Why Play a Rigged Game?

Poker is my religion. There are rules, upon violation of which, you get punished mercilessly. Some call it statistics, some – including myself – poker Gods.

When I sit down at the table I appreciate the plethora of characters from all walks of life. I appreciate the fact that there are winners and losers, luck and grind, spectacular twists of fate, rivalries but also universal fairness: In the long run, if you play correctly, you win. Very American Dream, isn’t it? There are quiet types you have to watch out for, business travelers, retirees, smelly hobos, students and “just passing by” types. There are also administrators of the entire establishment including dealers, floor managers, security that derive their sustenance from players; and an element of game – a deck of cards that is changed every few hours. You get my drift – just like a democracy. Except that we’ve been playing with the same stacked deck for the last few decades. Some people at the table will never get dealt two kings or two aces and it is not chance related. Others, who consistently win at the table make me wonder – have they really become so much smarter, savvier and better at math to beat the odds in such a remarkable manner? Am I to believe that some players are now so much sharper and more productive than they were 30 years ago, thus deserving not 20 times but 300 times the payouts of an average Joe Schmo?

That’s some impressive margin of error! So a hobo-looking character and a few students at the table complain about it and demand a new deck. And predictably, “good players” immediately jump in and attack them for being losers and comment on their personal hygiene. I wonder why – are they in on it? The sad truth is – correct play is no longer a guarantee against a long-term loss at this poker table of ours. And, if you don’t want to award any credibility to dirty hippies for voicing it, then who’s to know that better if not hundreds of thousands of people laid off from financial industry in the wake of the financial crisis. They played correct, solid game – they went to college, worked hard, got a mortgage, paid taxes and still got run over. Just look at the headlines from the last few days:

“Finance Job Losses Near 200,000 as BNP, Citigroup Cut Staff

Commerzbank sinks to first quarterly loss since ’09 and begins lending pull-back

UBS plans to cut 2,000 investment banking jobs

More heads roll in 2011 than in 2009

BNP Paribas to lay off 1,396 as crisis deepens” (Source: Options Group, Fins.com)

The first, and understandable, reaction of those laid off is to blame government regulation that encumbers the normal flow of business. If the government wasn’t pressuring banks to comply with strict rules those people would not have been laid off, the logic goes. While this can be somewhat true in the short term, are those people prepared to endure boom and bust business model in the future? And, more importantly, do they want to continue to play the game where the odds are against them, no matter how good their skills are? Guys, it’s been a juicy game at the table, no doubt, but not for you. Because to have a comfortable, middle-class life in Manhattan (not lavish, just comfortable!) you have to be a Managing Director at a Wall Street firm, but there’s simply not enough facility to accommodate everyone to become one. So what is the rest, the middle of the Bell curve with just college degree, strong work ethic and no delusions of grandeur supposed to do? Why is comfortable, middle-class life increasingly becoming a luxury available only to super achievers?

This juicy table is on the brink of breaking as more and more players are saying – we don’t want to play this game.

Those who think that OWS are anti-capitalists, iphone-using, Starbucks-drinking hypocrites and society leeches demanding handouts could not be further from the truth. “Get a Job” signs, while prompting self-satisfied chuckle in the Fox News crowd for being “clever”, fall flat. Those protesters would love to get a job but they can’t. Why is it that thousands upon thousands who lost jobs on Wall Street following the crisis deserve sympathy and the unemployed protesters don’t?

All they want is a new deck of cards. To clarify what I consider a new deck of cards is (just to start, in no particular order): reinstatement of Glass Steagall Act; effective government regulation (not necessarily more and not necessarily stricter – effective); enactment of Volcker Rule; a bailout fund sponsored by a tax on corporations to save themselves should shit hit the fan again; stricter regulation of credit-default swaps – you can buy protection only on the asset you own; executive compensation regulation. The latter is controversial and I would support a legislation that regulates the payouts of CEOs of deposit-taking institutions. If it’s a hedge fund that trades its’ own money – knock yourself out. But there’s no amount of stress and hard work that I can think of that would justify $68mln payout (Lloyd Blankfein compensation for 2007) for a bank CEO. Tough decisions to make, thousands of people to manage, sleepless nights, erectile dysfunction – fine – but unless you played with your own money and took your own risks and your downside is that you lose it all, move to the projects and dodge collectors – it’s not worth $68 bucks. Commanders in Iraq are under more stress and have to make decisions with lives, not money – for what a typical CEO considers change.

Americans love a good underdog story and often see Rocky or Billy Beane in themselves. That’s commendable, but under the current rules Rockys will be perpetually dragging that log and Billy Beanes will be perpetually tweaking those metrics with only a promise of a win in sight. I too love the element of competition and game in life, but to stay and play at that table would not make me a hero – it would make me a fool.

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6 thoughts on “Why Play a Rigged Game?

  1. bob says:

    K –

    Sounds like you were hanging out with the OWS crowd too long. After being in the business a long time, you and I both know that its not a “rigged game” but one that rewards those that are aggressive enough AND politically motivated enough within their firms that wind up with the majority of the spoils. Note, I’m not saying that it only rewards those that are better at what they do or more qualified. I know plenty of senior MD’s that aren’t the big producers themselves but that are politically motivated enough to put themselves into a position of managing the biggest producers and tying themselves to the largest P&L’s in their respective firms. Doesnt mean that the game is “rigged” as you put it but that those guys have better political skills and in many cases, luck. Some of us just keep our heads down and produce for our respective firms.

    The thing about the OWS crowd that pisses me off is that SO many of them are complaining that they can’t pay their college loans. No one forced them to take out six-figure loans to get degrees. No one guaranteed them that they would ever make more than 80k/year. That’s the risk you take when you borrow money in order to attempt to gain a better future. No one is ever HANDED a Wall St. job that pays seven figures without doing anything. If you make that kind of bonus then you certainly have P&L behind you. The guy complaining about not being able to pay his student loan is no different than the car valet taking out a mortgage for $2MM and then finding that he can’t pay it when housing prices drop. That’s the risk he took.

    The simple fact is that there has been income inequaity since the Roman Empire. Back then, it was the Senators and Generals that wound up with the spoils of war. Today’s societies around the world are not all that different. If the OWS’ers think its bad here in the states, they should look at the Russian Oligarchs.

  2. Hey, Bob! Wow! How’s it going?
    I actually wasn’t hanging out with OWS at all. I do write for a liberal blog now though and I’m trying to make sense of it all. If you have noticed I do not blame just one side, on the contrary, I’m always sympathetic to the thousands that were laid-off from Wall Street, as well as those who will never get a decent job. The way things are going right now (and I know it’s stupid to get a degree in history and hope for $100K job to pay your loans) even engineering majors can’t get jobs. When unemployemnt was 4% I could say, with certainty, that those who can’t get a job are lazy or unqualified or between jobs. When unemployment is 9% I can not make that statement. A lot of worthy, qualified people will never have the standard of living you could have in the 1950-60s with just a college degree or even without. Do you expect everyone to have a PhD and get involved in agressive office politics just to stay afloat? You didn’t like that I used the word “rigged” as if someone consciously prevents people from getting cushy jobs. By “rigged” I meant much broader terms – a chance to a decent middle-class life is evaporating even for those who work hard and follow rules. These are the symptoms of a much larger problem and I can not just pinpoint in the scope of this blog. Our desk was a perfect example – we had a spectacular year and then – not so much. I’d rather had normal years for the rest of my career. If the economy is subject to boom and bust scenarios then my and everybody else’s goal will be to enrich themselves at all costs in the near future, simply because they might not have a career 2-3 years later. Isn’t that pretty much what happened? You and I had a feeling in 2007-08 it’s not gonna last and many people in our business did too. We had the tools to do something about it which made matters worse for everybody else. At least that’s how I look at it.
    Anyway, thanks for the comment.
    Get a facebook account. Everybody’s on it. What else is going on with you?

    • Bob says:

      I just couldn’t help responding just to get you worked up! We never agreed very often politically as you recall. Hope you’re doing well. I left the “old shop” this spring. Looking for a spot with a HF. That will be the only way to trade ABS and MBS. I anticipate a far larger role for HF’s and other invesment vehicles down the road. The desire for higher returns won’t go away and credit availability via RMBS and ABS won’t be accomlished through banks any more.

      To your response I would have to say this: I certainly don’t expect anyone to have to get a PhD to be successful. As I’ve said before those are the most overrated 3 letters in the English language IMHO.

      People now assume that job opportunities will remain very limited for the rest of their lives based on the past few years. The fact is that would have happened anyway, with or without the recession or the financial crisis. The amout of debt to GDP that we have accumulated over the past two administrations would have forced the issue. Yes, I do lay some of the blame on Bush for running huge deficits but the spending under the Obama congress has grown exponentially even from those levels. Its amazing that we can’t look at the problems in Europe caused by out of control social spending and see that is the same path we are going down. Obama seems to want to run down that path at breakneck speed. He’s an idiot.

      Your argument that many qualified, worthy people won’t be able to have the same standard of living that they did in the 50’s or 60’s is an argument that just doesnt hold water. I don’t think you appreciate what the real standard of living was during that time. Sure, there are always people that don’t get what they deserve based on effort or intelligence. ALways has been that way and always will but that is a few percent, not the bottom 50% or 20%. Look at the number of people below the poverty line that seem to believe that a cell phone, computer and flat screen TV’s are basic necesities of life. I’m not talking about those living in slums. I mean just very average, typical people that can’t get good jobs.

      Why is that? MOST of the jobs in this country that those people would have held in the 50’s or 60’s have been exported. Think of all the manufacturing plants, textile plants etc that used to make goods that we exported. Now, we have exported the jobs to the lowest cost producer. The OWS crowd and their ilk will blame those nasty corporations. However, if politicians on both sides of the isle make it more profitable to produce goods here and have their income taxed HERE instead of abroad then those lower level jobs would come back, and come back quickly. America switched from a manufacturing economy in the 20’s-70’s to a service economy in the 80’s. Then, we made it easy to transport the service jobs to India and Asia. Really dumb policies and they were supported by BOTH political parties.

      Now everyone wonders why they can’t continue to have the same benefits and standard of living when our debt burden to pay for it has exploded. Sounds just like the pensioner in Greece wondering why he can’t retire at 45.

      • Hi, Bob,

        This is Dmitry from the old Barclays SDAPS gang. I suppose you still remember be and it’s good to hear from you and have you on this board.

        As a matter of fact, Katya and I are ‘virtually’ sparring pretty much every other day on these issues. So it’s great to have another player :).

        I myself have always considered myself a centrist – I support lower taxes, limited government, free uncorrupted markets, individual freedom, gay marriage, stem cell research and my position on religion has always been very dismissive.

        I have read, watched and debated quite a lot on the whole OWS issue. I do share a lot of the viewpoints you’ve expressed, and without trying to politicize the debate true partisan prism as it is very often done today, I’d like to briefly touch on the fundamentals of that great asset bubble that had caused current recession, massive unemployment thus spurring such movement as OWS. I see this as 4 main points:

        1) Congress and government push for cheap housing for low income people, thus de-balancing the supply and demand equilibrium.

        2) Poor financial terms’ knowledge by American consumers who nevertheless had no second thoughts getting themselves entangled into ones.

        3) Inadequate policy by Federal Reserve post 9/11 recession by keeping the rates low on top of already excess liquidity.

        4) Securituzation of assets by sell-side investment institutions using faulty guidelines.

        For the sake of the argument I place 25% weight on each of those four items, although I suspect that, in spite that we would probably never know for sure, the real devil hides in point 3), that being the Fed’s and Alan Greenspan Ayn Randian oversimplification of societal trends within various historical contexts.

        It is my firm belief that not one of OWS-er’s, even the most smart and sensible ones, have got the grasp on the situation in the manner I just described. Their slogans and rhetoric that have been displayed in public, in my opinion signify just that. They seem to extract the items that serve their specified agenda of today, in a similar manner as Tea Partiers utilize certain teachings of Ayn Rand, cherry picking the ones that go with their flow, but completely ignoring others (like, for instance, Rand’s total rejection of any religious beliefs).

        As they use to say, ignorance is a bliss. Anything else comes as a package deal…

  3. What a lively discussion! Bob, I can assure you we’re not the next Greece. In Greece government workers were getting $100K salaries for doing nothing, while no one (NO ONE!) was paying taxes. No wonder they are bankrupt. There’s a vast divide between us and them.
    The point where I agree with Bob is the plight of manufacturing jobs. We don’t produce anything anymore and that’s where middle class used to be. Obama understands that too, thus he tried to pass the jobs bill that does just that and of course it got blocked by GOP, simply because they don’t want to give him any victories. He maybe an idiot in your book for running the deficits, but how can anything be done without spending these days? Corporations are sitting on cash but they don’t create manufacturing jobs. So who’s going to do it if not the government? “Who’s gonna do it? You, you, Lt, Weinberg?”.”You want me on that wall. You need me on that wall!”
    Btw, Dmitry, I do not consider you a redneck as you suspected on my facebook yesterday. I consider Bob one :-). Just like he thinks I’m a pinko Commie.

  4. Walter says:

    “I myself have always considered myself a centrist – I support lower taxes, limited government, free uncorrupted markets, individual freedom, gay marriage, stem cell research and my position on religion has always been very dismissive”.

    That’s not centrist — this is more or less a classic definition of libertarian. That being said, Bob’s argument of erosion of middle class jobs as main reason behind wiping out of middle class makes more sense to me than low rates on top of excess liquidity. With a qualification that these were mostly blue-collar jobs but once they went, the white-collar jobs that were supported by them went as well.

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