Jan

21

A Sad Day, from Nick White

January 21, 2010 |

A daily loss of 2%, erasing this year's gains, is nothing compared to the political and cultural shift that happened today.

The following is not meant to be romantic — simply a reflection of my feelings on today's news, nothing more.

Many readers of this site have been attracted to bank prop desks, "sponsored" hedge funds and merchant banking as career paths. Much of the attraction to these roles was because of the enormous entrepreneurial opportunities and intellectual satisfaction offered by such lines of work. I would say, for the right types of people, the net compensation was just a side benefit to the job satisfaction and freedom.

That the wholesale writeoff of a great economic engine has happened in the United States — of all places! — is truly sad and cause for great concern. What has happened to the nation that has posessed the birthright of capitalism and opportunity? Why has it now seen fit to discard one of the very engines that made it so powerful, respected and venerated? This is the nation that has produced, for better or worse, such (financial) cultural icons as Wall Street, Liar's Poker, the legend of Soros and the Sage, of our very own Chair — and now it has turned round to bite the hand that has so often fed its dreams. Such a move would have seemed unfathomable in 1985, 1995 or even 2005, yet here we are.

So a few thoughts and anecdotes:

1. PL is pure. There's no fudging performance. You are graded in the market every day by an unusually rigorous and ill-tempered teacher who never gives praise lightly. In trading, one cannot hide behind a sharp tie and a nice suit, cheap talk or family connections. It's entirely on one's own shoulders how one performs. Every day, every week, every year the bottom line is green or red and you own it. To discard and stigmatise such objectivity is a blight to reason itself.

2. I have had the privilege of working in some of these banks - the cultural and geographic diversity in the average internal hedge fund is deep, very often scholarly and high in camaraderie and positivity. The backgrounds are varied and are cause for many profitable interactions and learning. Many bank prop traders can come from the darkest, most depressing areas in the world and - with hard work and effort - transform both their own lives and the lives of those closest to them. Sure, there are the odd bad apples and obnoxious, attention seeking loudmouths - but what line of work doesn't possess such types?

3. Duly noted that there ought to be new, well thought through, sensible regulation; this should be of little concern if done properly. The best players want the most level playing field because they enjoy the challenge of playing within the rules and having security that everyone knows where they stand. Perhaps these new rules should focus on the leverage used by an institution as a whole rather than simply singling out particular activities. Was it really prop traders / internal hf's to blame for this crisis? Or were balance sheets leveraged 30-40x a more likely villain? Or, in the alternative, why not require higher professional standards and testing? Doctors and lawyers spend many, many years taking qualifying exams with very high vigs which encourage and ensure a largely compliant and responsible membership. Perhaps, if one handles client money, there ought to be far more extensive educational and testing requirements (perhaps having completed a professional qualification like the CFA first)? Not a solution, but at least helps to raise the professional standard and provide disincentive to those out for the quick buck.

4. Why not go after the media? Media - especially in the United States -is constantly selling people dreams that are near impossible for them to achieve given education, skills and income. Why not ban shows like MTV's Cribs that encourage poor economic behaviour? Why not ban any form of lifestyle TV programming? Why allow seductive ad campaigns? Is it more irresponsible to glorify and encourage conspicuous consumption, or to attempt to facilitate people's dreams (however foolish or unlikely) via the transference of risk? An open question for the reader to ponder.

5. Will taking speculative risk from banks and placing it in the hands of hedge funds or private investment vehicles alone really protect the world from financial calamity? Have we forgotten LTCM? What about counterparty risk? It's not so long ago that rafts of good hedge funds had to liquidate and pile in on the selling - not because their own performance was bad - but because the bad performance of others forced redemptions that sank them. 

6. Efficient use of capital. Much of the general public prefer to have the professionals do the thinking for them in complex matters - fair enough. If someone wants a (relatively) risk free return, they can have it for 3-5% a year….problem is that such a return is not particularly sexy or accelerative toward Ferrari ownership. The real problem is greed and overconfidence - a 25% return sure sounds good - but the concept of the variance required to achieve such returns is, at best, largely ignored. Banks and financial institutions are able to help facilitate financial goals by (theoretically) making good decisions with capital that is otherwise sitting dormant on their balance sheets.

7. Redundancy of capital, systems and process is key; not knee jerk reactions. More slack needs to be built in at all levels of the economy. People ought to save more. Risk takers ought to carefully consider their use of leverage and have more of a buffer. Risk methodologies need work. Shooting the messenger has never, to date, had much historical success in solving anything. All of the above would be nice, but I'm just old enough to appreciate that dreams are free. 

8. A conversation with a fellow spec this morning helped to crystallise in my mind that envy and resentment are not mutually exclusive. The evidence of such is all over today's news.

I thumbed through an old copy of Liar's Poker this morning. Maybe tonight I will watch "Wall Street". Sure, they're cheesy and it's silly. But it's like saying goodbye to someone I might not see again.


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