Hedge Fund Blindness

By James Kwak

Hedge fund managers may be good at investing money. (Or they may just be the beneficiaries of luck, like successful stock mutual fund managers.) But that doesn’t mean they can think clearly.

Andrew Ross Sorkin comments on the letter by fund manager Daniel Loeb, a former Democratic fundraiser, criticizing the supposed anti-business policies of the Obama administration. The letter includes blather like this:

“As every student of American history knows, this country’s core founding principles included nonpunitive taxation, constitutionally guaranteed protections against persecution of the minority and an inexorable right of self-determination.”

Who, in making a list of America’s founding principles, would put “nonpunitive taxation” first? Oh, right. A hedge fund manager.

More seriously, there is this:

“Many people see the collapse of the subprime markets, along with the failure and subsequent rescue of many banks, as failures of capitalism rather than a result of a vile stew of inept management, unaccountable boards of directors and overmatched regulators not just asleep, but comatose, at the proverbial switch.”

This is just sloppy thinking. I’ve written more than most people about “inept management, unaccountable boards of directors, and overmatched regulators.” I’ve criticized the Obama administration in many more words than Daniel Loeb. But putting the blame on certain categories of people does not somehow absolve “capitalism.” Our capitalist system–which until recently we considered the best, most pure version in the world–allowed incompetent people to become executives (and to run hedge funds), allowed incompetent people to become directors and to avoid any responsibility for their actions, and allowed companies to swamp regulators with battalions of high-priced lawyers and lobbyists.

This is a basic category error. Capitalism is an economic system; managers, directors, and regulators are people. They are not mutually exclusive. If you want to say that capitalism necessarily means universally good managers, responsible directors, and effective regulators, then that’s an argument you have to make (and good luck making it).

Just because you make a lot of money doesn’t mean you know what you’re talking about. Unfortunately, in this country if you make a lot of money, a lot of people listen to you.

(Here’s the full letter. Along the way, Loeb says that the current decline in confidence and economic activity is due to the SEC’s lawsuit against Goldman.)

114 responses to “Hedge Fund Blindness

  1. So refreshing…!!! I needed to read this.

    “Just because you make a lot of money doesn’t mean you know what you’re talking about. Unfortunately, in this country if you make a lot of money, a lot of people listen to you”.

  2. Who, in making a list of America’s founding principles, would put “nonpunitive taxation” first?

    Well, it is pretty easy to make the case that the American Revolution was about nothing but taxes. Just saying.

    Our capitalist system … allowed incompetent people to become executives (and to run hedge funds), allowed incompetent people to become directors and to avoid any responsibility for their actions, and allowed companies to swamp regulators with battalions of high-priced lawyers and lobbyists.

    Allowing incompetent people to become executives and to run hedge funds is a good thing, because who the heck are you to decide who is competent before the fact? Any attempt to ensure only “competent” people get to run companies will only serve to ensure mediocrity across the board.

    Of course, a free system only works if people pay the price for their poor decisions. Regulatory capture and government bailouts are not exactly part of the “free market” as its defenders would like to construe it…

    But the solution is not to over-regulate everything. The solution is to eliminate the capture of our public institutions by our largest corporations. The only way to do that is to break them up, not to turn them into quasi-government agencies.

  3. Ah, but it has always been so. Sadly, our “founding principle” designed to limit the power of money, equal access to the public square, has taken a back seat to “nonpunitive taxation.”

  4. Mr Nemo

    The Revolution was prompted, in part, by complaints over taxation without representation, not complaints about taxation. The issue was representation.

    After the revolution, President Washington oversaw the imposition of an excise tax on whiskey that prompted disturbances in Western Pennsylvania, known in the history books as the Whiskey Rebellion. The Founding Father and first President sent troops to suppress the rebels, make them pay the tax, and assert the supremacy of the Federal Government.

    So, yes, one could make an argument that the revolution was about nothing but taxes. And one would be very wrong.

    But facts don’t matter, nor does history, I suppose, Not when it comes to the evil of taxes.

  5. Another note on “nonpunitive taxation” — why shouldn’t those who behave in ways contrary to the public good be punished? And who says the tax code is an inappropriate means of delivering said punishment?
    (There goes the alcohol excise tax. And the cigarette tax. Loeb wants to repeal them all.)

  6. Princes and Kings can always justify their actions in that they are closer to God than us rifraff. Same with Goldman Sucks

  7. “But the solution is not to over-regulate everything.”

    Excuse me, but please wake me up only after derivatives are regulated so that they must be traded in the open, after Glass-Steagel is reinstated, and after “mark to model” accounting and off-the-books SIVs and the like are prohibited by regulation.

    Then we talk about whether coal mines and off-shore oil rigs are being inspected.

    And then, when all of that regulation is back in place, then maybe we can talk about whether it has gone far enough.

    Oh, no problem breaking up the big banks, too. That would also be a good idea, and complementary to proper regulation.

  8. No taxation without representation. From what I understand, John Hancock and a number of other patriots were the hedge fund managers of the day. Jus’ sayin’.

  9. Yes. Exactly right. Good post!

  10. Leave it to a hedge fund manager to confuse punitive taxes with taxation without representation.

    “If you are rich, no one will say that you are not intelligent.” – Tevye, Fiddler on the Roof

  11. To be more precise, the apparent tax issue during the Revolutionary period was really about Home Rule. No one on either side of the Atlantic ever seriously suggested that the 13 colonies should actually receive representation in the British Parliament. What the colonies were actually claiming was the right to determine their own internal fiscal policies. Note that the Declaration of Independence complains not about “taxation without representation” but about “imposing taxes on us without our consent”, which isn’t quite the same thing.

  12. Simon J Needs an Internship

    Perpetual academics like johnson and kwak may be good at writing books that nobody reads. But that doesn’t mean they can think clearly. The book ’13 bankers’ is mostly blather.
    It is mostly sloppy thinking. I’ve written more than most people (ha ha!!! come on kwak, you give too much credit to yourself) about “inept academics who love to sit in their ivory towers without knowing a thing about a real job.” BTW. being at the IMF and McKinsey is not a real job..just hideaways for semi-academics. Our educational institutions – which until recently we considered the best, most pure version in the world–allowed incompetent people to become professors (and to become interns), allowed incompetent people to become students and to avoid any responsibility for their actions (act like you were forced to take a mortgage at gunpoint and then blame goldman sachs for your plight).
    This is a basic category error. Education is a learning system; proffessors, students, and janitors are people. They are not mutually exclusive. If you want to say that being confined to an educational institution necessarily means universally good educators, responsible authors, and effective pontificators, then that’s an argument you have to make (and good luck making it).
    Just because you make write a garbled book or teach at MIT doesn’t mean you know what you’re talking about. Unfortunately, in this country if you write a book or at a prof at MIT , a lot of people listen to you.

  13. Also what he calls “punitive” taxation is simply taxing his earnings at the same ordinary income rate the rest us non-hedge fund managers, non-masters of the Universe, are taxed at, as opposed to their annual carried interest being tax at the the low capital gains rate (and the special favor for capital gains is probably the most inegalitarian, regressive feature our tax code and although correlation is not causation, I note that this super low capital gains tax rate has not given us the dynamic economic growth the last ten years that its promoters (Kudlow!!!) promised.

  14. It would seem that the hedge funds are really complaining about taxation without consent. Not that I care if they are happy.

  15. “who the heck are you to decide who is competent” is a common basis for defenses of the current economic system. There are a lot of different things implied here. It seems like one of them is that the economy should not be centrally controlled by the government, etc. Ok, only a small group of people would disagree with that. However, that isn’t equivalent to the implication that the legal systems associated with incorporation, finance, etc. as they currently operate are the best possible ones. Certainly by creating these legal structures it is the government that instituted this system in the first place. I think that many people would agree that the government should change it when it doesn’t work. This is NOT equivalent to central planning. The optimal set of structural laws and regulations SHOULD be based on whether (post hoc at least) it can be shown to lead to optimal outcomes. “Optimal” economic outcome are absolutely subject to public debate. To insist that whatever the current system produces is necessarily optimal is circular reasoning.

  16. http://en.wikipedia.org/wiki/Buckley_v._Valeo Buckley v. Valeo Money is speech.

    Citizen’s United provides the corollary: Overwhelming money speaks overwhelmingly

  17. Who, in making a list of America’s founding principles, would put “nonpunitive taxation” first? Oh, right. A hedge fund manager.

    One of the founding principles was justice. That includes justice for criminals, as was carefully framed in the Constitution’s body and the Bill of Rights.

    If by “punitive taxation” he means excessive taxation, it’s certainly not possible for any of these finance criminals to be excessively taxed, since they stole every cent they extracted.

    None of it needs to be “taxed”; every cent must be restituted.

    Of course, justice demands more that just financial restitution for this level of crime. Far more.

    This is just sloppy thinking.

    It’s lying. I agree it’s pretty inept.

  18. This guy is an idiot and if our economy is dependent on him as an allocator of capital we are all doomed.

  19. This is not fairy tales!
    Hedge funds are there to make money, not to improve and make a better world. Why we ask hf to regulate themselves and make “justice”. As far as they follow the rules and the laws it is normal that they will continue to make their job.

  20. The unfortunate part of this has really been team Obama’s obeisance to those individuals who – having funded his campaign – turned on him. In demonstrating this obeisance (and fighting to defend wall street from the so-called populists), Obama lost his majority and failed to deliver the policies he’d promised.

    Seeing his popularity sink, he tacked toward the majority again (calling out “fat cat bankers”), but it was too late – the damage had been done, and the rebuke of wall street was hardly convincing whith teh ongoing spectacle of Obama’s bromance with Tim Geithner. And for this price he earned what? Loeb’s haughty sneering jibes.

    Judging by the ratio of corporate profits to total wages, I can hardly think of an administration that has been more friendly to industry. Team Obama – ever the class nerd – keeps delivering for the cool kids on wall street, who laugh and sneer behind his back.

    And so, the unholy alliance between Wall Street and Glenn Beck is reaffirmed.

  21. The pragmatitist

    Only those who do not look beyind platitudes believe that the American revolution “was about nothing but taxes”.

    The fact of the matter is that it was very much about government policies that favored one group of businessmen (English Corporations), over another, (those living in the American colonies, priciply New England). The Boston tea party was organized by Boston merchants because of the British Government’s attempts to restrict those merchants from participating in the tea trade.

    The American revolution was against government policies that advanced the welfare of corporations over those of individuals. The taxes were only a part of those effcorts.

  22. The pragmatitist

    Hedge funds don’t make a dime. Only companies that provide goods and real services for profit make money. All hedge funds do is move that money around, principally from the long term stock investor into the hands of the wealthy few who can participate in a hedge fund.

  23. Well here we experience the mouth of an ignorant Amurican that exhibits a personal ignorance of another
    person’s vocation and deprecating their position on economic affairs without one sole example.

  24. The pragmatitist

    And if we really beleive that any activity is justified because it makes money, why not legalize prostitution and drugs.

    Entities that make (I mean concentrate) a lot of money, like Hedge Funds and Private Equity Firms (leveraged buy out companies) do considerable damage to companies and the economy in order to fullfill their mission, which is to ake money from the middle class and give it to the rich.

  25. Wall Street should not have been saved (including investors, CEOs, bond holders etc) even though the downturn would have been more severe but the upside would have clearly been much better than what has passed on as an improved economy. The fueling of the “new” economy to take off would be a financial system that would be much different realizing the CEOs skin would be in the game. Make them swallow what (toxic) assets they advised investors to buy. A generational lesson would have been learned better than any MBA.

  26. Right. And they all put their fortunes on the line (read the Declaration!) And many of them lost their fortunes.

    Today’s hedge fund managers are not nearly as courageous. They won’t even consider downsizing to a 100-foot yacht.

  27. Right you are, Pragmmatitist, but it’s so much simpler to just reduce every argument down to it’s most mind-numbing sound bite. Otherwise, people would be required to think – God forbid!

  28. Hell, they won’t even consider paying TAXES on their income! Not if they can shelter it in the Caymans, and what they can’t, they had re-defined as “capital gains” and thus taxed at a pittance, compared to REAL earned income.

  29. The pragmatist

    It is ironic that the modern day “Tea Party Movement” in large part advocates for policies that will favor corporations and corporate management over what is good for the people.

  30. The pragmatist

    John Hancock was not a Hedge Fund Manager. Other than being wealthy he had nothing in common with Hedge Fund Managers. He was merchant, engaged in the shipping trade. He was far more like a main street businesman than a Wall Street shark.

  31. “In most jurisdictions hedge funds are open only to a limited range of professional or wealthy investors who meet certain criteria set by regulators, and are accordingly exempted from many regulations that govern ordinary investment funds.”

    http://en.wikipedia.org/wiki/Hedge_fund

  32. The pragmatist

    My point exactly Rickk

    Hedge funds are made up of welthy investors who can engage in all manner of activity that the rest of us cannot. As a result their major accomplishment is to take wwealth away from the middle class and concentrate it for the wealthy.

  33. Sad! Nemo raises a critical point. “Of course, a free system only works if people pay the price for their poor decisions. Regulatory capture and government bailouts are not exactly part of the “free market” as its defenders would like to construe it…”

    There are no FREE MARKETS!!! If there were, predatorclass oligarchs like BofA, GS, JPM, Citi et al. would no longer exist. These oligarchs are still technically insolvent, were it not for the 14 TRILLION in taxpayer funded government largess. These oligarchs FAILED, horrifically. Their pernicious sociopathic managements FAILED miserably. The entire structure on which they operate is NOT capitalism, – but banditcapitalism wherein crimes and abuse or cloaked, or ignored, and the taxpayer is forced to burden and hazard the terrible costs of the oligarchs epic FAILURE.

    If there are laws, then those laws apply equally to everyone, including the predatorclass, and predatorclass oligarchs. If not – then in practical reality – there are no laws. In a world where there are no laws, – there are no laws for anyone predatorclass biiiaaatches.

    Hedge Funds or prop desks, or any oligarch must be forced to pay, and suffer the dire consequences for catastrophic FAILURE. If not, then the entire system and structure is perverted, retarded, toxic – and doomed to a future of continued abuse and pillaging of the taxpayer to benefit and advance the untoward interests of the FAILED predatorclass oligarchs.

    Until the system punishes FAILURE, and excoriates FAILED management, – the system itself is doomed to a continuation and perpetuation of FAILURE, with all the terrible costs heaped on the backs of the taxpayer, and the taxpayers children.

    This is NOT capitalism!
    This is NOT a freemarket!
    This is NOT democracy!
    This is NOT America!

  34. You very obviously have some personal issues, and despite having vented numerous times, STILL haven’t moved on with your axe. Did James and Simon somehow bruise your delicate ego? Might your first name be Timmy?

  35. Stephen A. Boyko

    Criticism that is unsupported by facts merely illustrates the critic’s biases. Next stop, ad hominem attacks.

  36. Bayard Waterbury

    Yes, there was the entire incompetence thing, but this goes far beyond the “Peter Principle,” where the last promotion one gets is to their level of incompetence. No, actually we haven’t had anything resembling pure capitalism in America in the 20th or 21st Century. Notably, the Fed would not exist in a pure capitalist state, unless it had a far broader purpose, and far less power. We wouldn’t need any but the most meager regulations, because, at its heart, pure capitalism IS self-regulating. In fact, armed with Sherman Antitrust, we might hardly need any at all.

    The surest problem is capture. Capture of the government, its elected Congress and Administration, its regulators (of all kinds, just look at the salmonilla problem — could that be FDA capture by big agriculture? — yes). If we have a strong and unfettered Justice Department without the Administration’s agenda (you know, lots of wrist slapping and putative, but everso symbolic fines), if we have a few well funded and highly empowered and substantially avid regulators, and if we have rational taxation, simple, consise and consistant, we could, in fact have a democracy with strong capitalism which works for eveyone from the least of us to the richest. There would be a clear shot for everyone to rise and make good financially and socially.

    As it is, we have a Rube Goldberg patchwork of ill-considered laws substantially enacted to benefit the richest and most powerful. Why is this? It is because our republican democracy is badly broken. Over the past nearly two and a half centuries, the laws and rules governing the probity of our society have been substantially skewed. It gets worse, now, day by day. Arianna Huffingtons new book tells it like it is, and I would add to what she says with the statement that we now substantially resemble the old USSR. Oh, you can say that we have freedom of speech, freedom of assembly, and freedom of the press. Sadly, those freedoms have, by hook or by crook, been set aside in favor of a press that focuses its energies in being a part of the system, and convincing us that the dogma spouted by our leaders is important, and respecting it to the point where so many of our public have become convinced, rational information to the contrary notwithstanding, that in that dogma lies solutions.

    How can we go about our business of living without understanding that America (as Simon has occassionally and cogently pointed out, and Arianna does in her book) is now rapidly looking more like a Third World country, where the oligarchs rule (called a PLUTOCRACY), and the rest are assured that they can “eat cake” while lots of folks on Capital Hill play Neroesque violins. Something will give soon, and it won’t be pretty.

  37. Bayard Waterbury

    Amen!! Now read mine — SSDD!!

  38. And absence of money means reduction to silence.

    One only has to look at who consistently wins legislative battles in Congress to realize that.

  39. Must hurt like hell to piss vinegar like you do.

    No wonder you’re in a bad mood.

  40. For the record, even though I have no interest in partaking in either, I’m all for legalizing prostitution and drugs. They’re not going away, and they’re victimless crimes based on morality laws. Were they legalized, at least we could tax and regulate them.

    You might want to talk about legalizing something like blackmail, bribery, extortion, or racketeering as good solid examples. Granted, from the lack of real prosecution over the financial crisis, one could very well assume all those examples are legal already…

  41. Coup d’Etat: Standard & Poor’s is now giving Orders to Congress…and the American People

    August 30, 2010 – excerpts

    “There’s been a lot of talk recently about the enormous power that’s been given to the Deficit Commission, which is co-chaired by Alan “Social Security recipients are milking it” Simpson and dominated by people who have advocated cuts to Social Security and Medicare. But here’s an aspect of the story that’s gone unremarked: Standard & Poor’s, the credit rating agency whose reputation should rightfully have been shattered by the economic crisis, is now dictating policy to the United States government. S&P just put our elected officials on notice: Submit to the proclamations of the Deficit Commission or we’ll downgrade our rating of government debt.

    That’s blackmail, plain and simple. This threat comes from a privately-owned company whose rating process is riddled with conflicts, and which has gotten virtually every critical assessment of recent years spectacularly wrong. Enron? Lehman? Subprime mortgages? They were zero for three. Yet rather than reining back their penchant for reckless proclamations, the chairman of S&P’s “sovereign rating committee” said that our elected officials’ response to the Deficit Commission would be crucial to its analysis of US debt.

    John Chambers said last week: “It is very important for the credit standing of the United States that the Congress considers very carefully what the fiscal commission proposes.” Just in case his intent wasn’t clear enough, he added: “It is very important for Congress to take the required steps.”

    http://www.huffingtonpost.com/rj-eskow/coup-detat-standard-poors_b_699476.html

  42. That’s enough to make anyone retch. Besides, the Chinese credit rating agencies are much more credible than any of the western ones.

  43. If FAILURE is not accounted as FAILURE, then what do we have as a economic system??? FAILURE must be punished. This is the underlying lynchpin to the socalled freemarket system. If FAILURE is not punished and ruthlessly – as in the Darwinian sense eradicated, – then we do NOT have free markets, – we do NOT have the rule of law – we have instead – crony or bandit capitalism and a world where the predatorclass is free to rob and pillage the people without restraint, and the socalled government is complicit is this crime and abuse. In this world the predatorclass effectively lives above or beyond the law, – so in practical effect – there are no laws. In a world where there are no laws, – there are no laws for anyone predatorclass biiiiaaatches!

    Buckle up America, we’re about to enter some turbulence!

  44. While your statement is not unreasonable, JK was being snarky and Nemo was right to call him out. Who will the competent people be who judge those who judge those Capitalists who are incompetent? A point of capitalism is success or failure determines competence. What happens when things go wrong? I think we have seen just how well the judges of incompetence have done the last 18 months.

    Its all Plato’s fault.

  45. “…that we now substantially resemble the old USSR.”

    Closing the ‘Collapse Gap’: the USSR was better prepared for collapse than the US
    by Dmitry Orlov

    http://www.energybulletin.net/node/23259

  46. “So the only question left is What to Do? And the only action left is to do it.”

    - Russ

    http://attempter.wordpress.com/

  47. Center of American Progress

    CAP’s on Facebook. Why not join us there?
    To be progressive is to be connected. To stay on top of what’s going on, and to spread progressive ideas to your networks. To challenge conservative misinformation with the facts.

    And CAP’s Facebook page can help. Just go to http://www.facebook.com/americanprogress and click on the “Like” button at the top of the page:

    After you’ve clicked “Like,” click the “Suggest to Friends” link on the left side of the page to invite your Facebook friends to join you.

    At our Facebook page, you can:

    •Stay on top of the great work Center for American Progress policy experts are doing and share it with your friends and networks
    •Discuss the major stories in the news with other progressives on Facebook
    •Get updates when we release new data or commentary on the issues that matter to you
    Thanks for standing with us. We hope you’ll join us in our Facebook community as we work together toward a progressive future.

  48. Tuesday, August 31, 2010 6:27 PM

  49. This will be a really telling analogy after academics blow up the world economy, or capture Washington and the regulatory process with floods of money.

    The real irony in all the bitching from Wall Street is that they’ve gotten off so lightly. And what Randian paradise are they comparing the US to, anyway?

  50. isn’t that the new world order for making money the old fashioned way – don’t earn it, take it?

  51. they’re figuring out apartment rent prices for the next wave of scheduled foreclosures…cramming all those “stories” (people) into one building is going to light a fuse when even a few of them talk to each other and figure how how they were all “rolled”…street law will come back…

    If The Wrecking Crew expects to get back into power by wrecking millions more and blaming it on some mythical “the other” ism,

    what is “FAILURE” other than a way to WIN in the current “business model”..?

    It’s REALLY bad. It’s actually WORSE, morally and ethically, than words can express. Total meltdown, total attempt at extinguishing any light…and then the super-cool attitude of , “yeah, so? that’s life”…is psyche ops psychic torture of souls – being forced to go along with the fiction that there’s something wrong with the person who SEES it, NOT the people doing it.

  52. Bruce E. Woych

    SJNI strikes me as a professional heckler. There is a technique borrowed from obnoxious 5 year old brats that simply reverses everything “I didn’t do it…You did it!” Right Wing radio/TV provocateurs utilize the same reversal as do professional political agitators. I suppose it is important to recognize that disruption has become the Republicans weapon of choice, and the tactics are never more than negation and the transposition of the language context to establish a reversal. It is still the mentality of a five year old, just as obnoxious; but professionally speaking the characters that hide in serious open communication streams to create this fallacy of dissent are more like viruses. Whoever you are hiding behind your pretentious SJNI pseudonym, you have presented yourself as being ridiculous. You should realize that this is typically an intelligent stream of discussion, agreements and disagreements and you obviously confuse categorical agency with rhetorical misconduct.

  53. Bruce E. Woych

    Bayward Waterbury:

    This is a great entry! When the “crisis” first balooned into fear and chaos there was a good deal of new information and communication that included terms such as “capture” and discussions were built upon this foundation and discovery. At this time we have lost that direct interest into the full spectrum of the problem due to entropy and some complacency. The status quo has become “…That’s just the way it is…” and bottom line blindness in a Political Economy of scale. Power, blindness and ignorance are tools of the trade. It is really great to see someone like yourself “refreshing” the discussion back to “fundamentals and discovery” but don’t be too surprised if it feel like you are talking to the wind. That is part of the problem of the disconnect in the scale of things. But do know this: People are learning and listening. The future will not be stolen from us!

  54. Simon J Needs an Internship

    Walter, yeah baby, timmy here. classic!!

  55. Simon J Needs an Internship

    Ha Ha Bruce E. “intelligent stream of discussion, agreements and disagreements and you obviously confuse categorical agency with rhetorical misconduct.”..are you serious??? i do hope you are joking. If this you call this intelligent, it explains why so many mainstream americans took out subprime loans thinking they were going to make a quck buck.

  56. Bruce E. Woych

    “How can we go about our business of living without understanding that America (as Simon has occassionally and cogently pointed out, and Arianna does in her book) is now rapidly looking more like a Third World country, where the oligarchs rule (called a PLUTOCRACY), and the rest are assured that they can “eat cake” while lots of folks on Capital Hill play Neroesque violin”

    The most accessible and comprehensive review of this progressive “Third World” economy syndrome now placing the entire United States Monetary Economy up for RENT… is still SHOCK DOCTRINE by Naomi Klein.

    If you had to read one single book of how we got to this historic precipice I would say this is the place to start.

    At the higher level I would still have to recommend SUPER IMPERIALISM and the work of Michael Hudson.

  57. Simon J Needs an Internship

    Frankie boy….please pary for kwak and johnson’s piss. i mean these guys were so pissed off, they wrote a book!!

  58. Stephen A. Boyko

    @ Bruce E. Woych
    @ Simon J Needs an Internship

    “SJNI strikes me as a professional heckler.”

    BEW and SJNI post exchanges are a good example of non-correlative information creating governance difficulties. It is similar to capital market policy makers trying to reconcile risk-uncertainty conflation errors. These non-correlative information problems will persist until the one-size-fits-all deterministic governance regime is segmented into predictable, probable, and uncertain underlying economic conditions. The result will be larger and more frequent boom-bust cycles.

  59. Bruce E. Woych

    Stephen:

    It seems to me that the real problem is that we have developed a fin acial system by way of “competitive exclusion” which has designed an entire finace system as “…ONE-SIZE-FITS-ALL…” and then confused this with too big to fail (TBTF) institutional dependency.

    As I recall the last few years the “free market anarchists of deregulation” regime were the ones who were invalidating restraints with the use of the term “one-size-fits-all” which had some accuracy in depicting a system of homogeneous rules that were not only inept and outdated from the outset, but were (like today’s consensus) designed to be circumvented.

    I follow your posts with interest and I do not think you are simply a mouth piece for laisez faire governance by any means. However, aside from dividing the obvious between predictable and unpredictable intervention rulings and governance divisions, I have yet to see your ideas on mechanizing an adjustable system for the SEC that would keep accurate and accountable tabs on the spirit of the law and the circumvention tactics that outdate legislated controls even before they are enacted. Do you have very specific ground rules on how to reign in the perverse incetives, create boundary parameters to restrain moral hazards and basically place an iron hand over corruption?

    In the end justice is the only one size fits all that the common economy is seeking and that is, right now, protection from the system that you guys built and operate.

  60. To put taxes at the top of the list of causes for the Revolution is tendentious at best. The Tea Party was not a protest against taxes because the Tea Act of 1773 removed all the taxes. But it did give a monopoly on tea to the East India Company. So it was a protest against corporate control. I wish the modern “Tea Party” understood this; then it really would change our politics.

  61. Ironic, isn’t it?

    A modern-day equivalent would be something like boycotting and vandalizing Walmart. But the average tea partier would be scandalized to be told that.

  62. Don’t feed the troll guys.

  63. Thanks to TARP, housing prices have not slid as much as they should have. This keeps the rents high, since you can’t pick up a property to own (or to rent to others) for as cheaply as you should be able to. Families unable to get away from their negative housing equity may submit to peonage, thanks to more austere personal bankruptcy laws. The insanity of appearing sane under such appalling circumstances may, given a critical mass, give way to the sanity of insanity, in that the downtrodden may get good and angry and break something.

  64. Another wonderful sound bit from the hedge fund community as reported recently in the NYTimes comes from Paul Singer, manager of $17 B. Elliott Management who allegedly said that government efforts to “take over and run” the economy through more regulations, threatened to ruin the United States’ standing as a world leader in finance. Excuse me, did he say “STANDING AS A WORLD LEADER IN FINANCE”?? My full blog post on the comment at

    http://tinyurl.com/2d7f9nh

    Keep up the good work-
    John

  65. Bruce E. Woych

    StatsGuy:

    “Judging by the ratio of corporate profits to total wages, I can hardly think of an administration that has been more friendly to industry”

    From your vantage point would it be fair to say that the monetary system is experiencing something along the lines of a corporate Dawn Raid; while the economy is being run from finace as though it had just been acquired by a massive private equity wealth fund (still growing and feeding on the takeover).

    And following on this analogy, would it be in any way accurate to compare the general economy to a corporate restructuring / downsizing process; one in which the consolidation at the top reaped the returns on the losses or sacrifices at the bottom?

    And if the analogy were to be that hostile corporate takeovers have dominated the field of corporate America so solidly that now the political economy itself is akin to the same scenario writ large?

    So in this regard, the above mentioned accumulative (agglomerated) corporate profits gained…in ratio to the accumulated wages is measurably what proportion at statistical measures and is there a measurable rate of change in the dynamics of this monetary power takeover?

    Just Curious… Bruce

  66. Bruce E. Woych

    Hidden Corporate Scandal: CEOs Who Laid Off the Most Workers Rake in the Most Treasure

    CEOs are throwing workers onto the unemployment rolls and dodging taxes to boost short-term profits and fatten their own paychecks. READ MORE

    Sarah Anderson / AlterNet

  67. When did rich guys become expert on anything other than getting rich?

    A loon like Daniel Loeb is really saying that everything government does should pass a cost/benefit analysis. He’s beyond nuts.

  68. “And it won’t make one bit of difference if I answer right or wrong; when you’re rich, they think you really know.” — Fiddler on the Roof

  69. Prag, I am confused and taken back by your two posts. 1st: “hedge funds don’t make a dime? Only companies that provide goods and real services for profit make money. All hedge funds do is move money around”. In no attempt to question your level of “know how” about Capitalism and money flow, at the very least I think your word choice is poor. “Making money” is synonymous with “moving money around”. Isn’t that technically how money is “made” in the first place? That is precisely what those companies that provide “goods and ‘real’ services” you talk about do. They command/require the shift of capital from you or I in return for their “good or real service”. 2nd: As per your second post, I strongly believe you have a very limited and elementary understanding of how hedge funds work and how they benefit our economy. First things first. In absolute terms you are absolutely correct, hedge funds are/can be quite large and have the ability to mobilize large amounts of capital, often very quickly too. In relative terms however (which is really the only way to look at hedge funds), your “argument” falls apart quicker than did our economy in 2008. When critiqued comparatively, hedge funds are dwarfed (both in AUM and leverage ratios) by other leading financial institutions such as investment banks, money center banks – even mutual funds. Granted hedge funds – due to the opportunistic and unconstrained mandate on how they invest – are more prone to “damage” (to use your word) our economy, calling a few hedge-fund-misbehaviors as normal or even sought-after by an entire industry is a very ludicrous statement. Unfortunately, our Capitalistic system does invite abuse and shenanigans (for lack of a better word), but no industry should have the luxury of being blanketed by the accusations you so freely and so “passionately” throw around. Should I hate the oil companies for what has happened with BP? As unfortunate as that incident was (and trust me it was bad) I am not about to attack the entire industry with misappropriated accusations and false motives [end rant]. To further this point, as much as this probably hurts you to read, Bernanke, Geithner and even Paulson have acknowledged the importance of hedge funds in our economy. Although HF may – and probably do – have some drawbacks (as does any company/industry, really) to the way they operate, wanted or not (obviously wanted because HF continue to exist) they allow savings to be channeled (or moved, to use your word again) to their highest return sources. This action in turn allows for innovation and growth (real economic growth), both at the micro- and macro- economic levels. Also, HF – more so than any other legally recognized financial institution – act as the ultimate risk holders in any market environment, which in turn allows them to act as significant liquidity providers, both in periods of calm and stress. In reality, putting your biases/pride aside for one moment, we should be glad they exist. I look forward to your response as I believe we have both only scratched the surface of this topic.

  70. Prag, I am confused and taken back by your two posts. 1st: “hedge funds don’t make a dime? Only companies that provide goods and real services for profit make money. All hedge funds do is move money around”. In no attempt to question your level of “know how” about Capitalism and money flow, at the very least I think your word choice is poor. “Making money” is synonymous with “moving money around”. Isn’t that technically how money is “made” in the first place? That is precisely what those companies that provide “goods and ‘real’ services” you talk about do. They command/require the shift of capital from you or I in return for their “good or real service”. 2nd: As per your second post, I strongly believe you have a very limited and elementary understanding of how hedge funds work and how they benefit our economy. First things first. In absolute terms you are absolutely correct, hedge funds are/can be quite large and have the ability to mobilize large amounts of capital, often very quickly too. In relative terms however (which is really the only way to look at hedge funds), your “argument” falls apart quicker than did our economy in 2008. When critiqued comparatively, hedge funds are dwarfed (both in AUM and leverage ratios) by other leading financial institutions such as investment banks, money center banks – even mutual funds. Granted hedge funds – due to the opportunistic and unconstrained mandate on how they invest – are more prone to “damage” (to use your word) our economy, calling a few hedge-fund-misbehaviors as normal or even sought-after by an entire industry is a very ludicrous statement. Unfortunately, our Capitalistic system does invite abuse and shenanigans (for lack of a better word), but no industry should have the luxury of being blanketed by the accusations you so freely and so “passionately” throw around. Should I hate the oil companies for what has happened with BP? As unfortunate as that incident was (and trust me it was bad) I am not about to attack the entire industry with misappropriated accusations and false motives [end rant]. To further this point, as much as this probably hurts you to read, Bernanke, Geithner and even Paulson have acknowledged the importance of hedge funds in our economy. Although HF may – and probably do – have some drawbacks (as does any company/industry, really) to the way they operate, wanted or not (obviously wanted because HF continue to exist) they allow savings to be channeled (or moved, to use your word again) to their highest return sources. This action in turn allows for innovation and growth (real economic growth), both at the micro- and macro- economic levels. Also, HF – more so than any other legally recognized financial institution – act as the ultimate risk holders in any market environment, which in turn allows them to act as significant liquidity providers, both in periods of calm and stress. In reality, putting your biases/pride aside for one moment, we should be glad they exist. I look forward to your response as I believe we have both only scratched the surface of this topic.

  71. Bruce E. Woych

    Hightower: Wall Street Bankers Pull Off Another Regulatory Heist

    The financial giants hired away nearly 150 regulators, luring them with fat salaries to switch sides and become industry lobbyists. READ MORE

    By Jim Hightower / AlterNet

  72. Re: @ CBCcap___”I am not about to attack the entire industry with misappropriated accusations and false motives [end rant]“. Well then why did we go too war with Iraq? Isn’t Goldman Sachs a large “Hedge Fund” backed by the US Gov’t? Fianally…am I mistaken when the King of Mega-Buc’s Hedge Funds, George Soros was about to go belly-up…Greenspan (1990′s…you can do the homework with the lead) bailed him out,…? PS. You have to be a member of the club to “Rape”!

  73. Bruce E. Woych

    Generally a very good defense and I am sure that there are many potential benefits to big money that are not involved in the crisis and corruptions but …

    well where do we start…let’s try these:

    #
    Offshore fund – Wikipedia, the free encyclopedia
    The relative absence of regulation relating to leveraging and investment strategies in offshore jurisdictions encourages higher risk funds, such as hedge …
    en.wikipedia.org/wiki/Offshore_fund – Cached – Similar
    #
    Tax haven – Wikipedia, the free encyclopedia
    See also: List of offshore financial centres and Tax rates around the world ….. It has been estimated over 75% of the world’s hedge funds (probably the …. James S., “The Blood Bankers: Tales from the Global Underground Economy. …
    en.wikipedia.org/wiki/Tax_haven – Cached – Similar
    #
    News & Features in The North Bay | Shadow Banks and Prime Brokers
    Jun 25, 2008 … Shadow Economy. How prime brokers paved the way for the biggest bank heist in history …. A hedge fund start-up–and there were thousands of them back in the … are almost always found offshore and redefine the term …
    http://www.bohemian.com/bohemian/06.25.08/news-0826.html – Cached – Similar
    #
    Foreign Policy In Focus | Pirate Bankers, Shadow Economies
    Apr 14, 2009 … Shadow Economies. Tax justice was billed as the “big issue” of the recent G20 … The strength of offshore hubs — an intricate labyrinth that … which range from shell companies to conduit markets to hedge funds, …
    http://www.fpif.org/fpiftxt/6033 – Cached
    #
    Tax Justice Network: The weakest link
    Feb 11, 2009 … The shadow economy is widely called “offshore”, … The majority of hedge funds are located in London, the Cayman Islands and the British …
    taxjustice.blogspot.com/2009/02/weakest-link.html – Cached – Similar
    #
    Economy and Society » Blog Archive » Offshore City of London …
    Aug 1, 2010 … Offshore City of London puffed up shadow banking … securities firms that provide lending and a bunch of other services to hedge funds) to …
    blog.heidi-barathieu-brun.ch/wp-archive/4192 – Cached
    #
    William Brittain-Catlin: How offshore capitalism ate our economies …
    Feb 5, 2009 … How offshore capitalism ate our economies – and itself … tax havens and offshore finance centres that formed the shadow side of the world’s … From hedge funds to credit derivatives and collateralised debt obligations …
    http://www.guardian.co.uk/commentisfree/…/offshore-tax-havens – Cached – Similar

  74. Stephen A. Boyko

    @ Bruce E. Woych
    @ earle,florida

    Re: How offshore capitalism ate our economies – and itself

    You guys can’t have it both ways.

    Investor rights (governance commands) have to be proportionate to investor responsibilities (due diligence).

    If rights greater than responsibilities: public sector rent seeking. If responsibilities greater than rights private sector free-riding. This is one reason why you need market segmentation for correlative information (See GAAMA Model text and footnotes for Comments on Release No. 34-49695, File No. S7-22-04 http://sec.gov/rules/policy/s72204/saboyko060904.pdf).

    Either you have proportionate regulation for domestic market transparency or disproportionate regulation will incur the cost of offshore opacity.

    Bruce – will respond to other post in due course.

    BTW: much like Danny DeVito in “Other Peoples’ Money,” it pleases me to be known as “simply a mouth piece for laisez-faire governance by any means.”

  75. To me, it’s a close call whether such tripe is better treated with complete neglect, or by further disseminating it, even if the prupose is to debunk the arguments.

  76. Stephen A. Boyko

    @ Badcheck

    The irretrievable Mr. Loeb notwithstanding, how do you control for rent seeking as in the case of SOX?

    Investor rights (governance commands) have to be proportionate to investor responsibilities (due diligence).

    If rights greater than responsibilities: public sector rent seeking. If responsibilities greater than rights private sector free-riding. This is one reason why you need market segmentation for correlative information (See GAAMA Model text and footnotes for Comments on Release No. 34-49695, File No. S7-22-04 http://sec.gov/rules/policy/s72204/saboyko060904.pdf).

    Either you have proportionate regulation for domestic market transparency or disproportionate regulation will incur the cost of offshore opacity.

  77. Anyone who cannot see this is a steaming pile of s**t should stay with Fox as an information highway.

    What hedge funds provide is destabilizing speculation through leverage piled upon Fed counterfeiting operations. For those who wonder just where QE is going and for whose benefit, the answer is hedge funds.

  78. Bruce E. Woych

    *
    Big finance rolls on
    27 Jun 2010: William Brittain-Catlin: Credit rating agencies may be under scrutiny now, but any radical reforms will soon be watered down 33 comments
    *
    Beyond the voodoo void of finance
    10 Mar 2010: William Brittain-Catlin: The moral gulf between citizens and banks must be replaced with an ethic of responsibility 31 comments
    *
    How offshore capitalism ate our economies – and itself
    5 Feb 2009:

    William Brittain-Catlin: Convoluted networks of tax havens became a model for the abstract financial wizardry that led to the current crisis
    17 comments

  79. What is there left to “break”?

    The ORIGINAL stance on CNBC when regime change began was “not everyone DESERVES to own a house”. And now that has extended to not everyone deserves a job, health care, education, decent food, clothing, local government services.

  80. amen to that – buy low, sell high

  81. “…it did give a monopoly on tea to the East India Company…” which in turn was part of a plan to bail out the EIC because–wait for it–it was Too Big To Fail.

  82. It all keeps coming back to the late Geo. Carlin: “The American Dream–you’ve gotta be asleep to believe it!”

  83. Stephen A. Boyko

    @ Bruce E. Woych

    Be careful what you seek, as I have written more articles, white papers, and seminar presentations etc. on capital market governance about which I care to think. Much to my naïveté, I have found that introducing “change” is a long “struckin fuggle.” For an overview read the text and footnotes of Comments on Release No. 34-49695, File No. S7-22-04 (2004) http://sec.gov/rules/policy/s72204/saboyko060904.pdf

    Let’s break down what I have to say from a contextual (capital market governance) and conceptual (management of “change”) perspective.

    A contextual review of my work is divided into effective (the ability to deliver capital market governance) and efficient (minimization to time, cost, and effort) components.

    From an effectiveness viewpoint, “We’re All Screwed” major thesis is that “segmenting governance into separate areas that apply to predictable, probabilistic, and uncertain regimes provides enhanced information correlation from which to issue best-practice commands.” (p. 56). This sentence is a mouthful, but the main point is that a one-size-fits-all approach to governance is doomed to failure.” See: http://readingthemarkets.blogspot.com/search?updated-max=2009-10-15T06%3A23%3A00-04%3A00&max-results=7

    Efficiency requires shifting from 2-D (maps) to 3-D (GPS) metrics. Before you think outside the box, you have to think outside the square. Unlike Kurowski and Katz, I argue that “governance goofs” are more attributable to systemic structural obsolescence rather than individual shortcomings. Much like a pilot who has 20/20 vision but lacks depth perception, policymakers using 2-D conventional oversight for a 3-D robust market will likely crash no matter how hard they try, or how smart they are. See: http://www.sfomag.com/article.aspx?ID=1353&issueID=c

    Conceptually, I argue for the management of “change” as a reflexive exchange between risk and uncertainty. Note: progressive Soros likes this, as I humbly / arrogantly (take your pick, the latter is a sop to Baseline’s pitchfork constituency) believe that I explain Soros’ genius better than Soros does. It has only taken me one book to illustrate Soros’ concept of “reflexivity,” while Soros is still flailing away with his 5th or 6th book (most of which I have read as I admire Soros’ insights). But if you really want to see how progressive genius really works, take a look at http://www.youtube.com/user/fiercefreeleancer . George has got to love those glass houses. How are progressives on windows?

    To Katz’s point in my context, capital market policy one-size-fits-all governance has bounded / constrained market rationality (positive cash flow, marked-to market) to such an extent that they have lost the ability to manage “change.” Central to the segmentation thesis is the accepted distinction between risk and uncertainty. Risk is quantifiable and has foreseeable consequences; uncertainty is indeterminate and has unforeseeable consequences. Change is defined as the movement in either direction between risk and uncertainty. “When uncertainty becomes risk, that’s learning or innovation; you have greater control over your underlying economic environment. On the other hand, when risk becomes uncertainty, there is either confusion (too much information), or ambiguity (too little information). Should the uncertainty become unstable . . . you have chaos.” (We’re All Screwed p. 61)
    See: http://readingthemarkets.blogspot.com/search?updated-max=2009-10-15T06%3A23%3A00-04%3A00&max-results=7

    A couple of specific responses to your inquiries

    BEW: “too big to fail (TBTF) institutional dependency”

    SAB: It is too bad that Mr. Kwak’s guest author did not engender a more enthusiastic Baseline response because TBTF details greatly effect the clearing entity and related market liquidity. Mr. Podolyako made a good attempt at addressing a complicated and not widely understood piece to the subprime puzzle. The Series 27 principal qualification exam (Financial and back office) test is much more difficult than the Series 24 principal qualification exam (managing principal) for a good reason; the Series 27 manages the firm’s and contra party capital exposure. It is one thing to reverse a trade, it is quite another to try to recapitalize an illiquid firm.

    BEW: the “free market anarchists of deregulation” regime were the ones who were invalidating restraints with the use of the term “one-size-fits-all”

    SAB: The command side of the governance model (see Fit Regulation to Market Reality, SFO Magazine, April 2009, S.A. Boyko http://www.sfomag.com/article.aspx?ID=1324&issueID=c ) consists of “FLITE” Model principles (Fairness, Liquidity, Integration, Transparency, and Efficiency) and rules—retrospective codified best-practices. Question: did de-regulation remove best-practices or “rule writing” (We’re All Screwed pages 50-51) where government attorneys expect societal buy-in by proscriptively describing an adverse situation and adding the preface “don’t do this.” This is not effective or efficient governance. Kurowski blames stupidity. Katz blames a lack of a scientific approach. I blame not changing to meet 2-D structural limitations

    BEW: Do you have very specific ground rules on how to reign in the perverse incentives, create boundary parameters to restrain moral hazards … ?

    SAB: EntEX for the uncertain regime. The predictable (GSA) and probabilistic (33 and 34 Acts) are well served by the conventional metrics. See: “Small is Beautiful”, The National Interest, No. 77 – Fall 2004. http://www.findarticles.com/p/articles/mi_m2751/is_77/ai_n6353167/print

    BEW: In the end justice is the only one size fits all that the common economy is seeking and that is, right now, protection from the system that you guys built and operate.

    SAB: “Protection” is a racket, whether Don Corleone or Don Columbia Law School. Investor rights must be proportionate to investor responsibilities. Otherwise you are buying the whole in the donut.

    I hope the above articles and book references were responsive to your request. Let me know if you have further questions.

  84. RE: Jake – I have to chuckle when reading your comment because even though it is obvious our ideas differ greatly, I too believe FOX can at times be too ‘one-sided’. But still, your “passion” clouds your ability to come off as knowing what you are talking about. As with any intelligent discussion, it is good to familiarize yourself with both sides; which I am. Forgive me if I come off rude – this is no personal attack – but your ignorance towards the topic is rather mind-blowing. Please, if you would not mind, before you post again, do some research on the so-called “destabilizing speculation through leverage ratios” you so ‘confidently’ claim the industry to have. Because I fear you will not take any time in doing any research -on any topic really-, but still ‘bless’ us all with your personal biases/bitterness towards the industry (rather than the facts) I will just tell you what you would find. As an INDUSTRY, hedge fund leverage ratios remain at an estimated average of 2.5x equity capital (if you would like me to forward you all those studies – some even performed by governmental agencies, I will be glad to). Granted, leverage ratios depend on the funds overarching investment strategy – as some funds will employ much more debt than others, which I am sure you know – but again you have fallen into the trap of blanketing an industry with accusations that hold no merit. It appears that your speculation is doing more damage than “that” of the industry. Please don’t forget, falling forward is not the same as falling backward. QE can only be initiated by a central bank; “printing money” stops at the colloquial. If HF benefit, great. Remember, this is a zero sum game. Regardless of where HF may fall with QE, every winner produces a loser to the same degree.

  85. This morning’s Wall Street Journal headlined that the SEC is “scrutinizing…’quote stuffing’….”

    Last week, the government was worried about what traders call “banging the close.”

    It’s funny that the govt never before noticed any irregularities, although the Harvard MBA greedy guts have slang expressions for their scams…

    …and, then, they quote Jefferson and whine that they are being regulated to death by their oligarch friend, Barack Obama. I’m sure Jefferson would be so very proud of them all!

    I’m a staunch capitalist, but this is greed. And, they are disgusting pigs.
    …Lady in Red

  86. you have to be a psycho without a dream to go after architecture like this!

  87. Bruce E. Woych

    Well the devil is clearly in the details and I fully appreciate your detailed response…but the idea that I am suggesting is that everything you are saying that is wrong with the “One-Size-Fits-All” rule book for bureaucratic governance is equally true for a Finance system that is consolidating vertically and becoming a “one size fails all” leviathan. Currently smaller banks are quietly continuing to fail and the entire banking structure of the country is becoming anything But “Small is Beautiful”…

    John M. Mason

    * Say Goodbye to the Smaller Banks by John M. Mason (Seeking Alpha)


    As more and more information is made available, the more one realizes that the banking industry is being re-constructed. In the next five years or so we will observe a banking industry that is much smaller than the one that exists today and this industry will be even more dominated by the larger institutions making up the industry. I believe that the number of domestically chartered banks in the United States will fall from a present level of about 7,800 banks to around 4,000 banks. I believe that the largest 25 domestically chartered banks in the United States will control about 75 percent of the banking assets in the country up from around 67 percent now.”

    The basic obfuscation of the obvious is just another version of the blind faith expectations you require when you overwhelm us with meticulous and matriculated regulatory claptrap when the big picture is that you simply FAILED to regulate propriety into active restraints.

    Check again how the system continues to be bought and sold while you peddle these archives formality and disorder…

    Hightower: Wall Street Bankers Pull Off Another Regulatory Heist

    The financial giants hired away nearly 150 regulators, luring them with fat salaries to switch sides and become industry lobbyists.

    By Jim Hightower / AlterNet

    And meanwhile while you call legislated governance a “Protection Racket” your “FLITE” planning is rhetorical mumbo jumbo that translates best as a FLITE FROM PROSECUTION.

    I fully accept that there is validity to the generalized complaint that the generalized version of SEC oversight fails when it is too vague, and “rule Writing” is reduced to a ad hoc level of “don’t do this” implying an inept “how to” manual by nearsighted bureaucrats. This is essentially a “truism” that legitimates crony capitalist collusion in the private practice of deceptive…not BEST…practices.
    The question is no longer about the fact of failure but more about the continuing failure to admit that inept oversight is simply built into your system. And no one seriously complained about it until we all started asking why WE have to pay for it.

    The ultimate lack of trust comes from people who were privy to the practices that try to blame the system and victims but never advise us what they witnessed that was wrong. You seem to imply that knowing what was potentially corrupt is superfluous because you translate it to become
    “… government attorneys expect societal buy-in by proscriptively describing an adverse situation and adding the preface “don’t do this.” This is not effective or efficient governance.”

    Isn’t this just playing with language to avoid pointing to “adverse practice” itself?

    Isn’t this just more of the same thing that you gave us as a regulator…when you yourself were charged with properly “protecting” the public interest. Isn’t it the cozy relationship and weakened (…perhaps “week end”…) rules of order that were never truly enforced anyway; truly the nature of the problem. And as suggested in Mr. Kwaks article…isn’t it still the practice to make authoritative claims of absurd ACCUSATIONS such as:

    “… the current decline in confidence and economic activity is due to the SEC’s lawsuit against Goldman.” REALLY THE HEART OF WHAT WE ARE TRUTHFULLY trying to understand. And when you place Don Corleone on the same scale of justice as the Columbia Law School…I have to wonder what kind of regulator you actually were and how you fit in the old boy school.

  88. Mr Boyko wrote, “…consists of “FLITE” Model principles (Fairness, Liquidity, Integration, Transparency, and Efficiency) and rules—retrospective codified best-practices. Question: did de-regulation remove best-practices or “rule writing” (We’re All Screwed pages 50-51) where government attorneys expect societal buy-in by proscriptively describing an adverse situation and adding the preface “don’t do this.” This is not effective or efficient governance. Kurowski blames stupidity. Katz blames a lack of a scientific approach. I blame not changing to meet 2-D structural limitations.”

    That’s why I ask for the math formula sometimes :-)

    proscription, noun, is: 1. The act of proscribing; prohibition. 2. The condition of being proscribed; outlawry. The adjective version (same meanings, though) is proscriptive. The adverb version is “proscriptively” (and the adverb is being underlined in red by the word processor this site uses – that’s funny).

    So this sentence

    “where government attorneys expect societal buy-in by proscriptively describing an adverse situation and adding the preface “don’t do this.”

    has me flummoxed because I don’t know which VERB, adjective or other adverb you meant to modify with the use of the adverb “proscriptively” in the above thought? I’m really asking…if we use the synonym “prohibitively” in its place, what are you saying that lawyers tried to get society to “buy” into?

    PROHIBIT describing an adverse event

    or PROHIBIT the adverse event, itself?

    Best practices is just that – BEST practices – which means some scientific rigor – at least repetition – has been met. Are you suggesting that best practices are so obvious that they did not need to be formalized into a “do this instead of whatever THAT it is you want to do until you have the same level of certainly to THAT as practice practice practice :-) has to this BEST practice. C’mon, when playing god with billions of lives, I don’t think it unfair to ask for the same level of scientific rigor that “best practices” have? And you can’t play BOTH roles – god and devil – either you are loyal and willing to protect BEST PRACTICE (AKA “regulation” to protect)

    or you want to go fiddle with uncertainty in the 3D world that you BELIEVE (really?! do you?!) does not have the “structural limitations” of 2D. But you can’t play both roles on the stage of life, Boyko.

    Besides, a purist will tell you that 3D has even MORE “structural limitations” because it is more complex.

    Limitations are not a BAD thing, btw.

    I have no personal freedom to be successfully unpredictable as a creator under the current financial regime because only those playing god decide where the sun will rise tomorrow and they do it based on having access to the data no one else has – namely where can we have the sun rise where the fewest amount of people will get any benefit at all from the sun.

    In a 3D system, especially, something’s gonna crack structurally and without limit.

    I can’t believe I just had this conversation…damn, I must really take my regulatory job seriously – patient safety….you borrowed a lot of our jargon, Boyko, to protect the safety of a 3D system where you don’t know what the structural limits are of that 3D system….think about it…it is CERTAIN there are limits.

  89. Correct me if i’m wrong. But wasn’t it people like dishonest hedge founders who convince Congress to deregulate the market. Wasn’t it that deregulation that has landed us in the recession were in now. If someone had been honest up front the regulation that had been enacted after the Great Depression, for a reason, had never been removed then we would be in as big a mess as we are right now!

  90. Stephen A. Boyko

    @ Bruce E. Woych

    BEW: Well the devil is clearly in the details and I fully appreciate your detailed response…but the idea that I am suggesting is that everything you are saying that is wrong with the “One-Size-Fits-All” rule book for bureaucratic governance is equally true for a Finance system that is consolidating vertically and becoming a “one size fails all” leviathan.

    SAB: Agreed—we’re back to the crucial question of whether the governance system is ineffective (broke) in need of fundamental change or inefficient in need of Dodd-Frank amendments. If, as Dr. Johnson and others have suggested, it is broke, then we need an alternative to the “one” in one-size. I offer segmentation of randomness and welcome the opportunity to consider other suggestions.

    BEW: The basic obfuscation of the obvious is just another version of the blind faith expectations you require when you overwhelm us with meticulous and matriculated regulatory claptrap when the big picture is that you simply FAILED to regulate propriety into active restraints.

    SAB: Your comment suffers from a time warp. I was with the NASD from 1972 to 1982. The paper crunch was the problem; The 1975 Securities Act Amendments was the solution. Infrastructure was enhanced via SIPC, NASDAQ, and DTC. From there I went into the industry until 1997. Thereafter a consultant, since there are always crises on the financial ramparts. How long am I to be held responsible for “FAILED to regulate propriety into active restraints?”

    BEW: I fully accept that there is validity to the generalized complaint that the generalized version of SEC oversight fails when it is too vague, and “rule Writing” is reduced to a ad hoc level of “don’t do this” implying an inept “how to” manual by nearsighted bureaucrats. This is essentially a “truism” that legitimates crony capitalist collusion in the private practice of deceptive…not BEST…practices.

    SAB: Agreed

    BEW: The question is no longer about the fact of failure but more about the continuing failure to admit that inept oversight is simply built into your system. And no one seriously complained about it until we all started asking why WE have to pay for it.

    SAB: Wrong. I have long said that the legacy system is broke. More importantly I have put forth a new and different regime. What is new in Dodd-Frank? Yet most commentary supports more of the same D-F while saying that the system is broke.

    BEW: The ultimate lack of trust comes from people who were privy to the practices that try to blame the system and victims but never advise us what they witnessed that was wrong.

    SAB: How do you know that I did this? What facts to you have to support your allegation? Unsupported criticism are biases.

    BEW: You seem to imply that knowing what was potentially corrupt is superfluous because you translate it to become “… government attorneys expect societal buy-in by proscriptively describing an adverse situation and adding the preface “don’t do this.” This is not effective or efficient governance.”

    SAB: Merely paraphrasing former SEC Secretary Jonathan G. Katz commented that when “the SEC adopts a rule, it believes it has solved whatever problem it is addressing. … The solution is to rethink the rulemaking process. Instead of assuming, as lawyers do, that rules are self-effectuating, the SEC should adopt a scientific approach.”

    BEW: Isn’t this just playing with language to avoid pointing to “adverse practice” itself?

    SAB: It is an observation of what happens. If you question me, Jon Katz was a long-time SEC regulator of distinction. Do you offer facts to dispute this?

    BEW: Isn’t this just more of the same thing that you gave us as a regulator…when you yourself were charged with properly “protecting” the public interest.

    SAB: Again, how long am I to be held responsible? For the time I was there, the record would show that I did a good job. What facts do you offer to prove to the contrary?

    BEW: Isn’t it the cozy relationship and weakened (…perhaps “week end”…) rules of order that were never truly enforced anyway; truly the nature of the problem.

    SAB: What facts do you have? Columbia Law Plaintiffs’ lawyers pay well for expert testimony. Are you saying that Don Corleone has better protection? Or is this more unsupported criticism disclosing your biases.

    BEW: And as suggested in Mr. Kwak’s article…isn’t it still the practice to make authoritative claims of absurd ACCUSATIONS such as: “… the current decline in confidence and economic activity is due to the SEC’s lawsuit against Goldman.”

    SAB: Agreed. But how does the blog change this. Where is the innovative alternative to Dodd-Frank?

    BTW who does “old boy school” play this Saturday?

  91. And your point, other than piggybacking a blog for the sole purpose of self-promotion and hijacking a thread, is what exactly?

  92. Deregulating the market is equivalent to deregulating traffic laws; it only helps the behemoths. Highways and intersections are the marketplaces of transportation where people in cars, trucks and other vehicles compete for the ability to get from one place to another. Deregulation of transportation would result in behemoth, heavily armed vehicles dominating our highways with the rest of us travelling at our risk in fear and trembling. The overall traffic flow would be a trickle of its regulated level… so overall freedom to travel would be reduced. Education is the key to smooth traffic flow with enforcement an essential adjunct.
    Same for economics… we’re failing to define essential rules, eliminating enforcement and we already have a population and Congress (and Larry Summers) who are abysimally ignorant about economics. Ignorance and lack of enforcement will result in a permanent economic Recession. It may well be that the concentration of wealth and power in the hands of fewer and fewer people that is the root cause of the current Recession. I’m working on a model that might demonstrate this and will post it on my own blog when it’s sufficiently robust.

  93. Ooops…. remember, GDP is a measure of the flow of goods and services in an economy. It is comparable to total traffic flow integrated over a years time.

  94. Mr. Sorkin, like so many of us, is taking a tribal view of our economic system. Tribalism, which is what our brains have evolved to support, universally has two sets of rules and myths: for those in the tribe there is one set, one myth being that the tribe is good, special, the best. The Ten Commandments, just to name one tribals set of rules, applied only within the Hebrew tribes. One could slaughter, rape and pillage other tribes and be perfectly good. Sorkin sees the world this way, and his reasoning is perfectly consistent with his biological bias.

    However, we are outside his financial tribe and are getting pillaged by it. We have two choices…. use our common government to bring his tribe (and the entire Wall Street Tribe) into a pattern of behavior that treats us all equally, or we can sit here and be plundered at will. It’s amazing that we’re struggling with this issue. However, Sorkin’s tribe is united about what it wants..a bigger share of the pie… and we’re not united about how to produce a level playing field.

  95. Stephen A. Boyko

    I agree and have used the traffic analogy many times especially how it relates to the US and UK relative to 1-size-fits-all trying to govern determinate and indeterminate economic environments. But given that the financial services industry is an oligopoly, does not 1-size enable the oligopolist to capture order flow and replicate what you argue against? That is why I favor randomness segmentation supported by regulatory proportionality.

    See: Comments on Release No. 34-49695, File No. S7-22-04 (June 9, 2004)

    http://sec.gov/rules/policy/s72204/saboyko060904.pdf

  96. Bruce E. Woych

    BEW: The ultimate lack of trust comes from people who were privy to the practices that try to blame the system and victims but never advise us what they witnessed that was wrong.

    SAB: How do you know that I did this? What facts to you have to support your allegation? Unsupported criticism are biases

    This is simply a failure to admit that you are a consultant and your business would suffer if you were to begin defining true transgressions in the wealth market. You know what I mean. You are very much more capable of defining the problems. Your theories are business propositions that are essentially “forward thinking” regulatory mumbo jumbo.

    Overall a fair exchange! thanks for the courtesy Stephen.

    Sorry the “reply” buttons weren’t lit on the responses I really wanted to Thank Annie for her conscientious response as well.

  97. The Wrecking Crew, a very easy read, is a good start to “positive” regulation – instead of regulations being “don’t do this”

    real regulation is “let’s do this because it is best practice”…

    We had a level playing field. And not just a level playing field but a foundation for research, innovation and progress – “minimum wage” and taxes that supported and maintained civilization’s infrastructure. People who BUILT the civilization know its value and figured out how to keep the currency flowing.

    Best practice has more of a following in the medical arts than it does in finance. And there is total freedom to make it a BETTER practice through the scientific method.

    The tribe gave itself permission to do what is “best” for them. Now they act like everyone else needs their permission to “produce a level playing field”. I agree it is amazingly ILLOGICAL that we are struggling with this issue…the dark side of political correctness is opening up “social space” in another tribe’s organization so that a vicious minority can create havoc as a smoke screen for the theft.

  98. Bruce E. Woych

    so here we have obfuscation by total fancy pants equivocation:

    “Adding regulatory costs without corresponding benefits creates a governance trap for the SEC. This is the regulatory equivalent of Heisenburg’s Uncertainty Principle. Heisenburg posited that the simultaneous measurement of two conjugate variables—such as regulatory commands and the level of commercial activity— entails limitations on the precision of the management for each variable. The more demanding regulatory commands for a given level of commerce, the more imprecise the management of commercial activity due to transactional transferences to market externalities. This, in turn, causes the capital market to be less transparent and less efficient6.
    Regulators set governance policy7 by choosing commands appropriate for the incentive set available in the economy. Incentives are the potential for net benefit in terms of economic profit. Commands are the package of standards and rules that regulators enforce to reflexively alter behavior in pursuit of profit. Standards and rules are divergent concepts. Standards are prospective societal policies that enable the realization of norms relative to cultural values. Rules are the retrospective codification of best-practice procedures that should, in theory, optimize market efficiency. Rules and standards can be perceived as alternative mechanisms through which the objectives and principles of regulators are satisfied. Financial product
    2
    innovation now requires that “risk” be differentiated from “uncertainty.” Historical information derived from financial statements that is used for risk-related predictions is separate and distinct from forward-looking information that projects future operating results of uncertain enterprises. Conflating “risk” with “uncertainty” results in a misspecification of data causing asymmetrical and/or asynchronous information flows. Governance misapplication due to an inability to disclose the unforeseeable brings into being incentives to conduct business either offshore or underground.”

    from your statement and link above:
    “nvestor rights (governance commands) have to be proportionate to investor responsibilities (due diligence).

    If rights greater than responsibilities: public sector rent seeking. If responsibilities greater than rights private sector free-riding. This is one reason why you need market segmentation for correlative information (See GAAMA Model text and footnotes for Comments on Release No. 34-49695, File No. S7-22-04 http://sec.gov/rules/policy/s72204/saboyko060904.pdf).”

    which truthfully bullies the SEC into non enforcement by threatening the failure of business exploitation or chasing them (of course legitimizing…) offshore shadow economies of dissent against controls. Outlaw thinking for outlaw rent seeking. And you seem to buy it and support it?

  99. Bruce E. Woych

    Thanks Annie…a reality base at last! Bruce

  100. Actually no. A healthy, sustainable organiztion must maintain a dynamic balance between efficiency and adaptability. Large systems get some efficiency increases from scale, but lose adaptability for the same reason. Small companies must adapt to the markets to survive. Large companies are most efficient when they can scale up and not change, so their best strategy is to make the market adapt to them. (Theory of mass production, and why old companies seldom innovate…it kills their ongoing business) The maneuvering by the behemoths of Wall Street are to make us adapt to what they are rather than have them adapt to our legitimate expectations.

    Dictatorships have the same problem, as time goes on they become fixed and spend most of their energy forcing outsiders and the individuals within them to adapt to their fixednesses. Any other strategy is too complicated and requires multiple times as much energy to manade to manage.

    The virtue of segmentation, many small competitors, is that each player is too small to have any chance of modifying the market, so must remain responsive to survive. The breakover point from adaptation to control is somewhere between a 5% and 20% market share. At 5% one can organize an oligopoly that dominates the market… at over 30% or so you can shoot for dominion. We have erroneous ideas about what a monopoly really is.

    Same issue with minorities in society. Less than 5% they have to adapt. By 20% or so (as the Sunnis did in Iraq) they can shoot for control by manipulating other blocks.

    Good to interact with you again.

  101. @ Anti-Nemo

    So now we have representation, at least theoretically. Do you like it any better?

  102. great comment.

  103. “Our capitalist system–which until recently we considered the best, most pure version in the world”

    Who is we here? I certainly never did. I considered it much better 3 years ago than today, but best in the world, never ever. Now im not American, please tell me Americans were never that deluded for the we to include the majority of the population. If that was ever true, it were another indication just how bad the American system is.

  104. This guy seems to think “punitive taxation” is a bad thing. No. What would be a bad thing for this guy is an orange jumpsuit for the perp walk.

  105. SJNI – “it explains why so many mainstream americans took out subprime loans thinking they were going to make a quck buck.”

    This is always a good one. Let’s put it this way – YOU are holding a million dollars in your hand. Some guy with no income and nothing to his name walks up and asks you for a loan to buy a million dollar house. YOU (being among the best and brightest), GIVE IT TO HIM.

    Now – BLAME THE GUY WHO TOOK THE MONEY!!

    Who had more responsibility at the outset – you holding the money, or the hobo that asked yo for it?

    Blame the hobo is the lamest excuse ever.

  106. It’s the circle of life.

  107. Been busy, missed this –

    Here is the data that someone kindly graphed for us:

    Note the relationship in the previous Great Depression, vs. this one. Note the past 30 year trend.

    I am generally suspicious of conspiracy theory type arguments – the capitalist class, etc. – but there seem to be some deep societal changes (driven in no small part by globalization and how this has changed the balance of power between mobile capital and immobile labor). Yet it does seem off that corporate officer pay has stayed so high, with CEO’s getting fired for poor performance after a year on the job receiving 20 million payouts.

  108. The source looks to be not working, does anyone have a backup or mirror website link I can use. Thanks, oh I got your link ok.

  109. I think our hedge fund guy should consider himself lucky if the only response to his predatory financial practices were punishing taxes. I’ve know people who have lost their children to family services because they couldn’t find work or afford housing. Personally I favor the guillotine for those that profit from making us watch helplessly while they destroy our children. A 99% tax really seems far too gentle.