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I don't think the problem is with the financial industry. The issue is most definitely with the financial/political system. We haven't run true capitalism in th

by alpine 14y ago

I don't think the problem is with the financial industry. The issue is most definitely with the financial/political system. We haven't run true capitalism in the Western nations for decades. It has been a hodge-podge of crony capitalism mixed with token dribs of 'social democracy' championed by wealthy political elites that no more understand the life of eg a bus driver than a tea leaf understands the history of the East India Company. Take the Libor scandal. Would this have happened if the banks had not been repeatedly bailed out - 'too big to fail' - giving traders the impression that they worked in a politically-sanctioned realm where the normal rules of capital did not apply? There is no danger of your company going bankrupt through loss of reputation or massive, penal fines for criminal behaviour if you have an unconditional sovereign back stop.

bedris 14y ago
Exactly. Take entrepreneurship: the founder is rewarded financially if he/she succeeds but is punished financially if he/she fails. The banks, on the other hand, were rewarded financially when they made money for their clients (in the form of performance bonuses), but were bailed out when they failed to carry out their job successfully. This asymmetry is antithetical to capitalism. I like how Nassim Taleb put it: "the incentive system put in place by financial companies has produced the worst possible economic system mankind can imagine: capitalism for the profits and socialism for the losses."
- confluence 14y ago
  One should also beware the insurance industry - it has essentially the same incentive structure. Sell cheap insurance while times are good - take profit/options/stocks and leave. When a catastrophe happens - go bankrupt and allow the government/people to socialize the losses for improper risk management. They also take advantage of socialized protection such as national defence, fire-fighters, police officers and ambulance drivers. They don't have to pay for them in proportion to the reward they receive for their services (society pays for them). Hence their risk is mitigated by society whilst privately profiting from our shared risk. Insurance is a great thing (no doubt about it!) - but these moral hazards exist in many systems around the world and they must be addressed. This is also why insurance is so highly regulated - the ability for financial impropriety and abuse is just too damn high!
intended 14y ago
From the case data - the scam was going on from 2005 - at least. Thats way before Too Big to Fail, and even before the domino of the Mortgage Market fell. What would have happened if they weren't bailed out can be answered - They would act the same way they were already acting. The problem is with the financial industry. I promise you. Heck, its not incentives, they just don't give a shit. Really. At one point someone was designing CDOs to explode, so that they could take the insurance money. Except that once financial jargon is applied to this, it stops being fraud and its starts being "caveat emptor". EdIT: The creator of above trade would also be held in high esteem by his peers for its elegance. After reading what keeps coming out the industry at this moment, going to the forums, working with people in it, I have no doubt that they aren't evil by individuals, but irredeemable in aggregate. Here - Information is power and what not: Annotated guide by the NYT covering the Order Instituting Proceedings. One of the first few links in the Parent article http://www.nytimes.com/interactive/2012/07/10/business/dealbook/20120710-bank-scandal-documents.html http://www.nytimes.com/interactive/2012/07/10/business/dealb...
- yummyfajitas 14y ago
  2005...Thats way before Too Big to Fail, http://en.wikipedia.org/wiki/Long-Term_Capital_Management#1998_bailout http://en.wikipedia.org/wiki/Long-Term_Capital_Management#19...

by alpine 14y ago

bedris 14y ago

Exactly. Take entrepreneurship: the founder is rewarded financially if he/she succeeds but is punished financially if he/she fails. The banks, on the other hand, were rewarded financially when they made money for their clients (in the form of performance bonuses), but were bailed out when they failed to carry out their job successfully. This asymmetry is antithetical to capitalism. I like how Nassim Taleb put it: "the incentive system put in place by financial companies has produced the worst possible economic system mankind can imagine: capitalism for the profits and socialism for the losses."

confluence 14y ago
One should also beware the insurance industry - it has essentially the same incentive structure. Sell cheap insurance while times are good - take profit/options/stocks and leave. When a catastrophe happens - go bankrupt and allow the government/people to socialize the losses for improper risk management. They also take advantage of socialized protection such as national defence, fire-fighters, police officers and ambulance drivers. They don't have to pay for them in proportion to the reward they receive for their services (society pays for them). Hence their risk is mitigated by society whilst privately profiting from our shared risk. Insurance is a great thing (no doubt about it!) - but these moral hazards exist in many systems around the world and they must be addressed. This is also why insurance is so highly regulated - the ability for financial impropriety and abuse is just too damn high!

intended 14y ago

From the case data - the scam was going on from 2005 - at least. Thats way before Too Big to Fail, and even before the domino of the Mortgage Market fell. What would have happened if they weren't bailed out can be answered - They would act the same way they were already acting. The problem is with the financial industry. I promise you. Heck, its not incentives, they just don't give a shit. Really. At one point someone was designing CDOs to explode, so that they could take the insurance money. Except that once financial jargon is applied to this, it stops being fraud and its starts being "caveat emptor". EdIT: The creator of above trade would also be held in high esteem by his peers for its elegance. After reading what keeps coming out the industry at this moment, going to the forums, working with people in it, I have no doubt that they aren't evil by individuals, but irredeemable in aggregate. Here - Information is power and what not: Annotated guide by the NYT covering the Order Instituting Proceedings. One of the first few links in the Parent article http://www.nytimes.com/interactive/2012/07/10/business/dealbook/20120710-bank-scandal-documents.html http://www.nytimes.com/interactive/2012/07/10/business/dealb...

yummyfajitas 14y ago
2005...Thats way before Too Big to Fail, http://en.wikipedia.org/wiki/Long-Term_Capital_Management#1998_bailout http://en.wikipedia.org/wiki/Long-Term_Capital_Management#19...