This morning I woke up to a bunch of hedgies on CNBC prattling on about how "the best and the brightest went to Wall Street" over the last 30 years or so, while at the same time blasting away at the utter failure of all the prognosticators (such as Bernanke) on the economic outlook.
There are mornings that I hate rolling over and pushing the button on the remote before I have had a good espresso, and this was one of them. Had I not been groggy I might have been driven to shoot my television.
What is it with these people? About the only guy on there that made any sense at all was Michael Steinhardt.
Let's put a few things into perspective, specifically:
As I have repeatedly noted in The Ticker, going back to its inception, securitization is inherently a process of wealth-stripping. That is, if a given pool of loans has a true risk-adjusted return of 200 basis points over Treasuries of equivalent duration that is all the money that there is in the deal.
There is no "wealth" to create through securitization - only wealth to strip - and this assumes the process is clean and honest.
The fact of the matter is that the process has been anything but clean and honest; the claim of "wealth creation" in any of this "financial product innovation" is a bald-faced lie.
The only way you can appear to have "created" wealth through securitization is to in fact steal. That is, to misrepresent the credit quality in that deal so that people will pay you more than the deal is actually worth. What's worse is that the inherent law of business balance (that prohibits getting something for nothing) means that in order to have a total (across the spectrum of those loans) return that is higher than simply portfolioing them at origination requires lots of stealing, because every hand that a deal passes through is yet more stripping that inherently must take place, since nobody works for free.
These people weren't "the best and brightest" - they were thieves. Theft by obfuscation is still theft. If I bamboozle you into buying something at above its true market value by misrepresenting something in that transaction the common word for what I just did is "defraud."
There is much wailing and gnashing of teeth about how the government is being "unfair" in the bill passed in the House yesterday to use the tax code to enforce bonus constraints that were put forward multiple times over the previous six months and ignored by Wall Street. This sort of "stick" goes with the "carrot" of getting involved with government, as anyone who has dealt with government knows.
One of the most dangerous things you can do with the government is to think you control them. All the lobbying and molly-coddling over the previous twenty years gave Wall Street the idea that they could literally give the finger to Washington DC and by kicking back another $50,000 in campaign contributions DC would wink and nod.
That was a critical miscalculation that has now blown up in their face. Too bad so sad.
I have also heard people complain about "evil speculators." Well, let me put on my pointy hat here, because I am one, and if you claim to be an "investor", so are you.
Unless you buy your stock in an IPO, you're a speculator. That is, you profit only if someone else loses, and if they profit, you lose - directly or indirectly.
As an example, not long ago I bought a chunk of Citibank stock at about $1 a share. Yesterday I sold it just over $3. Nice profit. But the guy who sold it to me obviously believed it was going lower, not higher, or he wouldn't have sold it to me at that price. He did, and he was wrong, while I was right.
While his "loss" may have been missed opportunity (as opposed to actual capital loss) the fact remains that I made money and he did not. When I sold that stock the price continued to decline somewhat, and as such the person who bought it from me turned out to be wrong, and I (once again) right - at least for yesterday. Today may be a different story - Citibank may trade at $2, or $4, and if its the latter then I'm the one who made the bad decision.
This is the essence of speculation, but unless one of us is trading on material inside information or putting out something for public consumption that is intended to mislead people this is an honest process of educated guesses. The person who makes the more educated guesses over time should, all other things being equal, wind up with more of the money.
I may be one of the "smartest guys in the room" (you be the judge) but I would never go so far as to claim that I am somehow "adding value" to the system by being present within it, other than as a provider of liquidity. Liquidity is not to be underestimated but liquidity is not wealth - it is the lubrication that allows wealth to move from one place to another. While it has value it is NOT an "addition" to the total wealth in the system, in fact, it is a subtraction, because with each trade there are slippages, costs and taxes involved - as my commissions paid will attest.
So let us call ourselves what we truly are. Providing liquidity to a market is important, whether that is done by an investment bank, hedge fund or as individuals trading the markets.
But we're not "adding wealth" - we are providing liquidity - and this assumes we are performing our function in the system in an honest fashion.
When you see trades put on as occurred in the hour or so prior to The Fed announcement that were clearly directional and appear to have been made with foreknowledge of The Fed decision to buy the long end of the curve, or when you see ratings that are absolute garbage and cause people to lose hundreds of billions not through speculation that turns out to be less informed but due to misrepresentation, that's not honest speculation.
That is theft and fraud, and until we separate out the two and apply appropriate sanction to the thieves we will continue to have distrust in the markets along with an increasing number of people taking their liquidity ball and bat and going home.
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