<p>The thing is though with what the “big bad banks” traditionally did, IB and market making, it was awfully hard to lose enough money to need to be bailed out. In theory that’s what they’ve returned to now. They lost their money on what you derisively call “prop trading” and that’s now been banned. I suppose my main issue is with calling banks some socially useless institution that does nothing but cost the taxpayer. Their traditional roles add quite a lot to society’s wellbeing and I agree completely that they should not be able to make bets, keep the profits if they’re right and have the taxpayer bail them out if they’re wrong. That’s now banned, can’t do it anymore. If we were truly an oligarchy as you imply would we have banned it?</p>
<p>@Sally - There’s a reason finance exists (and again, caveat, I do not work at in IBD). If you actually meet people who work in it, you’ll realize that the majority are very good people. Just like unions are not full of entitled, self-absorbed schmucks who think they should be immune from layoffs and get 5% raises every year like many think.</p>
<p>The industry fills a vital role. Just because some financiers did the equivalent of selling beat up, broken down cars for a premium, and buyers bought said used cars without even taking the barest glance, does not make everyone who works in it a selfish, self-absorbed prick who has no conscience. It’s like lawyers - everyone loves to hate them until they need one.</p>
<p>Edit: Also, I hear the Iceland argument all the time. The problem with that is that as a small country (300k people) with strong connections to Europe, their financing needs were easily filled by the international banks. If BAC/JPM/DB/Barcap failed, there would be no way to fill the void.</p>
<p>I am not saying everyone in the financial industry is a “parasite,” or greedy/entitled either. Obviously we need ethical lending institutions and a healthy financial sector to keep the economy going and allow consumers to borrow money for homes, cars, education, businesses and so on. And OF COURSE people bear some responsibility for borrowing or investing prudently. I have a ton of respect for those in the industry who help people make responsible decisions–I have worked with several in my lifetime.</p>
<p>But the fact remains that there are some very greedy, self-motivated people in the “club” at the top that gets idolized here. They have gotten away with a huge heist from the U.S. They KNOWINGLY engaged in practices that were likely to fail and cause widespread economic hardship, because they knew they would profit either way. I just think the bloom is off the rose and talking about “elite” business schools and “elite” IB and consulting firms without an acknowledgment of the very real underbelly to the industry is naive, at best.</p>
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<p>Jono, banks used to be divided into different categories, as you may know. When the banks began to buy up the great boutique trading houses in the 90’s, then you got to the point where the entire bank was at risk. The business model changed.</p>
<p>Volker really does nothing to change that. It’s weaksauce.</p>
<p>poetgrl - thought you weren’t going to get into it. D1 is going home at 10 now because there is a new crop. She is moving up the food chain.</p>
<p>I know, famous last words.</p>
<p>Good for her!</p>
<p>I think we agree more than you realize. I said in my first post if you can be bailed out you should not be making bets. That was the whole point of Glass-Steagall, back then only banks who took deposits would be bailed out so by banning deposit taking banks from making bets you accomplish the goal of not bailing out bet-makers. Now though Dodd-Frank makes it clear that you don’t need deposits to be bailed out so Glass-Steagall would be useless. If, huge if, the Volcker rule is implemented strongly, and it is made clear to hedge funds that they will not, come hell or highwater, be bailed out we’ll have accomplished the primary goal of Glass-Steagall without the massive cost of unwinding these banks.</p>
<p>@sunriseeast: I think it depends what firms you are talking about. Some, like Bain, are absolutely dominated by HBS grads:</p>
<p><a href=“Leadership Connect | Public Sector Decision Intelligence”>Leadership Connect | Public Sector Decision Intelligence;
<p>Jono, I think you think we disagree. We don’t disagree at all.</p>
<p>Just, I think the solution is that the govt either needs to break up the banks, or they need to let everyone go the way of Lehman. Also, the FED policies are picking winners and interfering with markets.</p>
<p>It’s gotten out of hand.</p>
<p>Poetgrl - The Volcker rule doesn’t decouple consumer lending from investment banking, but the JonoWono is right that the primary risk didn’t derive from that merger persay. Rather, it was the dominance of trading profit on the bottom line. If you look at Goldman, for example, I might have my numbers off (it’s been a while), but trading was the majority of firm profits by '08. Obviously, they were winners, but while assets are deflating, for every winner there has to be a loser.</p>
<p>Random note Jono, the only HF I can recall getting a bailout was LTCM, and it wasn’t so much a bailout of the fund as a bailout of the banks providing leverage to the fund.</p>
<p>Yes, collectiv and we see the problem with Solomon before LTCM, actually.</p>
<p>But, there’s honestly not going to be something you are going to tell me about this that I don’t know. </p>
<p>The real issue, no matter which way you dice it is this: if you don’t bail out the banks, which btw Goldman was allowed to become a bank for the sake of the bailouts, then you don’t have the problem. They will monitor themselves.</p>
<p>The issue is the TBTF’s being in bed with the government and the FED, in particular, at a level which makes the markets rigged. Therefore, even though I personally have benefitted tremendously from this, I have enough integrity to say, “there is no reason the guy on the street should be in favor of those bailouts, since even the 0% borrowing at the FED window benefits him not at all.”</p>
<p>I really “get” why people blame the bankers. But, if the government didn’t rig the system and play along, with taxpayer money and taxpayer funded debt, the bankers couldn’t play.</p>
<p>So who persuaded the government to rig the system? Not the Muppets.</p>
<p>Well, honestly, if you look at Paulson, and kind of play backwards from there, you see an interesting line of breadcrumbs leading over to Goldman, especially when you consider the number of Clinton people who went there and came from there, as well. (Not blaming democrats OR Clinton, just it starts with his presidency and continues through republicans,as well. it’s apolitical because it’s both parties.)</p>
<p>but, really, the evil begins with Greenspan and his bubble economics, and these begin with the crash in 87.</p>
<p>^Yes. And if we’re talking “breadcrumbs,” and trying to turn back to the focus of this thread and this site, the breadcrumbs go directly from Goldman back to our elite business schools–especially Harvard. Which is what I was trying to say (apparently not very well) several pages ago.</p>
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<p>Concur. And I would add the repeal of Glass Steagall Act. Warnings were many. The meltdown of the financial system was a very foreseeable tragedy. Its breath and depth were the only surprise. And we still have the Derivative problem.</p>
<p>@poetgrl - Salomon wasn’t a hedge fund. I was just clarifying the point because some people lump HFs in as part of TBTF or receiving bailout money.</p>
<p>I may not be able to provide facts which you didn’t already know (though I could say the same), but looking at the picture the right way is just as important. The real reason the government, the Fed, and the TBTF banks seem like they’re in cahoots is because they are forced to. It’s not some grand conspiracy theory.</p>
<p>The fact is this: without the intervention, asset prices across the world would have plummeted, and stayed depressed. No bounce back this time. Because major banks are the only bulwark we have against deflation. As you know, that’s because banks are the primary money printers in the economy due to fractional reserve banking. Tons and tons of it. UBS at the height of the crisis had a balance sheet somewhere around $3tn on $40bn of equity. If UBS goes down, that’s nearly $3tn that vanishes from the financial system overnight as it is no longer a viable counterparty. That money disappearing impacts stock prices, bond prices, the price of grains and oil and steel. Notice how the buck stopped after Bear and Lehman and AIG and Countrywide. It’s because the government realized it had reached the point where the dominos were falling, and it was far cheaper to firewall the remaining firms than the alternative</p>
<p>This is why I think it’s massively simplistic to say the markets are rigged. We simply have no choice. Banks still have so much legacy leverage, governments too, that the choice is either take massive pain in the short run, or protracted low growth over a longer time frame. For obvious reasons, everyone involved prefers the second. The pain the everyman on the street would be suffering in the first scenario would be intractable. Deflation favors the rich. Some people hate Bernanke. I think he’s a genius, and underappreciated for his egoless assessment of the situation.</p>
<p>I agree Toblin. The repeal of Glass Steagall lit the fuse. The rest was inevitable. Hindsight of course… </p>
<p>Does anybody recall anybody trying to stop the repeal of Glass Steagall? I’ve never even thought of that. Somebody must have thought it was not a good idea, but I honestly cannot recall anyone who was willing to fight that fight, at the time.</p>
<p>ETA: I know solomon wasnt a hedge fund. Most of the LTCM people came from there, and they, solomon, made the same mistakes. They were the canary in the coal mine, had anybody been paying attention.</p>
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<p>talk about simplification. 1. Bear was basically forced onto Dimon. 2. Countrywide was forced onto BofA, which has been paying for this “favor” as well as Merril, ever since. Lehman was allowed to fail because Paulson hated Fuld, which is why for so many from Lehman it just stings like crazy. 4. AIG was bailed out in order to assist the counterparties, including Goldman, and Dimon and BofA, etc… it was the biggest dark ops bailout ever. </p>
<p>What you are essentially saying is, we had no choice but to bail out the TBTFs because we allowed them to get too big to fail. So, no matter what they do, we have no choice.</p>
<p>This is why I say, and not just me, you must break them up. We cannot continue to be held hostage the way we have been. And, if Ben was such a genius, he’d have said this himself, and forcefully so. But he’s a coward.</p>
<p>Unless I remember incorrectly, Salomon was brought low by a rogue trader who committed treasury auction infraction, and happened to be on Meriwether’s team. LTCM failed because it massively overleveraged the fund just as Russia went bankrupt. Completely different animals, I wouldn’t consider that as having “made the same mistakes”.</p>
<p>Edit: Didn’t see your edit.</p>
<p>It’s a simplification, but I’m not sure you realize that you’re actually agreeing with me. Why did all those firms agree to acquire? Because they realized that grinding off the bad debt over several years was a far better option than taking the massive losses in one lump. As for Paulson hating Fuld, yes I’ve heard that. But then, much of that sentiment comes out of Fuld’s congressional testimony, which is hardly the most biased source. It’s the equivalent of your kid coming back and blaming an F on the teacher being biased and hating him. It may be true, but I sure don’t buy it at face value. As for AIG, isn’t that what I said?</p>
<p>And yes, the point is that the different points on the axis need each other right now. Global leverage (financial, sovereign, and personal) has to decrease in a controlled fashion, and that takes cooperation. Breaking them up can’t happen now for the same reason that smaller banks contribute much less to velocity of money than bigger banks (as a sum of its parts). The much more sensible path, which is what is being undertaken, is to let them keep their size for now but neuter them instead.</p>
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<p>The conspiracy part comes into play when we consider that not one major player in this banking house of cards was tossed in jail after the collapse. In the aftermath of the Savings and Loan fiasco, more than 1000 people were jailed. Instead these bozos continued to get multi-million-dollar bonuses as a reward for doing everything wrong.</p>
<p>Solomon Smith Barney had the same positions as LTCM and began to liquidate before LTCM realized what was going on. It’s more interconnected than you think, and it WAS the canary in the coal mine. The Russian bonds, obviously killed them. But, there were signs before the Russians decided to default.</p>
<p>Also, it is questionable how “honest” Merriwhether was with his “formulas” in terms of allowing investors.</p>
<p>But, for sure, the LTCM fiasco, which did make a lot of people a lot of money, on the other sides of the trades, was the start of the little masters of the universe game the FED plays with the heads of the TBTFs.</p>