One day, mathematicians will prove that any fund doing better enough than the index must be insider trading. All those people from the 90s and 2000s, long retired by then, will be convicted. It's like in cycling when they measure too much hemoglobin in the blood they conclude the guy's doping. The funds' financial records will be their frozen piss samples.
Seems like saying one day mathematicians will prove any poker player who won the World Series of Poker must have been cheating.
I'm sure people like Warren Buffett, and John Paulson and the numerous others who predicted the financial crisis, are not too worried about that.
In any case the Chicago efficient market mafia proved it years ago, based on their assumptions about how the market works. Proving something with a model doesn't make it true in the real world. Even in physics you have to do the experiment to show the model matches reality. Of course, in finance and economics, it's usually quite difficult to do a repeatable experiment.
There is information other than insiders get which can be used as an advantage. A person more knowledgeable about a field of activity may be better at spotting trends in that field. Also, someone like Warren Buffet who actually steps foot on the ground may get overall better information about companies.
But more profoundly, the markets are not really suited for retail customers. These people are drawn in by the promise (often lie) that investing is easy and it is possible to make a hobby out of it. What happens is these amateurs are losing money, which are gained by the real professionals.
Rules against insider trading are directed at making the markets a fairer place and especially so for the retail customers. In reality, these rules create the illusion that it's possible to make it as an amateur with little money and no connections. As we've seen, the promise is often illusory.
I wonder what the markets would look like if insider trading ceased being thought of as a crime. You just expected to make your decisions knowing that others out there may have better/different information.
Would this completely destabilize markets or would it find some new stability as people got used to it.
The 'first order' effect of insider trading is that some well-informed people can make profits at the expense of those who know less : But the flip-side is that price-discovery happens quicker.
The more insidious effect is that liquidity goes down (transaction costs are higher for everyone), since one always has to be wary that the person selling to you knows more than you do.
From an economics point of view, regulating (or not regulating) insider trading are both valid options. But the liquidity argument is the swing vote.
I don't find that transaction costs / liquidity story very convincing. Buying from someone who knows something is no more damaging than buying from someone who doesn't if its the same stock at the same time.
Suppose someone is selling you a house. They're desperate to sell : are you saying it makes no difference whether they're selling because their aunt just died (i.e. random sale) or they're someone within the town planning department?
Or suppose it's a car mechanic that wants to unload a car cheaply?
Hasn't Theil's Clarium Capital beat the market simply by making large calculated bets against the grain which turned out right? Why would that be considered insider trading? In cases where large traded just before a big move occurs, there's significant possibility for insider trading. But I don't think you can blanket statement all such wins against the market as insider trading. Maybe over a longer period of time, this would appear suspicious.
Peter Thiel is largely regarded as a failure of a hedge fund manager. For a while he had a good record but he did the decoupling/long oil trade which blew up in 2008.
His fund had a bunch of redemptions and is now mostly his own money.
Or very lucky. Or good at spotting trends. Or going out of their way to notice patterns indicative of insider trading on the part of other funds. Insider trading is not the only way to do better than the index.
The article lionizes prosecutors and demonizes Wall Street, even to the point of quoting Eliot Spitzer on honesty. It also goes on and on about the ethnicity of the accused in this case without ever mentioning the ethnicity of many of the players in the mortgage crisis. Finally, it puts the entirety of the blame for the crisis on Wall Street and cites Dodd Frank as good legislation...and puts zero blame on the shoulders of Barney Frank, the CRA, and the Bush/Clinton/Obama push for "affordable" minority housing.
George Packer has an agenda, and that agenda is not truth.
Anybody who cites the CRA as a proximal cause of the financial crisis is either a) profoundly ignorant of what the CRA requires of financial institutions, or b) has an agenda, (and that agenda is not truth).
"The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation (Section 802.)"
Huh? Are you arguing that the italicized passage disproves what happened?
The actual practice associated with the CRA had nothing to do with safe/sound operation, and everything to do with a system of penalties and incentives intended to artificially juice minority homeownership. Mergers were denied and anti-redlining probes were launched if you didn't make a certain percentage of ultra high risk loans. This was a bipartisan thing, Bush pushed for this just as hard as Frank. Read Gretchen Morgenson's new book; what happened indicts Democrats and Republicans alike.
The textual literalist argument you offer is reminiscent of those who denied that the Soviet Union could be killing people by the million. After all, the Soviet Constitution spelled out all these great rights!
Mergers were denied and anti-redlining probes were launched if you didn't make a certain percentage of ultra high risk loans.
Since neither I nor most other readers have access to Morgenson's book, would you please provide links to documented examples of agencies forcing financial institutions to make "ultra high risk loans"?
(And by documented, I don't mean some guy on National Review asserting that it happened. Agencies are required by law to document such actions and, in most cases, that documentation is public record.)
Just to be clear, I've analyzed this issue in more depth than the typical person making assertions (on either side of the issue), though I am by no means an expert on the issue. As such, your assertions do not comport with my understanding of ether the CRA's imposed requirements on financial institutions, or the CRA as a cause of the financial crisis (to any degree).
Also, at the risk of sending this off onto a tangent, please also explain why it took 30 years for the CRA to cause the financial crisis.
Re: the last point, under Clinton and then Bush, the old Carter era CRA law got new life poured into it. Deval Patrick (now MA mayor) was one of the key guys on this when he was at Justice, using a number of laws (including the CRA and others) to beat up banks if they didn't lend to minorities at higher risk of default. Example:
Google around, you can find plenty of stuff that starts using new regs around the CRA in 1993-5:
www.ffiec.gov/cra/letters/letter_19950629.htm
An analogy: the actual FD&C Act empowering the FDA hasn't changed much, but new appointees differ dramatically on how to interpret the law and which new regulations are consistent with that interpretation. Starting with Clinton and continuing through Bush and Obama, HUD, Justice, and others started to use the CRA as a tool to force banks to extend more mortgages to minorities ("anti-redlining"). Like Ness using tqx evasion to go after Capone, old laws were put to new use.
There really is copious documentation of all of this in Ms Morgenson's book; if you're as interested in the topic as I am, it may be worth reading even if you end up rejecting her line of argument.
(FWIW, National Review spent the 00s telling people about how Iraq was so important to US security. They had and have as little interest in exposing Bush's complicity in this as, say, MSNBC has in going after Obama. Morgenson is unusual in that she has penned a damning bipartisan indictment.)
The Justice Department alleged that Chevy Chase violated the federal Fair Housing Act and the Equal Credit Opportunity Act by declaring black areas off-limits for mortgage lending, a practice otherwise known as redlining. The complaint, filed together with a settlement in U.S. District Court in D.C., claimed that the bank underwrote approximately 97% of its loans from 1976 through 1992, in predominantly white areas.
"You can't be refused service, if there is no service being offered," said Assistant Attorney General for Civil Rights Deval L. Patrick.
The document makes it clear that the bank engaged in an illegal activity (red-lining), they got caught, and they settled the case with the government.
Nowhere does the document state that the bank was at any time before or after required to even loosen their lending standards in "black areas", let alone make "ultra high risk loans" as you have asserted.
I likewise find nothing in the second document you cited that proves your assertion.
I'm going to close this out with a tip - two years ago, Barry Ritholtz issued the following challenge:
"Well, its time to put up or shut up: I hereby challenge any of those who believe the CRA is at prime fault in the housing boom and collapse, and economic morass we are in to a debate."
The challenge is for any amount between $10,000 - $100,000.
In the two years since he issued that challenge, nobody has stepped forward to claim what should be an easy payout for those making the same argument as you.
Also, Deval Patrick is the Governor of MA, not the mayor.
The CRA is a favourite scapegoat for some conservative types, but I have yet to hear any of them put actual numbers to their assertions. If you have any, I would honestly love to hear them.
For instance, I have yet to see any evidence that mortgages originated under CRA authority have had higher default rates than higher income mortgages, and in fact I have heard plenty of anecdotal reports that the opposite is true.
> I have yet to hear any of them put actual numbers to their assertions. If you have any, I would honestly love to hear them.
As would I. Unfortunately, actual numbers seem hard to come by. Performance of CRA loans simply wasn't tracked. From a Fed study some years prior to the crisis:
We received responses from 143 of the 500 institutions to which we sent the survey (a 28.6 percent response rate). These responses and our follow-up telephone contacts revealed that banking institutions generally do not track profitability and performance separately for CRA-related lending... [1] [2]
For this reason, arguments absolving the CRA [3] instead look at high interest rate loans to low income households. If this is a good proxy for CRA lending, then CRA lending was a drop in the bucket.
However, there is evidence to the contrary. Edward Pinto, chief credit officer at Fannie Mae during the 1980s, published a report in 2008 that has some numbers you might be interested in. [4] From another article summarizing them [5]:
While it’s difficult to find data on how these CRA loans have performed, the few bank reports that break out these loans show much higher default rates than prime loans. Pinto’s research indicates that Fannie and Freddie’s affordable housing loans are a good proxy for CRA loans performance. For example, Fannie’s delinquency rate on its $900 billion in high-risk loans, 85 percent of which are affordable housing loans, was 11.36 percent at September 30, 2009—about 6.5 times the 1.8 percent delinquency rate on the GSEs’ traditionally underwritten loans. While the vast majority of CRA loans were fixed rate and did not have higher interest rates like other subprime loans, Pinto’s research has found that most had high risk characteristics such as small downpayments and impaired credit, signaled by a low borrower FICO score. As a result, loans with these high-risk characteristics have performed similarly to fixed rate subprime loans.
Perhaps more important in its implications for the financial crisis, Fannie and Freddie did not report that their mortgages were subprime and Alt-A. So instead of the 12 million prime loans market participants expected, Fannie and Freddie had added 12 million subprime and Alt-A loans to the market...
So, by the middle of 2008, there were almost 27 million subprime and Alt-A loans in the U.S. financial system. This amounted to almost 50 percent of all mortgages. More than two-thirds of these mortgages were held or guaranteed by government agencies like FHA (about 4.8 million), and the GSEs Fannie and Freddie (12 million loans), and by U.S. banks (a residual of about 2.2 million).
But I personally think the real answer is, we just don't know, CRA lending wasn't tracked. Hopefully next time we decide to experiment on this scale, we collect some data. ;)
The whole theory is bizzare. Banks didn't have to be forced to write stupid loans at the lead-in to the crisis. Once securitization made it easy to take a cut up front but sell them off onto someone else's books before they blew up, brokers and banks (including mortgage banks unaffected by the CRA) were eager to push through as many bad deals as they possibly could, with basically any buyer who could fog a mirror. Wall St. was so desperate for stuff to bet on that when the supply of borrowers ran low, they resorted to making new side bets on the outcomes of old loans (through synthetic CDOs made up of credit default swaps).
Blame the credit rating cartel for declaring large tranches of the whole mess to be "AAA investment grade" and thus marketable to huge institutions that had no business being involved, because they didn't think homebuyer defaults would be strongly correlated due to underlying forces.
You are correct that it lionizes prosecutors and demonizes Wall Street. The article keeps shifting focus way too much - first it's about Galleon, then about Preet, then the financial crisis, and it ends with a comment about Goldman Sachs, with some implied cynicism on the part of the author.
I'm not sure if the blame should be put on Clinton/Bush for pushing affordable housing however. At the end of the day, no one forced people to purchase a home beyond their means, just like no one forced people to purchase stocks during the late 90's tech bubble. It's a decision people made on their own.
Some people bought houses they couldn't afford because they were betting on a quick sale at an appreciated value to bail them out (and for a while they got away with it). But some people literally didn't understand that their mortgage payments were going to skyrocket after the "teaser" rate expired in a few years, nor that the fast-talking broker actually expected them to default but had perverse incentives to offer them a stupid deal anyway.
When the regulatory bodies allow a no-doc loan for a house to be entered into by the consumer they are in-fact complicit in fraud.. Uniform Commercial Code already implies that such a loan as a contract is extremely leaning towards fraud.
The biggest entities involved Bank lobbyists encouraging others to look the other way rather than enforce laws and rules laready on the books
This makes no sense. A no-doc loan is precisely that. If an applicant chooses to lie, the government is not responsible.
If your claim is that the applicants are being encouraged to commit fraud (by their local mortgage broker), then the government should start with regulating mortgage brokers. That's where the rot started.
While it's natural for politicians to point fingers at their opponents, or the Wall Street bogeymen, the reality is that neither party caused the massive run-up in housing prices, and nor did Goldman Sachs.
If you don't like X, then X caused the financial crisis, where X = [bankers | ACORN | CRA | Fannie Mae | regulation | deregulation | going off the gold standard | minorities | taxes | deficits | the Fed].
without going into too much detail, the crisis was the result of
1) excess leverage
2) moral hazard
3) MIA laissez-faire regulators who relied on nonexistent common sense and self-interest to contain moral hazard
4) complex and opaque interconnections between financial institutions leading to contagion and domino effects
limit those, and people will still find ways to lose money, but the whole system won't go down in flames.
Regulators were not MIA, they were all too present, forcing banks to extend risky loans by threatening anti-redlining lawsuits.
The non-existent common sense was the premise that you shouldn't loan to people who can't pay.
This common sense got suspended by government/NGO fiat because many of those who couldn't pay were minorities. No securitization hijinks could have happened if those mortgages hadn't been forced into the system in the first place.
It's ridiculous, because CRA loans were a tiny fraction of delinquent loans, they didn't go bad at meaningfully higher rates, the non-bank mortgage lenders like New Century that made the worst loans weren't covered by the CRA, something like 15% of loans over $1m were delinquent.
It's beside the point, because a well-designed financial system wouldn't blow up insurance companies, S&Ls, brokers, all because banks are required/encouraged to make a small percentage of their loans in underserved areas.
It's called confirmation bias, humans can and will believe what makes them comfortable.
Tl;dr: The article documents "the largest insider-trading case in history" where a hedge fund set up kick backs to individuals who provided the hedge fund insider trading tips.
I bet this kind of thing is happening ALL the time on Wall Street. This is just one particular case, one particular set of guys that got caught. I also believe that one unofficial purpose of the existence of many CxO roles (at large companies) and more especially Board seats, advisor roles, "strategic consultants", and both banking and legal advice is to help make this kind of insider info and quasi-legal information flow around to parasitic folks so they can make profitable bets on it. Especially the modern de facto aristocracy that exists.
There are just way too many people, pursuing their own self-interest, trying to maximize the money they make, with too many easy ways for folks to communicate or collude without a damning document trail, for this not to be the case. It's human nature. Particularly the kind attracted to the Wall Street kind of lifestyle and career.
The situation is complicated by the fact that the line is sometimes blurry between a case where you can make an ethical bet versus an unethical one. A legal bet versus an illegal one. Even supposedly ethical/legal investment is a form of betting.
I'll also go on record as saying I think the true purpose of some IPO's is to serve as a veiled excuse to induce an event that will enable people within that parasitic class to earn bucks from insider info bets. Not truly, and especially not solely, to raise investment money from the public.
For any pedants who may come back with criticisms: note my use of qualifiers like the word "some". I don't think it happens all the time, in all cases, and I don't think everyone involved in Wall Street or on a corporate board or at a consulting firm is necessarily unethical or doing these kinds of activities. But I've seen tons of evidence over the years that suggests that it is both common and by design.
To sum up my take overall: Entrepreneurship and business good. Parasitic financial shenanigans and aristocracy bad.
http://www.newyorker.com/reporting/2011/06/27/110627fa_fact_...