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"Much of what investment bankers do is socially worthless" Watch

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    The above statement comes from a by-line of this article. I don't think I have seen it here yet, so I will recommend it for interesting insight, even if it is a bit long. Some key quotes that set the tone:

    page 2
    Lord Adair Turner, the chairman of Britain’s top financial watchdog, the Financial Services Authority, has described much of what happens on Wall Street and in other financial centers as “socially useless activity”—a comment that suggests it could be eliminated without doing any damage to the economy. In a recent article titled “What Do Banks Do?,” which appeared in a collection of essays devoted to the future of finance, Turner pointed out that although certain financial activities were genuinely valuable, others generated revenues and profits without delivering anything of real worth—payments that economists refer to as rents. “It is possible for financial activity to extract rents from the real economy rather than to deliver economic value,” Turner wrote. “Financial innovation . . . may in some ways and under some circumstances foster economic value creation, but that needs to be illustrated at the level of specific effects: it cannot be asserted a priori.”


    page 4
    Rather than seeking the most productive outlet for the money that depositors and investors entrust to them, [investment banks] may follow trends and surf bubbles. These activities shift capital into projects that have little or no long-term value, such as speculative real-estate developments in the swamps of Florida. Rather than acting in their customers’ best interests, financial institutions may peddle opaque investment products, like collateralized debt obligations. Privy to superior information, banks can charge hefty fees and drive up their own profits at the expense of clients who are induced to take on risks they don’t fully understand—a form of rent seeking. “Mispricing gives incorrect signals for resource allocation, and, at worst, causes stock market booms and busts,” Woolley wrote in a recent paper. “Rent capture causes the misallocation of labor and capital, transfers substantial wealth to bankers and financiers, and, at worst, induces systemic failure. Both impose social costs on their own, but in combination they create a perfect storm of wealth destruction.”


    page 6
    “In most industries, when people are paid too much their firms go bankrupt, and they are no longer paid too much,” he told me. “The exception is when people are paid too much and their firms don’t go broke. That is the finance industry.”

    On Wall Street dealing desks, profits and losses are evaluated every afternoon when trading ends, and the firms’ positions are “marked to market”—valued on the basis of the closing prices. A trader can borrow money and place a leveraged bet on a certain market. As long as the market goes up, he will appear to be making a steady profit. But if the market eventually turns against him his capital may be wiped out. “You can create a trading strategy that overnight makes lots of money, and it can take months or years to find out whether it is real money or luck or excessive risk-taking,” Philippon explained. “Sometimes, even then it is hard.” Since traders (and their managers) get evaluated on a quarterly basis, they can be paid handsomely for placing bets that ultimately bankrupt their companies. “In most industries, a good idea is rewarded because the company generates profits and real cash flows,” Philippon said. “In finance, it is often just a trading gain. The closer you get to financial markets the easier it is to book funny profits.”


    Do you think Cassidy makes a solid point? Or is he missing something?
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    Bankers are incredibly useful, he just has no idea.


    Firstly, what generates value? REAL Activities like agriculture, product creation. Banks don't create much value - they (in the case of trading) facilitate the "moving around" of value. Bankers generate cost savings (synergies) through M&A, restructurings etc. Without the Capital Markets functioning the economy grinds to a halt... as everyone has seen. Banks drive globalisation and globilsation drives Capitalism and modernisation.

    This guy is trying to 'peddle' that products like CDOs and MBSs are useless economically... doubt he was saying that during the boom years CAUSED by these instruments (which allowed investors to fund homeowners). He talks about 'mis-pricing' being something we should all work towards getting rid of - mispricing is the reason why investors invest in the first place (to try and exploit potential mispricing and achieve abnormal returns relative to the market).

    Leverage is dangerous... but nothing new. It's not like banks let traders take on too hefty-a-position anymore... not after the LTCM and Nick Leeson episodes. The crash was caused by cheap credit and hence low liquidity.... and the interconnectedness of banks (buying stakes in each others' securities). Bonuses are being changed too.
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      "Make money your god and it will plague you like the devil"
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      I dont think that I-banks are socially worthless. there are couple of aspects that ppl can argue about but, nevertheless, I believe that overall I-banks have its uses. This article somewhat develops from the credit crunch and I have the impression that the author still doesnt know why the finacial crisis actually happened. He still blames 100% of the damage done on I-banks.
      For example related to the second citation of yours. Studies show, that it is the inexperienced investor that relies too much on past data, invests along the trend and poses much higher risk of fuelling a bubble than experienced investors (I-banks).
      I dont want to make this too long but i believe that I banks have valuable uses. Just some examples: they offer a pricing mechanism or can be used to raise capital etc.

      The question whether I-banks are socially worthless is meaningless. I could just as well say that doctors are socially worthless!
      Why you ask? Let me tell you. It is much better for society if sick people die early. This saves costs and taxes etc etc etc (I dont want to be dicriminating here! Just something you might take into consideration.)
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      He's probably right. There is a story Warren Buffet tells, where he says if you were at sea and got shipwrecked, and fifty of you made it to land, a fertile island where you could grow rice, and you were put in charge, what would you do? Would you get your smartest 5 guys of the 50 and tell them to start trading rice futures and creating derivatives? And probably give them a better way of life and higher social status for it, too? No, you'd get them growing rice like everybody else...

      That said though, in a capitalistic developed society like ours there is obviously a demand for them, or they wouldn't exist. I don't think they are really just 'gambling' in the way the article seems to paint them, there will be managers above the traders and people keeping checks on them.
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      (Original post by M_E_X)
      He's probably right. There is a story Warren Buffet tells, where he says if you were at sea and got shipwrecked, and fifty of you made it to land, a fertile island where you could grow rice, and you were put in charge, what would you do? Would you get your smartest 5 guys of the 50 and tell them to start trading rice futures and creating derivatives? And probably give them a better way of life and higher social status for it, too? No, you'd get them growing rice like everybody else...

      That said though, in a capitalistic developed society like ours there is obviously a demand for them, or they wouldn't exist. I don't think they are really just 'gambling' in the way the article seems to paint them, there will be managers above the traders and people keeping checks on them.
      Our economies are already developed though, not new. And in that sense you'd want to trade with other islands - rice is nice but you need other stuff too. And thus gives rise bartering --> currency --> fractional banking, a "confidence" trick. Futures would allow you to organise it nicely if weather conditions are unpredictable.
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      (Original post by M_E_X)
      He's probably right. There is a story Warren Buffet tells, where he says if you were at sea and got shipwrecked, and fifty of you made it to land, a fertile island where you could grow rice, and you were put in charge, what would you do? Would you get your smartest 5 guys of the 50 and tell them to start trading rice futures and creating derivatives? And probably give them a better way of life and higher social status for it, too? No, you'd get them growing rice like everybody else...

      That said though, in a capitalistic developed society like ours there is obviously a demand for them, or they wouldn't exist. I don't think they are really just 'gambling' in the way the article seems to paint them, there will be managers above the traders and people keeping checks on them.
      they are important only because the system we are using is so backward and old fashioned.

      in reality we should be aiming for a society which does not rely on money but instead on innovation, research, engineering, science and foremost education.

      in this time of the human race we live like kings and yet we still use a system which divides the people into rich and poor and we promote monopolies, we are far too rich powerful and advanced to not move on from these slavery based economies. There is no reason this country cannot be completely and totally independant from everyone else or completely involved with everyone else if they too should follow such a new system. If we all focussed on for example colonising mars then our lives would not be a complete waste, as of now we are born we get a job and we die, but it does not have to be that way. What is the purpose of our country and of mankind if not total creativity, exploration and inventiveness. nothing else matters, not bank led trading not war not fear of immigration or any other frivolous pursuit.

      i can see us gradually moving into this system but people need to realise that government is not important, eductation is. Why is someone who knows nothing of science in a position of power to make decisions on what is important or not, how does a career politician;who needs to smile nice or they are rejected -Gordon Brown-; know about how to run a country.We are stagnating and we need a target. For this we need freedom of education and the encouragement of everyone to be creative and become an expert in their chosen area.

      We need binmen well Mr Binman you know engineering as do many thousands of other binmen now, design a bin lorry that is automatic.
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      (Original post by Altruistic1)
      Our economies are already developed though, not new. And in that sense you'd want to trade with other islands - rice is nice but you need other stuff too. And thus gives rise bartering --> currency --> fractional banking, a "confidence" trick. Futures would allow you to organise it nicely if weather conditions are unpredictable.
      This is if you were truly stuck on an island, with no other islands nearby. If there were 50 people in such a situation I can absolutely guarantee that they would not try to set up such a financial system: they would be focussed on i) surviving and ii) trying to escape.

      And yes, I said that in a capitalistic developed society like ours there is obviously a demand for them, or they wouldn't exist - but I still can't really justify how they help society, except for making more goods available to more people at more competitive prices, albeit in a very indirect way.
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      (Original post by Altruistic1)
      This guy is trying to 'peddle' that products like CDOs and MBSs are useless economically... doubt he was saying that during the boom years CAUSED by these instruments (which allowed investors to fund homeowners). He talks about 'mis-pricing' being something we should all work towards getting rid of - mispricing is the reason why investors invest in the first place (to try and exploit potential mispricing and achieve abnormal returns relative to the market).
      Hang on, here; are you sure that what you're saying is actually a good thing? There was a housing bubble, after all, and there is a natural problem in using an overpriced market, like the instruments did, as backup. Yes, the instruments might have, as a side-note, allowed more homeowners to be funded, but if anything, that only represents a failure in allocation - the mortgages should never actually had been made, as the foreclosures caused by the post-bubble prices revealed. Perhaps I am misunderstanding you, but I don't think a misallocation of resources is considered a social good.
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      Basically another "burn all bankers" article. IBs use their knowledge, connections and resources to help firms either enter the market(equity/debt capital markets), reduce their exposure to the market (debt restructuring, creating derivatives), spot better value for money in the market(trading) or merge with another firm. As for social worth, its as much as accountants, lawyers and travel agents, all people we turn to because they know, and can provide us with, something we don't. I would read the comments section of a Robert Preston blog if I wanted to read more of the same populist bile.
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      alot of people in this forum think that investment banking is the best job... it's not. for one the hours are unbelievably long... more than 100 in a 5/6 day week (20 hours a day), if you don't believe me, look it up for yourself. the salary isn't that good either until you build up a wealth of experience.
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      Nevermind what they do, investment bankers in themselves are socially worthless.
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      (Original post by air-ninety-one)
      alot of people in this forum think that investment banking is the best job... it's not. for one the hours are unbelievably long... more than 100 in a 5/6 day week (20 hours a day), if you don't believe me, look it up for yourself. the salary isn't that good either until you build up a wealth of experience.
      What's a good job?

      And their bonus are massive...(if you work in FO of course)
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      It's true, IB is socially worthless. Investment bankers create more wealth for the rich and then extort massive bonuses from it, and don't serve society at all when they're making massive profit margins from usury and speculation whilst the wage-slaves labour at the bottom to feed their debts and taxes. Don't believe the myths of neo-liberal economics... wealth does not trickle down. Funny, if banks didn't make fat profits from exorbitant interest rates then the little people would actually be able to make a living for themselves. And that's a crime these days.
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      (Original post by ussumane)
      What's a good job?

      And their bonus are massive...(if you work in FO of course)
      bonus's are only'massive' for the top moneymakers. is the money really worth abandoning a social life and family.

      granted i am being very hypocritical... i also want to go into investment banking and i can because i have no plan on ever getting married, and am looking forward to living permanently away from my family. it's harsh, yes, but it's the truth. you need to be a very dedicated man to go into investment banking.
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      (Original post by air-ninety-one)
      bonus's are only'massive' for the top moneymakers. is the money really worth abandoning a social life and family.

      granted i am being very hypocritical... i also want to go into investment banking and i can because i have no plan on ever getting married, and am looking forward to living permanently away from my family. it's harsh, yes, but it's the truth. you need to be a very dedicated man to go into investment banking.


      Sir....we think alike
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      (Original post by air-ninety-one)
      bonus's are only'massive' for the top moneymakers. is the money really worth abandoning a social life and family.

      granted i am being very hypocritical... i also want to go into investment banking and i can because i have no plan on ever getting married, and am looking forward to living permanently away from my family. it's harsh, yes, but it's the truth. you need to be a very dedicated man to go into investment banking.
      While I don't necessarily disagree with you entirely I think you might be over-stretching a bit. The hours are not great at anything b/w 80-100 a week, but then there are not a lot of jobs, especially if you are just out of university, that will pay you 35k+ as a base salary. For someone in his early 20s with no major commitments, its probably one of the best industries to go into, of course as you grow older you might be tempted to go into a less intense job (and there are plenty who are clever with their money and do just that).
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      (Original post by ussumane)
      [/B]
      Sir....we think alike

      (Original post by ish90an)
      While I don't necessarily disagree with you entirely I think you might be over-stretching a bit. The hours are not great at anything b/w 80-100 a week, but then there are not a lot of jobs, especially if you are just out of university, that will pay you 35k+ as a base salary. For someone in his early 20s with no major commitments, its probably one of the best industries to go into, of course as you grow older you might be tempted to go into a less intense job (and there are plenty who are clever with their money and do just that).
      i agree gentlemen
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        If you think investment bankers/financial services are socially worthless - pick the point in time when that happened.
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        (Original post by Saichu)
        Hang on, here; are you sure that what you're saying is actually a good thing? There was a housing bubble, after all, and there is a natural problem in using an overpriced market, like the instruments did, as backup. Yes, the instruments might have, as a side-note, allowed more homeowners to be funded, but if anything, that only represents a failure in allocation - the mortgages should never actually had been made, as the foreclosures caused by the post-bubble prices revealed. Perhaps I am misunderstanding you, but I don't think a misallocation of resources is considered a social good.
        I hate to jump in, but forgive me.

        I think a distinction must be drawn between mis-pricing by the herd, where something is systematically mis-priced, as was the housing bubble and the mis-pricing of something being over or under valued to an investor. We tend to make the assumption that people on average get it right, they didn't in the housing bubble - partly because of skewed incentives in that profits were private but losses at least partly socialised (implicitly before eventually happening), among other things that changed the factors at play, and partly because of human error throughout (ie. not just in the banking sector).

        The market will quickly converge to the consensus price, and then investors will buy if they deem it under-valued or sell if they deem is over-valued. I wouldn't so much call that mis-pricing (perhaps it is, but only if the consensus is wrong), but rather the difference between an individual's expectations and the market is what allows investment. I think that's what he was getting it, but I could be wrong.
       
       
       
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