I recommend you reread the sentence prior to the one you quoted, and change your attitude.
@menloparkmom: âJust exactly where have you been these last 12 years prof2dad?â
Monitor wall street closely so that I can bring in various aspects of financial events into my classroom.
As I stated earlier, some banks did screw up and banks ought to act responsibly. Some of the behaviors that you mentioned above are facts and represent one aspect of the event.
When I used âmany of us,â I simply pointed out another aspect of the event involving another set of stakeholders. Now allow me to use some quotes:
âEconomist Paul Krugman wrote in January 2010 that Fannie Mae, Freddie Mac, CRA, or predatory lending were not primary causes of the bubble/bust in residential real estate because there was a bubble of similar magnitude in commercial real estate in America.â
âSpeculative borrowing in residential real estate has been cited as a contributing factor to the subprime mortgage crisis. During 2006, 22% of homes purchased (1.65 million units) were for investment purposes.â
âSeveral administrations, both Democratic and Republican, advocated affordable housing policies in the years leading up to the crisis.â
âInitially, the 1992 legislation required that 30 percent or more of Fannieâs and Freddieâs loan purchases be related to affordable housing (read subprime). However, HUD was given the power to set future requirements, and eventually (under the Bush Administration) a 56 percent minimum was established.â
So if one understands this part of history, you know that wall street was âforcedâ to engage in subprime lending in the name of social justice. There are many grass-root organization pushing toward this direction, including the following :http://nlihc.org. I believe that these activists are good people. Legislators and various administrations have good intension to push forward a rosy version of home affordability. But this was how we had a large scale of subprime at the first place.
For those of you who do not know finance, this may sound strange to you: reputable wall street banks do not like to market subprime. They are reputable banks and largely deal with reputable firms and reputable institutional investors. Institutional investors mostly have by laws require them only invest in investment-grade securities. So traditionally reputable wall street firms are mostly dealing with investment-grade securities. Now suddenly they were imposed or expected to do subprime in the name of social justice, how could they not get along? Explicit and implicit expectations/threats from high above were not uncommon.
Now consider yourself as someone running a reputable bank and you are put into a position to have a bunch of unwanted subprime, what should you do? This was the situation leading to further securitization of subprime, as you stated above.
Now let us look at this quote again: âDuring 2006, 22% of homes purchased (1.65 million units) were for investment purposes.â These speculative bets were largely driven by main street middle to upper households. They are a subset of us.
âThe only way WS could have paid back would be if they went to jail for their criminal act.â
Wall street bankers ought to go to jail when they commit criminal act. Auto executives and engineers who temper admission softwares ought to go to jail when they commit criminal act. Bio executives and researchers who lie about the effectiveness of their healthcare testing tools ought to go to jail when they commit criminal act⊠This principle ought to be universal for all industries.
The problem is that government agencies are more interested in collecting big fines when bad things happen, instead of putting bad people into jail. This has been so for many decades regardless of which industry involves; wall street is no exception.
That is actually happening:
http://www.usatoday.com/story/money/2017/01/09/fbi-arrests-top-volkswagen-executive-emissions-scandal/96340582/
Are you talking about transaction costs? For something like VTSAX, I would expect those to be minimal.
@ucbalumnus: âThat is actually happening:
http://www.usatoday.com/story/money/2017/01/09/fbi-arrests-top-volkswagen-executive-emissions-scandal/96340582/â
When only one was arrested for a large scale violation of trust and law, it would not make me satisfactory. Similarly, when only a few wall street bad behaviors were put into jail, it would not really serve justice either:
https://dealbook.nytimes.com/2013/11/22/ex-credit-suisse-executive-sentenced-in-mortgage-case/
http://money.cnn.com/2016/04/28/news/companies/bankers-prison/
The big picture is simply that for whatever reasons white collar crimes have been mostly ended up with a big fine regardless of the industry involved.
"The idea that no bankers went to prison for crimes related to the financial crisis is a myth, according to the watchdog overseeing the federal governmentâs bailout fund.
There have been 35 bankers sentenced to prison, said Christy Goldsmith Romero, the special inspector general for the Troubled Assets Relief Program (SIGTARP), in a report to Congress released Thursday."
When a mutual fund or ETF is tied to a benchmark, most of the hidden costs are market impact costs due to predictable trading that occurs whenever the benchmark is revised. Because benchmarks have well defined methodologies for what goes in to the index, well informed investors can buy stocks predicted to enter, expecting that the price will rise between then and when the index is actually revised (due to required buying pressure by fund providers to mimic the benchmark). Likewise, they can sell stocks expected to leave a major index. And this is ignoring the fact that a few days ahead of the revision, the benchmark providers explicitly say what is going in and out (but by then most of the movement has been arbitraged away).
The price movement on the stocks entering and leaving can be often be several percentage points. But none of this is visible to a buyer of a mutual fund or ETF because all they have to do is mimic the benchmark. In particular, almost all the trading that day is done at the close to make sure the price the mutual fund or ETF pays matches that of the benchmark. For the index provider, it doesnât matter if the price has moved 0.1% or 10%, as long as it matches what the benchmark says.
That said, VTSAX is one of the best choices out there because it has such low turnover, and because it is not tightly tied to an industry benchmark. There is much more turnover with style funds (such as value and growth).
Disclaimer: I worked in tech on Wall Street for many years, and DW still does.
- Many people only have access to 401k plans with extortionate fees ("One egregious example of an expensive S&P index product is the MainStay S&P 500 Index Fund (MUTF: MSXAX). This fund comes with an astonishingly high maximum sales charge of 3 percent. That's on top of an already high expense ratio of 0.62 percent."). Criminal.
- My in-laws have a trust administered by Wells Fargo; their relatively modest trust is spread over a dog's breakfast of funds. Almost criminal. You can see why the fiduciary rules are opposed.
Iâm perfectly happy with VTSAX, at 5 basis points, essentially zero realized capital gains, and dividends < 2%. I do not worry about the straw man problem of âwhat if everyone used index funds; who would set the price?â
Re the question of smart kids going to finance: tiny sample size, but DS has experienced the disparity in vetting of interns. âNameâ tech companies have an insecure, unimpressive, and low-rung engineer interview for 45 minutes or so. âNameâ hedge funds have pairs of PhDs (or work experience equivalent) do interviews (one questions, the other takes notes) for 45 minutes, followed by a new pair, repeated until more than 4 hours have flown by. I donât know if itâs an industry version of Tufts Syndrome, arrogance, the low perceived cost of a false negative, or whatever, but getting an internship offer from tech appears almost random, while hedge funds and such have a method. I can only hope that the process for âreal jobsâ in tech is better.
Iâm reminded of the movie Margin Call (fictitious account of the 2007 financial crisis) where the young guy who figures out thereâs a problem with the investments has a PhD in aeronautical engineering from MIT. He says he switched cuz the money was better on Wall Street and itâs pushing numbers either way.
âS& Lâs, as well as big time banks, got greedy and ignored normal, traditional underwriting standards [ designed to keep banks and their depositors safe] in order to market MILLIONS OF low interest, sub-prime teaser loans to people who could NEVER, EVER have qualified for them in normal times- people with lousy FICA scores, people with low incomes , people who did not even have to show proof of income- ALL who could NEVER pay the higher monthly payments once those teaser rate expired.â
That isnât entirely true, the S and Lâs in the 2008 meltdown were not major players, most S and Lâs stayed with traditional 30 year mortgages, for one thing after the 1980âs meltdown they faced a lot more restrictions.
The reason the banks ignored the lending standards and such is easy, they no longer had a risk in doing so. For a long time, when banks originate mortgages, they donât hold onto them, they sell them into the third market, Fannie Mae and Freddie Mac are one of those third party buyers. What happened was when Wall Street collateralized mortigages into CDOâs they had an insatiable demand for new mortgages to slice and dice, so they basically told banks âwrite any mortgage you want, I donât careâ, banks would be pressured from financial firms to originate loans. I have heard the crap it was irresponsible mortgage holders, banks being âforcedâ to lend to inner city people, and that for the most part is not what caused the main issues. And yes, they prayed on peopleâŠ"
âDid the banks care? NO, because the banks did not HAVE to hang onto those loans, again unlike the days before the repeal of Glass- Stegall.â
Glass Steagal had nothing to do with the CDO crisis, not that way at least. Banks routinely sold off their mortgages long before Glass Steagal was repealed in 1999. What Glass Steagal did do was allow commercial banks to lend to financial companies, and big commercial banks became the piggy bank for hedge funds (which operate on dollars invested to loans of 1 to 60âŠtry getting a bank to lend you money for a house with that kind of ratio). People were upset when financial firms were bailed out, for example Bear Stearns was taken down by two of its hedge funds that had heavy positions with CDOâs, and when they went under several big commercial banks ended up with billions in basically worthless paper they took as collateral. When they arranged a sale of Bear Stearns, they also bailed out the banks, several big commercial banks would have been in deep, deep trouble without that.
âInstead, they immediately sold those mortgages which were nothing than ticking time bombs to the big investment banks on WS who repackaged them and sold them to other unsuspecting banks.
WS and the originating banks , did not care less about the consequences of their actions, because it was all about the $$.â
The Wall street firms caused the demand, it wasnât banks âfoisting them offâ on unsuspecting financial firms. One of the biggest fails of the 2008 meltdown was that financial firms created a financial firm they could valuate, but they pretended they did. Trading in derivatives like CDOâs is based on mathematical calculations of risk, for an option for example there are well defined formulas traders use that look at the expiry of an option (how far out), the strike price, the current underlying price, interest rates, and something called volatility (or vol), that is a long term value of how much the options move if the underlying price (future price) moves. With CDOâs one of the factors would be the default rate of mortgages in these instruments, and there was the fail. For a traditional 30 year mortgage with 20% down the default rate was known, with these junk mortgages, no one knew.The formula these clowns started using (which in of itself is a problem, valuation formulas, the so called models, vary, firms have their own proprietary formulas), some genius came up with a formula that figured risk based on, get this, the price of the credit default swaps (a kind of insurance policy) that was being written against theseâŠso it figured out the risk based on the guess of the CDS market, which were no better informedâŠand everyone used it. S and P and Moodys also basically lied about these, they should have basically thrown up their hands and said we can evaluate their worthiness, but afraid of losing business from financial firms that use their service, basically made up ratings.
Glass Steagal would have protected the commercial banks, and that would have ameliorated the effects of all this, but with Glass Steagal gone banks got greedy. Plus commercial banks had large investments in derivatives, which likewise would have been forbidden before Glass Steagal (in part, because the major commercial banks post GS became âfinancial firmsâ, ie Citigroup, JP Morgan Chase, etc, where there was no firebreak between the investing and banking ends.
As far as high frequency trading goes (ie Low Latency trading), institutional investors are not that thrilled about it, institutionals like Fidelity and TIAA Cref and the like donât do that kind of trading, their portfolios are large and the kind of drift that HFC can cause drives them nuts. The other aspect of low latency trading (state of the art on a transaction is about 17 microseconds, 17/millionth of a second). Among other things, that low latency trading causes problems and allows trading firms to take advantage, that transaction that takes that 17 microsecond has lag until the public quote changes, and people take advantage cause while the stock may be trading at a penny now, someone might be able to hit the public offer at flat and that has to be honored. Algo systems blast out orders with a cancel a fraction of a second after, and that has costs to it. True, execution venues are often paid by trading firms to co-locate their systems (the ones doing the algo trading) to be in the same data center as the trading machines, which means their latency is basically near 0, you go in from a system located letâs say across the country, you are at a disadvantage at getting the better pricesâŠperfectly legal, but not fair trading since they have an advantage in getting the order. I am still not sure how I feel about it, trading these days is so crazy that I donât think that hfc necessarily is either a bad or good thing, it is what it is, and certainly isnât responsible for âthe craziness of wall streetâ. It is a very different world, and given the way algorithmic trading goes, individual investing is a crap shoot, you are fighting against a lot of things you have no way of knowing what they are, but then again Wall Street has never been inherently fair, even in the âgood old daysâ when specialists traded out of a paper book.