I wrote this for No Treason in July of 2002:
This morning’s New York Times has a curious piece on Alan Greenspan’s recent denunciation of greed.
The article consists of a series of quotations from Ayn Rand and from Greenspan in the days when he was incontestably in the Randian camp. On Usenet I wrote:
Well, I had wondered when someone here was going to remark upon Greenspan’s denunciation of greed, but I thought the article itself was very good. I expect the Times thought that merely quoting those texts was damning enough, but I thought they were nice selections. It would have been nice to point out that these events are the consequence not of capitalism but of our fascist mixed-economy, of Orren Boyle, not Hank Rearden, but I think the Times may have done its own cause more harm than good.
But wait. There’s more. The Times quotes Rand as saying “I make mincemeat out of the kind of businessman … that runs to government for assistance, subsidies, legislation and regulation.” Precisely what kind of corporate executive — not businessman — do they think has committed these awful crimes?
Does the New York Times think that the securities market, the sine qua non of these scandals, is free?
A year or two ago, conservatives were rejoicing that half or more of Americans were now ‘capitalists’, owners of the means of production, either directly or through retirement plans or mutual funds. Now that the New York Times is lamenting the sad fates of these — call them by their right names: Indiscriminate, uninformed, degenerate gamblers — is anyone happy to have the nation’s capital in the hands of such cry-babies?
Does the New York Times honestly believe that ordinary people should own securities? Does the New York Times believe that anyone who would gamble his retirement savings on the most volatile of stock issues should be pitied for suffering the predictable consequences of what Greenspan calls “infectious greed”?
Back when he was young and admirable, Alan Greenspan wrote that going off the gold-standard “put a penny in the fuse-box” of the American economy. Actually, the old and tired and irascible and very possibly corrupt contemporary Alan Greenspan has done the same thing, putting a penny in the (virtual)gold-standard (virtual)fuse-box crafted by his predecessor, Paul Volcker.
But securities laws have the same sort of effect on the stock markets: The state erects some pretty signs at the shore that read “No sharks allowed!” And down to the beach come the vast hordes of bathers, each of whom has spent not one second’s effort in due diligence. The blood-bath that follows is the fault of the sharks, to be sure, but they didn’t invite these idiots to go swimming.
The particular corporate sharks under scrutiny truly did lie to their shareholders, but the intelligent question is: Why would anyone invest in a business where the managers don’t have to answer directly to the owners? Limited-liability corporations and massive stock issues encourage investor ignorance by making true due diligence virtually impossible.
Does the New York Times think that anyone should invest in a business when true due diligence is virtually impossible?
Does the New York Times think that anyone who does not do true due diligence prior to making an investment should be encouraged by regulation to invest in the securities of limited-liability corporations?
In the casinos of Las Vegas, 74% of all the action is in the slot machines. Slots are a negative expectation bet. That means that for every dollar put into the machines, less than a dollar will be returned. To the slots do the uninformed repair, and to the slots are they doomed until they improve their minds.
Back in the poker room is the only true positive expectation bet in the casino — it is possible to walk out with more, sometimes much more, than you came in with. Most people don’t, of course. And, blessedly, the tables are arranged in such a way that the uninformed cannot do too much damage to their estates while losing at poker.
Over here is the $1/$3 Omaha table, where the pots run less than $20. Over there is the $20/$40 Stud table, where a good bluffer can take down as much as $250. Back in the corner is the $300/$600 Texas Hold-’em table, where a good hand might draw $10,000. But only in special rooms at special tables do gamblers play No-limit Hold-’em, where pots can run to six figures. Give a $1/$3 player a ‘share’ in a No-limit game and he will be back to the slot machines in minutes. Not because professional poker players are crooks, but because they are not amateurs.
Encouraging natural born slot-jockeys to ‘invest’ in No-limit Texas Hold-’em is the real crime, not the “infectious greed” that is the predictable consequence.
As a postscript, this essay was written before the movie Rounders convinced every jackass in California with a baseball hat to put on backwards that he could play Hold-’em at the Bellagio, and it’s important to remember that we’re talking about securities regulation, not poker. But the poker pros have a name for all those pretty boys with the hats, the sunglasses, the hair gel and the iPods: They call them “dead money.” I expect there is a similarly accurate sobriquet on Wall Street.
Technorati Tags: investment, Las Vegas
Michael Wurzer says:
Without doubt, the securities laws do invite and most do no due diligence. I would submit, however, that the solution is not to quit inviting nor is it to prohibit or regulate the experimentation with derivatives that has caused so much periodic volatility in the market over the last 30 years or so. Rather, the solution is to let the losses ensue so that education occurs, at all levels. The main street folks will take their losses and learn they are gambling more than they thought, and that will/may engender more caution and less demand. The lower demand may impact the wall street folks to be a bit more cautious as well. Overall, though, I believe the experimentation with derivatives is necessary to continuing the growth of our capital markets and, without such attempts to diversify and divorce risk from small investments, our capital markets would be severely limited. Much of this experimentation remains very new and esoteric. In a former career, I represented a securities firm in a law suit over interest rate derivatives and only a very few in the case understood the math involved. The models are complex and will never be explainable to the main street investor, but that doesn’t mean the risk should not be sustained by the investor. Only the consequences of the investment will educate over time. Of course, I’m not advocating protection of the math magicians from claims of fraud or even gross negligence, but rather that the failure to explain the models and all the risks inherent in such experimentation with risk reduction is not fraud.
One last comment — all these big company failures brings to mind a discussion I had with Jeff Brown quite some time ago about equity indexed life insurance policies. I learned a lot from those dicsussions and even implemented a Roth option in our 401k plan as a result. I’m also doing research now about various companies that offer such insurance plans. The highlight for me, though, is that such investments are, in the end, a bet that the company issuing the policy will be around in 30-40 years when you want your money back. As we watch the frailty of the math models being exposed this week, the probability of any company lasting that long frightens me.
September 16, 2008 — 8:18 am
Thomas Johnson says:
“such investments are, in the end, a bet that the company issuing the policy will be around in 30-40 years when you want your money back.”
AIG policy holders are about to find out the value of their insurance contracts, as the NY state regulators allow AIG to pour life insurance reserves down the sewer.
As long as I have been a grown up, life insurance cash value was safer as than money in a mattress it paid a little interest, but was always there just in case, plus, it took care of your family in the event of your demise. The blind governor of NY is leading us over the precipice.
September 16, 2008 — 8:36 am
Greg Swann says:
> to prohibit or regulate
You will never find me on that side of any debate. The point is that both the dot.com bomb and the current debacle are made possible by securities regulations. Without them, we would have far fewer and far smarter people trading securities — and none of them would have their assets artificially-shielded by liability limitation.
September 16, 2008 — 8:50 am
Michael Wurzer says:
Greg, limiting the market to “far fewer and far smarter people” would also mean much smaller capital markets. The point of most derivatives is to create market opportunities for smaller investments, i.e., bringing the market to the masses. That these vehicles are risky is beyond argument but not offering them — limiting the market to “fewer and smarter people” — is no better than regulation in my view.
September 16, 2008 — 9:04 am
Chris Johnson says:
This is something that is falling on deaf ears. While it may be opportunistic to seek government assistance to your industry, it is immoral, no questions asked.
And that’s the difference between ‘principle,’ and ‘pragmatism.’ We’re in a shitty situation now, and the easiest thing is to become incorruptable..
September 16, 2008 — 9:31 am
Greg Swann says:
> limiting the market to “far fewer and far smarter people” would also mean much smaller capital markets.
Possibly. Is it your position that the current situation — entirely engendered by government regulation of putatively “free” markets — is to be preferred?
When you discover that you taken precisely the wrong course, the only solution is to turn around. Abandoning capitalism — beginning in 1789 — was a very poor idea. Introducing even more Rotarian Socialism into the economy will only make things worse.
September 16, 2008 — 9:42 am
chris e says:
“Does the New York Times honestly believe that ordinary people should own securities? Does the New York Times believe that anyone who would gamble his retirement savings on the most volatile of stock issues should be pitied for suffering the predictable consequences of what Greenspan calls “infectious greed”?”
Unfortunately no one was able through history to regulate and protect people form their own greed.
I hear every body talking that if wall street goes down the economy will go bast.I that this is a myth that was sold to us very effectively.As you noticed every day an other wall street institution is going south every day and the sun is still rising from the east.
I think the whole security /banking system needs to be scraped and redesign.So far they have made money more from the markets that have put in.
September 16, 2008 — 9:43 am
chris e says:
n the face of growing pressure from Congress, the Bush administration said the federal government will not pay severance packages ranging up to $24 million for the two ousted chief executives of Fannie Mae and Freddie Mac.Leib Pinter, a former executive of a now-defunct New York mortgage lender, faces 20 years in prison after pleading guilty to stealing $44 million in payoff proceeds from Fannie Mae on more than 250 mortgage refinances.
Are those companies dealing in some form of securities?LOL
September 16, 2008 — 9:52 am
Michael Wurzer says:
I’m suggesting that regulation is not entirely to blame (some but not entirely), and that there is a benefit to inviting in the masses. That invitation does not come without risk, as we’re seeing now, but leaving the capital markets only to those few who have the time and inclination to do their due diligence is both limiting to innovation and ownership. That some big mistakes are being made by big players is not cause to close the doors for the small player to the big game, but rather make them accept the lumps and move on, hopefully learning from the experience and betting smarter next time around.
September 16, 2008 — 9:58 am
Michael Wurzer says:
Also, what’s really happening here is that the big game is going to get less risky as more is learned by the big players. As I mentioned in my earlier comment, the derivatives at the heart of these new and risky markets are highly complex and few understand them especially as they interplay with all the other markets. However, that doesn’t mean they aren’t continually learning and getting smarter about them, and each crash is yet another opportunity to improve. Going back to Jeff Brown’s advocacy of EIUL’s, I’m tending to agree with Jeff now that such contracts may well be the best vehicle for the little guy, from a variety of perspectives. I believe these insurance contracts will grow in use and become easier to administer and issue as well. This is where regulation can play a role. Currently, the regulations make these types of insurance contracts quite complicated but improving the regulation could create an entirely new market that makes it easier for main street to invest in Wall Street, with the types of guarantees for which insurance is designed. That the insurance companies will have to employ highly sophisticated investment and diversification strategies using derivatives is a fact, but that doesn’t mean there isn’t a way to make those strategies available to the masses.
September 16, 2008 — 10:05 am
Real Estate Watcher says:
This is dead on. Greed is good as long as the Brink trucks are piling up.
September 16, 2008 — 10:20 am
Michael Cook says:
This is a great discussion. To be fair to Greg, I completely agree that anyone without a degree in finance will have a lot of trouble understanding individual stocks. Asset managers get paid a king’s ransom to make all the information “user-friendly.” Most people that make stock investments are truly ignorant and simply hoping to get lucky, very much akin to gambling. To tell these people that what they are doing does not make sense, is very much the same as telling Grandma to give up the slots.
On the other hand regulation creates an even playing field. It defines what is fraudlent and it takes behavior that, on the surface may seem beign, but is actually harmful to the general populace. Perhaps the Fed overplays their hand too much, but regulations prevents the tremendous volitality that caused the Great Depression (hopefully). It also creates a safer haven that makes people feel more comfortable and gets more money on the table.
A simple example is homeownership. Not many people understand what Fannie and Freddie do but because of a tremendous amount of regulation they are able to bring homeownership to the masses vs. the elite 5% of the population.
Even prisoners and pirates have rules.
September 16, 2008 — 10:38 am
Sean Purcell says:
Michael,
The point of most derivatives is to create market opportunities for smaller investments, i.e., bringing the market to the masses.
I disagree with you here. The point of most derivatives is to lay off risk. You are absolutely correct when you say …only a very few in the case understood the math involved. The models are complex and will never be explainable to the main street investor.
As I transitioned out of the derivatives trading market in the early 90s, I watched average people get into day trading and found it laughingly silly. But when they started swimming in the derivatives market I got down right scared. That is no place for amatuers.
But that does not mean we should prevent people from doing so. It just means they should suffer the consequences. When government regulations and bail-outs give investments a veneer of protection it is always the least educated, least capable that take the brunt of the losses.
Markets work, sometimes brutally so, because they are honest. The great dishonesty does not come from the CEOs, it comes from government intervention.
September 16, 2008 — 10:43 am
Thomas Johnson says:
“Even prisoners and pirates have rules.”
Uh, Parley?
September 16, 2008 — 11:39 am
David Shafer says:
Since, as far as I know, no person has ever not been paid for their life insurance contract, all life insurance is a pretty safe bet. AIG is still rated “A” last time I looked even after being downgraded and all statements indicate that the life insurance and annuity business is still profitable for them. If a life insurance company does go down, there will be a fight for those policies from other life insurance companies!
As to the securities regulations, they don’t keep the 5 decade long propaganda from convincing people that stock diversification (ie the reason for mutual funds) makes stock ownership risk free. Check outflows every time the stock market goes down for a realistic look at human behavior after being told about the lack of risk of mutual funds!
Until folks take the same degree of seriousness to their retirement/investment accounts as they do their consumer purchases (clothes, cell phones, etc.) they will be “victims” of those Wall Street “sharks.”
Warren Buffett doesn’t think if takes advanced math to analyze companies. The crime is, of course, that the last 30 years has been a golden age to be an investor!
By the way, I am finishing my book, which discusses much of the above (not the insurance stuff) and if anyone of you very smart folks would be willing to read it and give me an opinion I would appreciate it. Just e-mail me and I will send you a pdf of it as long as you promise not to distribute it!
September 16, 2008 — 1:14 pm
The Mortgage Cicerone says:
This is perhaps the greatest yet subtle piece you have written Greg.
“reason cannot triumph over unreason until the unreasonable perish.”
It serves us well to be aware of the seducing and well packaged, yet self-serving business and political policies peddled by the ever present Looters. As Ayn Rand also tells us – “In the end, it is extremely difficult to “fix” the social policies of the government while still maintaining a belief in free enterprise.”
Very powerful post!
September 16, 2008 — 5:48 pm
Greg Swann says:
> Very powerful post!
Bless you, sir. Thank you. Alas, it seems certain that virtually no one will learn from this experience.
September 16, 2008 — 9:02 pm
David Shafer says:
Perhaps you can comment on the effect the repeal of the Glass-Steagal Act has on the current situation; specifically the Gramm-Leach-Billey Act which was pushed for and signed into law by the Clinton administration in 1999?
September 17, 2008 — 6:09 am