The fine was minuscule compared to the crime. I say crime because it was, just as all of this leveraged trading is a crime against the small investor who does not leverage, but has his Net Worth Impacted by these Wall Street Shysters. The SEC does not do their job. Want to see something interesting happen ? Stop Leveraged Trading completely - no money no trade. That would make investing more like it should be than how it is. This is multi-level investing (derivatives upon derivatives). Sort of like Multi-Level Marketing Schemes. Wall Street could get a real job that produced products instead of the jobs they now create. It makes me sick because I earned my money by working and it makes me sick to see it stolen. Yes, stolen. These "Marketers" hype the marked up and down so they can get rich. It has noting to do with the investor making a wise investment - the investor is making a "crap shoot in the dark". So no investment house is really scared of the SEC and their "baby" fines. I would not be. Everyone involved needs about 30 years mandatory in a prison and not a white collar prison with the "bosses" who are overseeing these actions convicted also.
The fine was minuscule compared to the crime. I say crime because it was, just as all of this leveraged trading is a crime against the small investor who does not leverage, but has his Net Worth Impacted by these Wall Street Shysters.
This makes no sense at all. Should people similarly be banned from leverage to buy houses or cars or send their kids to college or do home improvements, because there are people out there who don't use debt to do any of those things?
You gotta understand that this involves much more than politics. The big banks have sneaked in a way to remove some critical restrictions on their derivative trading activities. Remember derivatives? The stuff in October 2008 that blew up the markets, almost killed the banks, threatened a financial meltdown and threw the global economy into the crapper?
I don't think your quite understand what actually happened. You're just parroting the sound-bite version. It had nothing whatsoever to do with derivatives per se: it had to with derivative-like structured financial products that were 'marked-to-model' and there wasn't a liquid or deep market in the underlying security to get fair prices or to trade. The second mistake that these financial institutions made was to assume that the mortgage debt could be bundled and then sliced into different risk categories and sold in pieces, when it turns out that there were correlated risks between borrower classes (in other words, even if you were a AAA borrower, but your neighbor had his house foreclosed on because he was a deadbeat, your house value fell too, resting higher loan-to-value ratios, and hence margin calls on your debt).
We have an incredible derivatives market in stock options, commodity futures, FX forwards and futures etc. that work superbly and seamlessly. They have existed for many decades. If those did't exist companies wouldn't be able to hedge their foreign currency sales; a farmer wouldn't be able to sell his corn crop at a price he can lock in; an Apple supplier would't be able to buy some mineral or metal he needs at a price he can lock in so that he can give Apple a price quote.
I give up -- what is this "universal CR" you speak of TS?
Sorry, a continuing resolution that applies to the entirety of the budget, not just the Department of Homeland Security, such that the entire budget for next year comes up for debate under the new Congress. With the bipartisan dislike of the current proposal, it seems like this could be likely.
I’d actually prefer a Constitutional amendment regarding the budget, but that will require the states or people to pass, as there aren’t enough Congressmen who would grand themselves definitions to their power.
...I’d actually prefer a Constitutional amendment regarding the budget, but that will require the states or people to pass, as there aren’t enough Congressmen who would grant themselves definitions to their power.
Hell, you can't even get anything done when all three branches are under the same party umbrella. Our constitution and the rules dealing with Pres, House & Senate authority are a joke. The congress won't do something about immigration so Obama decides he wants to play dictator and throws down the Executive Order card. The House and Senate don't even keep the same rules -- they change what constitutes a majority or a plurality and which is required for what. These rules should note change every time the speaker changes. Pick some set of rules (Roberts Rules is a damn good start) add the things that are specific to our govt (e.g., a filibuster) and stick with them. I also think there ought to be a way to get some bills to the floor for debate without having to go down on the current speaker - I suspect things would get really interesting if there was more effort taken to get bills out of committee or bills that already out to the floor for some reasonable debate instead of allowing the elite to decide to quash something by getting pushed to the bottom of the list where it is guaranteed to fail since it doesn't even get considered.
The congress won't do something about immigration so Obama decides he wants to play dictator and throws down the Executive Order card.
In this regard, they didn’t do anything because they don’t have the power to do anything (enforcement of law is the purview of the executive) and existing laws are already as much as is needed.
On the subject of legislative efficiency, the measure of a nation is not the number of laws it adds. I’d suggest, however, this:
Bill Content Amendment
All bills submitted to Congress shall pertain to one matter and one matter alone, as outlined in the title of the bill. The president may selectively sign into law portions of any bill passed by Congress, under the stipulation that the unratified portions be returned to Congress with explicit reasons as to why.
Congressional District Amendment
No longer shall Congressional districts be redrawn by sitting state representatives, nor shall they be redrawn under any circumstance other than an official change in population–as defined by the United States Census–of the corresponding districts in the respective states. Congressional districts shall be henceforth be redrawn in a manner according to the mathematical Golden Ratio, where physically applicable within the bounds of state geometry.
The center of the smallest district shall be situated in the center of the most populous city in the state at time of ratification and henceforth from the time of finalization of the most recent census. Expansion outward from the first district follows the mathematical Golden Ratio accordingly. New districts formed due to a change in population shall be created by halving the size of the district in which said population has changed.
Senate Restoration Amendment
The Seventeenth Amendment is hereby repealed. All Senators shall be chosen by their state legislatures as prescribed by Article I. This amendment shall not be so construed as to affect the term of any Senator chosen before it becomes valid as part of the Constitution. When vacancies occur in the representation of any State in the Senate for more than ninety days, the governor of the State shall appoint an individual to fill the vacancy for the remainder of the term. A Senator may be removed from office by a two-thirds vote of the state legislature.
Federal Spending Amendment
Congress shall adopt a preliminary fiscal year budget no later than the first Monday in May for the following fiscal year, and submit said budget to the President for consideration. Shall Congress fail to adopt a final fiscal year budget prior to the start of each fiscal year, which shall commence on October 1 of each year, and shall the President fail to sign said budget into law, an automatic, across-the-board, 5 percent reduction in expenditures from the prior year's fiscal budget shall be imposed for the fiscal year in which a budget has not been adopted.
Total outlays of the federal government for any fiscal year shall not exceed its receipts for the fiscal year. Total outlays of the federal government for each fiscal year shall not exceed 17.5 percent of the nation's gross domestic product for the previous calender year. Congress may provide for a one-year suspension of one or more of the preceding sections in this Article by a three-fifths vote of both Houses of Congress, provided the vote is conducted by roll call and sets forth the specific excess of outlays over receipts or outlays over 17.5 percent of the Nation's gross domestic product.
The limit on the debt of the United States held by the public shall not be increased unless three-fifths of both Houses of Congress shall provide for such an increase by roll call vote. This Amendment shall take effect in the fourth fiscal year after its ratification.
I don't think your quite understand what actually happened. You're just parroting the sound-bite version. It had nothing whatsoever to do with derivatives per se: it had to with derivative-like structured financial products that were 'marked-to-model' and there wasn't a liquid or deep market in the underlying security to get fair prices or to trade. The second mistake that these financial institutions made was to assume that the mortgage debt could be bundled and then sliced into different risk categories and sold in pieces, when it turns out that there were correlated risks between borrower classes (in other words, even if you were a AAA borrower, but your neighbor had his house foreclosed on because he was a deadbeat, your house value fell too, resting higher loan-to-value ratios, and hence margin calls on your debt).
We have an incredible derivatives market in stock options, commodity futures, FX forwards and futures etc. that work superbly and seamlessly. They have existed for many decades. If those did't exist companies wouldn't be able to hedge their foreign currency sales; a farmer wouldn't be able to sell his corn crop at a price he can lock in; an Apple supplier would't be able to buy some mineral or metal he needs at a price he can lock in so that he can give Apple a price quote.
Fine. Agreed that derivatives have a purpose. They can limit risk in some areas, but increase risk in others. But wouldn't you have questions when you're looking at a piece of legislation crafted by a bunch of Citibank lobbyists, as this particular language was? No thanks. I don't want to see federally insured banking institutions putting my deposits into leveraged investments and then expecting the government to save their butts when they make bad calls. If all this provision is okay with you and you believe that the Big Five are looking out for your best interests, let me tell you about a bridge I want to sell you.
In this regard, they didn’t do anything because they don’t have the power to do anything (enforcement of law is the purview of the executive) and existing laws are already as much as is needed.
On the subject of legislative efficiency, the measure of a nation is not the number of laws it adds. I’d suggest, however, this:
Bill Content Amendment All bills submitted to Congress shall pertain to one matter and one matter alone, as outlined in the title of the bill. The president may selectively sign into law portions of any bill passed by Congress, under the stipulation that the unratified portions be returned to Congress with explicit reasons as to why.
Congressional District Amendment No longer shall Congressional districts be redrawn by sitting state representatives, nor shall they be redrawn under any circumstance other than an official change in population–as defined by the United States Census–of the corresponding districts in the respective states. Congressional districts shall be henceforth be redrawn in a manner according to the mathematical Golden Ratio, where physically applicable within the bounds of state geometry. The center of the smallest district shall be situated in the center of the most populous city in the state at time of ratification and henceforth from the time of finalization of the most recent census. Expansion outward from the first district follows the mathematical Golden Ratio accordingly. New districts formed due to a change in population shall be created by halving the size of the district in which said population has changed. Senate Restoration Amendment The Seventeenth Amendment is hereby repealed. All Senators shall be chosen by their state legislatures as prescribed by Article I. This amendment shall not be so construed as to affect the term of any Senator chosen before it becomes valid as part of the Constitution. When vacancies occur in the representation of any State in the Senate for more than ninety days, the governor of the State shall appoint an individual to fill the vacancy for the remainder of the term. A Senator may be removed from office by a two-thirds vote of the state legislature. Federal Spending Amendment
Congress shall adopt a preliminary fiscal year budget no later than the first Monday in May for the following fiscal year, and submit said budget to the President for consideration. Shall Congress fail to adopt a final fiscal year budget prior to the start of each fiscal year, which shall commence on October 1 of each year, and shall the President fail to sign said budget into law, an automatic, across-the-board, 5 percent reduction in expenditures from the prior year's fiscal budget shall be imposed for the fiscal year in which a budget has not been adopted. Total outlays of the federal government for any fiscal year shall not exceed its receipts for the fiscal year. Total outlays of the federal government for each fiscal year shall not exceed 17.5 percent of the nation's gross domestic product for the previous calender year. Congress may provide for a one-year suspension of one or more of the preceding sections in this Article by a three-fifths vote of both Houses of Congress, provided the vote is conducted by roll call and sets forth the specific excess of outlays over receipts or outlays over 17.5 percent of the Nation's gross domestic product. The limit on the debt of the United States held by the public shall not be increased unless three-fifths of both Houses of Congress shall provide for such an increase by roll call vote. This Amendment shall take effect in the fourth fiscal year after its ratification.
I don't get it, TS. In this post you propose removing the power of voters to directly elect their U.S. Senators, yet in another post you want to take Congress out of budget approval by vesting that power solely with voters. Appreciate your efforts and thoughts here, but how do you reconcile the two?
I don't get it, TS. In this post you propose removing the power of voters to directly elect their U.S. Senators,
Because it’s incorrect for them to have that power. The people have representatives already. Senators represent their respective states and the state’s interests. The states have virtually no power now, and the power they do have they don’t bother to exert, for whatever reason.
...take Congress out of budget approval by vesting that power solely with voters.
Another post or another amendment? What do you mean? I don’t recall saying that people should approve the budget; if we’re evidence of anything it’s not fiscal management.
The fine was minuscule compared to the crime. I say crime because it was, just as all of this leveraged trading is a crime against the small investor who does not leverage, but has his Net Worth Impacted by these Wall Street Shysters.
This makes no sense at all. Should people similarly be banned from leverage to buy houses or cars or send their kids to college or do home improvements, because there are people out there who don't use debt to do any of those things?
Most things people take on debt for act as collateral. The collateral in leveraging is the shares but as was the case with GTAT, they can drop over 90% in minutes. There's no way this company with $3.5m in assets could come close to covering $1b so why let them or anyone else make trades like that? Forex trading goes above 1000:1 leverage. Could you get a $25m mortgage on a $25k salary? You do need to be able to take on a loan more than your income but the banks place tight limits on borrowers so regulators should place similar restrictions on them. They are trying to do this to UK banks:
They are trying to tighten up the leverage ratios from 3% to 5% for mortgage lending to help stability. The British Bankers Association said:
"This would have significant implication for the international competitiveness of UK banks and their ability to attract investment"
Basically "Waaaaah". What a shame, only being able to loan out 20x your assets. They need to set the same leverage caps for traders too. Lehman collapsed at 30:1 so that's too high. 20:1 still seems high but it's moving in the right direction. The banks argue that the quality of the loans should affect the ratios but we know how that turned out before - loans being graded as AAA weeks before bankruptcy. This company should never have been allowed to trade over $70m. $1b was totally irresponsible. The aim should be to promote stability, not risk. There's been too much promoting high risk moves for quick, high returns. The greed of these two people making the $1b trade has resulted in dozens of employees losing jobs and a company that operated for 37 years going into bankruptcy. A 30 month jail term might make them think twice about doing it next time but it's high time we had some jail terms being handed out to the people doing far worse things that affected the whole economy. They shouldn't get to treat the entire economy as collateral for their high leveraging, they should be made to take responsibility for what they do and prevented from doing it in the first place.
Not all the people on Wall Street are crooks. But some of them are.
This trader and his boss should have a stint in jail. As an example for the others.
So why are they not there? Why is there a piddling $4 M fine against Morgan Stanley - which will be paid by the shareholders (indirectly) and not those responsible?
Where is the accountability?
Why is it that a teller who misappropriates money goes to jail, and a trader that does the equivalent has the fine paid for by the company?
And let's not forget that 2012 - the period in question - is when traders drove AAPL down to close at exactly $500 on the year-end. Which was good for the people dealing in options.
Not all of the people on Wall Street are crooks. But some of them are.
Most things people take on debt for act as collateral. The collateral in leveraging is the shares but as was the case with GTAT, they can drop over 90% in minutes. Etc Etc.
C'mon, you're bringing up one stock out of the many thousands that are traded on the stock exchange. Your collateral against homes purchased in Arizona, Florida, and Nevada were equally in trouble in 2007, and many lenders had to eat the losses. Does that mean we should get rid of borrowing to finance a home purchase? Of course not.
Stocks are no different. In fact, given their liquidity, they can be better collateral than homes, cars and education.
Does that mean we should get rid of borrowing to finance a home purchase? Of course not.
Stocks are no different. In fact, given their liquidity, they can be better collateral than homes, cars and education.
When you apply for a mortgage or other loan, they do checks to ensure that you can pay back what you borrow and the amount you apply for is limited to your earning potential. You can't leverage your income 100:1 or anywhere near that. Being able to leverage assets in trading by so much goes against the idea that you can't gamble on credit. A casino won't let you buy things on a credit card because it's money you don't have. In foreign exchange trading, they have to use significant leverage to make it worthwhile but that doesn't really affect companies too much directly. When trading company shares, there should be similar leverage limits as with mortgages and loans.
Does that mean we should get rid of borrowing to finance a home purchase? Of course not.
Stocks are no different. In fact, given their liquidity, they can be better collateral than homes, cars and education.
When you apply for a mortgage or other loan, they do checks to ensure that you can pay back what you borrow and the amount you apply for is limited to your earning potential. You can't leverage your income 100:1 or anywhere near that. Being able to leverage assets in trading by so much goes against the idea that you can't gamble on credit. A casino won't let you buy things on a credit card because it's money you don't have. In foreign exchange trading, they have to use significant leverage to make it worthwhile but that doesn't really affect companies too much directly. When trading company shares, there should be similar leverage limits as with mortgages and loans.
You're forgetting that the financial crisis was primarily precipitated by lousy loans made by mortgage lenders. On top of that, you're assuming that people who make loans to buy stocks are stupid.
You're forgetting that the financial crisis was primarily precipitated by lousy loans made by mortgage lenders.
It was from the practise of taking those loans and repackaging them to give them a higher rating than they deserved. If there was no practise of hiding bad loans, the mortgage lenders wouldn't have issued them. The failing didn't come from the principle of lending by mortgage brokers - Lehman Brothers was an investment bank that traded the bad loans to investors. The investment banks lied to mortgage brokers and investors about the reliability of this practise and covered up indicators of impending failure with accounting methods.
Anyway, you're agreeing here with what I said that over-leveraging is bad.
you're assuming that people who make loans to buy stocks are stupid.
Not stupid, greedy. The 2 people responsible for the $1b purchase of AAPL stock were greedy. They wanted to do a quick, huge trade so they could cash out and retire early and leave the responsibility for it failing to other people by claiming they'd made a simple typo and therefore it wasn't their fault. Just like the banks do when they are hauled before the courts when they say they didn't know anything about their rogue trading staff. Plausible deniability.
People act in a selfish way and if you sell an idea to someone that they can get rich quick by increasing risk and have no personal consequences for it then most people will go along with it. Just push a button and you have the opportunity to live a life of luxury or walk away without consequence. The lottery draws demonstrate this:
"Spend a little, get a lot -- the basis for every good investment. The lottery and penny slots are kind of the sweet spot of risk taking. They're really cheap, really inexpensive to play, but there's a big possible upside. It's ridiculous to say that 51% of the population is just irrational or self-destructive. It serves a psychological function for people. ... Our pleasure of living is not only based on our current situation, but what could be, what we can imagine our situation could become."
The reason people keep doing it is they see other people winning. The entire world watched the 2008 economy failure and yet hardly any prison terms handed out for it, what message does that send? The practises that led to it will build up again:
"capitalist economies slowly and naturally become unstable over time, as banks and private businesses take on more and more debt, until the system finally snaps under the weight of these obligations. After surveying the wreckage caused by an over-leveraged banking system, which had gorged itself on debt backed by overvalued real estate, the economics world has begun to pay much closer to attention to Minsky and his views on financial instability... over the long run, capitalist economies will inevitably suffer from the kind of trouble we’ve been in recently because capitalist systems encourage the growth of debt.
In Minsky’s vision, excessive leverage—too much reliance on borrowed money—creates a risk of crisis whoever the borrower. Banks, which in effect borrow money short-term from their depositors but invest in assets that can’t easily be converted to cash, may be especially vulnerable. But business and household debt also expose the economy to the possibility of a self-reinforcing downward spiral.
Debt in the U.S grew and grew until the trend was finally snapped in 2008. This process of “deleveraging” is beginning to end in America, but in places like China, the debt buildup hardly paused, and now the ratio of debt to GDP held by non-financial businesses in China is higher than it ever was in the U.S. So, what is this debt financing? Investment in businesses and real estate, to fund the great Chinese export machine. The problem is that exports haven’t grown in China to justify that demand."
I'm not arguing that all debt is bad, it's necessary. The problem is over-leveraging as well as being able to defer responsibility for your actions. This case with AAPL trading at least resulted in a prison term but how many more damaging cases haven't resulted in a prison term?
"Traders using private chat rooms and calling themselves “the players”, “the 3 musketeers”, “1 team, 1 dream”, “a co-operative” and “the A-team” were uncovered during the regulatory investigation into foreign exchange rigging.
The FCA said HSBC sold £70m in advance of this 4pm fix to take advantage of the expected downward movement in the fix rate because of the chat that had taken place beforehand when traders had discussed the orders they had received. One trader said they intended to “bash the fck out of it”.
In the first five seconds of the fix window, HSBC then entered nine orders to sell £101m, and the rate fell from 1.6009 to 1.600. HSBC sold £311m in total during the fix window and the rate was finally published at 1.6003."
The actions of these traders and banks are damaging businesses like Apple and low-end investors and they are walking away without punishment.
Comments
The fine was minuscule compared to the crime. I say crime because it was, just as all of this leveraged trading is a crime against the small investor who does not leverage, but has his Net Worth Impacted by these Wall Street Shysters. The SEC does not do their job. Want to see something interesting happen ? Stop Leveraged Trading completely - no money no trade. That would make investing more like it should be than how it is. This is multi-level investing (derivatives upon derivatives). Sort of like Multi-Level Marketing Schemes. Wall Street could get a real job that produced products instead of the jobs they now create. It makes me sick because I earned my money by working and it makes me sick to see it stolen. Yes, stolen. These "Marketers" hype the marked up and down so they can get rich. It has noting to do with the investor making a wise investment - the investor is making a "crap shoot in the dark". So no investment house is really scared of the SEC and their "baby" fines. I would not be. Everyone involved needs about 30 years mandatory in a prison and not a white collar prison with the "bosses" who are overseeing these actions convicted also.
The fine was minuscule compared to the crime. I say crime because it was, just as all of this leveraged trading is a crime against the small investor who does not leverage, but has his Net Worth Impacted by these Wall Street Shysters.
This makes no sense at all. Should people similarly be banned from leverage to buy houses or cars or send their kids to college or do home improvements, because there are people out there who don't use debt to do any of those things?
You gotta understand that this involves much more than politics. The big banks have sneaked in a way to remove some critical restrictions on their derivative trading activities. Remember derivatives? The stuff in October 2008 that blew up the markets, almost killed the banks, threatened a financial meltdown and threw the global economy into the crapper?
I don't think your quite understand what actually happened. You're just parroting the sound-bite version. It had nothing whatsoever to do with derivatives per se: it had to with derivative-like structured financial products that were 'marked-to-model' and there wasn't a liquid or deep market in the underlying security to get fair prices or to trade. The second mistake that these financial institutions made was to assume that the mortgage debt could be bundled and then sliced into different risk categories and sold in pieces, when it turns out that there were correlated risks between borrower classes (in other words, even if you were a AAA borrower, but your neighbor had his house foreclosed on because he was a deadbeat, your house value fell too, resting higher loan-to-value ratios, and hence margin calls on your debt).
We have an incredible derivatives market in stock options, commodity futures, FX forwards and futures etc. that work superbly and seamlessly. They have existed for many decades. If those did't exist companies wouldn't be able to hedge their foreign currency sales; a farmer wouldn't be able to sell his corn crop at a price he can lock in; an Apple supplier would't be able to buy some mineral or metal he needs at a price he can lock in so that he can give Apple a price quote.
Hopefully it’s ignored and a universal CR is passed instead.
I give up -- what is this "universal CR" you speak of TS?
Sorry, a continuing resolution that applies to the entirety of the budget, not just the Department of Homeland Security, such that the entire budget for next year comes up for debate under the new Congress. With the bipartisan dislike of the current proposal, it seems like this could be likely.
I’d actually prefer a Constitutional amendment regarding the budget, but that will require the states or people to pass, as there aren’t enough Congressmen who would grand themselves definitions to their power.
...I’d actually prefer a Constitutional amendment regarding the budget, but that will require the states or people to pass, as there aren’t enough Congressmen who would grant themselves definitions to their power.
Hell, you can't even get anything done when all three branches are under the same party umbrella. Our constitution and the rules dealing with Pres, House & Senate authority are a joke. The congress won't do something about immigration so Obama decides he wants to play dictator and throws down the Executive Order card. The House and Senate don't even keep the same rules -- they change what constitutes a majority or a plurality and which is required for what. These rules should note change every time the speaker changes. Pick some set of rules (Roberts Rules is a damn good start) add the things that are specific to our govt (e.g., a filibuster) and stick with them. I also think there ought to be a way to get some bills to the floor for debate without having to go down on the current speaker - I suspect things would get really interesting if there was more effort taken to get bills out of committee or bills that already out to the floor for some reasonable debate instead of allowing the elite to decide to quash something by getting pushed to the bottom of the list where it is guaranteed to fail since it doesn't even get considered.
Off my soapbox. Sorry for the rant...
The congress won't do something about immigration so Obama decides he wants to play dictator and throws down the Executive Order card.
In this regard, they didn’t do anything because they don’t have the power to do anything (enforcement of law is the purview of the executive) and existing laws are already as much as is needed.
On the subject of legislative efficiency, the measure of a nation is not the number of laws it adds. I’d suggest, however, this:
Congress shall adopt a preliminary fiscal year budget no later than the first Monday in May for the following fiscal year, and submit said budget to the President for consideration. Shall Congress fail to adopt a final fiscal year budget prior to the start of each fiscal year, which shall commence on October 1 of each year, and shall the President fail to sign said budget into law, an automatic, across-the-board, 5 percent reduction in expenditures from the prior year's fiscal budget shall be imposed for the fiscal year in which a budget has not been adopted.
I don't get it, TS. In this post you propose removing the power of voters to directly elect their U.S. Senators, yet in another post you want to take Congress out of budget approval by vesting that power solely with voters. Appreciate your efforts and thoughts here, but how do you reconcile the two?
Because it’s incorrect for them to have that power. The people have representatives already. Senators represent their respective states and the state’s interests. The states have virtually no power now, and the power they do have they don’t bother to exert, for whatever reason.
Another post or another amendment? What do you mean? I don’t recall saying that people should approve the budget; if we’re evidence of anything it’s not fiscal management.
Most things people take on debt for act as collateral. The collateral in leveraging is the shares but as was the case with GTAT, they can drop over 90% in minutes. There's no way this company with $3.5m in assets could come close to covering $1b so why let them or anyone else make trades like that? Forex trading goes above 1000:1 leverage. Could you get a $25m mortgage on a $25k salary? You do need to be able to take on a loan more than your income but the banks place tight limits on borrowers so regulators should place similar restrictions on them. They are trying to do this to UK banks:
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11093380/New-bank-rules-would-raise-mortgage-costs.html
They are trying to tighten up the leverage ratios from 3% to 5% for mortgage lending to help stability. The British Bankers Association said:
"This would have significant implication for the international competitiveness of UK banks and their ability to attract investment"
Basically "Waaaaah". What a shame, only being able to loan out 20x your assets. They need to set the same leverage caps for traders too. Lehman collapsed at 30:1 so that's too high. 20:1 still seems high but it's moving in the right direction. The banks argue that the quality of the loans should affect the ratios but we know how that turned out before - loans being graded as AAA weeks before bankruptcy. This company should never have been allowed to trade over $70m. $1b was totally irresponsible. The aim should be to promote stability, not risk. There's been too much promoting high risk moves for quick, high returns. The greed of these two people making the $1b trade has resulted in dozens of employees losing jobs and a company that operated for 37 years going into bankruptcy. A 30 month jail term might make them think twice about doing it next time but it's high time we had some jail terms being handed out to the people doing far worse things that affected the whole economy. They shouldn't get to treat the entire economy as collateral for their high leveraging, they should be made to take responsibility for what they do and prevented from doing it in the first place.
Not all the people on Wall Street are crooks. But some of them are.
This trader and his boss should have a stint in jail. As an example for the others.
So why are they not there? Why is there a piddling $4 M fine against Morgan Stanley - which will be paid by the shareholders (indirectly) and not those responsible?
Where is the accountability?
Why is it that a teller who misappropriates money goes to jail, and a trader that does the equivalent has the fine paid for by the company?
And let's not forget that 2012 - the period in question - is when traders drove AAPL down to close at exactly $500 on the year-end. Which was good for the people dealing in options.
Not all of the people on Wall Street are crooks. But some of them are.
C'mon, you're bringing up one stock out of the many thousands that are traded on the stock exchange. Your collateral against homes purchased in Arizona, Florida, and Nevada were equally in trouble in 2007, and many lenders had to eat the losses. Does that mean we should get rid of borrowing to finance a home purchase? Of course not.
Stocks are no different. In fact, given their liquidity, they can be better collateral than homes, cars and education.
When you apply for a mortgage or other loan, they do checks to ensure that you can pay back what you borrow and the amount you apply for is limited to your earning potential. You can't leverage your income 100:1 or anywhere near that. Being able to leverage assets in trading by so much goes against the idea that you can't gamble on credit. A casino won't let you buy things on a credit card because it's money you don't have. In foreign exchange trading, they have to use significant leverage to make it worthwhile but that doesn't really affect companies too much directly. When trading company shares, there should be similar leverage limits as with mortgages and loans.
You're forgetting that the financial crisis was primarily precipitated by lousy loans made by mortgage lenders. On top of that, you're assuming that people who make loans to buy stocks are stupid.
Both are egregious.
It was from the practise of taking those loans and repackaging them to give them a higher rating than they deserved. If there was no practise of hiding bad loans, the mortgage lenders wouldn't have issued them. The failing didn't come from the principle of lending by mortgage brokers - Lehman Brothers was an investment bank that traded the bad loans to investors. The investment banks lied to mortgage brokers and investors about the reliability of this practise and covered up indicators of impending failure with accounting methods.
Anyway, you're agreeing here with what I said that over-leveraging is bad.
Not stupid, greedy. The 2 people responsible for the $1b purchase of AAPL stock were greedy. They wanted to do a quick, huge trade so they could cash out and retire early and leave the responsibility for it failing to other people by claiming they'd made a simple typo and therefore it wasn't their fault. Just like the banks do when they are hauled before the courts when they say they didn't know anything about their rogue trading staff. Plausible deniability.
People act in a selfish way and if you sell an idea to someone that they can get rich quick by increasing risk and have no personal consequences for it then most people will go along with it. Just push a button and you have the opportunity to live a life of luxury or walk away without consequence. The lottery draws demonstrate this:
http://www.dailymail.co.uk/news/article-2239795/Powerball-pot-soars-past-550MILLION-130-000-tickets-sold-minute-11th-hour-frenzy-historic-drawing.html
That one had 189m tickets sold despite the crazy odds of winning.
http://edition.cnn.com/2012/08/15/health/psychology-playing-lottery-powerball/
"Spend a little, get a lot -- the basis for every good investment. The lottery and penny slots are kind of the sweet spot of risk taking. They're really cheap, really inexpensive to play, but there's a big possible upside. It's ridiculous to say that 51% of the population is just irrational or self-destructive. It serves a psychological function for people. ... Our pleasure of living is not only based on our current situation, but what could be, what we can imagine our situation could become."
The reason people keep doing it is they see other people winning. The entire world watched the 2008 economy failure and yet hardly any prison terms handed out for it, what message does that send? The practises that led to it will build up again:
http://fortune.com/2014/10/28/global-recession-us-europe-china/
"capitalist economies slowly and naturally become unstable over time, as banks and private businesses take on more and more debt, until the system finally snaps under the weight of these obligations. After surveying the wreckage caused by an over-leveraged banking system, which had gorged itself on debt backed by overvalued real estate, the economics world has begun to pay much closer to attention to Minsky and his views on financial instability... over the long run, capitalist economies will inevitably suffer from the kind of trouble we’ve been in recently because capitalist systems encourage the growth of debt.
In Minsky’s vision, excessive leverage—too much reliance on borrowed money—creates a risk of crisis whoever the borrower. Banks, which in effect borrow money short-term from their depositors but invest in assets that can’t easily be converted to cash, may be especially vulnerable. But business and household debt also expose the economy to the possibility of a self-reinforcing downward spiral.
Debt in the U.S grew and grew until the trend was finally snapped in 2008. This process of “deleveraging” is beginning to end in America, but in places like China, the debt buildup hardly paused, and now the ratio of debt to GDP held by non-financial businesses in China is higher than it ever was in the U.S. So, what is this debt financing? Investment in businesses and real estate, to fund the great Chinese export machine. The problem is that exports haven’t grown in China to justify that demand."
I'm not arguing that all debt is bad, it's necessary. The problem is over-leveraging as well as being able to defer responsibility for your actions. This case with AAPL trading at least resulted in a prison term but how many more damaging cases haven't resulted in a prison term?
http://www.theguardian.com/business/2014/nov/12/fca-transcripts-traders-forex-traders-chat-rooms-foreign-exchange
"Traders using private chat rooms and calling themselves “the players”, “the 3 musketeers”, “1 team, 1 dream”, “a co-operative” and “the A-team” were uncovered during the regulatory investigation into foreign exchange rigging.
The FCA said HSBC sold £70m in advance of this 4pm fix to take advantage of the expected downward movement in the fix rate because of the chat that had taken place beforehand when traders had discussed the orders they had received. One trader said they intended to “bash the fck out of it”.
In the first five seconds of the fix window, HSBC then entered nine orders to sell £101m, and the rate fell from 1.6009 to 1.600. HSBC sold £311m in total during the fix window and the rate was finally published at 1.6003."
The actions of these traders and banks are damaging businesses like Apple and low-end investors and they are walking away without punishment.