I currently manage a medium sized hedge fund (long/short equity).

The current populist uproar is absolute insanity.  I don't know how else to say it.  You are never going to legislate away greed.  Period.  It is part of the human psyche.  That's all there is to it.  You can either fight it, or use it.  Incentives work.  This is why.

Let's step back a minute and think about why and how this happened:

1.  Starting back in the 1970s Congress addressed discrimination in mortgage lending (which was really a serious problem) with the Home Mortgage Disclosure Act of 1975.  This approach was to open lending statistics by requiring banks to disclose the details of their lending by geography and, eventually, demographics and income level.  This was a stroke of genius.  Large banks were shamed into good citizenship.  The act did have the effect of elevating a number of "civil rights" personalities (Jesse Jackson, for instance) as they used shrewd public relations to expose some rather egregious practices by large banks when it came to mortgage lending.  These same personalities, names you doubtless recognize, in some cases, adopted more aggressive tactics, some that borderline on blackmail and extortion today.  I leave it to you to determine if this downside outweighs the upside of truth in lending practices.  I, for one, think that forcing disclosure like this was enlightened.  It was to be the last of its kind.

2.  The Community Reinvestment Act really was a serious break with the legislative practice before the legislation.  Suddenly, you have a small number of people determining where dollars will flow based on some political definition of who is worthy.  The early definition could be right as rain in terms of who is deserving, needs a leg up, has been wronged, etc. etc. but once you go down this path, you are truly fucked.  Once you start dictating capital flows based on political worthiness (an entirely subjective and whimsical standard) you have opened the door to all kinds of mess.  Play stupid games...

3. ...win stupid prizes.  In the 1980s and 1990s Congress literally had a hornet's nest up its ass with mortgage regulation.  Almost 400 bills in the 101st Congress contained the word "mortgage."  This doesn't seem like a big deal until you realize that the housing ranged from 7-20+% of GDP in a quarter.  Absorb that.  Something like 1/5 of quarterly GDP.  Now put in place mechanisms to literally pour trillions of dollars into the system to encourage "The Dream of American Home Ownership."  Think of it.  You have a small group of regulators/legislators (less than 100 people are making major decisions about how much Freddie or Fannie will lend, or what their capital ratios will be raised to, or what interest rates should be) controlling a massive portion of the economy.  You suddenly have price fixing for a sizable fraction of the GDP.  To compete with Fannie and Freddie, their subsidies, their tax breaks, their implied government backstop and their downward pressure on interest rates, you have to take on more risk for less money.  Hello Countrywide.  (Just a bit of history, Countrywide was explicitly founded to collateralize the only loans left to non-GSEs- those not already being siphoned by Freddie Mac and Fannie Mae).  GSEs held 1/3 of all residential mortgages by 2001 or so.  ONE THIRD.  GSEs were run by political hacks, installed there as a reward for political services rendered.  These are facts.

4. Banking and Insurance regulation is, and always has been, daft.  The blind focus on capital ratios, reserve ratios and the like, and the pedantic concentration on definitions of risk that results in notional insured figures being counted in capital ratio calculations but credit default swaps not counted in this way was insanity.  Of COURSE massive capital is going to flow into the exception you, regulator, have explicitly written into the regs.  Now you are shocked and surprised that people wrote Credit Default Swaps like there was no tomorrow?  Incentives matter.  Period.

ETA: I am not stupid enough to ask you to explain to me why you cannot just let dying firms in dead industries FAIL?  Watching an airline enter its THIRD bankruptcy, and proceed to wage a deleterious price war, only to suck down millions if not billions in federal aid may pull $50 off a ticket to Florida, but it also fucks the entire industry.  You've created the appearance of a right to cheap airfare, cheap gas, cheap insurance, and bailout if the McMansion you were stupid enough to built on a 20 year flood plain gets- quelle surprise- leveled by a storm.  Of course you can't let anything fail.  You've promised the world.  You've been borrowing and delaying the inevitable to deliver it for decades.

5. The market for talent is global, and you can't legislate it away.  Like it or not there is a metric ass-ton of money in finance.  The power to create, move or allocate wealth is very valuable.  It always will be.  You aren't striking a blow for social justice by enacting the first salary caps in the modern history of the United States.  You are guaranteeing that finance experts will flee.  The hiring binge going on right now as the likes of UBS suck out talent is just amazing.  UBS, with the support of the Swiss Government, is offering 10 year permits to execs and their families who relocate to Switzerland, not to mention the ability to negotiate your personal tax rate for the next 10 years up front in some Cantons.  You can't determine what finance execs will be paid, folks.  You can only determined WHERE they will be paid.  Who exactly do you think is going to pull the United States out of this mess.  Big Auto?

So, let me get this straight, Mr. or Ms. Congressional/Executive Scumbag....

You've spent the last two decades pumping trillions upon trillions of dollars into particular segments of the mortgage market, a major portion of the U.S. economy, dictating what risks were appropriate, how much would be paid for assuming those risks and generally underpricing risk in the entire system for years and years.  You've been inflating a bubble and assuring that the inflation passed to the riskiest portions of the economy.  You've been passing the buck for four decades.  Every time the economy tries to correct itself, you stall, pump borrowed money into the system, and grow the disaster the country will eventually have to face.  You buy votes year after year by delivering graft now, to be paid for later (after you've long left office).  In effect, nearly one third of the American economy has been run by central planning for the last five years.  During this inflation, you happily collected taxes on everyone, effectively collecting tax on borrowed money and inflated assets (none of which you propose to repay- what luck would I have asking for the real-estate taxes I have paid for years on appraisals that were pure illusion?)  I didn't hear you complaining when you saw massive, record revenues to the Treasury thanks to the boom the finance community facilitated and delivered to you, year in and year out.  I didn't see you pointing fingers when we dug in and pulled your ass out of two recessions.  Finance is a massive portion of the economy because it creates wealth.  Period.  Your social programs, state and local, are massive bloated vote-buyers because of our hard work, sweat and craft.  (New York State, I'm looking at you).  We work until mid-May for you and your vote purchasing juggernaut.   I accept that.  I have for years.  This is because what I make from June to December is more than enough to, not just enjoy the American Dream and the promises of success and wealth, but to take the capital I collect over the years and invest it, again and again back into American business, start-ups, and even your fucked up GSE mortgage securities (which my taxes support).  We carry the freight.  10% of us pay 70% of all income taxes.  50% of us pay 97% of all income taxes.  We tolerate this because this is the promise of America.  Work hard, pay taxes, and no one will second guess what you spend your money on in your personal time.  No one will tell you how much is a "fair wage."

Now, now that you have run out of delaying tactics, you want to point the finger at... me?

I came to this country for a reason.  I spent 9 years in U.S. universities, which I busted my ass to get into.  I didn't borrow a dime to do it.  I paid every cent myself.  I've never so much as accepted a single unemployment check.  I've never availed myself of any government largess that I wasn't forced to take.  I have repeatedly declined to challenge some of your more deluded tax claims against my income in court, as was my right.  Two of these I clearly could have won, though expensively.  What's more, I consider myself a patriot.  I consider it a great privilege to live in the United States and to be called one of her adopted children.  I defend this country, and what used to be her ideals, to any European socialist moron who cares to engage me in conversation.  I support the troops.  Wherever they are.  Unconditionally.  I create jobs.  Aside from two years where I broke even, I have made money for my clients and partners every year since I have been in professional life.  This includes 2008 and 2009 YTD.  You could house 50 families in reasonable comfort for 10 years on what I have paid in taxes since I've been here.  Actually, now that I've actually done the calculation just now for this post, you are really pissing me off.

Now you want to call me greedy?  Are you fucking kidding me?  After you fucked this place up?  You want to tell me that capitalism failed?  What capitalism?  You've socialized/centralized almost half of the GDP.  Now, you want to use me and the paycheck I've earned year after year to deflect attention from the basic fact that you have been shoving debt on people who couldn't hope to find within themselves the character to take responsibility for repaying it?  They get a pass and I get... what... a sharp stick in the eye?

And, you want to tell me that $250,000 is "enough?"

I will tell you what is "enough."  Me paying for your power grab for the last decade now.  That's quite enough.

Let me just tell you, Congressional/Executive Branch Scumbag, Esq., if you do this... if you take this turn... I won't even think twice.  I will move my firm to Switzerland, or to London before the year is out.  Those employees who do not follow me, I will have to fire.  The corporate taxes I pay will no longer be yours.  Instead, they will go to something useful, like a nice tunnel through a mountain for high speed trains that actually work.  Further, I will dedicate a substantial portion of my personal time, effort and capital to frustrating your every attempt to collect personal taxes on me thereafter- given your draconian anti-expatriation laws.  But that's not all.  My job is to make money for my clients, in whatever way I can.  I will short your flagging financial firms mercilessly and remorselessly.  I will buy QGRI puts to bet against any firm that took bailout money.  I will buy credit default swaps on every firm you put your greasy paws on, because I know your fingerprints are laced with poison.  For every boneheaded centralist move you make, I will be there, profiting from your lunacy.  I will never again take a client who pays taxes in the United States.  I will not permit any capital or profit to be diverted to any such.  I will do this because in the same way you believe it your divine right to punish "greed," I consider it my duty to punish the stupidity and arrogance that is central planning, and because I believe in economic freedom.  I will divert as many of your resources to my new home and its relative economic freedoms as I can.  I will promote free markets in this way, and I will never look back.  You will have made it clear that you are my enemy, and I do not forget such declarations.

I take no pleasure in this fight.  I did not ask for it.  I only asked for liberty, and the pursuit of happiness.  Deny me these at your peril.  In the end, I can only hope I'm not alone.

CRIMINAL!!!

Nice post.
You could also include the repeal of Glass-Steagall.

How does one become one of those?



Seriously.

You sell your soul to the devil.  

Good luck.

In my case, 9 years of higher education, including Business School, Law School, a Master's and an Undergrad.  Years of working for someone else and developing a track record of solid returns.  Then the temerity to forge off on your own and face the music if you lose your ass.

I understand your point, but I consider this a tiny part of the problem considering the insanity government has been engaging in the last four decades.

You have no right to bring logic and reality into this! You're a greedy bourgeois banker. Now shut up, whip out your checkbook, and pay your fair share!

This , he's not kidding.

Ah, yes.



Sometimes I wonder if I should attend Law School. I'm looking for a way to break out of the seeming rut I'm in in my career path, but don't have a clue how to.



For one thing, I have no creativity whatsoever, so being an entrepreneur is probably not my thing.

It really puts things in perpsective. Do you mind if i copy it and hand out to the dead heads in my neiborhood?

Or the local ACORN office.

or my blog

If you want it gone, say the word.

Yours, entirely, for non-commercial use.  (Or commercial use, for all I care).

Sad that money makers get punished, and leaches get rewarded.  It's fucked up.

I wish you well in your future.

Edit ... I'd like to snag this too.

Agreed.  

John Galt?

Yours.

Thanks for asking permission, but, for the rest of you, feel free to copy-paste wherever, however, whenever.  Nice to add a link back to ARFCOM, but I'm hardly in a position to enforce that.

Beautifully stated.  For the ADD types among us read the whole thing, it's worth it.  

Wow!

Thank you.  That put together a lot of my fragmented knowledge together to form a much better understanding about what is happening.  I will need to google quite a few of the concepts you mention though.  I appreciate you showing that, with a little effort, people can understand these concepts enough to vote on how they are handled.  It's obviously too dangerous to just throw your hands up because it's too complicated and let some elected Harvard lawyer "just handle it" for you.

What books or reference material would you recommend to understand the fundamentals of this aspect of the economy?  I have been reading Thomas Sowell's Basic Economics and although it's excellent for the fundamentals of the economy in general, I doubt it will get into "credit default swaps".

Thank you again,
Adam

ETA:  I thought this You Tube video explained the basics well.  I can just imagine what Austrian would think of credit default swaps being explained with cartoon faces on a marker board!

You should really send this to the Wall Street Journal, after a couple minor language modifications.

So your solution is to RUN?

Well, I guess that jives with my sense of what we could expect from all the "new" citizens that we collected over the last 40 years.

I suppose you will be sipping French wine and enjoying Swiss cheese waiting for someone to put things right while we fight for the soul of our country as we have done twice already in my family starting in 1776 and again in 1861 (we lost the second time but we tried and died in droves) .  We earned our right to be here, we paid for it in gallons of blood and sweat over the past 400 years.  Not willing to pay the price, Johnny come lately?  Go ahead and run and don't come back, ya' hear!!?  There will be nothing for you here when you return, you and yours will NOT be welcome.  I may be here or not, but my sons will be assuming what is coming does not last for 10 years or longer and they don't have to pay the price, they will be watching for you to try and return.

Offended?  Prove me wrong!!!  Change your mind and pledge your life, fortune and sacred honor in which case welcome to the fight brother.  

God help us all.

In his case it would quite obviously be an act of defiance and not one of cowardice.  He came to the US to live the American dream, and it sounds as though he has done so.  If our shortsighted politicians want to fundamentally change the system that allows success, then I can't blame him one bit for hauling ass.

I wouldn't say he's running.

Oh, if the citizens of the United States actually show some dedication to the ideals that built the country, you can bet I will support that.  I see few signs of this, unfortunately.

I am willing to be wrong on this point.  Maybe there will be enough backlash to halt paycaps.  Maybe there will be enough logic to return to free markets.  Maybe people will stop blaming algorithms, and theories for their inability to understand or take responsibility for a mortgage.  I will go farther.  I HOPE I am wrong.

It may come to pass that I'm proven wrong after I have departed, in exhausted resignation.  Well, if so, then fledgling governments need foreign financing too.  France isn't going to lend it to you this time, folks.

Let me just add that it wasn't rounds downrange that pulled aside the iron curtain.  It was impending bankruptcy.

That's the real reason for the furor over executive bonuses.

The elected officials who had a large role in creating this disaster are now attempting to shunt public anger towards the financial sector.

And, sadly, WE are now facing the same bankruptcy...  We're going to drown in this debt–– just as the Soviets drowned in theirs.  What emerges will be–– well, what the idiots in the Congress and Exec Branch engineered.

I think lots of people will be packing their bags and looking at the horizon.  The problem is that there really are no safe havens anymore.

I dont blame anyone but the Federal Reserve and the bought and paid for elected officials...

google - The Federal Reserve Act of 1913
google - Thomas Jefferson on central banks
google - Andrew Jackson on central banks
google - Revolution War Ben Franklin and Bank of England

you study those and tell me the The Fed isnt anything but a mob run group and we are the subjects...

Anyone who doesnt agree is ill informed or part of the Fed system, that simple...

Wake up America!

End the Fed

You are preaching to the choir buddy, go post that in DU.

What does Ducks Unlimited have to do with this?

I offer up a toast to one of the finest and most accurate rants ever to grace ARFCOM.

Sir, a glass of Etter Yellow Plum Mundgeblasene Glasfruchtflasche from Switzerland will be poured in your honor.





ps. oh hell ya, I'm copy/pasting that one to a finance pal of mine.

To hell with becoming a manager. How do I invest in yours?

I'm with `ya.

If you don't bonus, my boss does not bonus, I don't bonus.  I've got 20 more years of that mentality in front of me, and my local community and family relies on it.  The money-men in Stamford and Greenwich have been very good to me, and I've seen nothing but hard work and honest results from the ones that I have chosen to provide services to with jobs for thousands provided downstream in the process.


PM me when ACORN shows up with pitchforks and placards.  I'll make sure I bring my brass-catcher so I don't mess up the floor

Excellent post, sir.  This should be copy/paste on every board on the 'net.

Now if you can get a large number of your Wall Street friends to join you, maybe the .GOV will stop their  bullshit and let business get back to business.

So buying millions of rifles, 100 millions of rounds, 48% of the nation voting against Obama, most of the South and West voting against tyranny, but that's not enough for you?  

You will be France?  BS, we won't see a dime from you.  Lol.  Sure.

I am sure the Torry's who ran to Canada and left the country in the last revolution were telling themselves the same thing.  

Bye, don't let the door hit you in the ass.

You sell your soul to Jack Welch actually  

Any of the big I-banks will do just fine too.   100 hour work weeks for your first 4-7 years.  Make a lot of friends by making everyone above you richer.  Then you can cut loose and build your own mint.  Don't forget to have a good contact at UBS too!

I'm going to have to disagree with you.  I do blame the investment banks and "financial engineering" for nearly all of this crisis.

If a company takes government money, it is subject to its terms. The current bill before congress in its current form is unconstitutional and unfair, but let's also not forget that without taxpayer money, there would be no 'bonuses' to pay out in the first place.  Maybe those currently bellyaching about taxes on their bonuses should go work for Lehman, or Bair.  Are they hiring?

Show me the law passed by Congress or the banking regulation that mandated that banks lend money to people with no income, no assets, and no job.  At 105% LTV.  With interest-only, negative-amortizing loans.  Show me the law that 'forced' these lenders to securitize these loans.  Show me the law that 'forced' the ratings agencies to rate this garbage AAA in order to sell it around the world.  

And oh by the way, while the banks are selling this toxic waste as AAA paper, their in-house hedge funds were betting against it on the derivatives markets.  Often with AIG, Bair, and Lehman as the counterparties.

This global pool of "talent" that you speak of is the "talent" that created a $75 trillion dollar derivatives industry.  PhD level physicists and mathematicians along with the "smartest guys in the room" at the I-Banks helped create this system of unregulated insurance and gambling whose failure which, despite $8 trillion of bailouts and guarantees and counting may still harm the national and global economy.

So all this "talent" is free to relocate to anywhere on earth they think they can get a better deal.  But that's always been the case, right? Don't let the door hit you on the way out.  

Just finished re-reading Hayek's Constitution of Freedom.  I think Austrian is on the right path, the iron curtain fell because of economic reasons and only if another "beacon on a hill" exists will people see what we were, and return to capitalism, hopefully.  Too many economic illiterates running the show here.

Good luck, and keep posting.

Austrian, thanks for taking the time to post this.  Very insightful.   I can't believe that Congress isn't taking into account what happens when you try to assign unwarranted blame to motivated, talented people, who can make money virtually anywhere in the world.  It's going to take us a long time to rebuild from where we are now.

tag

tag for later.

Great rant...thank you for sharing this. I also hope that you send this somewhere where it can be read by many.

That would be here.

huh?

Thank you for the post, excellent read.
 

One of the best rants I've seen on arfcom.

They allowed discrimination lawsuits to occur.  They kept interest rates artifically low.  They funded groups (like acorn) that used intimidation tactics to get banks to make loans that wouldn't normally occur.

10/10

My hat is off to you sir.  Good luck.

Maybe one day the ideals that founded this country will raise it from the ashes, and your company will have fertile ground to return to.