Greenspun on recent Wall Street profits

Veggies for sale

Philip Greenspun – founder of Photo.net – has written an interesting post on one way in which big American banks are bilking the taxpayer: specifically, by borrowing money at 0% interest and then plowing it into short-term bonds yielding 2-3%. By using leverage, they can effectively earn even more. Since the bonds being purchased are mostly US Treasuries, this is an especially egregious way of generating private profits at public expense. Having been told that the banks are earning their billion-dollar profits ‘trading,’ Greenspun asks:

“For someone to make money trading, there has to be someone on the other side of every trade who is losing money. Where does each bank find someone who can lose $1 billion every month?”

No prizes for guessing that the losing party is taxpayers and citizens at large.

Greenspun has written previously on investment (including why managed mutual funds are often effectively scams).

In any case, this seems like yet more evidence that banks ought to be seriously busted down to size. It would be refreshing if they could stand or fail on their own merits, rather than propped up in vampiric form because of the systemic risk they create in the financial system.

Author: Milan

In the spring of 2005, I graduated from the University of British Columbia with a degree in International Relations and a general focus in the area of environmental politics. In the fall of 2005, I began reading for an M.Phil in IR at Wadham College, Oxford. Outside school, I am very interested in photography, writing, and the outdoors. I am writing this blog to keep in touch with friends and family around the world, provide a more personal view of graduate student life in Oxford, and pass on some lessons I've learned here.

44 thoughts on “Greenspun on recent Wall Street profits”

  1. While they don’t accuse the bosses of wrongdoing, even The Economist thinks American banks have become too big and complex to manage:

    Far from expertly manipulating their firms’ books, many could not understand them. Citigroup’s boss reportedly learned of its $43 billion of toxic assets only in September 2007 (he was told losses were unlikely). UBS’s own post mortem found that “at no stage” did managers have a decent assessment of its subprime exposure. Merrill Lynch signalled a $5 billion write-down in October 2007, only to increase it to $8 billion a mere 19 days later. Even when they had decent numbers, executives struggled to manage their mutinous staff. One ex-boss says his job was “less management, more crowd control”. Meanwhile shareholders pushed bosses to take risks. The vast majority backed RBS’s suicidal takeover of ABN AMRO.

    If the new bank bosses want to be in charge, they must shrink and simplify their firms.

    It is worrisome that Americans in general apparently think that there is actually too much regulation in the US:

    The proportion who believe that government over-regulates private businesses has also risen from 38% to 45% in a year. And despite the attention lavished on Michael Moore’s new movie excoriating capitalism, only 24% of Americans think firms are under-regulated.

    While this does partly explain how spineless the Obama administration has been about financial reform, it also means that abuses are nearly certain to continue.

  2. HSBC boss says banks owe apology

    The entire banking industry “owes the real world an apology”, the chairman of HSBC has said.

    Stephen Green told BBC World Business Report that a change in culture was needed to improve the public’s perception of bankers.

    He also said that London was secure as a major financial centre, but would lose market share as Asia developed.

  3. “this seems like yet more evidence that banks ought to be seriously busted down to size. ”

    No. It’s evidence that banks should never be able to borrow from the Fed for less than the interest rate on treasury bonds. If they can’t survive without stealing from the public, make them public institutions.

  4. It’s evidence that banks should never be able to borrow from the Fed for less than the interest rate on treasury bonds.

    And why are they getting this treatment? As part of a package of measures designed to keep the systemic risk they embody from destroying the whole financial system.

    And why can it do that? Because they are too big, and the instruments they sell are too complex and interlinked.

  5. “In the past year, taxpayers and government agencies have engineered optimal conditions for bankers to score. To use a metaphor bankers could understand (golf), by supporting markets, taking interest to zero, and providing legions of subsidies, the government has widened the fairways, enlarged the greens, and dug holes the size of bomb craters. Some bankers are playing the redesigned course like Tiger Woods. JPMorgan Chase and Goldman Sachs each earned more than $3 billion in the last quarter. But other huge banks are playing like Ted Knight’s Judge Smails in Caddyshack. Citi scratched out a mere $101 million in earnings and suffered heavy credit losses, while Bank of America lost $1 billion. A similar dynamic is evident in the domestic auto industry. Cash for Clunkers and government support for auto lenders has helped prop up demand. In September, Ford saw sales rise 5 percent from September 2008, and the company gained market share. But sales at General Motors and Chrysler were off 45 percent and 42 percent, respectively, from a year before.

    Put more simply: Government ownership doesn’t cause catastrophic losses; catastrophic losses cause government ownership.”

  6. I think one fact here is telling. Why can’t the Fed give zero interest loans to all the homeowners declaring bankrupcty? Well, because that would cause massive inflation – since when the Fed loans money, the money supply is increased.

    All those crack pot right wingers saying that inflation benefits those who use the printed money first? They’re right, although I don’t think they have anything like the whole truth. But this is still a perfect example of monetary inflation benefiting the rich.

  7. The scary thing must be, from the perspective of the banking elite, that they can only steal taxpayers money through monetary inflation so long as it does not cause price inflation – since this would devalue all the mortgages, which are the instruments of slavery whereby they maintain this huge rich/poor divide.

  8. Despite the fears people have expressed, inflation in the US seems to be under control.

    Frankly, I am a lot more worried about the lack of financial reforms.

  9. Also, I don’t think it is high interest rates putting home owners in distress.

    Rather, they were behaving as though the increases in the value of their homes were ‘real,’ when they were actually a fictitious product of securitization, to a large extent. Now people feel that they have ‘lost’ because they accepted those illusory gains as though they were real wealth.

    Something similar happened with inflated stock prices.

  10. Both those comments are true, and neither respond to the issues I raised.

    I clearly distinguished between monetary inflation and price inflation.

    I also did not say “high interest rates are putting home owners in distress” – but rather that the possibility of them will put bankers in distress – since it could cause so many of their assets to become even more toxic.

  11. It really doesn’t seem likely that policy-makers will be jacking up interest rates soon or aggressively.

    Of course, that creates other problems. When returns in savings accounts are less than the (low) rate of inflation, it does drive people to search for yield in riskier investments. Arguably, that drive to risk – partly generated through low interest rates – is part of what led to the imbalances that produced the credit crunch.

  12. What seems more likely in the medium term is the combination of tax rises (which governments will make as hidden as possible) with cuts in spending.

    The latter could especially harm those who are currently relying on the social safety net, to deal with the consequences of the recession.

    Of course, the people hoping for a return to strong economic growth (letting states grow out of debt, etc) may not be thinking through the long-term environmental consequences.

  13. That sounds about right. The result of neo-liberalist economics is neo-liberalist society. Through a series of increasing crises, society becomes more and more set up to benefit those with wealth rather than those without. This is pretty much exactly what Marx predicts. Maybe neo-liberalism really is what Lenin thought fascism was, i.e. the last gasps of capitalism that through increasing oppression creates the excluded “universal” class. Unless the left is able to do something other than feebly fight for a return to an older, more human capitalist, however, ideology will likely surpress that class’s consciousness of itself for a very long time.

  14. …or we could just go back to having a less exotic banking system, based on simple loans that will actually be repaid and banks that are small enough to be allowed to fail if they screw up.

    Wholesale political change doesn’t seem super necessary here, except perhaps insofar as politicians are too timid to effect incremental change.

  15. “Wholesale political change doesn’t seem super necessary here, except perhaps insofar as politicians are too timid to effect incremental change.”

    That’s right – but you also have to add “are unable to effect”.

  16. “At most companies, bonuses are paid out of profits. No end-of-year profits, no bonuses. But on the island nation of Wall Street, they’re paid out of revenues. Since the 1980s, notes Brad Hintz, an analyst at Sanford C. Bernstein, it’s been the standard for half of revenues to be devoted to compensation. So long as these outfits were private partnerships, that practice didn’t really matter to the rest of us. But since the 1990s, when investment banks went public, compensation has evolved into a zero-sum game between employees and shareholders. Guess who lost?”

  17. This is an interesting idea for dealing with systemic risk:

    “There is almost unanimous support for one set of remedies: making banks safer through bigger capital buffers and more intrusive supervision. Those wary of regulation’s efficacy, however, should be pleased that the debate is now shifting to another tack—making credible the threat that next time, banks will be allowed to fail. Hence the voguish idea of “living wills”, or more amusingly, financial “death panels”, which would force banks and regulators to organise themselves so that it is easier to dismember systemically important firms in a crisis. That should minimise the cost to taxpayers of future bank failures. And if investors fear they could lose money tomorrow, they may penalise badly run banks today. Proposed laws will make it possible to kill any financial firm in a way “that imposes losses on firms’ stakeholders”, Tim Geithner, America’s treasury secretary, promised Congress last month.”

    Probably not as good as keeping banks small, but quite possibly more politically feasile. It would also be a good reminder to everyone that banks do take risks and fail.

  18. Bent bosses

    SIR – You say that most bank bosses were useless rather than venal (“It wasn’t me”, October 10th). But to take an enormous salary for a job one is not competent to do strikes me as venal in itself.

    Tony Welsh
    Houston, Texas

    SIR – You state that many bank bosses were “useless” and “could not understand” their banks’ books. Yet you have repeatedly defended the fact that these same executives make tens or hundreds of millions of dollars because such top talent needs obscene amounts of money to be attracted to their employers. Have you finally admitted that your “attraction of top talent” hypothesis is wrong?

    James Doubek
    Washington, DC

  19. This means that large, complex financial institutions operate with an implicit state guarantee, giving them an edge in borrowing money and expanding their business. That will only make them a bigger liability for the government in the future. The IMF points out that it was the top five American banks, with the biggest assets, which also had the lowest capital ratios. These same banks suffered the biggest loan losses in the crisis. They received almost two-thirds of the government’s capital injections as they increased their market share to 63.5%. For them, the risk of insolvency has been somewhat comprehensively socialised.

  20. Some information on possible banking reform in the EU:

    In a speech earlier this year Neelie Kroes, the EU’s competition commissioner, spoke of how her officials were “doing the work that banking regulators should be doing” and warned that “this must be the last time banks are allowed to create this kind of mess.” That kind of rhetoric implies a more punitive approach to the problem of oversize banks than might be suggested by narrow metrics such as market share.

    The commission is still mulling over most of the bank-restructuring plans that have been submitted to it since April, but the few decisions it has made suggest its mercies will be anything but tender. German recipients of government help such as Commerzbank, Hypo Real Estate and Landesbank Baden-Württemberg have, in effect, been told to cut their balance-sheets by half. In Britain Lloyds Banking Group is expected to be told this month to reduce its share of the market for personal bank accounts to about a quarter of the total, from almost a third now. Royal Bank of Scotland is also expected to have to make large disposals. Bureaucrats in Brussels may yet inject more discipline into the banks than the free market ever did.

  21. Bank bonuses
    Compensation claim

    Oct 22nd 2009
    From The Economist print edition
    Banks are booming on the back of public support. That subsidy should be clawed back

    WATCHING an industry committing political suicide is ugly. That is what investment banks are doing by paying bumper bonuses a year after they were saved by state intervention. Goldman Sachs is set to award staff a near record $20 billion this year. Firms making losses for shareholders, such as Citigroup and Bank of America, are still paying hefty bonuses.

    Such rewards, in the face of public protest, feed the impression that banks are victims of what some call “employee capture”. The top ten investment banks at the start of 2008 made an average return on equity of just 8% between 1999 and 2008. Four made cumulative losses. Staff got four times as much as shareholders did in profits. In 2008 Merrill Lynch paid cash to staff equivalent to over 100% of the capital left by the year-end.

    Normally, for a liberal newspaper, that would be a problem for shareholders alone. But Merrill and many others got bailed out. The new bonuses make a mockery of banks’ claim that higher equity buffers are too expensive to contemplate. Some governments still own stakes in banks, so decisions on pay are directly theirs. Worst of all, bonuses are being paid in part from subsidies: this is not a free market, but a perversion of it.

    As a way to keep cash flowing to the wider economy and help banks rebuild their capital, this subsidy made sense; nobody intended it to go to employees.

    Providing banks have built up adequate capital, they could face a funding “premium” in much the same way that they already pay premiums for deposit insurance. This would have to be paid before bonuses. Regulators should cap bonuses only to the extent they cause losses which erode capital, but assuming shareholders, including governments, show some spine, pay would be squeezed at profitable banks. If some traders left weaker banks to join unguaranteed hedge funds, so much the better for the taxpayer.

  22. Geithner’s Disgrace
    The new AIG report reveals how the Treasury secretary—and U.S. taxpayers—were fleeced by Wall Street banks.
    By Eliot Spitzer
    Posted Monday, Nov. 23, 2009, at 2:57 PM ET

    The issue has been festering for months: Why were AIG’s counterparties—including Goldman Sachs, JPMorgan Chase, and UBS—paid 100 cents on the dollar when the feds rescued the insurance giant, helping raising the cost of the bailout to nearly $200 billion? A new report issued by Special Inspector General Neil Barofsky now reveals that government officials, notably then-New York Fed President and current Treasury Secretary Timothy Geithner, grievously damaged the nation and capitulated to the very banks they should have been supervising.

    Barofsky’s report reads like a case study in failed negotiation. The New York Fed didn’t have the backbone to stand up to Wall Street, didn’t understand its capacity to protect taxpayers, and didn’t appreciate that its responsibility was to taxpayers.

    Geithner and the Fed have proffered a series of spurious reasons for their willingness to pay AIG’s counterparties—the leading Wall Street banks—in full while demanding concessions from every other entity with whom the Treasury or the Fed dealt. Geithner suggested he could not use the threat of AIG’s default in the absence of a federal bailout to get concessions from AIG’s creditors. Why not?

    That is exactly what the government did with the auto industry, and rightly so. The entity providing financing to a near-bankrupt institution must always seek contributions from everyone else at risk. The fact that the Fed had a strong predisposition against letting AIG go into bankruptcy didn’t mean the Fed shouldn’t have used every opportunity to wrangle concessions from the other parties. For Geithner to say it would have been “unethical” to negotiate for concessions is sheer silliness. It is akin to saying that having decided that you are willing to pay up to $250,000 for a house, it is unethical to negotiate to buy it for $225,000.

  23. British finance minister Alistair Darling announced Wednesday his government plans to slap a one-off tax on bank bonuses. Banks would be charged a 50-per-cent tax rate on bonuses they pay to their staff above 25,000 pounds starting today until April 5, 2010.

    “There are some banks who still believe their priority is to pay substantial bonuses to some already high paid staff,” he said. “Their priority should be to rebuild their financial strength and to increase their lending,. f they insist on paying substantial rewards, I am determined to claw money back for the taxpayer.”

    The reaction was swift and strong.

  24. “The savings and loan industry, for example, fervently backed the regulatory reforms of the early 1980s that freed banks up to go on a lending binge. Largely because of those reforms, the industry fell flat on its face. In the 1990s, Citigroup pushed for the erosion of the Depression-era Glass-Steagall Act, which required the separation of commercial and investment banks. The result: debacle. Wall Street agitated for the Fed and the government agencies not to regulate derivatives, not to regulate credit default swaps, and not to regulate subprime loans. The result: debacle. And perhaps there was no single policy move so damaging as the SEC’s 2004 action, taken at the behest of the CEOs of the large investment banks, to allow the banks to boost their leverage ratios from 12-to-1 to 25-to-1 and above. The CEOs of Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Bros. and Bear Stearns pushed for the change, assuring all concerned that it would be good for them, for the system, and the country. At the time, SEC Commissioner Harvey Goldschmid said, “If anything goes wrong, it’s going to be an awfully big mess.” Four years later, the freedom to take on more leverage proved to be their collective undoing.

    Why are bank CEOs so clueless about the impact of regulation? The simple explanation is that these guys don’t know the first thing about their business, regulation, or history.

  25. “That’s why this bonus business isn’t merely a matter of getting upset about whether or not Lloyd Blankfein buys himself one tropical island or two on his next birthday. The reality is that the post-bailout era in which Goldman thrived has turned out to be a chaotic frenzy of high-stakes con-artistry, with taxpayers and clients bilked out of billions using a dizzying array of old-school hustles that, but for their ponderous complexity, would have fit well in slick grifter movies like The Sting and Matchstick Men. There’s even a term in con-man lingo for what some of the banks are doing right now, with all their cosmetic gestures of scaling back bonuses and giving to charities. In the grifter world, calming down a mark so he doesn’t call the cops is known as the “Cool Off.”

    To appreciate how all of these (sometimes brilliant) schemes work is to understand the difference between earning money and taking scores, and to realize that the profits these banks are posting don’t so much represent national growth and recovery, but something closer to the losses one would report after a theft or a car crash. Many Americans instinctively understand this to be true — but, much like when your wife does it with your 300-pound plumber in the kids’ playroom, knowing it and actually watching the whole scene from start to finish are two very different things.”

  26. “Six months after a federal prosecutor admitted in open court that the Goldman trading program could be used to unfairly manipulate markets, the bank released its annual numbers. Among the notable details was the fact that a staggering 76 percent of its revenue came from trading, both for its clients and for its own account. “That is much, much higher than any other bank,” says Prins, the former Goldman managing director. “If I were a client and I saw that they were making this much money from trading, I would question how badly I was getting screwed.”

    Why big institutional investors like pension funds continually come to Wall Street to get raped is the million-dollar question that many experienced observers puzzle over. Goldman’s own explanation for this phenomenon is comedy of the highest order. In testimony before a government panel in January, Blankfein was confronted about his firm’s practice of betting against the same sorts of investments it sells to clients. His response: “These are the professional investors who want this exposure.”

    In other words, our clients are big boys, so screw ’em if they’re dumb enough to take the sucker bets I’m offering.”

  27. U.S. Accuses Goldman Sachs of Fraud

    Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

    The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.

    The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.

    The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

    As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

    According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.

    Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

  28. The Goldman Casino
    Do investment banks do anything that helps America anymore?
    By Eliot Spitzer
    Posted Monday, April 26, 2010, at 5:34 PM ET

    In ordinary times, the SEC’s fraud case against Goldman Sachs would have been settled before it was even filed. There would have been a consent decree in which Goldman neither admitted nor denied any wrongdoing, paid a fine, and agreed to make more fulsome disclosures in the future. But these are not ordinary times, and the SEC’s very public announcement that it’s charging Goldman with misrepresentation and fraud in its marketing of a subprime debt product has become one of the biggest stories in the entire Wall Street scandal.

    The filing of the Goldman case has crystallized the public support for more vigorous regulation of Wall Street. The Republican effort to oppose financial regulatory reform is now fading into an effort to forge a compromise that will give them some sort of defensible exit strategy. Under any bill that is likely to pass, derivatives trading will become reasonably transparent; a consumer protection agency will be created with a significant degree of independence; some chairs will be rearranged on the organizational deck of the regulatory ship of state; capital requirements and leverage ratios will be adjusted in ways that will be designed to reduce overall risk; and a systemic risk overseer will be created. This is all good stuff, but none of it is really adequate to address the “too big to fail” structure of the financial industry in a fundamental way. And it won’t repair the underlying asymmetry of our having “socialized risk” and “privatized gain” for those entities that have an explicit federal guarantee behind them.

    The furor around the Goldman case offers an opportunity to consider Wall Street’s most profound, and entirely ignored, crisis. Now that we are seeing the inner workings of the products that Goldman is marketing, we must ask whether what Goldman and others investment banks do deserves the huge public subsidies they have received. Do they do anything that has any real social value?

  29. “Let’s say the government decides one day, ‘You know, we oughta listen to Che here, let’s throw the book at every firm and every executive that our people can make a case against. Because you know, gosh, it’s all about rule of law and blind justice, just like Che says.’ OK, so now this means indicting just about every serious player in finance, so they take down Goldman Sachs, they take down Citigroup, JP Morgan, BofA… and they also serve all the big funds who are at least as guilty, if not more. So they shut down Pimco, Blackrock, Citadel… maybe they indict Geithner and Summers, haul in some of Bush’s crooks… right?”

    “Too bad they don’t serve popcorn here, this is getting good.”

    “OK, now guess what you’ve just done? You’ve just caused the markets to completely tank. Remember what happened after the Lehman collapse? Remember how popular that made every politician in Washington? Still wondering why they coughed up a trillion bucks? They were scared for their lives; that’s why they voted for that bailout. You’d have done the same goddamn thing. But if we go after everyone guilty of fraud and theft, the market crash this country would see would make 2008 look like Sesame Street. Open that can of worms labeled ‘Fraud’ and the whole fucking economy collapses. You may as well prosecute people for masturbating. No one will know where the fraud investigation stops and who will be charged next—everyone will try to cash out, and the markets will tank to zero. And guess what happens when the markets tank to zero? Every fucking American with a retirement plan, or an investment portfolio, or a 401k—every state pension plan in the country, every teacher’s pension fund, every fireman’s pension—every last one of them will be wiped out. That’s what the Lehman collapse taught us.”

  30. Goldman’s “Social License”
    How the firm has endangered its most valuable intangible asset.
    By Daniel Gross
    Posted Friday, April 30, 2010, at 3:47 PM ET

    It’s been a bad week or two for Goldman Sachs. On April 16, the Securities and Exchange Commission charged the firm with fraud for the way it structured and sold some junky mortgage-related products. Earlier this week, its top executives came off as responsibility-evading jerks when testifying before Congress. And then on Thursday, the Wall Street Journal reported that the SEC had referred Goldman’s case to the Justice Department.

    I’d argue that Goldman is entering dangerous territory. The firm is in danger of losing what may be its most valuable asset: its social license.

    Social license is a vague term that you see bandied about more and more in the corporate world. It’s something like reputation. Social license describes how a company plays with others and how it responds to problems. If a company has social license, it behaves in such a way that other businesses and institutions want to do business with it, and governments are more likely to give it permission to operate. For example, it looks like British Petroleum, which has followed up a disastrous refinery explosion with a disastrous oil spill in the Gulf of Mexico, is in the process of squandering its social license to operate in the United States. The same holds for Massey Energy.

  31. “WHO’S on the other side, who’s the idiot?” is the question posed by one of the characters in “The Big Short”, Michael Lewis’s new book on those few investors who bet against the subprime-mortgage market. “Düsseldorf. Stupid Germans,” is the answer they keep getting. “They take rating agencies seriously. They play by the rules.”

    For Düsseldorf, read IKB Deutsche Industriebank, a bank that plays the role of hapless victim in the SEC’s complaint against Goldman Sachs and a strong contender for the title of leading chump in the financial crisis. This was a firm that was supposed to lend to Germany’s famed legion of middle-sized companies, or Mittelstand. When about one-third of the bank came onto the market in 2001, KfW, Germany’s state-owned development bank, bought into IKB to “maintain its role as a key provider” of finance to small businesses.

  32. Why Isn’t Wall Street in Jail?
    Financial crooks brought down the world’s economy — but the feds are doing more to protect them than to prosecute them

    Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

    “Everything’s fucked up, and nobody goes to jail,” he said. “That’s your whole story right there. Hell, you don’t even have to write the rest of it. Just write that.”

    I put down my notebook. “Just that?”

    “That’s right,” he said, signaling to the waitress for the check. “Everything’s fucked up, and nobody goes to jail. You can end the piece right there.”

    Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world’s wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

    This article appears in the March 3, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive February 18.

    The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What’s more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even “one dollar” just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick “The Gorilla” Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

  33. The findings of the psychologist Daniel Kahneman, winner of a Nobel economics prize, are devastating to the beliefs that financial high-fliers entertain about themselves. He discovered that their apparent success is a cognitive illusion. For example, he studied the results achieved by 25 wealth advisers, across eight years. He found that the consistency of their performance was zero. “The results resembled what you would expect from a dice-rolling contest, not a game of skill.” Those who received the biggest bonuses had simply got lucky.

    Such results have been widely replicated. They show that traders and fund managers across Wall Street receive their massive remuneration for doing no better than would a chimpanzee flipping a coin. When Kahneman tried to point this out they blanked him. “The illusion of skill … is deeply ingrained in their culture.”

  34. Buttonwood
    Rich managers, poor clients
    A devastating analysis of hedge-fund returns

    HEDGE-fund managers are the smartest investors around. With keen eyes and sharp brains, they spot and exploit inefficiencies in the markets. Or at least that is what the industry tells its clients.

    There is no doubt that hedge-fund managers have been good at making money for themselves. Many of America’s recently minted billionaires grew rich from hedge clippings. But as a new book* by Simon Lack, who spent many years studying hedge funds at JPMorgan, points out, it is hard to think of any clients that have become rich by investing in hedge funds (whereas Warren Buffett has made millionaires of many of his original investors). Indeed, since 1998, the effective return to hedge-fund clients has only been 2.1% a year, half the return they could have achieved by investing in boring old Treasury bills.

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