Wednesday, November 19th, 2008...12:39 am
Money Shufflers
Citigroup just announced that they are letting go 50,000 staffs. In the mean time, the US automakers are crying as they are threatened with the possibility of bankruptcies. In the mean time, the auto union refused to make any concession. Way to go, better for everyone to die than workers to sacrifice - then again, the executives aren’t known to sacrifice their exorbitant salaries and bonuses.
Obama talked about bailing out the auto-industry and providing reeducation for the manufacture of green-technology products. It’s a great idea to help the workers in the long run, though in the short run they might suffer. However, I have a nagging question: what about the money-shufflers in Wall Street that got laid off by the thousands? What kind of retraining program should they get?
For an auto-worker, I think it won’t be a great seismic shift for their lives and psyche if they went from making car parts to solar panels. It won’t be much of a life changer if a waitress in a Chinese restaurant moves to become a waitress in an Italian restaurant. But there’s a legion of financial analyst, fund managers, day traders, and so on, who created their individual wealth by betting and hedging while providing little added value to the society as a whole. Will there be the same level of need for these types post-crisis as it were pre-crisis?
Don’t get me wrong, I do understand that financial institutions serve a purpose and actually provide value and service needed to the society: they are a great capital allocator - pooling money from people who have more of them but have no idea what to do with them to create return and loaning them to those who actually need money to make investments with good return. Fund managers also allocate investments to companies that perform. Not to mention these institutions’ role as facilitators to financial transactions.
But in the last two or three decades, as the US economy grew by the virtue of debt, there are legions of money-shufflers who played a zero-sum game. They work not to add any value, but to make bets on movements on index. Hedges are made against the movement of the value of a financial instrument, not on the financial instrument itself. I’m talking about the derivatives of the derivatives, the credit default swaps, and so on - financial products designed to game the system, not to create value or good investments. And they probably number to the millions in the whole wide world.
This means that there is a generation of people who only knew about the financial world - who knows the arcane rules of derivatives, the codes on indexes by heart, the slang and jargons that soon might be regulated out of existence or grew irrelevant. Question is, will the same kind of job in the same field be available after the crisis for these legions of money shufflers? How many brain power were, sorry to say, wasted in the game of financial derivatives in these last few years?
Anyway, I’m not sure if this is a big problem in the end - maybe they’ll all be employed back in the finance industry. Or maybe they could become entrepreneurs in the end. Or even if not, maybe they could re-enter educational process. I have no answer to this. Then again I’m just a stupid blogger that rants too much about things that I shouldn’t worry about.
1 Comment
November 19th, 2008 at 4:26 pm
I somehow beg to differ. I don’t think those financial innovation is all that bad. Of course, they are now being casted as the cause of all the mess we are having now, with the value of credit default swaps over a ridiculous sum of 60 trillion USD. However, the problem is that these so called financial experts underestimate the risk involved in these new innovative products. The fact that banks can repackage their debt into triple-A grade investment by combining bad debts together with good ones is just crazy.
If these new structured instruments were properly graded by the risk of debt default and ability of the people inside the package to be able to pay their debt, then it could become an excellent exit strategy for the banks. By the same logic, CDOs are similar to REITs (Real Estate Investment Trust), where developers can have an exit strategy for their commercial properties by packaging them into investment trust and sell the property ownership to the public (like shares). The rent payments from tenants will become the dividend (in those CDOs, future debt payments from debtors become the dividend) of the said investment trust. REIT has been around for quite a while and nothing has gone terribly wrong with it. It’s because it’s properly regulated and graded, and developers are prudent in selecting their tenants.
The CDOs, on the other hand, is full of bad debt repackaged by banks and drunkenly graded as triple-A junks by the likes of Fitch and Moody’s. Lots of the CDOs that got default mostly contain subprime mortgages in them, the main problem that causes the whole mess in the financial world. The banks were lending recklessly to finance people in mortgages of outrageously expensive houses, even to those who fall into the NINJA category (No Income, No Job, and no Asset). The fact that the Fed kept the interest rate too low for too long didn’t help either. This lax lending fueled the price bubble in US housing market by increasing the demands from people who cannot afford the houses.
On top of that, the banks even dared to lend higher than the market value of the property, thinking that the future value of the collateral will be higher. The banks assume (wrongly) that property value will never drop. Of course they do. Singapore’s property value has dropped by average of 20% in this year alone. Ideally, a conservative/conventional bank will lend debtors a sum amount of money no higher than 80% of the current collateral value. That means the collateral value has to be at least 120% of the debt. That’s why in most banks, you have to put down payments of 20% or more of the value of the property before you can be eligible for the mortgage.
These reckless moves by the American banks were fueled by the US Congress’s and Senate’s desire to increase the number of home ownership in America. Because of these new sets of policies, banks were given the green lights to lend to those NINJAs and created the mess. So I think the blame for the mess should lie within the regulators, the government and of course, the banks. If the CDOs were properly graded by their risks, I am sure it would not have become such attractive investments (most people wouldn’t be so keen to invest in these CDOs if they were rated as BB- or something).
And lastly, of course the banks were pressurized by the shareholders to give even higher return from their investment. Perhaps because of the shareholder’s demand, they were willing to risk themselves by exposing themselves to subprime mortgages to get higher return. So.. greed, for the lack of a better word, is good..?
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