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Posts Tagged ‘Too Big To Fail’

Strip The Stewards

March 12, 2015 6 comments

To absolutely no one’s surprise, the “takers” on Wall St. seem to be at it again. It’s funny how capitalism abhors “takers“, yet the biggest schleppers of your money dwell at the celebrated heart of unbridled capitalism – Wall St.

Capitalism is the worst “ism”, except for all the other “isms” – Unknown?

While government gets reviled for catering to average Joe Schmoe welfare “takers“, the hulking buttheads on Wall St. not only get off with a token monetary fine and a promise to “behave honorably” in the future, they get to set their own definition of “honorably“. As long as they’re too big to fail or jail, these psycho banks and the “innocents” who run them will continue to do as they please, knowing full well that small potatoes “takers” like you and me will bail them out when their wreckless, self-serving behavior triggers the next global crisis.

In “Prosecutors Suspect Repeat Offenses on Wall Street”, the NY Times states:

Just two years after avoiding prosecution for a variety of crimes, some of the world’s biggest banks are suspected of having broken their promises to behave. Typically, when banks have repeatedly run afoul of the law, they have returned to business as usual with little or no additional penalty — a stark contrast to how prosecutors mete out justice for the average criminal.

So, now that prosecutors are hot on the tail of some repeat big bank offenders, what do you suppose will happen to the guilty? The same old, same old:

Even now that prosecutors are examining repeat offenses on Wall Street, they are likely to seek punishments more symbolic than sweeping. Top executives are not expected to land in prison, nor are any problem banks in jeopardy of shutting down.

I think that the only way to medicate the psycho-orgs in our midst is to hit their stewards, the real people hiding behind the abstract corpo Hannibal Lectors among us, where it hurts – right in the pocketbook. Make it unambiguously transparent that the top tier(s) of executive management will be stripped of all their personal wealth if the narcissist monsters they run are found guilty of wiping out the IRA’s of thousands of the little people.

We don’t even have to jail them or demand their resignations. Simply treat them as big time drug dealers by confiscating all their property and making them start over again at step one. No more unconditional yearly bonuses and “but, I didn’t know” defense strategies. Put some teeth into “the buck stops here” and force them to, as Nassim Taleb suggests, place some “skin in the game“.

As the figure below illustrates, a “strip the stewards” punishment policy may not inhibit future normal-to-criminal behavior transitions after a reset to normal behavior, but it has a better chance of doing so than the current slap-on-the-wrist policy. What do you think can work?

Strip The Stewards

The TBTF Threshold

August 5, 2014 Leave a comment

Did you ever wonder why companies are obsessed with growth? Check out the growth trajectories of four hypothetical companies below. Although company stewards may not explicitly state it, the goal of every for-profit enterprise is to become Too Big Too Fail (TBTF). At the moment the TBTF threshold is crossed, the risk of going bust disappears. Well, it doesn’t disappear, it simply gets transferred from the TBTF menace itself to the public via taxpayer bailouts by politicians who love to play with other people’s money – yours and mine.

In nature, nothing organic is Too Big To Fail. I wish the same could be said for man-made systems. Timber!!!!!

Too Big

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All Upside, No Downside, No Conscience

Check out these three financial portfolio performance graphs from Mr. Nassim Taleb:

FRA

A fragile portfolio is one which is prone to getting decimated by a rare, unpredictable, event (a.k.a. a Black Swan). A robust portfolio is one which is relatively immune to the effects of a devastating Black Swan. An antifragile portfolio is one which experiences spectacular gains from a Black Swan.

Mr. Taleb asserts that the world’s financial system has been (since the 80’s when we first started bailing out banks), and still is, fragile. As long as bankers know that we, the taxpaying public, will continue to shoulder the cost when they blowup because they are too big too fail, they will continue to exhibit incompetent, reckless, risky behavior backed by bogus PhD calculations. They get their perennial bonuses before each big bust for “doing well“, but aren’t forced to give them back when they lose more money in an instant from a Black Swan than all the profits they’ve ever made previously in the history of banking. It’s a no-brainer with all upside and no downside. What a life… if you don’t have a conscience.

So, how do you construct a anti-fragile portfolio? According to Mr. Taleb, you allocate 80% of your portfolio to “cash” and 20% to wildly speculative investments. It’s called the barbell strategy – weighted investments at both ends of the risk spectrum and nothing in the middle. In the worst case, you’ll lose the full 20%, but the sky is the limit if you’re right with your speculative investment choices. The challenges are:

  • To muster up the nerve to actually go against what the mindless “portfolio theory” trained herd says and reallocate your currently fragile portfolio,
  • Figure out exactly what Nassim means by “cash” (no, it’s not a savings account at Citibust or Bank Of Nightmerica),
  • Decide on which speculative financial instruments to invest in (gold/metals? commodities? real estate? “other”?) .

BD00 knows what these challenges are because, as an unsophisticated investor, he’s struggling to conquer them himself. WTF!

investment allocation

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