the buyers didn't bother (or have the computational resources, as almost none of them did) to do their own pricing analysis, is that the fault of GS? If you buy a CDO and lose your shirt, well, don't buy CDOs again and maybe don't buy from GS if you didn't like how they sold it.

ajtulloch 14y ago
Well said. I'm an ex-quant, and one thing that is supremely irritating about discussions of Abacus is the inability of people to distinguish between acting as a fiduciary and acting as a market maker. When a counterparty calls GS up for a quote on the JPY/USD cross, they don't care one iota what GS's internal positioning is, or where GS thinks the JPY/USD will be in 3mths time, or any other number of things. These are sophisticated counterparties (as you pointed out) who 1) know that GS doesn't owe them a fiduciary duty, and 2) don't expect it to. It seems like theres a whole population of people out there who think that GS is playing some sort of trusted financial advisor role in OTC derivative trades, when in fact it's in a bidding war between 4 other banks to get you the lowest rate. That's the case in Abacus as well, AFAICT. If you don't want to trade thinly traded opaque credit derivatives, don't trade them. No-one is forcing you to. But if you don't understand your risks, you trade, and your position moves against you, don't blame your counterparty. Blame yourself.