

Stop shitting on Wall Street - bsiscovick
http://bsiscovick.tumblr.com/post/849658406/stop-shitting-on-wall-street

======
T_S_
Wall Streeters are only human. If you want to fix Wall Street you have to
design a _system_ that works better, taking human nature into account. One big
difference between Wall Street and startups is the heavily regulated nature of
the financial industry. The public already has the control, but our government
doesn't use it effectively.

I worked on Wall Street for many years before becoming an entrepreneur. My
fingerprints were taken several times. No I wasn't being arrested, everybody's
are taken--a holdover from the days of physical securities. I took 5 major
exams over the years and many minor ones, in order to be permitted to do my
job. Oh yes, the content of the exams had little to do the products I worked
on, which were all invented only yesterday. Our company had offices set aside
for regulators to use whenever they visited. The public never, ever heard or
saw the results of those visits. Our P&L had internal and external auditors
looking at it all the time. Only the internal guys were good, since it
protected managers from rogue traders. Our capital was regulated, which capped
our risk only in a very vague way. I could go on.

What did all this regulation accomplish? Nothing in the end. Why? Regulation
pits bureaucrats against highly paid professionals. Some bureaucrats are
highly motivated and intelligent (I know, I used to work with a few of them
when they worked on Wall Street). But their bench is not deep and the stars
show up only when there are investigations to lead and headlines to grab.

We need a _system_ that pits the smart against the smart every day. It starts
with opening up bank operations to public scrutiny. The balance sheet you and
I have is open to creditors to inspect. The reverse positions, held by banks,
should be visible to the public. Only then will privately employed bank
analysts have a prayer of calling bulls__t in a timely manner. If you think
this is some kind of socialist plot, think again. Even Friedman and Hayek knew
that markets can't clear without adequate information. Where do you think all
this volatility is coming from?

Will we get this kind of transparency from the new financial reform law?
Afraid not. All we did was put the A-team of regulators in charge--but they
will move on after a while.

~~~
jbooth
We don't need a system that pits the smart against the smart, we need a system
that pits the smart against nature. I'm sick of zero-sum competing to leech a
bigger share of money out of the system rather than giving it to investors or
investees.

Smart people should be creating things. Discover/fund a new market and get
rich? Great! First one to see a big trend and have the guts to bet against it,
lining up market pricing? Good, I hope you get rich.

But playing video games in order to nip the largest number of pennies off of
actual investment is just a giant waste of time, talent and money.

~~~
T_S_
Ideally, the efficient allocation of capital _is_ the smart against nature.
However the nature of the current system injects too much noise into the
markets, since trades and positions are generally secret, except as
occasionally viewed by regulators or post-mortem as in the Madoff case.

------
drunkpotato
"Stop shitting on Wall Street"

No. Wall Street has not been shat upon enough. Banking and finance have a
proper place in a well-run market, and that place is much, much smaller than
they currently are, with much less lobbying power. Until the financial sector
is drastically reduced in size and power, we need to shit on them _much, much
more_.

~~~
T_S_
I think vitriol plays into the hands of the industry. It appeals to anger,
which will fade and is not focused. I think we should be analyzing _how_ to
shrink the industry's size and influence, and design what should replace it.
After all this site's readers are nothing if not problem solvers.

~~~
hga
Well, the shrinking of the size of the financial sector is happening all on
its own and I'm not sure we need to do anything to help that (and it's a
fantastically dangerous and inherently politicized thing to do anyway, by
definition "picking winners and losers").

What I'd prefer concentrating on is reducing firms that are "too big to fail"
to "small enough to fail". Except that that wouldn't have prevented the 2008
financial crisis, it just would have changed its shape. People have this
unfortunate pattern of group betting AKA manias that regularly produce
financial bubbles and that's a system problem for which I don't see any
solution.

What have we learned since the Tulip Mania, the South Seas Bubble, etc. etc.
etc. other than that we don't learn from history?

As for shrinking their influence, how do you do it to the people who are
handling your money? Buying your bonds (government (e.g. the Federal primary
dealers) and corporate)? Etc.

As for replacing it, with what? What type of institutions or economic system?

------
pxlpshr
Okay. Meanwhile, 17 bailed-out banks overpaid executives with tax payer money.
If my startup failed, man it sure would be nice to get a $MM exit.
[http://www.npr.org/templates/story/story.php?storyId=1287195...](http://www.npr.org/templates/story/story.php?storyId=128719536)

Wall Street needs to return to partner-driven approach like law firms instead
of taking risks with other people's money.

~~~
chasingsparks
Subjectively, I think the executives are overpaid in general. However, bailed
out bank executives are objectively overpaid for the reason you stated: you
can't have capitalism without losses.

In fact, I don't think they shouldn't have been bailed out at all. The banking
system probably had to be rescued, but bailouts mangle capitalism. Banks that
needed bailout should have been nationalized with the very explicit constraint
that they be re-privatized after the storm had passed.

(Note: I mostly just parroted Nassim Taleb's argument from two years ago.)

~~~
dasil003
_Did_ they have to be rescued? We already have FDIC to ensure the little guy
doesn't lose his shirt.

Sure, top financial experts claim that if some those big insolvent banks
failed then the economy would die. Well, maybe or maybe not, but most of the
top experts testifying to congress had an a tremendous conflict of interest
with regard to their personal careers and holdings. We don't have any example
of what would have happened... somehow I doubt people would just stop
producing though.

Also, even if we accept that a bailout was necessary, then the taxpayers
should have owned those banks. The government should have seized them, purged
the toxic assets, and then re-privatized when the books were clear. This is,
as far as I know, the textbook way that the World Bank recommends bank
insolvency be handled, recommended over and over again to third-world
countries, but somehow never got seriously considered when it's big American
banks.

~~~
hga
Actually, plenty of them _didn't_ have to be rescued; note this from the
report:

" _Payments largely from firms that have reimbursed taxpayers: Eleven of the
seventeen firms the Special Master has contacted regarding his proposal have
fully reimbursed the taxpayers. Of the $1.7 billion in payments identified by
the Special Master, more than 90% were made by firms that fully repaid, or
were taken into consideration in the Special Master's determinations regarding
"exceptional assistance recipients."_ "

I don't know what the last of that means, but the rest suggests that most of
these "overpaid executives" worked at firms that never needed a bailout, but
were e.g. part of Paulson's "you are not exiting this room until you sign this
agreement" 3rd World dictatorship riff, which was done so that the public at
large wouldn't know which companies were actually in deep trouble (a strategy
that was necessarily well publicized at the time).

~~~
sethg
Yes, _in 2010_ , a lot of these companies have been able to pay back the
government. But _in 2008_ the whole system of credit was seizing up because
lenders and investors, not knowing when the next pile of shit would hit the
fan, were panicking. We can’t send a time machine back to 2008 and announce,
“we are from the future and we certify that you can lend to these guys at 5%”.

~~~
anamax
> But in 2008 the whole system of credit was seizing up because lenders and
> investors, not knowing when the next pile of shit would hit the fan, were
> panicking.

That's true, but it doesn't imply that Wells Fargo, to pick one example,
needed a bailout in 2008.

Note that much of the potential for panic came from a regulatory decision to
exempt certain obligations from normal bankruptcy rules. That made an orderly
shutdown of Lehmann impossible.

~~~
hga
It's hard to imagine any "orderly shutdown" that would have resulted in their
bonds being worth much, especially during the process (that's Leahman's
commercial paper AKA ordinary borrowing, not anything exotic or toxic they
were selling). The Reserve Primary Fund's inexplicable overexposure to Lehman
bonds then caused them to "break the buck" which started the cascading failure
of the world's financial system.

~~~
anamax
Lehman's bonds went to 0 because all of its assets went out the door with its
derivatives. If the derivatives had had the same status as other debts,
including said bonds, those bonds would have been worth >0.

~~~
hga
Are you really sure Lehman's bonds went to zero? _No_ one was willing to take
a chance they'd be worth something when everything was sorted out? I doubt
that and would like to see some evidence of it.

The problem for the Reserve Primary Fund was that their value dropped
precipitously; I suspect it wouldn't have mattered if they ended up at 0, 1, 5
or 10 cents on the dollar.

As for the derivatives, when it came time to settle them, as widely predicted
they mostly canceled out with only (from memory) 6 billion US$ changing hands.

~~~
anamax
> Are you really sure Lehman's bonds went to zero?

The official story is that market essentially froze, that no one would buy.
I'd have bought everything I could get my hands on at fractions of a cent (and
possibly more), but they didn't ask me. (After they let individuals back in, I
thought that all of the bargains were gone, so I didn't go bottom fishing. Big
mistake. The great deals were gone, but there were still some opportunities
left even when I got around to looking.)

The money that left with the derivatives may have kept the bonds at 70-80
cents. Unless Reserve Primary was 100% Lehman, that might have been enough.

> As for the derivatives, when it came time to settle them, as widely
> predicted they mostly canceled out with only (from memory) 6 billion US$
> changing hands.

Yup, but no one knew that when the derivatives were being made whole while
everyone else waited to see what was left.

------
arethuza
I'm honestly amazed at how quickly everyone has stopped throwing sh_t at the
various financial institutions that caused the chaos of the last couple of
years.

In the UK, where most public spending is being cut by 25% there are a _lot_ of
unhappy people who blame this mostly on the £850B bank bailout (of course, it
wasn't just the cost of the bailout, but it certainly didn't help).

I think things could potentially get a lot uglier before they get better.

~~~
Jd
Not "could potentially" but "will definitely."

There is a one word description that suffices to describe the problem:
corruption.

------
isleyaardvark
The author tries to explain the benefits of Wall Street, but unfortunately the
benefits he describes are individual in nature, "what did _I_ learn". It's all
about the skills the author gained will working in that industry, but what
good are those skills for? A critic of Wall Street might think that these
skills are only "as value extractors rather than value creators". Edit: I'd
rather see a more detailed explanation of how Wall Street creates value in a
post defending them.

~~~
leelin
I agree, the better title seems to be "Stop Shitting on Wall Street
Employees".

For the defense of Wall Street, a small start might be the capital marketplace
argument:

<http://news.ycombinator.com/item?id=973663>

------
motters
I'm not at all sympathetic to wall street. They relied on bad math and bogus
assumptions, and ended up ruining a lot of people's lives in the most
unprofessional manner imaginable, whilst absconding with a huge amount of tax
payers money which future generations will be paying for.

------
ccamrobertson
A number of comments have hinted at it, however, I think that the key issue
with the article is that it does little to break down Wall St. as a _career_
as opposed to Wall St. as a mis-regulated _industry_.

I would agree with Ben that many in the startup community focus far too much
vitriol against the profession of a financier on the Street. There is
significant value in facilitating financial allocation and increasing market
efficiency.

However, given the financial regulatory environment that has not allowed banks
to fail, I think that it is legitimate to take issue with the fact that Wall
St. as an industry is far too large and riddled with players that should have
been washed out by both the S&L crisis as well as the most recent financial
fracas.

------
MediaSquirrel
I responded: <http://news.ycombinator.com/item?id=1541442>

Wall Street and Big Co. are the competition. We compete with them for talent
and mindshare every day. And precisely because they are so appealing and have
so much to offer, especially monetarily, we try to detract from their power
and allure by spreading fear and talking shit. We try to make people afraid
that joining Google or Goldman will lead to a forfeiture of their soul. Is it
100% rational or true? No, as he adroitly pointed out. But it is strategic and
accretive to the startup ecosystem for us to talk such shit. It is marketing
in its most pure and basic form.

------
ubernostrum
Let's make a deal: I'll stop shitting on them when they stop shitting on me.

------
chasingsparks
Thanks for writing this; it's been bothering me for sometime now.

Commonly, the arguments are Wall Street "doesn't create value," "merely moves
money from A to B," or "just exists to extract wealth." Wall Street produces
pricing information. Wall Street produces this pricing information by moving
money in markets from A to B, and extracting _some_ money as payment. All
businesses exist to extract money from somewhere!

Good pricing information is extremely valuable. Bad pricing information is
devastating. We just had a crisis caused by bad pricing information that had
multiple origins, including Wall Street. However, the majority of the
information produced by Wall Street is still good.

Wall Street gets the brunt of the animosity because Wall Streeters make a lot
of money. Furthermore, there is a severe asymmetry between positive and
negative perceptions. When markets are well-functioning, their success is
easily obscured; When markets are poorly functioning, their failure is center-
stage.

Before someone accuses me of conflating Wall Street with markets in general, I
would like to counter that Wall Streeters are the maintenance men of markets.
Some of those out-sized returns on short-term trading operations help pay for
the fundamental research that helps produce good pricing information.

~~~
dasil003
You're right that Wall Street serves a valuable function.

The reason for all the animosity is because they did a _piss poor fucking job
of it_ and then used their influence at the highest levels to convince the
government that a bailout was necessary, enriching themselves instead of
taking their lumps. In 1929 wall street men were jumping out windows. In 2008
they were jumping out planes with golden parachutes paid for by the taxpayers
while vast swaths of America were losing their homes and jobs.

Bottom line is, Wall Street fucked up and they should have taken their lumps
for it. That doesn't mean everyone on Wall Street is to blame, but it means
that generally yes, Wall Street does deserve our scorn (as well as congress).

~~~
hugh3
Wall Street has already taken their lumps. I'd like to see feel-good
government policy take its lumps now. Specifically, the kind of policies that
encouraged and/or forced banks to make loans to uncreditworthy individuals.

Any time you hear a politician shitting on a bank, it's because they're trying
to distract from the role the policies they advocated had in all this.

------
wheaties
The funny thing is that there is a lot of innovation within large companies
that will never see the light of day elsewhere. These inovations are viewed as
a competitive advantage so will never emerge. Sometimes engineers have
invented things within corporate confinement only to take those ideas and
refine them within the freedom of a start-up. Then there are those who speak
of things within companies like Google who swear what they have seen in open-
software pale in comparison to what happens behind their closed doors.

Speaking of Wall Street, people need to realize that there's just as much
emphasis on learning, evolving, and discovering new science there as there is
in many smaller companies. The problem domain is more geared towards the
maths, data mining and currently low-latency systems.

------
hsmyers
He is right--- bankers at the level he speaks of certainly don't deserve the
crap handed out by the tech community. That said I'd still apply the
'Shakespeare' solution to the rest of the corporate pyramid just after
handling the lawyers.

------
known
Wall street adds value to Govt. Start up adds value to the society.

~~~
rmk
Well said. Startups add value to society.

But society quickly discards anything that is not of value. How come Wall
Street still thrives? Surely there must be something that they offer?

It's Government that doesn't add value. It failed miserably at its job of
regulation (whatever was left after glass-steagall, that is), passed highly
unpopular policies whose results have been questionable, and now passed
another monstrosity that it hasn't even finished, but will leave it as an
'exercise for the readers'.

I would say Wall Street is an ugly manifestation of the perverse incentives
that Congress helped create.

------
marze
Some say Wall St is a "Ponzi scheme". If that was accurate, certainly one
could argue big changes are in order, but is it accurate?

In a Ponzi scheme, you have an organization that takes peoples money, does
some complicated things with it that are difficult to understand, pays
internal people handsomely, pays back early "investors" handsomely, then
suddenly collapses and all the investment the later investors thought they had
is gone. This happened in 2007 before the governments of the world contributed
in $3,000,000,000,000 keep the scheme going.

The difference between the Wall St. Ponzi scheme and your average couple-
million Ponzi scheme is three-fold: the organizers are still running it
instead of being in prison, it is a million times bigger, and scheme insiders
are running the Federal Reserve and the U.S. Treasury.

This is be made out to be a natural consequence of the complicated modern
financial world, but was it unavoidable? The $3T bailout works out to about
$10,000 for every person in the U.S.

~~~
thailandstartup
Also the Fed can print money. Which is how the story inevitably ends.

It seems to me that the problem is created by economists winging it. I'd
rather see a financial system designed and run by engineers.

------
lsc
eh, I think the real problem isn't wall street... the real problem is that we
subsidize investing to sell over investing to hold through lower capital gains
tax rates... If I sell my company, I pay less than half as much taxes than if
I continue to hold the company and just pay out profits to myself.

this encourages short-term thinking.

If we still want to give preferential tax treatment to investing vs. working,
you can do that without forcing people to sell by removing the double taxation
on dividends... simply allow corporations to write off dividends as they would
wages, and charge owners the existing capital gains taxes. this would allow
owners to extract value at the lower capital gains rate.

------
dyc
"I spent two years and a summer as a junior banker. I knew from the get-go
that I never wanted to be a career Wall Streeter. I viewed my time in banking
as a continuation of my education. And you know what, from that perspective it
was incredible. The nearly undeniable reality is that the skills and knowledge
acquired in banking are remarkably valuable and broadly applicable throughout
ones career. Contrary to uninformed opinion, it is not all about spreadsheets
and powerpoints - it’s about understanding flows of cash through companies,
analyzing markets, thinking critically about strategy and competition, and
importantly, identifying and valuing opportunities."

This is so far from the truth. Most junior bankers come away learning little
relevant or valuable towards actual business and the startup world.

~~~
leelin
I can't speak for bankers, but I can confirm a similar situation from my hedge
fund days.

I interviewed lots of interns and junior full-time folks who worked in IT or
infrastructure groups supporting trading desks. They all claimed it was a
great experience learning how markets work, how their asset classes behaved,
etc, and wanted to move to front-office. Sadly, the vast majority were
completely clueless of how the asset class worked or even what instruments
their code was pushing through databases, booking systems, and PNL
calculators. Keep in mind I'm not faulting them for being ignorant of the
actual trading strategy (which by design the front-office keeps a secret).

Fresh college candidates fortunate enough to play around with an options-
enabled eTrade account during undergrad have far more market knowledge and
passion for finance than say, a 2nd year infrastructure or trading platform
coder at a bulge-bracket bank.

It stinks that the IT guys get pigeon-holed into the least glamorous part of
finance, but after trying to keep an open mind for years, I can understand now
why firms are so reluctant to let their back-office shift their way to front-
office. For anyone trying to make the move, my advice is take the extra time
to learn about the liquid you are plumbing through the system, get truly
passionate about the underlying finance and math, and then change firms,
because your current one likely won't let you make the leap.

EDIT: Responding to comment below. Hard work and a high threshold for pain
will get someone pretty far in finance, but I suspect not far enough if there
is no underlying passion. Anyone who really wants big bucks and prestige must
eventually earn the pilot seat, or at least be in the cockpit (as a co-pilot).
Maybe the saddest part of finance is that far too many people want to be
pilots and not enough are happy being flight attendants and mechanics.

~~~
Jd
I'm not sure that "market knowledge and passion for finance than" translates
into big bucks and prestige, which seems to be what most people going to Wall
St. are seeking.

