Category Archives: OWS

Askers vs Guessers in Finance: Askers are Annoying, Rich

Any follower of @Real_Interloper is aware of my fixation on the issue of Extroverted versus Introverted personality types and the possibility that Introverts will be devalued in a service-based, technology-heavy economy. * There is a subset of this discussion which relates closely to relative success in the financial industry – Askers versus Guessers – which is helpful in understanding the frequent annoyances experienced by clients and prospective clients of investment banks.

The popularization of the Asker/Guesser Paradigm began with a blog post by Andrea Donderi quoted by the Guardian HERE:

We are raised, the theory runs, in one of two cultures. In Ask culture, people grow up believing they can ask for anything – a favour, a pay rise– fully realising the answer may be no. In Guess culture, by contrast, you avoid “putting a request into words unless you’re pretty sure the answer will be yes… A key skill is putting out delicate feelers. If you do this with enough subtlety, you won’t have to make the request directly; you’ll get an offer.

The most obvious general manifestation of Asker/Guesser are the dudes that internalize the dating scene as a numbers game, and will spend an entire night at a bar getting shot down until some definition of success is achieved. The necessary psychological equipment for this practice is incredibly thick skin, an ability to soldier through mass rejection that would emotionally cripple a Guesser.

The stereotypical retail broker is virtually the Platonic ideal of the Asker. Successful brokers are often immune to rejection, criticism or introspection.  To provide a specific example, I was once involved with a merger where the retail wing of one company combined with the capital markets department of another. About a month in, a broker sent an email to all capital markets staff informing them that they would be required to switch all of their investment accounts into the new retail division, and since this was the case, they might as well sign up with him.  No such policy was ever discussed or established. When confronted, the broker just said, “Oh, sorry, I must have made a mistake” and went on with his daily routine.  Didn’t work, on to the next.

Not everyone employed in finance is an Asker and self-doubting Guessers are particularly prominent among strategists and economists.  Askers however, particularly in their most subtle form of investment bankers, tend to make the bulk of the money. This makes sense in that the asking is generally for money, and Askers rightly demand their cut.

The Asker/Guesser dichotomy operates on a continuum – very few people are 100% oriented either way. However, the differences are so fundamental that communication between the two groups is often fraught with danger. The Guardian article describes this well:

An Asker won’t think it’s rude to request two weeks in your spare room, but a Guess culture person will hear it as presumptuous and resent the agony involved in saying no. Your boss, asking for a project to be finished early, may be an overdemanding boor – or just an Asker, who’s assuming you might decline. If you’re a Guesser, you’ll hear it as an expectation.

I suspect that Asker/Guesser issues form a significant part of anti-finance sentiment.  Finance asks to maintain its current privileged status and an audience guesses that this represents a sense of entitlement.  Guessers, including politicians and regulators, could potentially be surprised at the extent to which rank and file financial employees would accept a puppy-like smack on the nose or, in more common trading floor parlance, told to go fuck themselves.

 

 

*Two aspects of Introvert/Extrovert interest me most. One, that the rise of extroverts corresponds to Professor Cowen’s Great Stagnation thesis. Two the possibility that the necessary skill set for success has made an almost exact 180 degree change from the 19th and early  20th.

Finance Defends Bain, Misses Point

Reformed Broker and Epicurean Dealmaker recently provided a necessary service in defending Bain Capital from scurrilous and misinformed attacks. I suggest, however, that this “rallying of the finance troops” is an example of preaching to the converted, and talking over the heads of an increasingly motivated anti-finance movement. Again, the anti-Bain idiocy deserved a corrective response and both Josh and TED did so effectively. However, there is a sense in which the argument is merely shoring up the walls of the finance cocoon.

The Other End of the Pendulum

It is possible to view the socioeconomic conditions of 2005 as the converse of 1975. Thirty years ago, corporate management was largely powerless in the face of labor power, taxes were extreme and government intervention was the “vampire squid” of the age.  Profits sucked and unless investors were fully exposed to the major geopolitical clusterfuck of Iran-related East tensions, returns were scarce to non-existent.  Beginning with Reagan, the pendulum began to swing back, slowly crushing labor and, for our purposes, culminating with the repeal of Glass-Steagall.

To be employed in finance in the 75-05 period was to believe fully in the primacy of bottom line, profit-related orthodoxy. If nothing else, it sustained the efforts to clear the political and regulatory anti-business, socialist clutter of 1970s. As an organizing principle, faith in the bottom line provided the advantages of clarity and measurability in addition to the obvious outsized creation of wealth.  Bain Capital, among many others, is the walking, talking, strutting embodiment of this thirty-year transition – the realization of a Platonic form dreamed up by William F. Buckley and other 1970s-era pro-business conservatives.

The Financial Crisis was a clear representation of the other end of the socioeconomic pendulum, and the excesses, arrogance, avarice and overall public destructiveness of finance was clearly analogous to that of organized labor and misguided government in the 70s. To blindly defend Bain now is to associate ourselves with the spluttering, enraged defenders of organized labor in the early 80s. In both cases, an intellectually-consistent orthodoxy not acclimated to criticism had ceased to function for wide segments of the population, in the current case the un- or under-employed.

We are conditioned, in finance, to accept as an axiom that aggregate corporate profitability should be the end goal of almost all government policy.  Primarily, we only really argue about the means to achieve this. Outside of the finance cocoon however, this is exactly the mode of thinking they believe is the problem.  For people who haven’t experience real wage growth in a couple decades (i.e almost everybody in numerical terms), finance-generated, corporate profit-friendly policy solutions to the current economic malaise are a ridiculous, tragic joke. “Oh, really? You want license to fire more of us in the pursuit of productivity?  While cutting unemployment insurance? Where do I sign up?”.

Incumbent politicians and the banking industry will use all of their considerable intellectual capital to maintain the current, rent-seeking status quo. The truth in the end, however, is that many of the actions of the investment banks during the lead up to the GFC were entirely indefensible, and eventually history will show this. It does not, importantly, mean that the economically important aspects of finance should be “thrown out with the bathwater” of reform or that every element of the business is corrupt.  But, in defending the finance industry from attempts to reform we are going to have to understand that for most Americans, referrals to the benefits of increased profitability are going to fall on deaf, increasingly angry ears.

Interloper’s Best Reads of 2011

Attempting to drink from the financial information fire hydrant is more or less a necessity for investors at this point, despite the numerous counter-productive side effects the practice entails.  One of the larger issues involved is one of prioritization in that the daily onslaught of noise-ridden details makes an assessment of yesterday’s opinion difficult. Wave after wave of advice and opinion keep coming at us, paradoxically leaving no time to learn anything from it. To paraphrase the great John Wooden, we are confusing activity with achievement.

In highlighting my favorite blog posts from 2011, I want to focus on those with persistent benefit rather than outline successful trading ideas or strategies that may or may not be useful in the next twelve months. (I will, for future reference, point out that Richard Bernstein again justified my ongoing adulation – see HERE.) The danger as always is to select articles because they reaffirm what I already believe, which would make this post merely an excellent example of confirmation bias. I hope I have avoided this pitfall, but look for readers to call me out.

Psy-Fi: The Proper Etiquette for Market Panics.    The consistently-awesome Psy-Fi Blog more or less lays out exactly why investors do what they do, why its wrong, and how to fix it.  In a market environment where returns are generated almost solely by arbing the market’s emotional overshoots, it is difficult to think of a more productive blog to read than this one. Thee were numerous candidates for applause among Psy-Fi content in 2011 but this one stood out for its “man bites dog” argument surrounding volatility. The key bit:

all the sensible indicators like whether economies are actually doing well or badly and whether companies are more or less profitable don’t always matter very much when markets go mad. Often it really does seem to be a matter of psychology rather than financial fundamentals.

However, a nice piece of research by Dion Harmon and colleagues entitled Predicting Economic Crises Using Measures of Collective Panics attempts to do exactly what it says on the label. Now, generally economists have studied volatility, the rate of change of stock price movements, as a way of investigating behaviour during market crashes. However, volatility doesn’t appear to predict crashes:

“Studies find that, on average, volatility increases following price declines, but do not show higher volatility is followed by price declines.”

 

The implications of the conclusion, essentially that volatility is a lagging indicator, are wide reaching, not least because we can now forget about the Vix as a predictor of anything.  If the study is accurate, the phrase “I’m not buying until the Vix goes below 30” will become a historical artifact.

 

Felix Salmon:  The growing crisis of institutional legitimacy . Reuters’ most visible online voice details a longer term issue that scares the bejeebers out of me:

on this side of the pond we have Rick Perry — harbinger and prime example of the way in which mistrust in federal institutions has moved from the fringe to the mainstream. Indeed, what we see with Perry is far more than mistrust — he actually denies most federal institutions their existential legitimacy, and has written a book explaining at length how everything from Social Security to federal bank regulation is in fact unconstitutional.

When Perry accuses Ben Bernanke of treachery and treason, his violent rhetoric (“we would treat him pretty ugly down in Texas”) is scary in itself. But we shouldn’t let that obscure Perry’s substantive message — that neither Bernanke nor the Fed really deserve to exist, to control the US money supply, and to work towards a dual mandate of price stability and full employment.

No matter what your political affiliation or financial caste, a complete breakdown in institutional trust will not be welcome. It should also be noted that anti-institution pressure is coming from both ends of the political spectrum – OWS hates big banks, Ron Paul wants to get rid of the Fed. It is certainly not my contention that every institution that currently exists should be maintained, but this urge this urge to tear everything down, as an extension of the ongoing infantilization of public discourse, is a process that can run out of control. (I attempted to cover the technology aspect of this, and the echoes of the violent Protestant Reformation HERE. Warning: its among my most disjointed performances).

 

Interfluidity: Why is finance so complex?: Some essays are so good they represent an intellectual punch to the face, necessitating the equivalent of a “standing eight count” of ponderation.  One of the undercurrents of Interloper to date has been an effort to illustrate the ways in which the industry subtly misleads its clients, with the intention that more transparency will allow for more investor wealth creation. Waldman turn this on its head by suggesting that hiding risk from investors is one of the primary, and overall economically

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OWS and Why Anyone Not at Their Desks by 7:30 is a Nobody.

I have worked closely with Institutional Equity Sales desks for the majority of my career and have been tempted to accept offers to work there. There are two reasons why I haven’t.  One, the politics surrounding the dispersal of client accounts is Machiavellian enough to make the backroom dealings of the medieval Vatican seem like a rural PTA meeting. The other reason is that, given my later start in the industry, I was too old. Unless you are firmly established on the Desk by your early 30s it is unlikely that your energy level will hold up long enough to realize the considerable compensation potential. Those fuckers work hard. The basic hours, at your desk at 7:00, meetings at 7:30, 12:05 and 4:10 with the intermittent time spent either generating or shepherding your clients’ trades, are not prohibitive. The bigger problem is that Wednesday through Thursday, it is more or less required that you entertain your clients according to their proclivities – dinners, strippers, shows, whatever – until late at night before arising again at 5:30 to head back in to the office. Not occasionally – this is every week.  Recent layoffs have only made this worse, to the point I would like to see an intrepid, well-connected reporter dig in to the insane growth of the illegal stimulant market which is reaching 80s levels again as aggregate job security wanes.

I am again just using Institutional Sales as an example. The workdays for traders and bankers, particularly during a big deal, can be even more onerous. As a whole, the level of effort expected leads to the generally-accepted belief within Capital Markets that anyone not at their desks by 7:30 is a nobody. The most common response to the experience of getting a coffee at 9:15 and seeing people rushing to the office in their coats,(and this is a topic of discussion on the floor), is a bemused “what exactly do you people do that you can get away with starting at 9:00?”.   By definition, it can’t be that important.

The anti-finance movement can, if they carefully ignore some of the more economically vital aspects of the industry, frame their argument in terms of “all you guys really do is shuffle paper around”.  What they under-estimate, however, is how hard industry participants work at “shuffling papers around”. It is extremely difficult for anyone, including me, to take someone seriously when they work less than 50 hours per week. Unless they’re semi-retired, no one we know who works 35 hours a week is even relevant, never mind qualified to re-regulate the industry.

The work ethic is clearly a function of simple economics. The monetary upside in finance is arguably higher than any other so the candidates to replace the more complacent employees are at least in the 100s, probably 1000s and everybody knows this. The means by which the less committed get jettisoned can get pretty nefarious – I’ve seen three or four women ousted during their maternity, albeit with big checks – but everyone understands, and largely accepts, the logic behind it. Not only that, we take a sort of black humor pride in it.

The psychological outgrowths of this type of environment are pervasive and powerful. When OWS is trying to comprehend the viciousness of pushback, they need to keep in mind that the level of personal investment for industry professionals, years upon years of 60 hours weeks and four hours of sleep a night, is not something you ever, ever want to see threatened by a Tobin Tax. And this is particularly true if the complainants’ primary motivations, and theological certainty, arise solely from one charismatic professor teaching Rawls during an “exhausting” 20 hour per week class load. You may have a point, nobody knows better than we do, but we’re not going to consider you credible unless you work for it.

death wish, dirty harry and how the bank lobby resembles the 1970s uaw

Feel free to talk about the glory days of Led Zeppelin all you want, but the point remains that growing up in the 1970s suuuucked. We had no idea at the time that the explosion in crime rates was a function of the high percentage of males in the 18-24 age bracket, we just thought social order was collapsing. Imagine me, at seven or eight years old, flipping through Time magazine and finding a picture of an American soldier carrying the severed head of a Viet Cong.  You had to be there, at my age, to understand how unrelentingly bleak the news backdrop was but looking back at the Hollywood heroes of the era can give some indication. Charles Bronson was the Mr Average-turned vigilante who had had enough in Death Wish. Clint Eastwood hit his peak as Dirty Harry, “with his finger in the dike while the whole thing was caving in on him”.

Economically, the wage/price spiral that crippled the economy of the 1970s is now a matter of record. People like my parents, granted a 16% mortgage in the mid 1970s, didn’t start making a dent in the principal until a decade later. There was, over all, a desperate feeling of falling behind as prices skyrocketed that combined with the crime rate , geopolitics and poor general  hygiene to make the 70s just miserable.

The UAW, Teamsters and organized labor in aggregate were front and center during this period of economic malaise. Their political power was more or less unassailable – they mobilized members and delivered the votes to the Democrats who dominated Congress.  Strikes and job actions seemed a weekly occurrence in memory and their demands were always met.   Again, you had to have been there to understand how Ronald Reagan’s first act as president, the threat to fire every air traffic controller, was such a giant relief.  The sense was that a pall was being lifted and that some hope existed of the madness coming to an end.

So here we are now with two major market upheavals in recent memory and a political morass where the financial services industry has replaced organized labor as the seemingly unstoppable, Congress-owning corrupting force.  A decent-sized segment of the population has taken to the streets, the modern anodyne to the NOW and anti-Vietnam marches, leveraging their influence with modern media.

The problem for me and for any my age is that we saw in the 70s what happens when the lunatics demand to run the asylum and we have no interest in repeating the experiment. We do not, for instance, want to see a new form of soldiers returning from duty covered in the human shit of student protestors. The current generation of protestors learned about activism in books, where the inconvenient details of the 70s can be glossed over or repressed – for them it’s a romantic pursuit akin to the Civil Rights efforts of the early 60s. They know nothing, in other words, about what it was like to live through the excesses of emotion that accompany periods of significant upheaval combined with economic stagnation.

If there is hope in this comparison of eras, it lies in the UAW/Banking lobby equivalence. The rise of the Republicans in the 1980s was in direct response to the excesses of organized labor in the previous decade, and the hegemony of Big Labor in Washington was steadily removed. At some point, which may or may not be now, the same process will occur for the bank lobby. Things change. The inevitable arrogance of having everything your way, and demanding more and more until forced to willfully ignore the dangers of killing the host implies that current trends are not unsustainable.  Let’s just hope that the process is less depressing than the 1970s.

Has wall street “Abstracted” itself from america?

I have been exceedingly fortunate in my career to have met and spent considerable time with some of the big hitters in global finance, some now disgraced and others who remain in the Market Wizards pantheon. It is still the case, however, that the most impressively brilliant human being I’ve ever consistently been around is a Philosophy of Literature professor who’s name, while it deserves to be mentioned, in the interest of my continued anonymity I’ll change to SOAT – Smartest of All Time.

One of professor SOAT’s primary influences on me was an explication of the now-consensus view that the Protestant Reformation was an outgrowth of movable type and the printing press. Mass printing of bibles ended the Roman Catholic church’s monopoly on biblical interpretation and individual clerics, led by Martin Luther, used their intellectual freedom to begin a series of revolutions against an unfathomably corrupt Catholic Church. The True Church quickly became five – add Lutherans, Calvinists, Anabaptists, and Anglicans – which begat a whole host of eventual spin-offs including Puritans, Pietists, Baptists, Congregationalists and Republicans Luddites. For our purposes it is only important to remember that A) a media explosion started the whole thing and B) By the mid 17th century the entirety of Western Europe had split into heavily armed camps ready to stab and/or roast anyone who disagreed with them.

If I’m ever going to get to my conclusion, the concept of Abstraction in Computer Science will also have to be described in brief. When Bill Gates wrote the precursor of Windows, it was in machine language, the series of 1s and 0s that hardware understands without a translator. When we recognize that the word “START”, for instance, had to be entered in pencil, on little cards, as “01110011011101000110000101110010011101000000110100001010”, it is not difficult to understand what an excruciating process this must have been. Abstract programming languages, those that act on machine code without the author having to know machine code, alleviated the problem. Further languages acted on the level two programming language and so on and so on until modern languages like Java and C+ are now five or six steps away from machine code.

The closest metaphor I can think of for this abstraction principle is biological, with the doctor as machine code writer and nurses, pharmacists, medical equipment designers and drug company researchers as somewhat analogous to the abstractions. The latter act on complex segments of the whole without holistic understanding. So, we understand the thankfully misplaced freakout over Y2K as an outgrowth of the problem that very few current programmers were capable of working at the machine code, lower languages. If the screw-ups occurred at those lower levels there wouldn’t be enough “doctors” to prevent a global epidemic where pharmacists would be completely unhelpful.

Those few of you still reading are wondering why I just subjected you to a medieval history lesson and a description of a systems concept that was last really important eleven years ago. It is to posit this: Wall Street and the financial industry as a whole has profitably “abstracted” itself from the lives of the average American and that the Internet, as the modern equivalent of the Gutenberg Bible, is the primary catalyst for the OWS backlash. Finance, after all, facilitates economic activity but in a tangible sense produces nothing. Industry employees certainly go grocery shopping and buy cars, but for them the daily lives of  people employed in the slaughterhouse or the auto assembly plant are obscure to the point of theoretical. The lack of empathy displayed by financial leadership, while regrettable, is not that hard to understand in this interpretation nor is the vehemence of their defense of the status quo.

The printing press/Internet equivalence is largely self-evident. Sudden, all encompassing changes in mass media consumption have through history caused major social upheaval. (The television/60s relationship works here also). Contrary to intuition, these technological changes that allow exponentially higher levels of individual participation in cultural discourse can result in the paradoxical effect of splintering away from the whole into like-minded, dogmatic sects – formerly the formation of new churches and armies, now evident in the cocooning effect that fertilizes the OWS movement and others.

I have no conclusion here, its just my way of trying to understand current events. I have no doubt made errors in representing the programming analogy (its not my area, clearly) and stretched some historical precedents too far. I don’t, for what its worth, expect 200 years of armed, theological/political conflict. But the analogies interest me greatly and possibly above all other blog posts I will write, I welcome corrective feedback and discussion on this one.

corruption is boring: the primary hurdle for OWS

Felix Salmon did a tremendous job yesterday detailing the latest accounting skullduggery at BofA, summarizing a shift in derivative assets from subsid Merrill Lynch to the balance sheet of the BoA retail bank. The end effects, although admittedly  unquantifiable, are that a combination of the FIDC/taxpayer and unwitting BofA depositors are now fully insuring the counterparties to a multi-bazillion dollar portfolio of dodgy derivative positions. This is, of course, outrageous on two fronts, both increasing the taxpayer liability for bad investment bank decisions at a time when previous support is generating angry protests, and also because the move highlights the complicity of government institutions who have an actual legal obligation to the state, not the industry.    To the extent that it improves Merrill’s balance sheet, it is also likely to facilitate further aggressive lending with the implicit guarantee that, if the loans go bad, the accounting swap can just happen again. I’m won’t re-hash the details – read Felix’s “BofA puts taxpayers on the hook for Merrill’s derivatives” HERE.

For the majority of Americans, this story is eye-wateringly mundane. Accounting changes do not make for highly-rated CNN exposes. And here, for me, is the central problem for OWS – corruption is boring. Like most things truly tragic in the human sphere (obesity and substance abuse come immediately to mind), corruption occurs through the steady accumulation of small, seemingly meaningless decisions – cheeseburgers versus broccoli to extend an already tortured metaphor – rather than the sudden appearance of a Stalin-like villain that can be replaced.

The idea of a revolution that will end with Lloyd Blankfein’s handcuffed parade through a rotten vegetable-wielding mob is a satisfying one for adolescent minds. Much less satisfying is the prospect of strapping on a tie and beginning the excruciatingly detailed and largely anonymous process of lobbying for accounting reform or, at the very least, the enforcement of existing laws. There is little doubt that the OWS movement would be far more successful from this point forward if, instead of marching on a neighborhood where bankers don’t work anymore, it went door to door raising money for a small army of motivated accountants and lawyers to besiege congressional members. It is, admittedly, a task where recounting your day is unlikely to get you laid on campus and a “No Free Swap into Hold to Maturity” placard is decidedly not going to show up on Tumblr.

I don’t mean to be patronizing, I have no right. I am not willing to head into the bureaucratic pit and slug it out for my interpretation of accounting or regulatory justice any more than the now freezing OWS protestors are. OWS has likely proven the most successful protest movement of the millennia, entirely productive in garnering and focusing attention. But, if anything lasting is to be accomplished its time for the less boredom-prone adults to take over before the wave finally breaks and rolls back. The revolution won’t be telegenic and in the unlikely event that it ever happens, it will be won by dogged lawyers in cheap rumpled suits and over-full briefcases. The real world is just not that exciting.

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