Why Are Bankers So Rich?

[Donnachaidh]

http://motherjones.com/kevin-drum/2010/12/why-are-bankers-so-rich


Tyler Cowen has a big piece about income inequality in The American Interest that's well worth reading. However, it's not really about the growth of inequality. It's about Wall Street. In particular, it's about this question: why do financial professionals make so damn much money?

The answer, of course, is that they work in an industry that's become ungodly profitable. But how? Tyler attributes it to the practice of "going short on volatility." That is, modern finance professionals mostly gamble that what happened in the past will keep happening in the future, and disasters will never happen. In most years this makes them a lot of money (because, in fact, disasters rarely happen).

But this is mysterious. After all, not everyone is going short on volatility. In fact, by definition, only half of the punters on Wall Street are doing it. The other half are taking the other side of the bet. Tyler explains this with an analogy to a bet that the Washington Wizards, one of the worst teams in basketball, won't win the NBA championship. If you make that bet year after year, you'll keep making money year after year.

This is a useful analogy precisely because it wouldn't work. After all, to make that bet, you have to find someone willing to take the other side and bet that disaster will strike and the Wizards will win. But they know just how unlikely that is, so they're going to require very long odds. On a hundred dollar bet, they'll want $100 if they win but will only be willing to pay off one dollar if you win. That won't make you rich.

More at the link --

[Jackpine Radical]

1. I think the answer is a lot simpler.

Theft.

[phantom power]

5. Yeah -- you put some people In Charge Of All The Money, then de-regulate them...

for a decade or two...

what could possibly go wrong?
:eyes:

[DeSwiss]

2. They're robbers.

- Successful robbers.

[reformist2]

3. Why are bakers covered in flour?

[Rex]

4. Because they've been allowed to commit crimes for decades now?

Would be my guess.

[liberal N proud]

6. Simple - If I were a banker, I could charge you to put your money in my bank

I can then charge you to take it out.
Charge you if you don't take it out often enough and I pay the lowest possible interest rates only on accounts deemed as savings account by me. But you have to keep adding money to that account or I will stop paying you.

Then if you want to borrow money, I will own you and you will never get away from me.


But then I am not a banker and am owned.


It's really that simple.

[valerief]

7. Because they have all the money. nt

[taught_me_patience]

8. Leverage

when you have 40-1 leverage, a 2.5% positive move means you double your capital. When you eventually crap out, the government comes to bail you out.

[ladjf]

9. They are crooks who have access to other people's money.

And, they write the rules.

[unblock]

10. first, he's talking about traders, not bankers; but here's why they make unfair returns:

it's basically a form of insider trading. these people are so plugged into the market that they see immediately where money is coming and going because all big money flows through them. if people hear a piece of news and suddenly take money out of bonds and put it into gold or whatever, they know that as soon as the trend STARTS. so there's time to get in on the action well before the trend ENDS -- which may be a mere five minutes later. but you do this a couple of times every day and pretty soon you've got a nice profit.

it's not considered "insider trading" in the legal sense, but perhaps it should be. the argument is that it's not "material non-public information" because it is mostly public information, reflected in the price movements as they start the trend up or down. but that information takes time to reach the public, and traders are in a position to take advantage immediately, whereas peons are not. this is especially true with the advent of trading computers.

what is more truly insider trading is that the traders and salespeople TALK with the big money customers, so they know how much money is behind the moves and how much greed or panic is in the air. so they can distinguish a solid move from a fakeout.

then the leverage means that the tiny amount you can make get multiplied 10-30 fold. mere mortals can't play the stock market at more than 2-1 leverage because of margin requirements, but banks can get away with much more. and nowadays they borrow at nil.


among the many virtues of glass-steagall was separating trading from banking. bankers know the real fundamentals of the markets, they know the broad forces behind market movements. traders know the short-term technical mechanics. combining them means they can make vastly more lucrative decisions than anyone else on the planet.

this is evidenced by goldman sachs' track record of being able to post trading profits on EVERY SINGLE DAY in an entire quarter. that can't be ascribed to luck and it can't be ascribed to reasonable skill. it CAN ONLY be ascribed to a tilted table.

[dd2003]

11. thanks for clearing the traders and not bankers up

It annoys me to no end on here to see all wall street characterized as the same...I bankers are mostly 100 hour a week slaves to excel and powerpoint not ruining the monetary system and get bonuses at the end of the year. But I still continue to see hate for bankers on wall street. The people causing your foreclosure is some guy in a back room at your local bank, not an ibanker on wall street. They do not deal with mortgages, they are sell side. The Traders on the other hand are complete machines that have the income made up of almost all bonus so they take extreme risks to make more money as the more money they make the company the more money they make and if shit hits the fan and the "lil" gets hurts then too bad...I really think they should regulate the hell out of trading as it sure is not a fair game, its corrupt, and its killing the American economy with how they can manipulate any stock, commodity, or even currency.

[unblock]

12. another point is that traders can actually START a stampede.

whether based on nothing or rumor or blowing a legitimate news item out of proportion, traders are in a position to move mountains of their money and salespeople are in a position to move mountains of client money by making "recommendations".

any such move is an opportunity for the traders to make money getting in as it starts and out as it ends. the clients may make money as well if their salesperson likes them and clues them in as to when to get out. but guess what? someone's at the other end of those trades, so someone is losing out.

[Yavin4]

13. Simple: Wages Have Been Replaced by Credit

Look at how individuals and businesses use credit. Every time credit is used, a banker somewhere gets paid. Every time.

Credit is bundled up and re-sold. Credit is collected. Credit is zapped with fees.

And if folks cannot pay off the credit, the tax payers will.

[PhillySane]

14. It's A Wonderful Life

I'm going home to watch it right now! I love this movie. Every time I watch it, the little guy always wins. Why? Because he has friends! And everyone throws a couple of dollars in the basket at the end and he tells Mr. Potter to F-Off!
Just like real life.

Actually, I'm going home to get stinking drunk. F-George. Loser.