Who Wins in the Financial Casino?

I received a message last week from a savvy reader, a former McKinsey partner who has also done among other things significant pro-bono work with housing not-for-profits (as in he has more interest and experience in social justice issues than most people with his background). His query:

We both know that financialization has, among so many other things, turned large swaths of the capital markets into a casino

Here’s my thought/question: is there a house?

The common wisdom is that the ‘house wins’ in casinos

In all likelihood, at least in the great financial crisis, the TBTF banks were the ‘house’… yet, it’s at least a bit different from a casino house because, absent the bailouts, those banks would not have won.

So, who or what was really the ‘house’? Was it the Fed? Did the Fed actually ‘win’?

Maybe the ‘house’ is the 1% …. or, more precisely, the .01%???

I have included this fetching image to give you the opportunity to formulate your own answer before scrolling down.

casino roulette wheel

My reply:

The producers in finance: the managing directors and heads of trading desks at major banks, the more senior managers who are along for the ride, the hedgies, guys in private equity.

The “house” is individuals, not institutions. That is how looting works.

Remember, the question is not merely who wins from our current hypertrophied financial system, but who is set up to be the house, as in to win no matter what. The answer in this case is intrinsically linked to looting.

The concept of looting is so important that it pays to revisit the seminal 1993 George Akerlof and Paul Romer paper that set forth this concept. The key section (emphasis ours):

…an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations. Bankruptcy for profit occurs most commonly when a government guarantees a firm’s debt obligations. The most obvious such guarantee is deposit insurance, but governments also implicitly or explicitly guarantee the policies of insurance companies, the pension obligations of private firms, virtually all the obligations of large banks, student loans, mortgage finance of subsidized housing, and the general obligations of large or influential firms. . . .

Because net worth is typically a small fraction of total assets for the insured institutions, . . . bankruptcy for profit can easily become a more attractive strategy for the owners than maximizing true economic values. If so, the normal economics of maximizing economic value is replaced by the topsy-turvy economics of maximizing current extractable value, which tends to drive the firm’s economic net worth deeply negative. Once owners have decided that they can extract more from a firm by maximizing their present take, any action that allows them to extract more currently will be attractive—even if it causes a large reduction in the true economic net worth of the firm).

The difference between the classic Akerlof/Romer notion of looting, where the owner ssyphoned off funds and left the company so fragile that eventual bankruptcy was almost inevitable, is that the evolution of Wall Street has produced a much broader class of individuals who are treated as if they have claims on profit streams. That puts them in a quasi-ownership position.

These “producers” are typically perceived to have enough control over a revenue stream as to have leverage over the institution. That includes anyone who runs a profit center (and remember, a profit center can be as small as one trader and a trading assistant), as well as individuals on the more-team-oriented investment banking side of the house that have strong enough client relationships that they could take some business with them (and perhaps other members of their team) if they left. As we explained in ECONNED:

In the financial services industry version of looting, we instead have firms where operational authority, is decentralized, vested in senior business managers, or “producers.” As a result of industry evolution and perceived competitive pressures, these producers, as a result of formal incentives plus values held widely within the industry, focused solely on producing the maximum amount possible in the current bonus period. The formal and informal rewards system thus tallies exactly with the topsy-turvy scheme of “maximizing current extractable value.”

This behavior in the past was positive, indeed highly productive, as long as it was contained and channeled via tough-minded oversight, meaning top management who could properly supervise the business. The main mechanisms are management reporting systems, risk management, and personal understanding of and involvement in day-to-day operations, plus external checks, such as regulations and criminal penalties. For a host of reasons, the balance of power has shifted entirely toward the forces that encourage looting. And because the damage that results cannot clearly be pinned on the top brass… it is difficult to ascertain from the outside whether the executives merely unwittingly enabled this process or were active perpetrators.

Notice this excessive extraction that led to business failure took place even though these firms had high levels of employee stock ownership. At Bear Stearns, members of the firm owned roughly one-third of the shares. At Lehman, they held nearly 30%, and the average managing director owned shares worth on average two times his annual take. Economic theory says that share ownership by employees and managers should lead them to produce the best long-term results for the enterprise. Yet those assumptions were shown to be flawed on Wall Street, as they were with Enron, in which 62% of the 401(k) assets were invested in Enron stock, and senior management also had significant share ownership.

Just as we have seen in Corporate America, using equity to align the interests of managers and shareholders has produced the converse of what the theorists expected, a pathological fixation on short-term results. On Wall Street, where the business model and rewards systems already had an intrinsic propensity to emphasize the quick kill, widespread employee ownership was an ineffective counter at best and more likely served to reinforce the fixation on current performance, irrespective of the true cost of achieving it.

The very worst feature of looting version 2.0 is that it has created doomsday machines. In the old construct, the CEO fraudsters would drain a business, let it fail, and move on. The fact of bankruptcy assured that the trail of wreckage would catch up with them sooner or later. But here, the firms, due to their perceived systemic importance, are not being permitted to fail. So there are no postmortems, in particular criminal investigations, to determine to what extent fraud, as opposed to mere greed and rampant stupidity, led to what would otherwise have been their end.

Now mind you, these producers aren’t the Ayn Randian rugged individualists that they often envision themselves to be. Their success depends on institutional infrastructure: concentrated capital and information flows, access to cheap leverage, risk control systems, a back office, etc. Quite a few successful Goldman traders have flopped when trying to launch their own hedge fund. John Meriwether, a storied Salomon trader, has presided over a series of hedge fund failures in his later life, the most spectacular being LTCM. Former Goldman CEO Jon Corzine is another high profile example of a supposedly successful trader and trading manager who came a cropper when given more degrees of freedom at MF Global than at his former home.

But while these individuals’ ability to succeed on a stand-alone basis or in different type of firm is subject to question, they nevertheless hold their employers hostage. If they decamp to a competitor, they not only take some (or a lot) of their revenues with them, but they can damage the ability to be competitive in closely aligned businesses. Senior people cannot be replaced quickly and each unit’s activity is so specialized that employees from other area can’t pinch hit for the recently departed producer or team. And if the loss is significant enough, competitors will poach on other business units, which in a worse case scenario can put a firm in a downspiral.

And the worst is given the present structure of these firms, there is no simple way to curb the leverage these staffers have over their employers. Again from ECONNED:

On paper, capital markets enterprises look like a great opportunity. The firms that are at the nexus of global money flows participate in a very high level of transactions. Enough of them are in complex products or not deeply liquid markets so as to allow firms to find ways to uncover, in many cases create, and capture profit opportunities. New, typically sophisticated products often provide particularly juicy returns to the intermediary. And in theory, clever, adaptive, narrowly skilled staff can stay enough ahead of the game so that the amount captured off this huge transaction flow is handsome.

Once again, however, the real world deviates in important respects from the fantasy. Why? This business model is also a managerial nightmare.

We have a paradox: “success” and profitability in the investment banking context entails giving broad discretion to individuals with highly specialized know-how. But the businesses have outgrown the ability to monitor and manage these specialists effectively. The high frequency, meaningful stakes, and large absolute number of decisions made at the operational level, the geographic span of these firms, and the often imperfectly understood interconnections among business risks make effective supervision well-nigh impossible.

What is intriguing about the ex-McKinsey partner’s question is that even after reading extensively about the crisis, he was unable to see the true locus of power in the financial services industry. Yet the answer is obvious to anyone who has worked in or closely with major capital markets firms.

And the conundrum we have outlined means the people who call for prosecutions of individuals are exactly right. Punishing firms is ineffective. Firms are fluid; key players can and often do move around. And the culpability for bad practices typically resides both at the producer level (the manager immediately responsible for the unit in which the bad conduct took place) and more senior management (which typically benefits directly from any ill-gotten profits, in terms of their compensation levels, and needs to be held responsible, even if they were simply derelict in duty, as opposed to actively complicit).

When the SEC was respected and feared, back in the stone ages of the 1970s, the capital markets delivered far better value for society as a whole than they do now. But even though financial services industry looters are the big winners in the capital markets casino, many members of the 0.1% have been along for the ride. Until some of the uber-rich join the great unwashed as victims of financial services industry looting, the house has nothing to worry about.

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  1. ArkansasAngie

    Dis-economies of scale. Boards and top management are not owners of the companies they run so for them betting with other people’s money … is logical.

    The fact is it isn’t desirable. And … we pay a huge price for it. One which should be included in a cost benefit analysis

    1. digi_owl

      Never mind the whole mess that is “stock options”. Talk about putting a big carrot on “pump and dump”…

    1. R Foreman

      The ’employers’ give the business controls over to individuals who destroy the business, for the Big Win.

  2. agkaiser

    From “How Does That Work: A View From the Bottom”

    “Consider this analogy: In a hypothetical casino card game the house takes 5% of every pot. If 10% of the money at the table is on average played on each hand, then the house takes 0.5% of the money in the game on each rake. After 200 hands, 100% of the money that is on average at the table has been taken by the house. The only way the game may continue is to have new money come to it. The winners, of course, smell the new blood and even anticipate it greedily. And the biggest winner over a time is always the house. Until the free market ideologues took over, the biggest difference between a casino bank and finance was that the gaming house took a bigger cut of the handle.

    “The media have played up the CDS and futures gambling aspect of derivatives, in what they call ‘Casino Capitalism.’ This distracts from the better casino analogy where the principal players are the house that always wins. The fundamental function of the big hedge funds, banks, brokerages, private equity firms [formerly venture capitalists] investors and insurance companies is to take a cut of almost every transaction and enterprise through interest on finance and profit on investment, banking, debt and credit card fees, etc. Even if some of them did lose a little on the derivatives frenzy and didn’t pass on their losses – to we, the people, their victims, the all time losers – by virtue of the bailout, the biggest just got bigger and only the suckers and small fry got hurt badly or wiped out.”


    1. QuarterBack

      Good analogy. I see the casino as two camps: 1) Those getting commissions on trades; and 2) those supplying casino credit to players needing help through volitile periods. The house loves volatility because it drives both of these mechanisms for paying the house.

  3. Larry

    Great post Yves. I was taken by this portion near the end:

    When the SEC was respected and feared, back in the stone ages of the 1970s, the capital markets delivered far better value for society as a whole than they do now. But even though financial services industry looters are the big winners in the capital markets casino, many members of the 0.1% have been along for the ride. Until some of the uber-rich join the great unwashed as victims of financial services industry looting, the house has nothing to worry about.

    I had thought that this had indeed started to happen. The biggest example I can think of is JP Morgan’s dealings with Madoff’s failed Ponzi scheme. And probing the recesses of my memory and then searching the blog, I came up with these stories:


    And this that discusses Les Blavatnik :


    So it would seem that the 1%, dare I say, 0.1% and 0.01% are indeed being hit. But they seem unable to align their material interests with better control over Wall St. Is that because an relatively insignificant portion of the uber wealthy are being hit, or because Wall St. is so deeply embedded in the bodies that should be regulating it?

    1. Yves Smith Post author

      Even among the super-rich, there is a collective action problem. I met with Blavatnik to discuss the idea of broader noise-making about JP Morgan misconduct. He made clear he was not interested in looking like an enemy of banks, that (among other things) as a buyer and seller of companies, he needed them. He was receptive to the idea of narrower action but I concluded the cost of doing it right was probably higher than made sense given the uncertain payoff. But part of it also is that structurally, they are forced to go after the institution. They can’t single out the individuals who were the immediate perps (save for describing their role in litigation).

      And you also have the problem of denial. Blavanik was so clearly abused, in a way that there was no basis for self-recriminatation that he was clear about taking action, which in his case was suing. But a lot of people are really embarrassed about losing money or being taken advantage of. So even if they might threaten litigation, they won’t talk it up among their peers to try to shift opinions and recruit allies.

      So I’d hazard things have to get worse before the real economy types start to organize to rein in Wall Street.

      1. Ulysses

        “But a lot of people are really embarrassed about losing money or being taken advantage of. So even if they might threaten litigation, they won’t talk it up among their peers to try to shift opinions and recruit allies.”
        Very well said! This same psychology partly explains why, at the lower end of the socio-economic spectrum, it is so difficult to get workers to go after even egregious cases of wage theft. Plus, these workers rightly understand that, by taking action, they risk gaining a “troublemaker” label that will make it very hard for them to keep earning their daily bread.

        1. Moneta

          And this ties up nicely with the class bigotry post. It’s amazing how EVERYTHING is interconnected and keeps the beast alive.

          This whole mess is social, political, financial, environmental, physical, chemical, psychological, philosophical. etc.

          And society today does not value generalists.

  4. proximity1

    I agree with Larry– this is a really great, great post of yours. I think I now have to get your book and read it— soon.

    In reading through the fascinating observations, I was reminded of a saying which, in the current context would run, “If you have to ask ‘Who is the ‘House’ in this (gaming operation)?’ then it’s clear that you and yours don’t belong to it.”

  5. Jim Haygood

    ‘Maximizing current extractable value … tends to drive the firm’s economic net worth deeply negative.’

    This is true in spades for governments. Lawrence Kotlikoff has estimated Usgov’s negative net worth at minus $200 trillion, or twelve years’ worth of GDP.

    For those at the top, looting is done indirectly by capitalizing on one’s prestige and power after leaving office. Those lifelong public servants, the Clintons, have raked in nearly half a billion this way.

    Meanwhile, our corpgov sponsors loot directly via federal expenditures. Our splendid new war in Syria, voted yesterday, is looting in its purest form.

    1. MikeNY

      And certainly our healthcare system is organized around the principle of looting. Cui bono? Well, the insurance companies, hospital groups and pharma companies. Who owns them? The usual plutocrat suspects. Since they make the rules, it’s hard to find a game that they lose.

    2. Ben

      It seems to me that there is a sever disconnect between money and value delivered. The whole system seems utterly broken because of the asynchronous nature of debt. You can make a trick look like value by deferring the truth through debt.

      “Money” has become too abstract and that we need to move back up the scale towards bartering in order to re-assert the link between reward and value delivered.

  6. craazyman

    This guy is giving people advice? Holy Guacamole.

    Here’s the correct answer for the mentally challenged to consider: “When the game is played long enough, everybody loses.”

    But only a lucky few get the Big Bailout$, so they think the actually “won”.

  7. Ulysses

    “Investors who lost their life savings in convicted Texas financier R. Allen Stanford’s $7 billion Ponzi scheme got their day in court today on the first day of the Supreme Court’s 2013 term, but it was unclear whether their plea will pay dividends. Unable to recover their investments from Stanford or his fraudulent entities, including a bank based in Antigua, the plaintiffs filed class-action lawsuits in state and federal courts in Texas and Louisiana. But a law passed by Congress in 1998 was intended to preclude such lawsuits and assert federal jurisdiction. Faced with conflicting lower court rulings, the Supreme Court must decide whether to side with the defrauded investors or the financial institutions, law firms and insurance companies accused of aiding Stanford’s scheme. The federal government, seeking to protect the Securities and Exchange Commission’s regulatory authority over security fraud claims, is siding with the defendants.”

    I think a lot of very wealthy fraud victims still believe that they have a chance of recovering their losses through legal channels, not realizing how much the game has been rigged to allow the fraudsters to operate with impunity. Perhaps more importantly, I think a lot of wealthy investors are simply unaware of how they are being fleeced. They have very diversified investments, usually managed by other people. They may feel mildly disappointed that their returns are modest in what the media has told them is a historic bull market. Yet as long as some parts of their portfolio do bring decent returns, the overall picture they have of their finances is that of modest growth– so they shrug off the possibility that they have been conned. No one likes to think of themselves as a mark. As long as they still have enough money sloshing around to live in the style to which they’re accustomed, why go into all the ugly details?

    1. RUKidding

      You make some valid points about the wealthier investors and not wanting to believe that they’re a mark or a victim of some looter. That, plus they’re probably connected by family or societal ties to the looters, so they don’t want to make waves. Making waves are for the rabble, who’ll lose anyway.

      Unless or until the looting gets really egregious and/or enough of the very wealthy (upper 2% or 3% but not .1%) starting seeing their wealth dwindling, don’t expect them to lift a finger or make a stink.

      The court cases against crooks like Madoff and Stanford may (have in the case of Madoff, I believe) result in investors getting some of their money back, but I believe it ends up being pennies on the dollar. Probably worse than the drubbing that investors took from the crash of ’08.

      Believing that the USA regulatory, administrative and/or “justice” system will serve your needs is what I like to call Magical Thinking. Ain’t gonna happen. Most we rubes might get is, as with Madoff’s case, pennies on the dollar.

  8. Banger

    Great post and great question–the term “maximizing current extractable value” is a terrific term that should be more generally used about all assets and call it “MCEV.” Anyway the term does open up vast horizons. As for who the “House” is I think it is not the key managers and traders who seem to have the world by the short hairs but, instead, the imperial apparatus that consists of a network of oligarchs around the world that make sure the crooked game continues and this would include the crooked dealers; we have to remember that, ultimately the ones who control the guns are always going to be the House.

  9. cnchal

    Who wins in the financial casino? Hardened, unpunished criminals.

    I have a couple of questions.

    Can a bank lend money to itself, to speculate in the equities market?
    If the answer is no, what stops them?

  10. Moneta

    Until some of the uber-rich join the great unwashed as victims of financial services industry looting, the house has nothing to worry about.
    It will happen but not on our schedule. Patience is a virtue.

  11. McMike

    I think there’s a huge wall of cognitive dissonance and learned frames to overcome.

    We have been trained to see the systems as orbits of institutions, and to assume there’s structures serving to keep them in line. Even when those break down, we still grant implicit assumption that people work for institutions, not the other way around.

    It remains invisible to most of the country that the system has evolved to legalize and enable looting by sociopathic individuals on a massive-widespread-systematic-ongoing scale. It’s so simple, so pedestrian.. so un-American.

  12. Andrew Foland

    First, largely I agree. It’s important to highlight the role of individuals.

    Second, the house doesn’t win every single hand. It loses often, with very high variance. In a way, that’s part of the trick that keeps it from being obvious the house ultimately always wins: because the house only wins on average.

    So the TBTF institutions (qua institutions) can also act as the house, even if they had lost the 2008 hand. Which, it should be noted, they didn’t. “Absent the bailout, they would have lost” almost misses the whole point.

    The heads-I-win-tails-you-lose nature of the social guarantees and bailouts are effectively an extremely valuable option. Whomever is getting those options for free is acting analagous to the house.

  13. The Dork of Cork

    I hate to break it to yee “New Deal “socialists but banking extraction is very much state policy.
    The state is the bank and the bank is the state.
    We can easily see this as wealth is concentrated.

    This is how it has worked since Tudor times.
    The King is no longer divine and all that jazz.
    The bank took its seat inside the Tabernacle.
    And as they say the rest is history………or was it the end of history ?

  14. jefemt

    McMike… un-American, or quintessentially American? Better yet, pandemic through history, regardless of Empire? The hoorah Kool-Aid we get in our early years is strong stuff… when we cling to a false paradigm, such as , “American”, it prevents us from moving into a new paradigm and order. I mention how arcane our Constitution is to folks, how we can and should re-tool for the 21st century and beyond, and folks recoil in horror. Is my concept, or their reaction un-American? BTW, I can’t imagine Chris Hedges, Sarah Palin, Karl Rove, Noam Chomsky all in the same room hammering out a new Constitution. Why would they get the invite? Do we have to abdicate our thinking to Proxy? Sure is easy to have little-and-declining hope these days if one is paying even a bit of attention… back to, Dancing with the Master Chefs! The Kardashian-Jenners are guests!!

    1. RUKidding

      It is interesting how small a percentage of the citizenry is able to really remove the Kool Aid induced veil over our eyes and really accept what this country is. I have friends who have directed me NOT to discuss these “UnAmerican” issues with them ever again. They simply will not countenance any discussion about how badly we are being ripped off by our elected officials (and others, of course) in the District of Criminals. It doesn’t matter how some vote – not a partisan issue – it’s the majority. Hooray for the Red, White & Blue is, apparently, very compelling for the majority. Pass the clicker!

  15. whine country

    Excellent post with a particularly concise description of the problem. I’m trying to imagine how the system could have evolved to its current state without the repeal of Glass-Steagall, but I can’t. Your mention of Meriwether and Corzine makes my point. The “managers” you refer to are able to create profit centers because of the discounted (and subsidized) access to capital that TBTF banks receive from all of us. Left to fend for themselves in the market for access to capital that us mere mortals conduct business, they are no more than average.

    1. Yves Smith Post author

      The repeal of Glass Steagall was not the key event. Glass Steagall was a dead letter long before it was repealed. Banks were already substantial participants in capital markets by then. Credit Suisse (a bank) bought First Boston (a major investment bank and top bond trader, of Salomon’s stature) in 1988, 11 years before Glass Steagall was repealed.

      If I had to single change that over time changed the industry most, it was the repeal in 1970 of the New York Stock Exchange rule that required all members to be partnerships.

    2. WhiteShoeGuy

      For me, an outsider, the big change was the move on Wall Street, from the white shoe, golf club leisure class to the Brooklyn hard scrabble, hungry guy. 1980s? 1970s?

      The Brooklyn boys were eager, in a hurry, and had sharp elbows. This may be too broad but – much of the damage done by The Street was perhaps done by such “boys,” not the old crowd of [HYP] Harvard-Yale-Princeton guys from top families.

      If so, democratization of some industries doesn’t always work.

    3. just bill

      The critical events began much earlier. Nixon closing the gold window and cementing the special relationship with Saudi Arabia that tled the oil market to the dollar, giving the largest banks access to essentially unlimited off shore deposits, as well as a magnificent usury opportunity to plunder oil starved nations, activities which the Fed could not have regulated if it wanted to. Money essentially ceased to exist as a store of value. Mega banks could no longer be resolved, only bailed out. After 1973 only individuals and bit players have been allowed to fail. As the amount of money in circulation mushroomed, it had nowhere to go but transactions escalating asset values, particularly corporate asset values. Successful looters gained control of the transaction machinery.

  16. William C

    On the subject of the rich who lose money to looters, it is worth remembering that the rich are not homogenous. There are the smart, amoral rich who will generally get richer and there are also the dumb rich (sometimes the children of smart amoral rich) who the first category regard as legitimate and extremely tempting prey. And as they are dumb, they probably will never think or know how to do anything to redress their losses.

    I came across some who clearly regarded it as a badge of honour to boast how much they had lost through Madoff (presumably because it showed how much they had to lose initially). These are the people who provide the basis for the (sometimes true) saying ‘clogs to clogs in three generations’.

    These are the

  17. Don Levit

    I have been introduced to a new term – maximum company extractable value.
    There seems to be no difference between the thoughts and actions of company leaders who know the firm is going down.
    The bailouts I don’t think make much difference in their behavior, were the bailouts not available.
    I assume the thieves’ notion of maximum extractable value means taking every cent out of what is currently available.
    Don Levit

    1. WordMonger

      “Maximum extractable value” — savor the sounds here — plenty of masculine consonants to make the neurons stand up and tingle.

      There must be an HBS course here. And certainly a B-school paper on the topic with plenty of empiricals, especially gathered since the 2000s, the fertile times.

      Also wealth here for a consulting practice built on this pillar. Impressive when a highly paid young consultant throws it at you.

  18. Lune

    Your summary of the Akerlof and Romer paper sounds like an instruction manual for private equity.

    And as for who is the house? I remember flying into Las Vegas on Southwest Airlines one day and after landing, the pilot came on and said “Welcome to Vegas! And for all of you getting ready to gamble, please take a look out the right side of the plane. See those big, gleaming, new fancy hotels? They weren’t built with money from the winners.”

    I imagine if you take a similar plane ride into the Hamptons, you’ll see equally impressive mansions, and they also weren’t built with money from the winners of the Wall St. casino. So what’s the difference? The hotels are owned by the casino corporations, while the Hamptons mansions are owned by private individuals…

    1. Moneta

      These hotels were probably built with a little bit of money from the losers and a lot of money from leverage… IOW printed money from misallocation of capital if you believe that a city based on gambling is a waste of resources and destructive to society over the mid to long term.

  19. jfleni

    RE: Who Wins in the Financial Casino?

    The Finance and Bankster Offal, carefully backed up by “DogPatch-DC”, who the ef* else! Believing otherwise is like devoting fervent prayers to the Tooth Fairy! Apparently the rich are often even dumber!

  20. susan the other

    When the whole system has been so looted for so long – by decades of IBGYBG scam artists – it is a dead man walking. It is time to change it. In a revolutionary fashion. It might be good PR to throw the sleaziest traders in jail, but that isn’t gonna change anything fundamentally because fear of prosecution will just make the next gen cleverer. A financial system that is uncorruptible seems like a fantasy though. When has there ever been one? That very question could be the basis of new finance. Since nothing we have tried so far has worked over the long run we need to look at the way human society evolves and stay one step ahead of it – financially. Don’t ask me how.

    1. ReadyToDissect

      Do I hear a tune of desperation here — “scam artists,” “a dead man walking,” “sleaziest traders in jail”, “fantasy”?

      And change in “a revolutionary fashion”?

      Actually, I don’t think we’ve really explored economic alternatives here in the USA. Yeah, some talked about socialism during the Real Depression. But mostly we’ve embroidered and tinkered with our current set-up. So if we don’t want socialism and capitalism is broken, what’s left?

      Alternatives do exist to our current financial and economic systems. Unfortunately they haven’t received much in the way of PR, much less public discussion. For example, some here have mentioned Gar Alperovitz.

      But there are many other ideas. Maybe NakedCap can help spread these.

  21. Mattski

    To some real extent, however, hasn’t it always been a casino? In fact, the police who ran the first stock traders off of Paris street corners understood this to be a fact, as did those who rioted against them. At least, this is my recollection of. . . someone’s account (Henwood’s? Maybe I picked this up in a lecture from Tom Weisskopf decades ago. . .) Would love it if someone could point me to early accounts of these dealings because there would be a lot to learn from them. . .

    I think there’s a tendency of reformist as opposed to structural analysts to posit this perversion of something that was at one time good (the noble stock market has been turned into a casino!). . . nah. Even the original notion of shared risk in the buying and selling of shares is in no way a democratizing function, but a game for the one percent. (Of course, it could be SOLD as such. . . )

  22. fresno dan

    “And the conundrum we have outlined means the people who call for prosecutions of individuals are exactly right. Punishing firms is ineffective. Firms are fluid; key players can and often do move around. And the culpability for bad practices typically resides both at the producer level (the manager immediately responsible for the unit in which the bad conduct took place) and more senior management (which typically benefits directly from any ill-gotten profits, in terms of their compensation levels, and needs to be held responsible, even if they were simply derelict in duty, as opposed to actively complicit).”

    So clearly put, so nicely explained. The American way – mistakes were made…..let’s not dwell in the past.

  23. Anon

    Seemed like a simple question with simple answer to me: The dealers are the house. Duh. That’s why they’ve been lobbying for this system for so long.

    Agree that it’s astounding that anyone who worked for McKinsey could be confused about this issue.

    You are of course right that there are certain individuals within the dealers who make the most off of the system — but something tells me you’d find the same basic phenomenon in the casino business. “The house wins” doesn’t mean that low-level employees of the house win, and it doesn’t mean that shareholders of the house win.

    1. Mattski

      Came back to post something like this–the “house” is never as clear cut an entity in gambling as it looks, either. Turns out the city fathers take their cut, local interests, the Mafia has its hand in, the pols who cleared the way legally. . .

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