What are Derivatives?

This Washington Post article contains a concise explanation of what derivatives are. It also explains why the Agriculture Committee is putting this legislation together. A question I have is, what prevents a large financial institution from buying some other type of company so that they can get around a ban on trading in derivatives?

Digging past the trash to get to the rot

The SEC is investigating Goldman Sachs for fraud...because the United States Government HATES America! We'll see if that's an adequate defense, not that we should expect anything truly impressive to come of this.

We will find in the next few months that most if not all of the biggest financial players were doing something similar to Goldman's scheme of setting up a portfolio that was designed to implode. The awful thing about it is that they sold that portfolio to their own clients, meaning they had to misrepresent their knowledge of how that portfolio would function.

Just so I can pat myself on the back later for making an obvious prediction: It's likely Tim Geithner will resign his post shortly after the midterm elections: he began his job in a caustic environment, then proceeded to consistently handle situations in the ugliest possible way from the view of the public's interest versus the industry from whence he came. He's the closest thing to Ashcroft/Rumsfeld/Cheney this administration has.

On the Origins of Corporate Morality

Some thoughts on Vision for a company and what the loss of that Vision can do

How do most people respond when Life has no meaning for them?

As individual investors, we must have verbal goals, such as "get my kids through college," "retire at 45 and travel the world," "make it so my children never have to worry about money," etc. Our verbal goals center around the human life cycle.

Though a company will have a verbally-stated character in the form of its mission and how it makes its money, these things only have a meaning by their individual connections with people. The businesspeople who created those statements may be long gone before a company vanishes, and generations later, perhaps after the advances of technology have rendered the original vision long obsolete, the basic meaning of the company remains the same: its share value or the money it otherwise earns. Yes - all obvious.

Shareholders attach individual meanings to company shares through their personal goals, and such meanings are statistically eliminated because they all meet in the dollar value of the stock. So as time passes, all human values other than dollars will disappear from the behavior of the company - perhaps those values may take some form as part of the vision that is sold to the public (Green products, for example), or through the mortals who guide the company; but these cannot stand up to Stock Price in the context of a publicly-traded company.

Is this too cynical? If it's true, maybe it means that larger private corporations that are held by "benevolent dictators" are better than publicly-traded ones led by CEO's who shift from company to company like mercenaries. Maybe it means that smaller companies, regional or local ones, are more likely to remain "human" and maintain the company's Vision, maintaining boundaries of right and wrong in their efforts to grow in monetary terms.

This reasoning is too trite to be a real answer, but it seems to be most of what we take sides about in our politics. It should make you suspicious of totally-unregulated Capitalism, where dollars by themselves would rule without any of the goodness of people.

Now, I'm no Commie. So don't worry about Fair and Balanced or other false dichotomies. Just beat on these ideas and see what of them survives.

A Banking Joke

Did you ever hear the one about the [insert group you're discriminating against here] -ish bank robber who walked into a bank, held a gun to his own head and said, "Gimme all your money or the [insert group you're discriminating against here] -er gets it." (You can see a much better version of the joke in Blazing Saddles, but it's not quite on the mark for our purposes here)

That is exactly how the government policy "Too Big to Fail" works. Right now the 12 largest banks in the US hold 50% of total deposits. And by its complex nature, banking needs experts to properly regulate it. In this article an expert steps forward.

I wouldn't expect something like this to actually happen, but it sounds great: it's good for local businesses to have local banks able to compete, it's better for you the consumer when a cartel of giant banks can collude to erode your dollars with high fees; and it's good for investors (regardless of what they may tell you while they are getting high on artificial, short-term returns) to experience true, steady returns over the long-term in an environment of few or no bubbles in financial sectors created by the irresponsible actions of enormous players like Lehman Brothers (Rest in Peace), Bank of America, etc.