Money Power and Wall Street - a few thoughts

I caught the final episode of Money Power and Wall Street on Frontline last night (thanks to my DVR).  If you missed it you can watch it on the PBS website.

Overall, I thought it was pretty good.  The documentary showed that private derivatives - custom made for a client - make up the largest part of bank's profits.  In particular the documentary focused on interest rate swaps and the numerous municipalities (here and abroad) that had been caught out after buying one of these things.

I was actually pretty surprised at how naive some of the buyers of these swaps were.  Basically they were swapping a higher fixed rate for a lower variable rate.  This is fine as long as rates stay low, but of course when the financial markets collapsed, all rates (except the US government bond rate) went through the roof.  In my opinion, municipalities have no business swapping fixed payments for variable rates.  In effect they are saying, "hey - we'll take the interest rate risk in exchange for lower payments today".  That's not the job of local government.   Of course the slick sales force of the banks coupled with a little bit of bribery helped make the case for these products.

The complexity and vastness of the wall street machine also was pretty apparent and that this complexity makes it incredibly hard for regulators to keep up with new products and markets that are being developed all the time.  In addition, the global nature of the banking business means that many banks could just move part of their derivative shops to London to avoid the closer scrutiny of US regulators.

Going forward, it was clear that nothing has really changed.  The Dodd Frank Act is unlikely to change much behavior, and the incentives to make large amounts of money quickly will no doubt drive yet another generation of bankers to create ever more elaborate products to sell to unsuspecting customers.

Personally, I think we should reinstate Glass Steagall and separate out commercial banking (loan making etc) from investment banking.  I also think that we should impose increasing capital requirements on banks that increase with the size of the bank to make it costly to be too big to fail.  Finally, I think investment banks should go back to being organized as partnerships and not as corporations.  Under the partnership model, the partners were always on the hook for the risks taken by the bank.

I have zero confidence in any of these things happening however.

How unbiased are financial advisors?

Not very -  according to a well crafted double blind study. (Full paper here).

The study found that too often advisors took clients portfolios and re-worked them in ways that would earn them the highest commissions.

My advice:  Index.  Fees and commissions are very detrimental to your wealth.

The multimillionaire men of Lehman

What the top 51 non-C level employees of Lehman made.   Notably there is only one woman in the list.

Quote:
One can’t help but suspect that the all-male culture at the upper reaches of Lehman was a corrosive and damaging thing, which in some way helped lead to the bank’s demise.

10 things your commencement speaker won't tell you

With graduation around the corner, here's one from the Wall Street Journal.

Quote: Is that pretty girl Phi Beta Kappa? Marry her.

Actually that's what I did and it's worked out pretty well.





Thanks to my colleague Melissa for the link.

Black Scholes caused the crash?

In an interview on Radio 4 (the UK's equivalent of public radio), Ian Stewart, a Maths prof from Warwick Uni in the UK argues that the Black Scholes equation was a "dangerous invention".   This argument has been trotted out numerous times, and frankly it is pretty silly.  It's like saying that the Wright Brothers are responsible for airliner crashes.

The article talks about LTCM (Long Term Capital Management) and how the failure of that hedge fund was in part due to its usage of Black Scholes.  I disagree.  The failure of LTCM was due to excessive leverage.  The recent market crash also had little to do with Black Scholes, but was again due to excessive leverage by banks and people as well as a complete failure of risk management.

I've posted on this before - here and here.   I am sure this isn't the last we'll here of this.

NC Treasurer race - why fees are what really matter.

The local ABC channel (11) reported last night that the NC Treasurer's office has uncovered wide spread fraud among retirees.  Examples include retirees boosting their income in their last year of work and double dipping by retiring and then returning to work too quickly.

An officer for the Treasurer's office claims that in the later case alone, they've uncovered $1 million of fraudulent payments.   While this is good news, lets get things in perspective.  The state of NC Pension Fund pays over $300 million in fees to Wall Street and still underperforms its peers.  The average management fee for the fund is around 50 basis points (0.5%), which might seem low, but for a fund of this size, this is ridiculously large.   The state should be paying well under 10 basis points.  Remember that 1 basis point of $70 Billion is $7 million!

While stamping out fraud is good, the place to look for real savings is in the fee structure of the fund.  It is for this reason that I'll be voting for Ron Elmer in the May 8 primary for NC Treasurer.   He's pledged to cut management fees by $50 million in his first year or he'll work for free.  You can read more about his plan here.

You can also check out Ron's website here.  You can also visit him on Facebook.


Disclosure:   This blog is my personal blog, posts on it reflect my own personal opinions and do not reflect the views of my employer.   I wrote and posted this on my own computer on my own time.

Money Power and Wall Street Pt 2 - tonight PBS

The second part of the excellent Frontline documentary is on tonight at 9 ET.  My DVR is set.