"To paraphrase Paul Volcker, the only productive invention to come out of the banking industry over the past generation was the ATM." - Bill Gross
Wow. Who pissed Bill Gross off? The PIMCO founder is known for having strong opinions, and his letters to investors are closely followed by those who matter on the Street. But he must have been in some mood when he wrote this one.
The thrust of the letter is that bondholders should look outside the U.S. to maximize returns, because the U.S. government and the Fed are determined to keep real interest rates negative for the foreseeable future. But it's what Gross has to say about bankers that is pure gold.
As a profession we have failed miserably at our primary function – the efficient and productive allocation of capital: The S&L debacle of the early 1980s, the Asian crisis, LTCM, dotcoms, subprimes, Lehman and the resurrection, instead of the reformation, of Wall Street, are major sins of the modern era of money. Hang your heads, moneychangers. And no, it is not yet time to move on, as many banking CEOs suggest. How can bond traders make ten, one hundred, one thousand times more money than an engineer or social worker given their dismal historical performance? Why is it that some of today’s doctors are using food stamps while investment banking executives complain about millions of dollars in compensation that might be deferred in case of a future bailout?
Ouch.
By now we're used to outsiders lobbing grenades into the banking camp, but it's unusual to have one of our own shine the harsh light of reality on the negligible value that banking adds.
I'll be honest. Today's post was a toss-up between this letter from Bill Gross and Matt Taibbi's latest vivisection of Wall Street. And believe me, it was difficult to resist the temptation to discuss the prospect of Lloyd Blankfein doing a jolt in a pound-me-in-the-ass prison. (That's twice this week I've used that in a post, so no homo. Just want to put that out there.) I just thought Bill's comments might be a little more meaningful since he's one of us.
I know we spend most of our time with our eyes on the prize and don't often stop to consider what else we could be doing. But does the apparent lack of value add in this line of work ever get to you? We literally just move paper around the globe and get paid ridiculous amounts of money relative to our contribution. Or is Bill Gross way off? I'll leave you with his parting shot about our vaunted profession:
Big boys don’t cry unless their last name is Boehner, or they’re a banker in need of a bailout.
Yikes.
By the way, I'd love to hear your thought on the Taibbi piece too. Would Blankfein getting in touch with his feminine side in general population at Rikers put an end to Wall Street abuses?
The idea of sending Blankfein to jail is fucking preposterous. Whatever happened to limited liability, the rule of law, free entreprise?!
we add value... not as much as we get paid for, but we definitely add value.
But let's be honest, i don't think anyone really cared about that when they started applying.
I will be honest. There are definitely more value-add businesses than others - and taking the time to consider what contribution my career might have on society WAS something I thought about.
Don't get me wrong.... I was just as concened about prestige, respect, and money as any other matriculating d-bag. Fuck, I remember at one point my main goal was to make over 100k my first year out of college; at that point, I'd probably have cleaned toilets for 100k+ a year.
That being said, I absolutely thought about what sort of value add different industries deliver. I honestly chose to pursue asset management for the reason, amongst others, that the motivations of the manger and the client are closely(but not perfectly) aligned. If the fund does well, both client and manager get paid - fund doesnt do well fund , manager get his 2%(if hes lucky and managing a hf) and generally gets raped on redemptions.
That always attracted me to the business...not only do you eat what you kill, but you invite your clients to the feast and also personally participate in the famine(to some extent - betting with other peoples money is what it is).
Can the same be said for IB teams that really just break apart/build up companies in the name of synergies? Do they give a shit about the company or just the fat ass, one-time, fee. Do mergers add value? In my opinion and historically speaking, rarely.
At least Bill gross and his minions can go to sleep at night knowing that hes hopefully doing his best to beef up the pension savings for joe the plumber, teachers, firefighters,marines... people who add value to society, not just the economy.
I also truely believe that traders DO provide a valuable service by creating liquidity. Bankers do add value by structuring products and delievery acces to markets/allocating capital to firms that need it. But the question is, how much of that value does the average person feel? Maybe a lot, maybe not. Would society really miss MBS? Would anyone really give a fuck?
It comes down to differentiating between adding value directly to society and its contributors, and adding value directly to the economy. Now, I know some dickhead is gonna come back at me saying the two are related since the economy is part of every society, but the point in merely illustrative. The average guy on the street doesnt care or even notice how fx liquidy makes global markets more efficient - he doesn't see it. He might care about the price of cotton, but the guys at the comex arent exactly tilling any feilds. in fact, I'd venture a guess that commodity speculation probably creates more volitility and unrest than the value add they deliever by hedging price increases.
On the other hand...in AM, if Bill Gross/Larry Fink handle their shit, the average joe might be able to afford some of the finer things in life when he retires. Maybe he could even retire at 74 instead of 75. The value add in that sense is quite clear.
I'm not saying AM doesn't also throw shit on the fan, cause it does. But, from my perspective its a lot easier to see/believe the greater goal - helping people make a little extra cash while protecting the wealth they do have. That notion helped guide my career path, and frankly, it helps me sleep at night. I even occasionally have the warm and fuzzy thought that if we do our jobs right, little Johnny's parents will be able to afford Yale instead of sending his ass to BumbleFuck State - but then that thought gets pushed by thoughts of potential bonus speculation. But, the whole point is, the two thoughts are related...because we dont really get paid unless Jonny's get paid, period.
I guess what it really comes down to is client service. AM has to make a wholehearted effort to do right by its clients cause otherwise they will bail for shop/fund accross the street. Banking, just isn't the same. For many services, large financial institutions are the only game in town, and clients have to get in bed with them regardless of whether or not they get fleeced or played like absolute fools.
This IS something to think about. I'm still young, but I know one day I might wake up and want to know that I haven't just helped myself my entire life.
Compensation is a function of BOTH: production and demand. We are paid for the value added and our value to an alternative employer.
He's right.
so i take it this means he's reformed, repented and will no longer be front running the fed?
Seriously.. I'm sure he rode the treasury train all the way to the bank (no pun intended). I think his bitch rant is grossly overblown (no pun intended).
Also I though porn was credited for ATM??
Seriously. I enjoy his commentary. However, QE is not an efficient allocation of capital (last time I checked, raising equity prices so Upper-class citizens can spend more after seeing their portfolios rise at the expense of the lower classes paying more for food and energy doesn't seem like an efficient allocation of capital). Yet, Gross is still making money from this. He's been long equities since last August (or perhaps before, I just remember the Bloomberg Markets article on him).
3, 2, 1 to people badmouthing him for being a "sellout".
If there was a group that could do banking cheaper and more efficiently than the status quo, I think it would have happened by now. People want to work with firms they feel they can trust, and that is a large part of the equation.
I signed up for WSO to post this.
I think there is a certain network effect. But what we're seeing is that a lot of "MM" firms are doing "BB" deals these days. And I think we'll see alternatives get created over the next decade or so that makes the system even more efficient.
Best to attack Wall Street after you've spent 20 years making your hundreds of millions, not before. Bill Gross is a smart man.
Couple thoughts:
1.) 30 years ago, most people had savings accounts, and if they were upper-middle-class, maybe a mutual fund that charged a 7% load and 1.5% management fees. ETFs did not exist, stocks traded with dollar bid-ask spreads, and it was illegal for banks to pay more than 4% interest. So for Gross to claim bankers have not created any value or done anything for the markets over the past 30 years is a little bit off.
2.) More people have their money invested in the stock market than 30 years ago, and corporate earnings make up a much larger part of our GDP than 30 years ago. That means more work for financiers.
3.) Yes, bankers are overpaid. But NYC is also overpriced. It takes $150K/year pre-tax in NYC to have a $60K/year life in Texas. And if NYC bankers are overpaid, one can probably say the same of consultants, lawyers, professional athletes, and CEOs.
4.) If everyone thinks rich people are all overpaid and G20 governments which are the world's main food producers are having revenue shortfalls, there is a very obvious solution.
[quote=IlliniProgrammer] 3.) It takes $150K/year pre-tax in NYC to have a $60K/year life in Texas. [quote]
You have no idea how happy this makes me. I like Houston and NYC just the same, so I derive a massive amount of utility from the lower cost of living I get in TX, while earning a bigger paycheck than my peers in NYC (no state or city taxes in the Lone Star State, boys and girls).
(just accepted Houston IBD offer)
So try not to laugh at us too much. There's benefits/drawbacks to both, but I think the NYC BB or trading experience is probably equally as valuable as the net comp over the long run. So it all evens out.
I read this letter a few weeks ago and considered making a thread, but I figure I'll ask it here. Are there are books out there that give a historical account of financial innovation and the "financialization" of the U.S. economy?
A Demon of Our Own Design is a very good one, but if you're looking for the best book on the subject and aren't afraid to spend a little dough, it has to be The Origins of Value: The Financial Innovations that Created Modern Capital Markets.
Bankers are underpaid! Yes, underpaid. Just because the public at large did not take time to thank the bankers after they were approved for additional credit cards and 0% down home loans does not mean the banker did not enable them to consume whatever their hearts desired which ultimately added value to their irrelevant lives. If anything the bankers should have been thanked. Why is it the banker's fault that people acted so irresponsibly? Never did Smith, Friedman, or Keynes say that bankers should be the nannies of capitalism. No banker held a gun to anyone's head and forced them to take a loan they couldn't afford. If a person makes $25k a year they should not apply for a mortgage for a $500k dollar house plain and simple. Thats the problem with America today no one wants the government/corporations to mess with their life. However, as soon as sh*t hits the fan everyone cries foul and blames either the government or corporations for not protecting them. Im glad we TARPed the banks because they deserved restitution and credit for all of their hard work.
What is a more value added business than banking? I can't think of any. Can't be teaching because schools suck. Don't say being a doctor because those natural selection defying bastards are slapping God in the face allowing an 85 year old smoker/drinker to hang on longer and cost me more social security money (maybe bankers really were doing God's work).
^^Obviously playing devils advocate....
But seriously banking in moderation did and still does create value even though we may have gone a bit overboard in the past. When I read Gross' Investment Outlook piece "Devil's Bargin" I was taken back. First Bill short for Billionaire Gross seems a little ridiculous talking about value added vs compensation. I challenge anyone to ask a non finance friend what a PIMCO is and see what they say. Secondly, to say bakers failed in distributing capital is a stretch when we see companies increasing profitability, people reasonably being able to afford education, housing, and transportation in much higher proportions than just a generation ago. Im not saying bankers got an A over the last 20 years but it shouldn't be an F either. Lastly, why does compensation for bankers have to be tied to someone's idea of "value added". The same people who say bankers shouldn't make as much money are the same ones saying government should reduce funding to teacher's pensions - give me a break at least keep it consistent.
Times like now I wish I was Pujols trying to get $300m to swing a bat...obviously adding value.
People need to read that Taibbi article. Nice outline of how in-bed the regulators are with Wall Street and Big Law and how fucked the system is. Really disheartening stuff.
I can see the value add of m&a as these guys create the transaction market and make it more efficient.
Can someone break down the value add of s&t? I am sure theres loads but I just can't quite get to the bottom of it?
Today, the spread is more like $50.65/50.68. Instead of costing 3% to get into or out of a stock, it now costs more like 0.03% on the spread.
Traders also ensure more efficient pricing. So if Gulf Petroleum is really worth $40/share when it's trading at $20, they can bid up the price. That sends a signal to Gulf's CFO and CEOs that their cost of capital has gone down and if they've got a great project they're thinking about, maybe it's worth it with the stock at $40/share rather than $20- especially if they do a secondary.
In an ideal market, investors would be able to just stick their money in and get a relatively fair price for everything- paying $0.01 for companies that were going bankrupt- but also paying $500 for the next growth hit- and enjoying market returns without having to do much thinking. The economy would run more efficiently, too- allocating capital where it needed to go.
Traders take the risk of being wrong about where they think the market needs to allocate capital. And they also provide liquidity to investors.
This is cool. A fair enough explanation, however, it clouds one major fact...
That being said such tight spreads and a greater efficiency decrease (if not rape, pillage and plunder) the ability of the average person to trade their own nut and actively invest themselves. This ties them to the whims of their brokers/dealers, who in turn can easily front run them without much fear of reprisal.
Since everything is so efficient the implied need for prop trading is increased, vis a vis the closed door circle. I agree that having a $0.03 spread is more efficient than having a $0.40 spread.
However...in times of the $0.40 spread there was (a perhaps backwards, but clearly existent) transparency of responsibility where even the slightest theft went punished. Today, a $100 billion disappears and we shrug our shoulders. There's no quantitative argument that can account for that level of irresponsibility yet it happens quite often.
Efficiency has made the Black Swan into an almost monthly event.
Agreed, while the markets have become more efficient, it's the illuision that they are more efficient than they really are that can cause huge problems.
This is silliness. The increase in liquidity and decrease in bid-ask spreads is more attributable to technological innovation than "banking." Furthermore, the Justice Department had to intervene in the 90s to end collusion between market makers trading on NASDAQ.
My first post, and I'd give MItchc a SB here if I had any.
Tightening spreads is due to trade executions being done in faster time than traders "engineering" some way to close the spread. IT has really shaped the financial industry in the past couple decades with reducing latency where everything happens in close to real-time. Since we're talking about adding value and efficiency, IT has simplified and automated so many things done by traders, bankers, or anyone in business or who uses a computer. Imagine being a banker without all your Excel tricks from vlookups, pivot tables, macros, etc. All this creates efficiency and allows everyone to reallocate their time to more necessary tasks for the job.
To my knowledge, ECNs aren't very prominent yet. If the industry shifted towards that direction due to that technological advancement, traders will be losing jobs. And the S&T career will be redefined. Probably only possible if BBs endorse ECNs for their brokerages to set a trend and shift the industry. ECN trade volumes and exposure now seem very low and primitive.
This is also food for thought to those who shit on IT consulting, but that's besides the point.
I still have to believe that the market sets the rate at which bankers are paid. I'm sure nobody in their rights minds would be willing to get fucking destroyed working on an Excel model for 100 hours a week for $60k a year...
By the way, did you read this one on crying at work -> http://blogs.wsj.com/juggle/2011/02/16/the-high-price-of-crying-on-the-…
The only way bankers are overpaid is if their salaries are above the market equilibrium. You could make the argument that the gov subsidized banks w bailouts and increased demand so there is overconsumption. Otherwise, I don't buy that crap about morality and how much people think bankers should earn.
Did anyone else read the Taibbi article?
Alot of interesting Stuff...
Eddie, thanks to you, my Kindle is constantly being filled with good reading material.
However, I've been reading Gross' comentary for a long time, and I think, particularly since he published the November 2010 commentary, Run Turkey, Run, he has been becoming a bit more of a populist than we think or expect from a Wall Street type. I think that the anger he's exuding isn't about innovation, or the lack there of, but of the effects of innovation. The creation of MBS was not inherrently evil, but the innovation behind asset backed paper clearly had unintended and serious negative consequences. That's what he's bitching about here, the unintended and abused consequences of our actions and then the bailout that occurs afterwards without reform to follow.
His monthly commentary is one of the few places he can freely say what he wants.
I realize I took one quote, so it's not all about context here, but he has slowly been using this platform as an Anti-Fed pulpit. He's starting to come around and see why some other shops are folding, and using his stance as a major player to make his comments. Whether he frontruns the Fed or not, if the QE trade is the only thing that's profitable, then he would still continue to do it despite being against it. I think he has now started to use his platform to rally against the Central Planning done by our government and the Fed, and that's what he's aiming at. It's not so much a jab at our business, but at our failures to fix the broken business model. To him, from what it looks like, again this is my interpretation of his grain of salt, the Fed actions of QE2, ZIRP and the freeflowing transfer of taxpayer money to the banks goes against what he does as a bond fun manager. I am not stating that he needs to be 100% invested in USTs, but with the longer we see central planning and a prolonged ZIRP environment the harder it will be to get out this mess, so he is advocating moving outside the scope of traditional investments in order to find the last vestiges of real return.
And as to Tabbi's article, you never get things done when the police are in bed with the crooks.
I know someone who worked in Saudi Arabia for years and they told me that a thief has his hand cut off. Needless to say, there was very little theft by the average person - if you fuck with the system, the system will fuck you harder. It's a separate issue, but the royal family has always raped the system, and watching Egypt: now.they.are.afraid
Here, the laws for financial crimes make it worth it to steal, do your time or pay the fine, and then just go about life enjoying the plunders when you get out of the slammer. Even Madoff isn't in some gulag, he's in a country club prison hanging out with the made men. The message is: if you fuck the system, you may or may not get punished, and more than likely you will not suffer all that much.
I constantly hear talk around me of how business tells the government what to do, how we really run things, blah blah blah - we don't. First of all, the defence industry has WAY more power and second; the financial industry is influential but does not actually 'run' the system. Finance is about lending money and giving advice, and it pays well for sure. But I think the political system is figuring out that there's something to be gained by setting higher standards for dealing with other people's money, and honestly, the industry did this to itself. There's an awful lot of buck passing over who caused the recession: the fed, Main Street, Wall Street, average dopes: truth is, it was everyone. Everyone wanted in on the action during the housing boom. Now we have to clean up the mess and move on.
Restoring trust in the financial system should be priority #1. It's just good business.
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