Should all financial innovation be curbed?

I have to say you have failed to point out the collusion, in both the US and the UK, between the politico's and the financial services industry.
They both benefited hugely, profits for the financial services and tax revenue for the
governments of both countries which ended up being a mirage.

"These CDOs seemed to offer the safety of US Treasuries or UK gilt-edged stock - they had the same AAA rating - but with a much higher yield".


The above says it all about the financial collapse. "We bankers are super clever and provide treasury security with better returns".

There will always be someone who is adamant they can remove the "risk".

I disagree entirely with high brow intervention and more regulation . The answer is enabling the risk to be clearly identified and understood by Joe Average. Who would of invested in CDO's if it was clear you were buying mortgages on New Orlean properties-

Answer - NO ONE...

The very word innovation, along with the word compensation, have been hijacked by the business and financial community as alternative words to "scam".

Innovation is a new improved way of doing things. If it makes things more obscure then it is not in the true spirit of innovation even if providing a very one sided improvement.

Compensation is nothing other than what you should rightly receive after being wronged.

Back to plain English please.

RP wrote It is taken for granted by regulators and governments that the likes of you and me need protecting from our own ignorance and folly when investing.
-------------------------------------------------------------

Common sense. If anything seems too good to be true then it is not true. The "innovation" is a hiding of truth to ensnare the gullible. It is a shame nearly all the brightest and best were taken in.

I am interested in your suggestion Robert that Lord Turner and Paul Tucker are in the running to be the next Governor of the Bank of England. Both have attracted criticism for their roles and both have been heavily involved in the banking industry. Mind you I read this today about the new appointee to the Monetary Policy Committee.

"If you were from Mars observing the UK over the period of the credit crunch you might think that it might be best to avoid appointing a banker at this time and that ... it would be particularly wise to avoid appointing someone from Goldman Sachs......So I guess our Martian is currently wondering about this appointment!"
https://t.co/uZPNJ89

As Pete Townsend put it "Meet the new boss,same as the old boss..."

A well known Scottish engineer put it rather simply: "Ye cannae change the laws of physics". And in the world of financial innovation, the same applies - what comes out cannot have a significantly different return/risk profile to what you put in. Now, it may be that you can dissociate the risk from the return, shunt it into a backwater somewhere, but it's still in the system somewhere.

So financial innovation can never remove the risk, all it can ever do is repackage it. If you create an instrument which appears to have a too-good-to-be-true return to risk profile, that can only be at the expense of the risk being hidden somewhere else in the system. The result - investment banks create profits and bonuses from the good bits while hiding the not so good bits elsewhere...which eventually leads to central bank bail-out.

Which brings us back to innovation in investment banking. Inventing new ways of making finance available to the productive economy is clearly wealth creating. But the further the financial instruments get from this fundamental objective, the more it turns into a zero sum game. And in a zero sum game, the profits made by investment banks and bankers have to be coming from elsewhere.

THEY CAN'T CURB IT!!!

Don't you get it - financial innovation was created to extend the booms. It allows the banks to increase the supply of debt by supposedly making capital 'work harder' - which basically means 'new ways of issuing debt'.

The problem the world of finance has is that it's in a bind, if we got rid of all financial innovation tomorrow then you could wave goodbye to that car loan, the mortgage (probably), credit cards and many other forms of debt. The width of the 'debt audience' would be much reduced - the result would be deflation on a scale not seen before as the credit is wound back in.

Now some would argue this is a good thing - but the pain is there for all to see. We're just 'touching the cloth' of the same retraction of credit - the banks are hoping that more financial innovation will help them 'get out of this credit hole' - but all it will do is push the problem further down the line and magnify it.

Basically we're a nation of credit junkies, the money masters have enslaved the population (please tell me if you're all out there working for fun!) and this has been their plan ever since Jesus kicked over the tables of the money lenders in the temple (presuming he existed)

Financial innovation also helps keep the Ponzi scheme going - you know, how businessmen are always talking about 'confidence' in the Economy - well in my experience only Ponzi schemes require confidence to function - genuine wealth creation doesn't need any confidence. However by making finance as 'complicated as possible' - the bankers can ensure their jobs for life.

This is where writingonthewall comes in - at first there were computers - and IT played the same game, so writings got off his backside and learnt how they work - lo and behold, they're not as complicated as the IT guys made out (once you strip out all the acronyms and nonsense speak)

....then he moved onto finance - and guess what? - same game, different park. Using acronyms to confuse the general public - a sure sign of a confidence trickster.

I am quite happy with people who do not understand finance - it's not designed to be understandable. What drives me mad is those capitalists who think they understand finance - but every day in this blog show they understand very little about the true concepts of finance.

Take CDS's for example - does anyone really believe the issuers of CDS contracts really have the assets to guarantee all those contracts?

Of course they don't - and one day we will find out. The capitalists argue that the contracts will 'cancel each other out' - shame that's not what happened when AIG popped!

The people have no idea how shaky the whole system is - and this is nothing new, look what Henry Ford was supposed to have said about banking...

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

This is still true today - if the people actually see how it works (and they're getting better and better each day) - there will be a revolution - not least because they will realise all the wealth generated comes from them and a small section of society exploit that and live without having to raise a finger as a result.

What's the difference between capitalism and regime like Mubarak's? - well the only difference is the impression of choice capitalism gives - i.e. you control your own destiny.
Unfortunately this is wholly untrue - there are very few millionaires in Britain who weren't born millionaires (or heirs to millionaires) - the chances of success are very poor for even the most educated and dedicated of society.

Meanwhile you don't have to look far to see the feckless and moronic populating the 'wealthy elite' of the country.

One day the hard working people of Britain will work this out - then they will go on strike and we shall see how the 'wealth creating financial sector' manages without the source of it's wealth extraction - i.e. labour.

However I'm sure a capitalist (probably more than 1) will claim that 'financial innovation puts food on your table' - well it might have done for the last 10 years....but only at the cost of not putting it there for the next 10! It's merely a way of bringing forward demand (yet again, lost on capitalists because they try not to think too hard about what a financial instrument does - only what it can produce for them)

Aesops fable - the hare and the tortoise - capitalism in a nutshell.

RP wrote It is taken for granted by regulators and governments that the likes of you and me need protecting from our own ignorance and folly when investing.
-------------------------------------------------------------

If your grandmother wouldn't understand what it is about, then leave it alone

Bankers have been compared to pre-1789 French aristocrats. There were many of them who really cared about the people who lived on their vast estates (and kept them in luxury at the Court).

However the "Revolution" treated them all the same.

Are we by any chance heading for something similar here?

https://www.accountingweb.co.uk/blogs/jefflcbba/mad-lemming/i-am-ashamed

"a new culture of busybody interference" is what I would call moving from regulating SIFI's to supervising them i.e. intervening pro-actively in the sensitive decisions and proposals. Refusal to cooperate would bring the removal of underwriting the savings of individuals who would quickly switch to those institutions offering 100% government backed security. The debate is not far away from proposing the retention of sizeable levels of public ownership as comparator/exemplar/strategic control of the finance sector but the Adam Smith head banger, Osborne will not allow it.

2. At 10:46am on 8th Mar 2011, hughesz

If Joe public knew all the risks of investing - they would NEVER invest in anything. This is the reason why financiers make it as hard as possible (with packaging up debt and disguising it) for the end investor.

It's similar to mafia money laundering - only this mafia bought the government first (through lending) so it didn't interfere with their robbery.

You will never get banks to agree to openess and allow consumers to act 'rationally' - in fact the first thing they will do is thraten to leave and punish us with high unemployment for not allowing them to rip the public off......I suppose exactly as they are doing now.

Only fools think this is not the case now - the cat is out of the bag, we know banks are crooks in suits, we're just deciding on how best to deal with them.

6. At 11:17am on 8th Mar 2011, Dunstan wrote:

"Which brings us back to innovation in investment banking. Inventing new ways of making finance available to the productive economy is clearly wealth creating."

Really? - how? Why do you make such statements which have no reference to reality?

The 'wealth' generated is the difference between the "true risk" and the "implied or expected risk" of the end investor - which financial innovation produces.

....or do you have a better explanation? I've been waiting 4 years for one so I'm dying to hear you justify your glib statement about innovation creating wealth.

It created NOTHING - except FRAUD.

because it purports to offer a mathematical proof that much financial innovation is socially and economically harmful, by definition as it were, turning on its head the prevailing orthodoxy of the previous 30 years that markets are rational and efficient.
----------------------------------------------------------------------


It was the mathematical proof used by the banks (risk assesments and businees models) that got us into this mess in the first place.

What the boards of banks and the regulators have proved over the last 30 years is that they don't have the common sense to assess the true "cost" of their action/inactions.

It was their blind leadership that created a "market" that was unsustainable leading to a tbtf outcome.

I was employed by Citibank when they first started packaging up mortgages in the UK 25 years ago (securitisation).I and many others could see it was unsustainable then.

When banking was turned into a sales led and sales driven business model,
the outcome was inevitable.

I have been mocked on here that a Credit Union can not match the products and services provided by the High Street providers.
Yet consistently our CU offers far better service and products.

So please mock, which Credit Unions are "socially and economically harmful".

8. At 11:28am on 8th Mar 2011, yam yzf wrote:

"If your grandmother wouldn't understand what it is about, then leave it alone"

...and your pension? - are you telling me you know everything your pension invests in?

What about your S&S ISA? - are you aware of all the investments of all the funds in those?

What about other savings products? - any idea what the underlying holdings are? what they mean? what they're for? what their risk is?

All your confidence is based on the people who manage the funds - and those people are held accountable by......well the sack. Not really accountability considering they could have your retirement in their hands?

How many pension funds got screwed over when the Volkswagen's share price went supersonic?
You think it only affected hedge funds and therefore 'the wealthy'? - then you need to look more closely at your pension fund holdings.
https://www.independent.co.uk/news/business/news/porsche-in-20bn-sting-976896.html

Your advice is good - but unfortunately the consequence is you cannot invest in anything - because you have no idea what the motives, actions or investments of the funds that make up your overall investment are.

This is the dilemma of investment - greater diversity means less and less control. Less diversity means greater and greater risk.

I don't feel sorry for the 'kiddie investors' who think they know what they're doing and lose out - but out there are millions on unwitting pension holders who have no interest in finance - and they're being fleeced by the banks and their financial friends.

Nothing will be curbed though will it? Lord Turner has made various recommendations over the past few years, none of which anyone in the financial services sector has taken a blind bit of notice of. Nor will they. The bankers and politicians are gently shepherding Lord Turner off into the economic long grass.

I agree with #2 hughesz. What sane person, knowing what a CDO consisted of (largely sub-primes) could have thought it was low-risk ? We have never, as far as I know, been told how and why the Ratings Agencies came to gave these things an AAA. And then there is this. If I, as an individual, buy goods or services from a business, I'm covered by various guarantees (e.g Sale of Goods Act etc). In B2B transactions, the Law of Contract applies. Yet here were the banks, bundling up their CDOs, selling them, taking their commission and.. that's it. Did any business "stand behind" the CDOs they sold ? Buy a bond, and it's copper-bottomed, at least as long as the issuer is still in business - and sometimes (as with Ireland) when the government has to intervene to keep the issuing bank afloat. By contrast, as far as I'm aware, the CDOs were free-floating -there was nothing between the buyer and a motley collection of borrowers. Local bank branch staff could lend money like there was no tomorrow - confident in the knowledge that the comeback (and surely they must have had a pretty good idea) would have hit some other business, while leaving their commission safe. Like the traditional description of a journalist "... power without responsibility"

"Schleifer et all start from the premise - which no liberal ideologue would dispute - that most financial innovation is based on the desire to create investments that deliver reliable, above average cash returns to investors."
WRONG
The desire is simply to produce investments on which they can earn commissions/charges.

"there was a powerful motive to repackage and reconstruct other kinds of loans so that they would mimic those ostensibly low-risk government bonds."
The motive was to con the gullible as Mervyn King pointed out.

The problem is the lack of stability in the investment market due to the instant availability of information to anyone with a little knowledge of how to get it. How do investment managers persuade the public that they know more?
The answer is to bundle products so they become too complicated for anyone but a specialist to understand; then you can prove you know the bundle to the punter and persuade him/her that there is safety in numbers.
Oh for the bygone days of unit trusts when names like "Income Trust" "Capital Trust" actually meant something.

Of course more complicated instruments are pushed by the salesmen (investment advisor, money consultant, wealth health check assistant - call them what you like) because the commissions earned are higher and that affects your bonus.

These so called innovative products are essentially gambling systems.

There are many such systems which reduce the probability of loss. But inevitably the trade off is that, when a loss does occur, it is very large, so that the expectation of loss, or the amount that the loss will average out at over a long period, is not reduced. This fact, well known to those who have studied the mathematical theory of probability, seems to have been at last rediscovered by economists. It should have been well known to the very well paid "experts" entrusted with the task of investing clients money. It is astounding that those who classified some CDOs as AAA were not aware of it.

Increasing reserve ratios will not eliminate failures all together, only reduce their probability. Mervyn King is right to insist that retail and investment banking should be separated. Furthermore, retail deposits should be fully, not partially, covered by completely liquid assets, such as BoE deposits.

Let hedge funds and investment banks continue, because the desire of some people to gamble has to have legal outlets. But insist that they conform to strict trading standards and do not misrepresent their products as safe when they are not.

You just can't bring yourself to use the F word can you Mr. Peston? The CDO's and CMO's were not innovations at all, they were outright fraud, in my opinion of course. Somehow the banks have made this fraud legal and I hope Lord Turner brings some regulatory sanity to the City.

This has to be described as the oldest news going.

"The bigger the boom the larger the bust" has been known for over a century

People do not behave in robotic fashion, they may be entirely rational in what they do but prone to exaggeration or following the herd, has been known for even longer.

So we now have mathmatical equations to demonstrate what anyone with even a smidgen of common sense and some understanding of economic theory (not that the two always go together) could have told you in 1900.

The concept of restricting financial innovation is complete nonsense. For starters how would you define innovation - derivates are not innovation they have been around for 2000 years, securitisation or packaging of loans for at least 60 years, different layers or tranches of debt for centuries.

Also why should you limit it to financial innovation - after all did not the dot.com boom cause a crash as well? That had nothing to do with financial innovation.

As for restricting "innovation" in retail sector, that has nothing to do with financial stability but everything to do with govt, in typical patronising fashion, deciding that the great British public are incapable (and possibly uninterested) in risks and rewards of financial products. Retail regulation should simply be about ensure that risks and rewards and clearly and consistently explained and people should be allowed to take the own decisions (and face consequences when they get it wrong). Obviously some regulation is needed about how a financial product is sold (ie no high pressure tactics).

Even in retail areas I see lots of "innovation" over the last 30 years - we have many different types of mortgages finance shared ownership schemes, equity withdrawal schemes (much abused) just to name a few

2. At 10:46am on 8th Mar 2011, hughesz wrote:

"These CDOs seemed to offer the safety of US Treasuries or UK gilt-edged stock - they had the same AAA rating - but with a much higher yield".


The above says it all about the financial collapse. "We bankers are super clever and provide treasury security with better returns".

There will always be someone who is adamant they can remove the "risk".

I disagree entirely with high brow intervention and more regulation . The answer is enabling the risk to be clearly identified and understood by Joe Average. Who would of invested in CDO's if it was clear you were buying mortgages on New Orlean properties-

Answer - NO ONE...


Could you not argue that human nature is to chase rainbows? People want higher returns without doing much, (including reading the fine print evidently!)

I would never buy some 'product' off a bank, because fundamentally if you are buying it off them, they are SELLING it. If this product was so great, why would they want to sell it to you, if it yields better than a govt bond with the same risk?

I 'invest'/'gamble'/'speculate' with my own money, if I get it wrong it is entirely, 100%, my fault. In a sense I fully expect to lose, but at least, perhaps, the odds are slightly more in my favour than if I buy something claiming to be 'low risk', made for me by some bank trying to screw me.... Does it take more time doing my own thing, yes, but I'd rather give it a proper go and admit if it goes wrong I'm not good enough rather than rely on some bank to flog me something useless!

This would stir up a bit if financial innovation if it gets past the mods,

https://www.youtube.com/watch?v=u2OfFSlylkQ

Then google FMOTL and read similar.

Baiscally what they're saying (confirmed by Blacks 9th Edition) is that if the people were savvy and used the literal interpretation of statute then every loan would be unenforcble along with other civil statutes. The only reason the corporations win is because the people give up too early, there are hundreds of success stories where persistent individuals have defended themselves and won, the legitimacy of their claim being the agreement was made with a legal fiction i.e. their corporate self creted by the state at birth and they are the only party that puts any consideration on the table. Interesting stuff and potentially armageddon for lenders.

So people are starting to see that simplification is the way forward, this has been discussed at length on this very same board.

I am glad to see the EU at least proposing among other things to ban naked short selling which to me is nothing but fraud.

I would hope they go further the squealing from the investment bankers is enough to convince me they are on the right track.

Robert Peston wrote:

"As you know, in recent years, the most conspicuous and deadly example of what became known as the search for yield was the explosive growth of structured or tranched products, of AAA-rated bonds - collateralised debt obligations - manufactured out of low quality or subprime loans to US homebuyers.

These CDOs seemed to offer the safety of US Treasuries or UK gilt-edged stock - they had the same AAA rating - but with a much higher yield.
"

OK, I admit I'm not a banker, but with all these eroneously risk rated (presumably) investment products, has anything been done about the agencies issuing the risk ratings? Isn't this a key checking and balancing system that failed?

12. At 11:39am on 8th Mar 2011, writingsonthewall wrote:

>6. At 11:17am on 8th Mar 2011, Dunstan wrote:

>>"Which brings us back to innovation in investment banking. Inventing new ways of making finance available to the productive economy is clearly wealth creating."

>Really? - how? Why do you make such statements which have no reference to reality?




I don't mean that the banking activity creates wealth in and of itself. Rather, that an "efficient" banking system can make the difference between a widget company being able to expand (credit available) or not (credit not available), and it is this expansion which is wealth creating.

Making credit available to wealth creating business could be described as "enabling wealth creation". Making the this process more "efficient" *can* have a second order benefit to wealth creation enablement. But, as I wrote, trading in complex financial instruments which are wholly abstracted from this end becomes a zero sum game.

Apologies for not making this clear.

The markets can be rational and efficient, though driven by fear and greed. But the banks have a kind of monopoly ( monopoly money anyway).

The regulators might license or approve financial products (maybe under existing legislation ie. the dangerous dogs act). Then banks would be free to create AAA junk but far fewer people would buy it.

I always knew that 0% credit was peculiar, but I borrowed 28K on cards and made 3k in interest before the bubble burst. If I knew it was odd, so did the banks then.

14. At 11:48am on 8th Mar 2011, writingsonthewall wrote:

"...and your pension? - are you telling me you know everything your pension invests in?

What about your S&S ISA? - are you aware of all the investments of all the funds in those?"

Do not care about the first and do not have the second

"What about other savings products? - any idea what the underlying holdings are? what they mean? what they're for? what their risk is?

All your confidence is based on the people who manage the funds - and those people are held accountable by......well the sack. Not really accountability considering they could have your retirement in their hands?"

Again, do not have/care about them

"Your advice is good - but unfortunately the consequence is you cannot invest in anything - because you have no idea what the motives, actions or investments of the funds that make up your overall investment are."

Credit Unions? Building Societies? Money under the matress? Gold?

"This is the dilemma of investment - greater diversity means less and less control. Less diversity means greater and greater risk."

NSS

"I don't feel sorry for the 'kiddie investors' who think they know what they're doing and lose out - but out there are millions on unwitting pension holders who have no interest in finance - and they're being fleeced by the banks and their financial friends."

There is always a SIPP option.

Anyway, back on topic, if your granny does not understand....

Can someone please explain to me why Gordon Brown praised Lehmans for its 'inventiveness' ten days before it collapsed?

"I would like to pay tribute to the contribution you and your company make to the prosperity of Britain," Mr Brown told assembled bankers in London's Canary Wharf . "During its 150 year history, Lehman Brothers has always been an innovator, financing new ideas and inventions before many others even began to realize their potential."

16. At 11:54am on 8th Mar 2011, Anselm wrote:

"We have never, as far as I know, been told how and why the Ratings Agencies came to gave these things an AAA."

We have I'm afraid - the reason was because the banks paid the agencies to rate their products.

The con here is that it's (rightly) assumed that ratings agencies are impartially rating instruments - the reality is they are far from impartial.

An excellent post but you are quite wrong about this:

"That said, there is nothing particularly radical about this conclusion as applied to the creation of retail products. It is taken for granted by regulators and governments that the likes of you and me need protecting from our own ignorance and folly when investing."

In the UK at least, retail investments are just as prone to "local thinking" as our regulators regulate, not the products themselves (the innovation) but the marketing of the product (what claims are made for it etc).

And therein lies the problem: Had, for example, the regulators here and in the US ruled that a retail mortgage of more than, say, three times salary was unacceptable then the innovations further up the chain (CODs etc) would never have been possible. Instead they just regulated the marketing of such products with health warnings etc.

Exactly the same happened with Home Income Plans in the '80s and Endowment Mortgages and Personal Pensions in the early '90s. All were objectively v poor and high risk products that should not have been allowed on the market in the first place. Instead they were allowed, subject to a bit of vague small print being included. The result was people bought them in droves, unaware of the "local" or low-ish probability risks you mention (in the case of endowments and personal pensions, that the hidden charges were so high as to render the products useless).

The answer is that financial regulators like Adair Turner should regulate the product itself, not just in institutional markets but in retail markets too.

Confusion marketing 101. Like oil and electricity, money is a commodity. When all other things are equal, a (retail or institutional) consumer will choose between different commodity suppliers solely on price. Financial institutions providing these services do not want to compete on price – where is the margin in that?

Consequently, they use a smoke screen. The technique is sometimes referred to as “confusion marketing”. This involves wilfully confusing the consumer regarding the truth about the product.

Investment bank institutions employ mathematicians to assemble basic financial components trading at commodity prices into more complex products, the true value of which are opaque. Such products are marketed as “innovative”, “structured” or (worse) “highly structured”. They are marketed as “adding value”. Of course the value is always added to the seller! And if the structure is sufficiently impenetrable, the buyer may never know he's been had. Borne from ignorance, it's a form of victimless crime.

Designing and marketing such products to “professional” institutions cannot be made illegal. But there should be no tax payer guarantees of such products.

Retail consumers should be protected as much as possible and better educated via the national curriculum. It is a sad that UK research shows that many retail borrowers believe a high APR is better when taking a loan.

Confusion marketing works.

"#20 Justin wrote:

Also why should you limit it to financial innovation - after all did not the dot.com boom cause a crash as well? That had nothing to do with financial innovation."

Doesn't financial innovation prolong and exacerbate the losses provided by the bubble? Dot com is just another equivalent of the sub prime market. Investors with not a clue about the underlying business.

I guess the mortgage market will bring about the next crash. Especially when the public sector cuts start biting. Anyone can see 40 year mortgages and 8-10 times salary house prices are totally unsustainable.

Our mad bankers need to be told one thing, over and over, until they get it: KISS - Keep It SImple, Stupid! Once they get it, we can have a truce. Until then, they remain pariahs.

From post 16 from Anseln;

"as far as I'm aware, the CDOs were free-floating -there was nothing between the buyer and a motley collection of borrowers."

Yes, the whole point of that "financial innovation" was to shift transactions into a NON-regulated arena.
As simply explained in the film "Inside Job" and known by everyone on the inside.
That's the point of all "financial innovation."
That's why Credit Default Swap generating AIG FP was in London and not New York.

Robert. Plenty of work for risk assessors then. But as eloquently pointed out by other more knowledgeable contributors here, the system is designed to fail isn't it. That's why it is so lucrative for those in the business.

21. At 12:07pm on 8th Mar 2011, al2975 wrote:

"Could you not argue that human nature is to chase rainbows? People want higher returns without doing much, (including reading the fine print evidently!) "

If we suppose this is true - then why have a system which promotes people with this inclination into power?
Surely it's self destructive for society to have all the people who's goal it is to be 'lazy' dictating how society is run economically?

At a personal level, I am doing my level best to get out from under the financial services industry by investing my pension in farm land, then using the land to produce food and renewable energy - I simply do not believe the system won't collapse and I don't want my hard earned money used to bankroll financial gambling, the exploitation of people overseas and the raping of the environment.

It is as plain as the nose on your face that the whole system is geared to obfustication - creating products that are so complex that the market cannot understand them, so cannot price them - this is the ultimate abuse - the circumvention of market forces - created and connived at by big financial business and their politician allies.

Until we all vote with our feet and take away our savings and investments from their greedy clutches the game of cat & mouse will go on until the final banking meltdown that we won't be able to afford to bail out, or UK PLC melts down under the impact of spiralling oil, food and import costs into an even worse mess than in Eire.

Actually market risk free trades are possible.

Take for example, what I do - develop post-tax hedge trades for a major banking group.

We take market risk positions and hedge ourselves through the tax line via a series of hugely complicated financial structures.

End effect: guaranteed revenues for us, and the taxpayer (in whatever jurisdiction we transact in) is the one standing at risk of loss on the underlying.

I love my job. Making huge amounts of money and putting one over all you mugs at the same time :-)

#31

"Retail consumers should be protected as much as possible and better educated via the national curriculum. It is a sad that UK research shows that many retail borrowers believe a high APR is better when taking a loan.

Confusion marketing works."


Very good point about education of the consumer. Maybe that's why the tories want to move away from vocational and practical subjects back to traditional subjects;-)

Wall St insists that we follow its model, where the super-rich get richer and richer, and the public support them when they hit trouble. Many think that the whole thing is corrupt.
Richer and richer.....while the American British and European public swallow the losses.
It ends up with a massive concentration of wealth in the hands of a few, and general public disadvantaged.
It is a profoundly flawed model, as the last few years have shown.
Governments need to change this model, before serious trouble erupts.

to offer a mathematical proof that much financial innovation is socially and economically harmful, by definition as it were, turning on its head the prevailing orthodoxy of the previous 30 years that markets are rational and efficient.
==============================================================

Obviously the author(s) are about 2 days away from a smear campaign suggesting they are muderers, rapists and child killers, waged by the economic fascists and their right wing lunatic media allies, who hate this premise or fact that neo liberal model is doomed.

25. At 12:27pm on 8th Mar 2011, Dunstan

My apologies for misunderstanding.
However you have raised a point that is never answered by the capitalists.

Banks advance debt (future stored capital) - but who allocated that capital to them in the first place?

The answer is - nobody - it's OUR capital, and they restrict the use of it in order to accumulate more (ursuary)

https://www.youtube.com/watch?v=JXt1cayx0hs

The money masters - this robbery started long before any of us were born...

Some on here have already highlighted this! But because they are not ‘bread and developed or go to the correct school of thought’ they are ignored.

The best brains are in the community not in the schools and when some one learns to tap into this resource then the better things will be.

Mathematics cannot be based on assumptions; that’s for the economist not for the mathematician. (1 and 1 are the same as 2, you cannot get passed this fact)

From post 25 by Dunstan

"Making credit available to wealth creating business could be described as "enabling wealth creation". Making the this process more "efficient" *can* have a second order benefit to wealth creation enablement. But, as I wrote, trading in complex financial instruments which are wholly abstracted from this end becomes a zero sum game."

Ask yourself the basic question, Why should private banks be allowed to create that credit out of nothing in the first place?
Why is 97% of the money-supply now dependent on borrowing?
No debt means no money.
The creation and of credit should be the prerogative of The People through it's Government.
And therefore its benefits too.
Reform of the money system is needed but not even spoken about.
Here is a good place to start;

https://prosperityuk.com/

16. At 11:54am on 8th Mar 2011, Anselm wrote:

"We have never, as far as I know, been told how and why the Ratings Agencies came to gave these things an AAA."

Rating Agencies have a number of risk models that test assets based on their own predefined stresses. Based on those stress test, a rating was assigned - and there are usually a number of different ratings assigned to one transaction ranging from triple A to junk according to the asset compilation, so whilst a transaction pool might be rated as top-notch, the notes sold might pay different coupons according to their riskiness. Clearly the rating agencies had not built in a "complete meltdown" stress test, but then again, nor did anyone else

Yes, the agencies fees are paid by banks - you buy a service, you pay for it

27. At 12:30pm on 8th Mar 2011, yam yzf wrote:

"There is always a SIPP option.

Anyway, back on topic, if your granny does not understand...."

rather contradictory isn't it? - you suggest a self managed pension fund but only in investments your granny could understand - which is 0.

If you're a SIPP holder then you're no better off than the kiddie investors - except your gambling with your retirement. I don't blame you for not having a pension - but without savings either - how are you planning to live after you're too old to work?

44. At 12:58pm on 8th Mar 2011, thomas_paine wrote:
Ask yourself the basic question, Why should private banks be allowed to create that credit out of nothing in the first place?
Why is 97% of the money-supply now dependent on borrowing?
=================
It is such a shame that the Irish banks did not realise that they could create credit out of nothing. Instead they borrowed vast sums of money and lent it out. When the borrowers could not repay, the banks were left still owing the people they had borrowed from and the Irish state ended up with the debt.
If they had created the money from nothing, they would not have had to pay interest and when it was not repaid it would not have mattered. Seems very incompetent to me, even criminal?

36. At 12:46pm on 8th Mar 2011, writingsonthewall wrote:

21. At 12:07pm on 8th Mar 2011, al2975 wrote:

If we suppose this is true - then why have a system which promotes people with this inclination into power?
Surely it's self destructive for society to have all the people who's goal it is to be 'lazy' dictating how society is run economically?

How else would the banks make a profit on commissions if there wasn't this market?? Banks wouldn't like that now, would they.....

But it is also a reflection of human nature that this desire to make a quick buck can cloud ones judgement so much, and they say the market is 'efficient', of course it isn't when you have irrational players involved (myself totally included!)

By the by, I imagine Trichet, on course to raise interest rates at the ECB, isn't planning on booking a holiday in any of the PIIGS anytime soon, look at them yields rocket....

writingsonthewall wrote:

"How many pension funds got screwed over when the Volkswagen's share price went supersonic?"

We didn't - we'd hedged ourselves through the tax line.

It was the UK Revenue, and hence the tax payer, who got massively screwed over here.

Haha! Seriously, we had a good old chuckle over that one

The late renowned economist J K Galbraith wrote the definitive history of the 1929 Great Crash. In later life he analysed common elements in financial crises and summarised them in his 1993 work 'A Short History Of Financial Euphoria'. I would recommend both of these highly readable works to anyone interested in the genesis of the current crisis.

I make no apology for repeating these quotes from the latter work:

"Speculation buys up ... the intelligence of those involved".

"There can be few fields of human endeavour in which history counts for so little as in the world of finance."

"The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves, in one form or another, the creation of debt, secured in greater or lesser adequacy by real assets."

"All crises have involved debt that ... has become dangerously out of scale in relation to the underlying means of payment."

"The final common feature is what happens after the inevitable crash. .... There will .. be scrutiny of the previously much praised financial instruments and practices ... There will be talk of regulation and reform. What will not be discussed is the speculation itself or the aberrant optimism behind it. .... the reality will be all but ignored."

"Markets in our culture are a totem; to them can be ascribed no aberrant tendency or fault."

A significant portion of both of these works describes the criticism and bullying of anyone who dares question the soundness of a boom. "If it does go wrong it will be your fault" has been the message directed to doubters from Paul Warburg to Robert Peston.

In our market system, rationality is treated as a crime!

28. At 12:33pm on 8th Mar 2011, sandy winder wrote:

"Can someone please explain to me why Gordon Brown praised Lehmans for its 'inventiveness' ten days before it collapsed?"

For the same reason David Cameron has just announced a war on beaurocracy in business. They all talk rubbish.

...and you must get off this 'Gordon Brown' thing - the guilty are a much wider set than 1 man - your obsession with Gordon is not going to help you find the true culprits.

To suggest Gordon was at fault for everything (as you have intimated in your previous posts) is to give him credit for something he knew very little about.

The problem is that the insistance on blaming Gordon is diverting attention from the real culprits - allowing them to get away scott free.

....now why would anyone want to do that?

1. At 10:37am on 8th Mar 2011, richardcalhoun wrote:
"...I have to say you have failed to point out the collusion, in both the US and the UK, between the politico's and the financial services industry..."
++++++++++++++++++++++++++++++++++++++++++
From my POV you could perhaps include some of the judiciary in this.

As far as I can see some of the instruments, or "innovations", while not in breach of Statute (because they were repealed in Big Bang") might well be against common law or Equity. However the grey eminences seem to have been rather quiet on the matter.

Now, it may well be that it's hard for an aggrieved party to work out if he has a case, because the consequences of possible malfeasance have burdened whole nations' taxpayers, and millions of shareholders, and arguable injustice spread.

However, just because it has been so distributed does not need to mean that it does not very much exist.

Unfortunately however it would seem that it would have to fall to someone outside the financial clique to bring the needed actions.

This comment was removed because the moderators found it broke the house rules. Explain.

3. At 10:48am on 8th Mar 2011, Kit Green wrote:
Compensation is nothing other than what you should rightly receive after being wronged.

Back to plain English please.

- I believe it is American English for salary. Anyway, I thought they received compensation in return for having to sell their labour to capitalist pig dogs so compensation is an accurate description.

Kit Green wrote:

"Back to plain English please."

How's this for a job description in plain English:

What I do is redistribute wealth from the public purse to the private sector (specifically to my bank's shareholders, but also - of course - to me and my colleagues personally).

We do this perfectly legally through mind bogglingly complicated tax structures.

I believe fully in the justice of what I do. I am aiding the counterrevolution against the grasping undeserving hands of the scroungers in society: the ones who've never worked an honest day's work; the ones who contribute less than zero.

Of course I do what I do because I'm well paid for it (stupidly well paid actually).

But frankly I'd probably do it on the side for free in any case since I believe firmly in the ideological principle. Anything we can do to (legally) undermine the tax base is fine in my book.

If John Galt existed today, he'd work in tax structuring.

Looking at this entire thread, where anger with banks and bankers is justifiably manifested in virtually all posts, it seems to me that anger at bankers' bonuses is far less justified than anger at the way banks operate, in particular the "products" they sell. One is reminded of the comment - was it by Adair Turner or Lord Myners, that much of what banks do is "socially useless" or words to this effect. The UK Financial Sector is a big revenue earner for HMG. But I wonder what proportion of those earnings comes by bleeding poor UK residents with excessive charges and commissions and what proportion comes from overseas ?

47. At 13:07pm on 8th Mar 2011, AnotherEngineer wrote:

"If they had created the money from nothing, they would not have had to pay interest and when it was not repaid it would not have mattered. Seems very incompetent to me, even criminal?"

Thanks for that inaccurate analysis - actually the banks had no problems with creating the debt from nothing, the problem was the people who they lent that debt to were unable to pay it - then the small amount of assets (1 to 10) which allow that debt to be created were reducing in value and being withdrawn (by hard-up savers)

The creation of debt was not the problem (I mean plenty was created) - it was the servicing of that debt and the shaky premise on which it was issued (FRB).

...once again your quick remarks show an underlying misunderstanding of the way banking works.
The only thing that has prevented the irish banks continuing to make money from nothing is the reducing and fleeing assets the banks hold. The end result is having far more loaned out than you have assets to cover it - nothing to do with interest.

20. At 12:03pm on 8th Mar 2011, Justin150 wrote:

> how would you define innovation - derivates are not innovation they have been
> around for 2000 years,

Maybe the Romans all had collateralized debt obligations?

> how would you define innovation

There's no need to. Bankers would have demonstrate that their products have a useful, social function that is fully comprehensible to all the likely stakeholders (including the taxpayers). Let's call it the "Mervyn King Test". If they can't pass that, then Hong Kong beckons!

Schleifer's conclusions are not earth shattering - although I would question any study that seeks to mathematically "prove" how humans will behave. Alot of the financial products / innovations outcomes have undoubtedly been sub-optimal even for the banks themselves, and it is puzzling, academically speaking, as to why many of them persist today.

I think the answer is that the banks generally are stuck in a rut of having balance sheets that are just too big to finance on an on-going basis in conventional markets, particularly with so much nervousness around the sector, and they therefore believe they need the financial innovation just to try and keep the balls up in the air a bit longer.

They ongoing role of the implicit state guarantee is important as, to Schleifer's point, even to this day many (but by no means all) investors are generally assuming it will continue in perpetuity - despite clear guidance from the monetary authorities on a national and international level, that severing this link is the number 1 priority.

While painful, seperating investment banking from a highly regulated commercial banking sector seems to me the most likely way of bringing back the transparency required to give investors confidence that they can fund the banks assets and have a decent idea of what they are getting into. But even that seems a long shot in the UK right now due to the relative size of our banking sector compared to the rest of the world (Ireland and Iceland excepted).

Finally, there seems to be some confusion about CDOs, sub-prime, AAA ratings etc. Very quickly, banks originated US loans to borrowers with low credit scores. They sold these loans (true sale) to a bankruptcy remote company i.e. company has no other assets. This company sold bonds to finance these assets tranched from the most senior (i.e. first to receive all cashflows) to the most junior (last to receive all cashflows). Typically these underlying poor credit loans were 80-90% loan to value. The senior bonds would typically take up 70-75% of the capital structure i.e. if everyone defaulted, all the houses in the pool would have to fall in value by an average of 30-40% for the most senior bonds to lose money. That's why the agencies gave them AAA ratings -they thought the risk of that was so remote. A sub-prime CDO was another layer of "innovation" whereby 100-125 of the junior sub-prime bonds were sold to another bamkruptcy remote company and bonds were sold (from senior to junior) to finance that. How the most senior bonds in those deals got a AAA rating is beyond me as it doesn't (and didn't) take that much for those individual underlying bonds to get it the correlation between them was always going to be massive.

Incidentally, despite the train wreck of the US sub-prime market a large proportion of the original AAA rated sub-prime bonds are actually still current i.e. have not defaulted - which might validate the agencies' opinion frankly given how much fraud was rife in the original underwriting of those loans. I imagine 95% + of the sub-prime original AAA CDOs defaulted.

48. At 13:07pm on 8th Mar 2011, al2975 wrote:

"But it is also a reflection of human nature that this desire to make a quick buck can cloud ones judgement so much"

Well it doesn't affect me (as well as many others) - so is it not human nature - or am I not human?

I can honestly say I have never looked to make a quick buck - even to the point where I turned down things which were 'easy money' because I was brought up that if it looks to good to be true - then it is. Even if this is not evident immediately (like pyramid schemes) where in the beginning there are 'winners'.

We must stop blaming this fictional 'human nature' - it's an excuse used by the weak minded to explain away their bad behaviour.

Otherwise I shall start promoting murder as 'human nature' - I mean it's been going on for centuries and many people have thoughts of it at one time or other in their lives......and yet most people manage to resist it.

Greed is the same.

49. At 13:09pm on 8th Mar 2011, PostTaxHedge

Yeah - if I had a pound for every 'smarter than the market' capitalist I met darksurfer - then I would be a very rich man.

Strangely after a while they all seem to evaporate (usually around a crash)

BTW - "We didn't - we'd hedged ourselves through the tax line." - this is nonsense I believe - you need to research better.

@38 I presume that you are really a secret Trotskyite anti-capitalist agitator. If I were one, that is exactly what I would say.

A general comment about zero sum games - something I first studied under C W Kilmister at KCL in the 1970s. The ability to create money from debt means that Western Finance is NOT a zero-sum game. Starting from a point of equilibrium, a boom means that the net game payoff is positive - until the crash. Then it becomes negative.

The new equilibrium, for both financial services and the real economy, will be below where it was when the boom started. Many players will be wiped out, but without social intervention there will be a net trasfer of resources from the poor to the rich.

The speculation game is like a nasty combination of pass the parcel and musical chairs in which the number of chairs and players increases at first, but then is abruptly reduced when the timebomb in the parcel goes off!

I would suggest that anyone who promotes our current system of finance as being good for society is guilty either of self-deceit, or of fraud.

54. At 13:20pm on 8th Mar 2011, Lindsay_from_Hendon wrote:

"Back to plain English please."

Are you so desperate that now you're resorting to criticising diction and prose?

Come on - you're a tax specialist - explain what this means...

"we'd hedged ourselves through the tax line"

I know you've got nothing better to do - and also the sun is shining in Milton Keynes today - even you must have stopped dreaming of Switzerland!

13. At 11:43am on 8th Mar 2011, creditunionhero wrote:

It was the mathematical proof used by the banks (risk assesments and businees models) that got us into this mess in the first place.

------------------------------------------------------------------------

I'm extremely wary when anyone uses the phrase mathematical proof. There are things that you can prove, and things that you cannot. For example, it is impossible to prove that there is no life on other planets, you would have to search each planet individually before making that claim.

Generally in maths, proofs are based on a series of initial assumptions, that must hold in order for the end statement to hold. This is (mostly) impossible to do in real world applications like finance where the initail assumptions are approxiamtions. there will always be some perfect storm scenario where small factors create a situation where the end statement (this financial product is safe) doesnt hold.

These approxiamations come about because "it extremely unlikely for the three once in a hundred year events to occur at the same time" is easily translated to "this will never happen", or just werent thought about to begin with (eg "what would happen if a healthy bank like Lehamnns collapsed overnight without going through any period of ill health?")

For a finacial product to be 'proven' safe, it would have to be deomnstrated what would be the outcome in every eventuality which is a problem because

a) anything can happen in the real world, and there isnt enough time to map these out

b)most of these situations are so remote, its not worth the time to think about them.

For these reasons any 'proof' of safety essentially boils down to "if its not too bad, then it'll be fine !" (the general idea behind capital requirements of banks)

55. At 13:21pm on 8th Mar 2011, PostTaxHedge wrote:

"...We do this perfectly legally through mind bogglingly complicated tax structures..."

+++++++++++++++++++++++++++++++++++++++++++
Hi Postie:

Oh, go on. We're grown ups. Explain. You might find it so, but many posters here will perhaps not struggle.

38. At 12:49pm on 8th Mar 2011, PostTaxHedge wrote:
==================================

Brilliant stuff! More, More.....

Local thinking, or individual government action, is simply not enough.
We need another "Bretton Woods" and another "Basel Rules".
The difference today is the vast lake of international cash sloshing around the world.
The orginal Capitalist rules and agreements were set up in a more stable world, where wealth was concentrated in the West, and Western manufacturing was king, and international oil wealth did not really exist.
Tougher banking regulation, including on remuneration, and limiting rewards for excessive risk taking is required.
The new rules would insist on banks being sub-divided, and the public only guaranteeing retail operations.
And the "secrecy" that banks run on must end.
Rating agencies should be held legally accountable for oversights or errors or incompetence.
And special rates of tax for excessive financial industry pay and bonuses.
And a harmonisation of corporate taxes to stop "poaching" around the world.

'financial innovation' = putting one over on the gullible, or the less informed - that is a legally permitted fraud. So the obvious conclusion is that all 'financial innovation' should be first licensed. For example 125% mortgages should have been banned.

While we are about it all 'confusion marketing' also needs to be banned. The test should be that both contracting parties understand the contract, fully and in detail. If this is not the case then the contract should be void. The supplier would have to prove that the customer fully understood the contract to be able to enforce the contract. I am particularly concerned about complex service contracts where there is a substantially difference in economic power between the supplier and the customer.

"56. At 13:29pm on 8th Mar 2011, Anselm wrote:
Looking at this entire thread, where anger with banks and bankers is justifiably manifested in virtually all posts, it seems to me that anger at bankers' bonuses is far less justified than anger at the way banks operate, in particular the "products" they sell. One is reminded of the comment - was it by Adair Turner or Lord Myners, that much of what banks do is "socially useless" or words to this effect. The UK Financial Sector is a big revenue earner for HMG. But I wonder what proportion of those earnings comes by bleeding poor UK residents with excessive charges and commissions and what proportion comes from overseas ?"


You are in essence correct but banks, their systems and their products are a product of the people working in the banks. Now what is motivating them to exploit investors and companies in the way they do? Bonuses many times their salary based on their ability to maximise that exploitation.

Take away, or ameliorate that motivation and you will start to fix the problem from within.

As much as these things ever set the pulse racing (unless you are a saddo like me). It is a gripping piece of work - because it purports to offer a mathematical proof that much financial innovation is socially and economically harmful, by definition as it were, turning on its head the prevailing orthodoxy of the previous 30 years that markets are rational and efficient.
-------------------------------------------------------------------------------
Robert, as in many areas of life there are markets and markets. Forex enables, amongst other activities, the good subjects of HM to enjoy hols in foreign parts. Creating a market for the purpose of creating a market - CDOs, carbon, etc - is an invitation to exploit ...
... in all sorts of ways.

"Turner and Tucker were sparring in the same Cambridge room, since they are the heavyweight contenders to succeed Mervyn King as Governor of the Bank of England"

No! Neither of them are any good and both are tainted by being unable to understand the calamity of regulation that led to the 2008 crash.

We need new blood, or there will be blood on the carpet again and it will be the blood of the poor, yet again!

#32 wrote "Doesn't financial innovation prolong and exacerbate the losses provided by the bubble? Dot com is just another equivalent of the sub prime market. Investors with not a clue about the underlying business.

I guess the mortgage market will bring about the next crash. Especially when the public sector cuts start biting. Anyone can see 40 year mortgages and 8-10 times salary house prices are totally unsustainable"

That assumes that there is financial innovation. Very little of what is described as "innovation" is innovative, I seriously doubt that there has been any "innovation" in financial products in the last 50 years, changes of course, pushing the previously held prudent limits (obviously) but innovation?

Credit default swaps - just credit insurance with a fancy name
Securitisation - just a big version of selling on a loan (which has been done for centuries)
Derivative trading - Romans did that on grain futures and they were not even the first.

Would I take out a 40 year loan at 10x salary on a house - no. Does that mean it is wrong for someone else - no, depends on circumstances. I have had this argument before with John_from_hendon, mortgages based on salary multiples are way too simplistic what matters is affordability. Affordability depends on salary, monthly cost of mortgage and other commitments. Some people might think that spending 2/3rd of their post tax salary on a mortgage is affordable others (particularly those with kids or looking after aged or infirm relatively) might regard this as idiotic. I remember my first mortgage, I got was fixed at 11.5% pa for 3 years and regarded it as a great deal as interest rates went up. It was 3x my salary + 1x wife's salary and was absolute limit of affordability for me. Nowadays for the same monthly affordability I could borrow about 7x salary (assuming same salary) because interest rates are much lower and the tax free element of salary is higher

Curbed?
I prefer ... 'containment' ... so that any negative effect is taken by those who should be held personally responsible at the bank and by the bank itself so that any negative effects are held within the bank and not passed on to the market, local or national economy and taxpayers.

Its high time the innovation experimenters were held personally responsible and accountable for their own actions - another significant failing of those feeble banking reforms that have been or as likely to be announced... as preserving 'over privilege' for the 'over-privileged'.

61. At 13:42pm on 8th Mar 2011, Sasha Clarkson wrote:

"@38 I presume that you are really a secret Trotskyite anti-capitalist agitator. If I were one, that is exactly what I would say."

I agree Sasha - we do not need to stoop to those levels - deception from both sides is unrequired. Let's leave the lying to the capitalists - it's a shame someone thinks they can do 'good' by acting as an agitator whereas all they do is undermine the truth - which doesn't need to be lied about - merely presented.

It does not take a mathematical model to determine the difference between buying a pig that you can see is a pig and buying a pig in a poke; when a poke is another word for a sack rather than a function of Face Book.

The misrepresentation of sub-prime disguised as triple A rated securities is deceit. Deceit in the pursuit of a pecuniary advantage is criminal.

So when are the felons coming up for judgement and sentence?

57. At 13:33pm on 8th Mar 2011, writingsonthewall wrote:
So, if the money was created from nothing, why did it matter when it was not repaid?

60. At 13:40pm on 8th Mar 2011, writingsonthewall wrote:

"BTW - "We didn't - we'd hedged ourselves through the tax line." - this is nonsense I believe - you need to research better."

Haha. Like you know the first thing about internal tax hedge total return (aka overhedge/underhedge) trades.

For your general edification, here is HMRC trying to clamp down on them back in 2009:

https://tax.uk.ey.com/UKTaxLibrary/UK+corporate/General+news/HMRC+Technical+Note+on+overhedging+and+underhedging.htm

Let's just say they haven't done a very good job.

PostTaxHedge

Are you Bob Diamond? Or are you one of his minions? It must be require tremendous intellect, training, interpersonal and negotiating skills to reach the top of your profession and still be so shallow.

I mean without a tax base your Gran wouldn't have the NHS and presumably you went to a school that wsn't funded by the taxpayer and of course you never travel by road and have your own army?

PostTaxHedge. I love your posts. You're doing more for the revolution than any of my ramblings could possibly do! I'm gonna call you out on some of your tax trades though.

Do you engage in any of the German cum-ex stripping of dividend withholding taxes? What about SDRT arb?
Give us an example of some of your structures. Genuinely interested.

This comment was removed because the moderators found it broke the house rules. Explain.

This comment was removed because the moderators found it broke the house rules. Explain.

@56 Anselm. Right about everyhing :-)

If banks were constrained to operating in a socially useful way, there would be no need for bonuses.

As an NEF spokesman said recently: "The fact that he pays taxes does not make it right for Peter to rob Paul".

In fact, all of this frenzied financial activity extracts value from our genuinely productive economy, undoubtedly syphoning some of it abroad in the process. We need a new, robust, financial criminal code, and a punishment system to match. To me it seems wrong that such damaging crime is punished in an open prison. Hard labour would be preferable!

#38

"Actually market risk free trades are possible."

Really?

Yet you also say "End effect: guaranteed revenues for us, and the taxpayer (in whatever jurisdiction we transact in) is the one standing at risk of loss on the underlying.

So which is it, "Risk free" or it,s the taxpayer standing the risk?

Are you saying it's the bank that's risk free, we already know that, we paid for the last bail out and probably the next, if you do a good job!

DotCom was not quite the same, that was a goldrush, and no one knew what would work and what would not work and in the end some did very well in their investments and others did not, that followed a fairly simple natural order or things. Banking crisis however totally different, that was about pretending one thing is actually something else and selling it on. How this is not seen as criminal fraud is beyond me, in any other marketplace people would have gone to jail

What I would like to know is how we would ever go about separating out banks from their investment wings. The investment wings would instantly go bankrupt because they no longer have the assets backing their current investments and their borrowing costs would very quickly exceed their returns (manufactured or not) and bring the entire hedge fund structure with them.

Wouldn't this exacerbate the investment banks' predatory instincts at the cost of pension funds, commodity prices and gold price (pushing up inflation - excuse my simplistic relationship)?

And the new rules of Capitalism must contain regulations to stop banks holding countries to ransom and bullying governments.
They should be serving us, not dictating to us.
Governments should have the right to impose "restrictions on trade" to any bank seen to be acting against the public interest or involved in reckless or self-rewarding trade.
And banks should be prevented from "playing the field" (moving around the world for their own advantage, constantly picking the "most favourable spots".)
To do that, banks must be much smaller, or broken up.
Banks are too imporant to indulge in their current behaviour.....new international rules please.

76. At 14:14pm on 8th Mar 2011, PostTaxHedge wrote:
=========================================

Thanks. Ernst & Young?

71. At 14:08pm on 8th Mar 2011, Justin150 wrote:

"Nowadays for the same monthly affordability I could borrow about 7x salary (assuming same salary) because interest rates are much lower and the tax free element of salary is higher"

And of course with rampant house price inflation (due to lack of control by lenders) you probably HAVE to borrow at 7x, unfortunately no one will lend you at this level.

We'll soon be back to 3x and 1x and prices will adjust accordingly.

#71

Not just affordability, quality of cashflow (income, if you like) is also very important.

Many of the sub prime loans were affordable even now, however if the value of the property you take a loan for becomes worthless, even though you can afford the repayment why continue paying for something which is now worth nothing. They just hand the keys back.

62. At 13:48pm on 8th Mar 2011, writingsonthewall wrote:

"Come on - you're a tax specialist - explain what this means...

"we'd hedged ourselves through the tax line"

I know you've got nothing better to do - and also the sun is shining in Milton Keynes today - even you must have stopped dreaming of Switzerland!"


A number of ways of doing it, but in most cases it means you structure so that gains are exempt and losses are deductible, and you balance the longs and the shorts such that you lock in a gain no matter what market conditions are.

Essentially a way of taking the rewards of holding an asset without being exposed to the risks.

(Only risk is a tax risk, namely being successfully challenged by the authorities... and trust me, those guys are about 10 years behind the sharp end of our thinking.)

For LfH and Kit Green

Here are some of the meanings for compensation:

Damages, legal term for the financial compensation recoverable by reason of another's breach of duty (Wikipedea)
Workers' compensation, to protect employees who have incurred work-related injuries (Wikipedea)
Nationalization compensation, compensation paid in the event of nationalization of property (Wikipedea)

https://dictionary.reference.com/browse/compensation Says
noun
1. the act or state of compensating.
2. the state of being compensated.
3. something given or received as an equivalent for services, debt, loss, injury, suffering, lack, etc.; indemnity: The insurance company paid him $2000 as compensation for the loss of his car.
4. Biology . the improvement of any defect by the excessive development or action of another structure or organ of the same structure.
5. Psychology . a mechanism by which an individual attempts to make up for some real or imagined deficiency of personality or behavior by developing or stressing another aspect of the personality or by substituting a different form of behavior.

—Synonyms
3. recompense, payment, amends, reparation; requital, satisfaction, indemnification.

I particularly like:
5. Psychology . a mechanism by which an individual attempts to make up for some real or imagined deficiency of personality or behavior by developing or stressing another aspect of the personality or by substituting a different form of behavior.
If it looks like a banker sounds like a banker then this as it spot on!


Lets keep using compensation because the unintelligent bankers think it makes them better than us? HaHa

Sorry to disappoint but I’m not a lefty and did you know that the retired bankers on the east coast of Spain stick together because none of the others can stand to be in their company!

Some would say the condems are engaging in some "financial innovation" of their own and judging by the reaction to Nick Robinsons bbc blogg on changes to police officers terms of employment, the bobbies aren't going to be happy bunnies.

wotw-careful on the 26th you might be marching alongside my local PC.

76. At 14:14pm on 8th Mar 2011, PostTaxHedge wrote:

"Haha. Like you know the first thing about internal tax hedge total return (aka overhedge/underhedge) trades."

I know what overhedging and underhedging is - the tax situation is not my area - however this is still a nonsense phrase "We didn't - we'd hedged ourselves through the tax line"

It's a bit like saying "the long and the short of it".

"For your general edification, here is HMRC trying to clamp down on them back in 2009:

https://tax.uk.ey.com/UKTaxLibrary/UK+corporate/General+news/HMRC+Technical+Note+on+overhedging+and+underhedging.htm

Let's just say they haven't done a very good job."

Convincing.....but where is the inland revenue page to which this relates?

https://www.hmrc.gov.uk/drafts/over-underhedging.htm

Blank.

However a quick search finds that this practice has been clamped down under the Finance Bill 2010 - a copy can be found here.

https://www.hmrc.gov.uk/budget2010/march/bn16.htm

It appears your dodge is now out of date - but don't let me stop you - please reveal more.....how much are we talking about? a few thousand - or a few million?

I know of a company in the city which is assisting in the 'avoidance' of 30 billion in tax revenues - and that's one company.

If you want to be a true whistleblower - you need to have the sums behind it - otherwise it's just a distraction.

HOW CAN ANYONE TAKE THE FINANCE WORLD SERIOUSLY WHEN YESTERDAY AS THE EURO HIT $1.40 SURPRISE! MOODY'S SUDDENLY ANNOUNCE GREECE'S CREDIT RATING DOWNGRADE - WHAT A COINCIDENCE! COULD THEY PERHAPS WANT TO SAVE THEIR DOLLAR DO YOU THINK??

Nice to see the banks showing some restraint in the markets.

https://www.bloomberg.com/news/2011-03-07/saudi-arabia-s-day-of-rage-lures-record-bets-on-200-oil-chart-of-day.html

The future of capitalism rests with how Saudi Arabia handles this crisis and how much blood is shed for oil.

#71. Justin150 wrote:

"I have had this argument before with John_from_hendon, mortgages based on salary multiples are way too simplistic what matters is affordability. "

You have forgotten that the reason for 3 times is that it provides a safety headroom for when interest rates inevitably rise. The affordability nonsense is a 'criminal' trap for borrowers and is an absolutely appalling system. It 'creates' bubbles and crashes and MUST be outlawed!!!!

You want affordability then the maximum loan to salary should be set at notional 15% interest rates so than when rates rise the mortgage is still affordable! If you allow the current interest rates computation of affordability the inevitable consequence is a property bubble and crash - affordability really is the pernicious evil at the heart of the Bank of England's /FSA/s incompetence - it should never have been allowed.

This comment was removed because the moderators found it broke the house rules. Explain.

55. At 13:21pm on 8th Mar 2011, PostTaxHedge wrote:

What I do is redistribute wealth from the public purse to the private sector (specifically to my bank's shareholders, but also - of course - to me and my colleagues personally).

We do this perfectly legally through mind bogglingly complicated tax structures.

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Paradoxical sarcasm. You're good, one of the best clockwork merchants yet.

• 95. At 15:20pm on 8th Mar 2011, John_from_Hendon wrote:
#71. Justin150

I agree with JFH (alter ego of LFH) X3 covers eventualities

75. At 14:12pm on 8th Mar 2011, AnotherEngineer wrote:

"57. At 13:33pm on 8th Mar 2011, writingsonthewall wrote:
So, if the money was created from nothing, why did it matter when it was not repaid?"

The money could only be created from nothing while there was a PROMISE of assets to cover it should it be called in. When the assets collapsed then the promises dried up.

The problem was not the money being 'paid back' to anyone in particular - but the fact that people who took those notes passed them on...and on.....and on.....around and around the promises went - buildings were built on those promises, businesses were started on those promises - then the promises lost their backing (when the credit crunch came).

Watch the money masters - it explains it far better than I can in a paragraph.

https://www.youtube.com/watch?v=JXt1cayx0hs

One can no more halt innovation in finance than any other sector.

Read your Darwin. Progress needs a) variation, i.e. innovation and b) fitness testing to erase the useless, i.e. poor banking systems will be killed off.

As for 'uninformed investors':

a) Who the heck was going to tell punters about tail risk? Buyer beware!

b) What politician will cap borrowing when it buys them votes? Voter beware!