Tag: casino capitalism

Finance Industry Laments New Curbs on Securitization (via The Fiscal Times)

On By southwerkIn business ethics1 Comment

Yesterday, I was explaining to my students that the word, securities, had become an oxymoron. (I am a reality based instructor.) Ironically, within 24 hours, I run into this article which says that the problem of securities being a highly speculative investment has abated somewhat. If the numbers are accurate, things have improved.

From The Fiscal Times (from an article by Zachary A Goldfarb) –

For nearly two decades before the financial crisis erupted in 2007, the securitization market allowed Wall Street to manufacture all manner of financial products. The most basic of these were bundles of home, auto and credit card loans that were turned into single investments that firms and countries worldwide could buy.

But then things got more complicated. Wall Street found ways to allow investors to speculate on Hollywood films, patents, lawsuits, airplane sales, and fast food revenues. The most infamous financial engineering, of course, involved the creation of seemingly high-quality investments that were in fact backed by high-risk home loans, extended to people with weak finances.

These subprime mortgage-backed securities helped doom the financial system starting in 2007, and the securitization market has been working to make its way back ever since. Although it has had some success, particularly in auto and student loans, participants at the ASF conference here said that they expect financial engineering to play a far smaller role in the markets for years to come.

“Banks will be utilizing securitization less in the future than they have in the past,” said Bianca Russo, managing director at J.P. Morgan Chase.

In total, there was $145.3 billion in securitizations in 2010, compared with $875.5 billion in 2005, and far below the number even a decade ago, according to industry newsletter Asset-Backed Alert.

Every time I explain what a security based on home loans looks like broken down into its parts, my students are amazed that anyone would buy them. But then I show them what the paperwork looked like to an investor. If you can divide the home loans between, prime and sub-prime, only then can you see how much trouble you are in. But the poor investor can only see a list of smaller investments perhaps of thousands of mortgages which for accurate knowledge need to be researched individually. The investor would have felt that they needed no such investigation because the security was  rated as triple A by an international ratings corporation like Moody’s. Investment firms like Goldman Sachs are not required by law to disclose risks with an investment they are selling. So, the investor was swathed in assurances that he was making a good investment when for all intents and purposes he was driving blind in a snowstorm. And in 2007, they hit the wall.

James Pilant

Casino Banking

On By southwerkIn business ethics1 Comment

For most of American history, banking was a vital part of economic growth. Bank loans provided the capital for small businesses and government to build factories, stores, highways and other public works. This is no longer the bank’s major function. While bank lending is still a critical part of the function of banks as far as the welfare of the nation is concerned, the profits are elsewhere.

It is hardcore speculation, casino capitalism, where the real money is made. This is not wealth creation, it is more similar to the board game, monopoly, you try to make money speculating on property although in the modern sense this is more likely stocks, mutual funds, derivatives, etc. This is not a benefit to the economy. It is a drag and a danger to the larger economy. When the financial sector loses, the taxpayer picks up the losses, while taxpayers share nothing in the winnings. This is because the nation insures deposits and because changes in the law in 1999 allows banks to speculate with these federally insured funds – Corporate welfare on a scale of trillions of dollars.

This gambling has far reaching societal effects. Those who benefit from this no way to lose game make more and more money while those who insure them against loss make less and less.

From the New York Times Article – Scrutinizing the Elite, Whether They Like It or Not –

Olivier Godechot, a French academic on the sociology panel, presented research that quantified just how skewed the increase in wealth at the very top has become. Mr. Godechot, a researcher at the National Center for Scientific Research in France, said that two professions — finance and business services — accounted for almost all of the increase in income inequality.

Professor Godechot has put his finger on it. Our society has focused, fixated on finance as the only mode of economic growth. Everything else from services to manufacturing are poor relations whose share in the wealth and even the concern of the government continues to dwindle.

Because of these changes we have an enormous inequality of income in the United States. From wikipedia –

Americans have the highest income inequality in the rich world and over the past 20–30 years Americans have also experienced the greatest increase in income inequality among rich nations. The more detailed the data we can use to observe this change, the more skewed the change appears to be… the majority of large gains are indeed at the top of the distribution.

The big incomes in America are strongly aligned with the world of finance. So, many of the great incomes in the United States are associated with a socially negative activity that not only produces no value to the large economy but actively endangers the economy through its taxpayer guaranteed bets.

It this wasn’t bad enough, hundreds of thousands of graduates from the most expensive and prestigious universities in the United States pursue careers in this field often starting at a quarter of a million dollars in annual salary, a massive diversion of talent from every other field of endeavor. So, our focus on finance weakens the nation and diverts its future leadership into the same unproductive path resulting in further devastating losses to society as a whole.

What can be done? Well, we could consider making things. We could make actual products in this country, televisions, stereos, building materials, etc. We could base our economy on things of value. We could rise in morality and ethics to a point where the idea of making money by financial speculation becomes an abomination to any upright citizen with even a smattering of civic conscience.

We will do it. Either by choice or by necessity.

You see, the financial way of making money, this casino capitalism, when applied to a society like ours is a disaster that unfolds over the years. It hollows out our country diverting the money that would have built manufacturing and countless other useful investment, diverting the young from useful and productive enterprise and diverting the attention of society away from the important endeavors of life and nation building and into a life of profit based on speculation. Why work, when you can gamble with other people’s money?

When this cardboard edifice falls, once again we will find virtue in the making of value.

James Pilant

(This is a revised version of an earlier post.)