Of Books and Guillotines

Being a fairly boring guy with too much time on my hands, I tend to read a lot.  Much of what I read these days pertains to our capital markets — from postmortems of the 2008 crisis, to analyses of the 2010 flash crash, to wonky books on the nature of high frequency trading.  I also read some Stephen King now and then, which often leads to less horrific outcomes than those we often meet in the financial arena!

In the book “Confidence Men, ” one is left to decide whether government ineptitude or Washington/New York collusion placed the big banks in the profitable position they are today — after nearly cratering the global economy.  The part about Ken Lewis extorting $20 billion from Hank Paulson is terrific.

There were no heads on pikes.  Just rapid returns to profitability.

In “Dark Pools, ” (a book oddly lacking much content about actual dark pools but long on the surface level analysis of high frequency trading) a moral argument is put forth.  Should the fastest, most ruthless, amoral, wealth-mongering individuals be legally compensated with hundreds of millions of dollars while breaking down the very structure of our capital markets? (Note:  the value judgement is the author’s, not necessarily mine.)

The question is interesting in the abstract, but rhetorical in a world in which I watch stocks close on their VWAP (Volume Weighted Average Price) every day as if they were a jet being eased onto the runway by a skilled pilot.

We practice our trade in a world where the maker/taker fee system, set up by the exchanges, compensates the bad actors for the very behavior of acting badly.  But if my algo can swallow yours, (while creating trade volume, of course), good for me.  Price discovery be damned.

I’m not about to opine on the issue of societal good versus individual financial gain in this blog post.  It’s a discussion I’d welcome, if any readers would like to discuss it in the comments section.

It just strikes me that more, and more extreme, writings are cropping up that favor draconian resolutions to today’s (perceived or real) government/corporate exploitations.  The 1% is under assault; both for their level of wealth and the methods they used to attain it.

“You didn’t build that” might be better stated as “You shouldn’t have built that.”  You shouldn’t have built the “too big to fail” bank (with all due respect to Sandy ‘Born Again Financier’ Weill.)  You shouldn’t have built the algorithms that now constitute over 70% of the stock market’s volume while old-school investors recede into the shadows.  You shouldn’t have built a policy where bondholders were exempt from normal, market-based haircuts while the rest of the country was in financial flames.

But, I digress.  I often do.

After just having finished “Confidence Men, ” I started perusing the Wall Street Journal.   In the editorial section, I came across a very interesting question…  Would capital punishment for financial crimes be effective in quelling what we’ve been experiencing in the financial markets?  It’s a funny question in its absurdity, but the history of times when the question was not so absurd shines some light.

Rather than paraphrasing, here’s the link in its entirety.  Issac Newton and all.