Questions for the Commission

[oddlots]

Thought this was the best, most pointed grilling proposed for the TBTF bankers I've seen:

http://www.nytimes.com/2010/01/12/bu...l?ref=business

It's by Andrew Ross Sorkin, author of "Too Big Too Fail." Haven't read it (anyone else suffering GFC fatigue?)

A pointy example:

"This question is for Mr. Mack. In November, in a surprisingly candid moment, you publicly declared, “Regulators have to be much more involved.” You then added, “We cannot control ourselves.” Can you elaborate on those comments? Is Wall Street inherently incapable of policing itself — a view contrary to what most of your peers have argued?"

The whole thing is well worth a read.

What I would really like to know is how they would defend themselves against the charge in this piece which I linked to a couple of weeks back:

http://www.ft.com/cms/s/0/fe462a30-e...nclick_check=1

This article coughs up the answer to something I've been wondering for a long time: how does cash flow work in a trading firm. Speaking of the ever-rising pay scales the author states:

"Observers of financial services saw unbelievable prosperity and apparently immense value added. Yet two years later the whole industry was bankrupt. A simple reason underlies this: any industry that pays out in cash colossal accounting profits that are largely imaginary will go bust quickly. Not only has the industry – and by extension societies that depend on it – been spending money that is no longer there, it has been giving away money that it only imagined it had in the first place. Worse, it seems to want to do it all again.

What were the sources of this imaginary wealth? First, spreads on credit that took no account of default probabilities (bankers have been doing this for centuries, but not on this scale). Second, unrealised mark-to-market profits on the trading book, especially in illiquid instruments. Third, profits conjured up by taking the net present value of streams of income stretching into the future, on derivative issuance for example. In the last two of these the bank was not receiving any income, merely “booking revenues”. How could they pay this non-existent wealth out in cash to their employees? Because they had no measure of cash flow to tell them they were idiots, and because everyone else was doing it. Paying out 50 per cent of revenues to staff had become the rule, even when the “revenues” did not actually consist of money."

I almost felt sick when I read this the first time. Unless someone wants to correct me, I take this to mean that effectively the bailouts go directly to the bonusses. Even the patina of legitimacy here is simply a misunderstanding of the accounting involved.

It should be noted that the author is the former chief executive of Barclays!!!

So I would ask the bankers to simply explain why the good ex-chairman is wrong. And if they can't, to simply give the money back.

[Rajiv]

Re: Questions for the Commission

This article coughs up the answer to something I've been wondering for a long time: how does cash flow work in a trading firm. Speaking of the ever-rising pay scales the author states:

"Observers of financial services saw unbelievable prosperity and apparently immense value added. Yet two years later the whole industry was bankrupt. A simple reason underlies this: any industry that pays out in cash colossal accounting profits that are largely imaginary will go bust quickly. Not only has the industry – and by extension societies that depend on it – been spending money that is no longer there, it has been giving away money that it only imagined it had in the first place. Worse, it seems to want to do it all again.

What were the sources of this imaginary wealth? First, spreads on credit that took no account of default probabilities (bankers have been doing this for centuries, but not on this scale). Second, unrealised mark-to-market profits on the trading book, especially in illiquid instruments. Third, profits conjured up by taking the net present value of streams of income stretching into the future, on derivative issuance for example. In the last two of these the bank was not receiving any income, merely “booking revenues”. How could they pay this non-existent wealth out in cash to their employees? Because they had no measure of cash flow to tell them they were idiots, and because everyone else was doing it. Paying out 50 per cent of revenues to staff had become the rule, even when the “revenues” did not actually consist of money."

I almost felt sick when I read this the first time. Unless someone wants to correct me, I take this to mean that effectively the bailouts go directly to the bonusses. Even the patina of legitimacy here is simply a misunderstanding of the accounting involved.

It should be noted that the author is the former chief executive of Barclays!!!

So I would ask the bankers to simply explain why the good ex-chairman is wrong. And if they can't, to simply give the money back.

Yes that is how it is -- but it is no different than the value of your stock and bond portfolio. The value of your portfolio is to a fair extent imaginary. Your ability to realize the cash value of the portfolio is dependent upon the buyers available for those assets -- and this will almost always be less than the mark to market value. The assumption is that the trades made on your behalf will have little or no impact on the market (an assumption that may or may not be true in times of high frequency trading when just a few players account for 90% of the trades -- the liquidity that they are supposedly adding to the market may be purely imaginary

With this background, it should be remembered that the commission and fees you pay thae brokers and banks is in cold hard cash -- and not as a percentage of your stocks. That is where the conundrum lies. Thus the ability of the bankers and the marketmakers to bleed the stock market participants.

The image that "High Frequency Trading" brings to mind is that expounded by an old Indian (South Asian) folk tale -- I will Americanize it in the telling.

Two Farmers were tired of growing apricots -- and selling their produce cheaply to the middlemen -- so they decided that they would start producing and selling an end product themselves.

Their wives were good cooks -- so they went to their wives and asked them to bake them some apricot tarts that they could sell in the market. The wives knew their husbands well and said - " We know you. We will put in all the effort, and all you will do is to eat up all the tarts -- We do not think that you have the ability to sell them." The farmers promised their wives that they would not do anything else with the tarts other than sell them for at least a quarter each.

So off to the market they went dragging a cart with the tarts. On the way - one of the farmers said to the other "I am feeling very hungry -- why don't we eat a few tarts?" The other farmer said, "Are you crazy? If we do that our wives will kill us!" So thay walked for another couple of hundred yards, and the other farmer said "The smell of the tarts is killing me -- I have to eat some! Look I have a quarter -- why don't you sell me a tart -- that way our wives will be happy, and I will have satisfied my yen for the tart!" Both agreed that it was a good idea. So one thing led to another, and a couple of miles down the road, all the tarts were gone. The two farmers were very happy -- they had not even reached the market and they had sold the entire lot of tarts!

They went back home -- and their wives "Killed" them!

That is what I think of High Frequency trading and liquidity in the market!

[cindykimlisa]

Re: Questions for the Commission

Thought this was the best, most pointed grilling proposed for the TBTF bankers I've seen:

http://www.nytimes.com/2010/01/12/bu...l?ref=business

It's by Andrew Ross Sorkin, author of "Too Big Too Fail." Haven't read it (anyone else suffering GFC fatigue?)

A pointy example:

"This question is for Mr. Mack. In November, in a surprisingly candid moment, you publicly declared, “Regulators have to be much more involved.” You then added, “We cannot control ourselves.” Can you elaborate on those comments? Is Wall Street inherently incapable of policing itself — a view contrary to what most of your peers have argued?"

The whole thing is well worth a read.

What I would really like to know is how they would defend themselves against the charge in this piece which I linked to a couple of weeks back:

http://www.ft.com/cms/s/0/fe462a30-e...nclick_check=1

This article coughs up the answer to something I've been wondering for a long time: how does cash flow work in a trading firm. Speaking of the ever-rising pay scales the author states:

"Observers of financial services saw unbelievable prosperity and apparently immense value added. Yet two years later the whole industry was bankrupt. A simple reason underlies this: any industry that pays out in cash colossal accounting profits that are largely imaginary will go bust quickly. Not only has the industry – and by extension societies that depend on it – been spending money that is no longer there, it has been giving away money that it only imagined it had in the first place. Worse, it seems to want to do it all again.

What were the sources of this imaginary wealth? First, spreads on credit that took no account of default probabilities (bankers have been doing this for centuries, but not on this scale). Second, unrealised mark-to-market profits on the trading book, especially in illiquid instruments. Third, profits conjured up by taking the net present value of streams of income stretching into the future, on derivative issuance for example. In the last two of these the bank was not receiving any income, merely “booking revenues”. How could they pay this non-existent wealth out in cash to their employees? Because they had no measure of cash flow to tell them they were idiots, and because everyone else was doing it. Paying out 50 per cent of revenues to staff had become the rule, even when the “revenues” did not actually consist of money."

I almost felt sick when I read this the first time. Unless someone wants to correct me, I take this to mean that effectively the bailouts go directly to the bonusses. Even the patina of legitimacy here is simply a misunderstanding of the accounting involved.

It should be noted that the author is the former chief executive of Barclays!!!

So I would ask the bankers to simply explain why the good ex-chairman is wrong. And if they can't, to simply give the money back.

Most people live their lives and pay their taxes on the "cash" accounting basis. Most business run their companies and pay their taxes on an "accruial" accounting basis. If you invest in companies it is helpful to know the differences in cash and accruial accounting - in accruial you can account for money you may not really have. But when you discover you really dont have it then you write off what you do not have to make your statements correct. This has been ongoing for at least a century I suspect. I dont own any companies but have worked for many with interesting accounting methods. I always took my commissions in cash =thank you.

Cindy

[oddlots]

Re: Questions for the Commission

I like the parable. My favourite still remains the Monkey Market:

"Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.

The villagers seeing that there were many monkeys around, went out to the forest, and started catching them.

The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on [/font][FONT='Tahoma','sans-serif']his behalf.

In the absence of the man, the assistant told the villagers. "Look at all
these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each."

The villagers rounded up with all their savings and bought all the monkeys.

Then they never saw the man nor his assistant ever again, only monkeys everywhere!

Now you have a better understanding of how the stock market works.

Cash is king I guess.

Except it's not. Saving your way to security is not possible with inflation.

I think the only two options remain investing or speculating, or both as a side occupation to working your ass off in the real economy of course. Likely just to stand still in terms of purchasing power. So you have to run the gauntlet of the monkey sellers to some extent. In terms of dealing with the first circle of responsibility - your family's security - I don't think there's any other option.

Personally I like equity and the closer you are to risk capitol the more justified the gains. Equity is at least not always a zero-sum game. (I think Chris Coles is really onto something.)

The reason I think the FT piece is important is because it dares to think something that I've never run across anywhere else: the compensation is the problem, not just a symptom. It suggests a whole new angle of understanding: these companies went broke [/font][FONT='Tahoma','sans-serif']literally [/font][FONT='Tahoma','sans-serif']because they have overpaid for talent for a couple of decades. There's a clarity to this that I think is startling.

Imagine, for instance, that these were not public companies but private partnerships. Don't you think that their past outrageous compensation policies would be of interest if they came cap in hand to the government to ask for a bailout? Why does the situation change entirely when they become publicly traded and systemically important? I don't mean on a practical level (we all know the answer there: it would never happen.) I mean on a logical level. It's like a strange fairy tale. Poof. They become princes.

There's something really screwy there.

I think somehow that it has something to do with shame. Ours not their's obviously. We just cannot accept that the whole thing is largely a sham. That the only value in play was the money earned with our very finite labours and that it has disappeared irrevocably into the accounts of these charlatans errr... I mean captains of industry. (I'm chanelling a schoolboard somewhere or a German pension fund here. I'm not personally agrieved. I would not invest in a financial firm in the current environment on ethical grounds. )

It reminds me of conversations I had with stalwart communists in eastern europe right after the wall came down. I felt for them. They had "invested" their life in a code of conduct and set of values that was being binned wholesale by everyone surrounding them. The few I knew were good people and I felt for them.

But I knew that didn't change anything.

[Rajiv]

Re: Questions for the Commission

Personally I like equity and the closer you are to risk capitol the more justified the gains. Equity is at least not always a zero-sum game. (I think Chris Coles is really onto something.)

Owning equity in companies that do not pay back the profits to their shareholders in the form of dividends again rely upon the market makers to provide liquidity for shareholders. This leads to the rise in stock value -- but again that is a paper gain -- while dividends are cold hard cash.

The entire stock market relies upon the banks creating liquidity for the shareholders. But that as we have discussed is illusory, and based upon the issuance of debt and even more debt. Differentiating between cash, "hard assets," "soft assets" and "paper assets" and then giving them an imputed equivalent cash value may be a good first step to take in how we do our accounting. The nominal value of each may be the same, but the equivalent value obviously is not the same.

[cindykimlisa]

Re: Questions for the Commission

I like the parable. My favourite still remains the Monkey Market:

"Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.

The villagers seeing that there were many monkeys around, went out to the forest, and started catching them.

The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on [/font][FONT='Tahoma','sans-serif']his behalf.[/font]
[FONT='Tahoma','sans-serif'][/font]
[FONT='Tahoma','sans-serif']In the absence of the man, the assistant told the villagers. "Look at all[/font]
[FONT='Tahoma','sans-serif']these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each."[/font]
[FONT='Tahoma','sans-serif'][/font]
[FONT='Tahoma','sans-serif']The villagers rounded up with all their savings and bought all the monkeys.[/font]
[FONT='Tahoma','sans-serif'][/font]
[FONT='Tahoma','sans-serif']Then they never saw the man nor his assistant ever again, only monkeys everywhere![/font]
[FONT='Tahoma','sans-serif'][/font]
[FONT='Tahoma','sans-serif']Now you have a better understanding of how the stock market works.[/font]
[FONT='Tahoma','sans-serif'][/font]
[FONT='Tahoma','sans-serif']Cash is king I guess.[/font]
[FONT='Tahoma','sans-serif'][/font]
[FONT='Tahoma','sans-serif']Except it's not. Saving your way to security is not possible with inflation. [/font]
[FONT='Tahoma','sans-serif'][/font]
[FONT='Tahoma','sans-serif']I think the only two options remain investing or speculating, or both as a side occupation to working your ass off in the real economy of course. Likely just to stand still in terms of purchasing power. So you have to run the gauntlet of the monkey sellers to some extent. In terms of dealing with the first circle of responsibility - your family's security - I don't think there's any other option.[/font]
[FONT='Tahoma','sans-serif'][/font]
[FONT='Tahoma','sans-serif']Personally I like equity and the closer you are to risk capitol the more justified the gains. Equity is at least not always a zero-sum game. (I think Chris Coles is really onto something.)[/font]
[FONT='Tahoma','sans-serif'][/font]
[FONT='Tahoma','sans-serif']The reason I think the FT piece is important is because it dares to think something that I've never run across anywhere else: the compensation is the problem, not just a symptom. It suggests a whole new angle of understanding: these companies went broke [/font][FONT='Tahoma','sans-serif']literally [/font][FONT='Tahoma','sans-serif']because they have overpaid for talent for a couple of decades. There's a clarity to this that I think is startling.

Imagine, for instance, that these were not public companies but private partnerships. Don't you think that their past outrageous compensation policies would be of interest if they came cap in hand to the government to ask for a bailout? Why does the situation change entirely when they become publicly traded and systemically important? I don't mean on a practical level (we all know the answer there: it would never happen.) I mean on a logical level. It's like a strange fairy tale. Poof. They become princes.

There's something really screwy there.

I think somehow that it has something to do with shame. Ours not their's obviously. We just cannot accept that the whole thing is largely a sham. That the only value in play was the money earned with our very finite labours and that it has disappeared irrevocably into the accounts of these charlatans errr... I mean captains of industry. (I'm chanelling a schoolboard somewhere or a German pension fund here. I'm not personally agrieved. I would not invest in a financial firm in the current environment on ethical grounds. )

It reminds me of conversations I had with stalwart communists in eastern europe right after the wall came down. I felt for them. They had "invested" their life in a code of conduct and set of values that was being binned wholesale by everyone surrounding them. The few I knew were good people and I felt for them.

But I knew that didn't change anything.

This is about the best and most accurate post i have read here

thankyou

Cindy

[oddlots]

Re: Questions for the Commission

Most people live their lives and pay their taxes on the "cash" accounting basis. Most business run their companies and pay their taxes on an "accruial" accounting basis. If you invest in companies it is helpful to know the differences in cash and accruial accounting - in accruial you can account for money you may not really have. But when you discover you really dont have it then you write off what you do not have to make your statements correct. This has been ongoing for at least a century I suspect. I dont own any companies but have worked for many with interesting accounting methods. I always took my commissions in cash =thank you.

Cindy

Thanks. I am coming to a dawning realisation that accounting is a bit of an art and may be straining the author's point to make a point. Clearly accounting is difficult as soon as you're dealing with receivables much less leveraged, open trades with hedges or assets that will throw off a future cash stream, the value of which will vary along with every other asset out there. I get it.

But I still think that the fact that accounting is a grey area doesn't mean it's purple: at the very least finance needs deferred compensation or some form of "eating your own cooking" to ensure that the incentives don't become entirely perverse.

[cindykimlisa]

Re: Questions for the Commission

Thanks. I am coming to a dawning realisation that accounting is a bit of an art and may be straining the author's point to make a point. Clearly accounting is difficult as soon as you're dealing with receivables much less leveraged, open trades with hedges or assets that will throw off a future cash stream, the value of which will vary along with every other asset out there. I get it.

But I still think that the fact that accounting is a grey area doesn't mean it's purple: at the very least finance needs deferred compensation or some form of "eating your own cooking" to ensure that the incentives don't become entirely perverse.

Accruial accounting is not grey: It is "Golden!" for the Big boys in Corporations. Learn accounting - read the IRS tax code - make big bucks the old fashioned way using hard work, accounting fundamentals and the tax code legally to your benefit and retire early - continue the process but help your fellow man along the way - my lifelong pragmatic strategy. Ps I pay and will continue to pay few taxes because i know accounting and the tax code. I dont buy stocks or gold ever and I dont short.

Cindy

Cindy

[MulaMan]

Re: Questions for the Commission

Self regulation is the way to go. I do not believe that government should control our lives.

I emailed my congressman about opening a small casino and sports betting business and promised to create an indenpent regulator.

My good friend Frank the Accountant would be hired to watch over the business and to ensure that I paid my taxes and adhered to all required state gambling and irs regulations

[oddlots]

Re: Questions for the Commission

Owning equity in companies that do not pay back the profits to their shareholders in the form of dividends again rely upon the market makers to provide liquidity for shareholders. This leads to the rise in stock value -- but again that is a paper gain -- while dividends are cold hard cash.

The entire stock market relies upon the banks creating liquidity for the shareholders. But that as we have discussed is illusory, and based upon the issuance of debt and even more debt. Differentiating between cash, "hard assets," "soft assets" and "paper assets" and then giving them an imputed equivalent cash value may be a good first step to take in how we do our accounting. The nominal value of each may be the same, but the equivalent value obviously is not the same.

This is dense and really good. The first paragraph clarifies a lot for me: i've never before really clearly accepted the dependence of equity prices on "liquidity" (i.e., Sylvester McMonkey McBean) absent the, I suppose, discipline of dividends. Is this what you are saying? The lack of dividends is a symptom of the same ramping behaviour that we have discussed before. More amplitude for the insider's stock options, again cashed out at the opportune moment.

Cash is king once again.

But let me ask you this. I live in Canada and we fairly recently lived through the debacle of the income trusts. There was an earlier American equivalent but I can't remember the term used. Anyway they were entities that sought to profit from their unique legal sanction to pass through revenue directly to the investor (who would presumably pay tax on it.) As far as I understand it they existed to either pay dividends or invest just enough to keep paying dividends, so to speak. It sort of ended in a farce: the mania for these instruments grew so large that major pillars of the TSE started making moves to convert themselves into these things. Seeing it's future corporate tax revenue evaporating before its eyes the government stepped in and put a halt to the whole thing. I remember reading Warren Buffet at the time talking about retained earnings and the equivalent American experience with these kinds of structures. I think his point was something like... why would you invest in a company that you couldn't trust would do something more valuable with the company's earnings than you could yourself.

Anyway my question is, "Does the above not suggest that there is also a limit to the value of cold, hard cash?" What are we to do with it once we have earned it? Not lose it certainly, but not lose it how?

Your second paragraph has me kind of stumped. I suspect you're saying that, given its reliance on an unsustainable debt-pyramiding in the economy overall, accounting niceties regarding asset classes is a gilded lily. Or maybe you are suggesting that I'm being a bit naive about the problems real life accounting coughs up. Don't know.

I'll revisit less tired.

Best.

[oddlots]

Re: Questions for the Commission

Self regulation is the way to go. I do not believe that government should control our lives.

I emailed my congressman about opening a small casino and sports betting business and promised to create an indenpent regulator.

My good friend Frank the Accountant would be hired to watch over the business and to ensure that I paid my taxes and adhered to all required state gambling and irs regulations

AMERICA FUCK YAH!