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Weekend reading: Wall Street to Reddit – hold my beer

Weekend reading: Wall Street to Reddit – hold my beer post image

What caught my eye this week.

Competition to work for one of the bulge bracket investment banks is always fierce.

Young graduates from the best universities around the world compete for the chance to make millions in the markets.

Indeed, many onlookers – myself included – have lamented this brain drain. Finance takes too many clever people away from science and engineering.

So it’s especially galling that all that striving for academic achievement and going toe-to-toe in grueling interviews wasn’t enough stop bankers at some of these big institutions losing billions of dollars in the past fortnight.

Several investment banks had enabled an obscure family office, Archegos, to leverage up its $10 billion portfolio until it reportedly had more than $50 billion in exposure to just a handful of companies.

Which was a nice little earner, until the music stopped – like it always does.

When share prices began to fall, Archegos needed to stump up more money that it didn’t have to meet its margin calls.

This meant forced selling, and plunging share prices of the companies Archegos held:

Which was a problem for the banks.

You know what they say: when you owe the bank £10,000 you have a problem. When you owe the bank £1 million the bank has a problem.

Well, when you owe the banks tens of billions, everyone has a problem.

A billion here, a billion there

The Archegos SNAFU unwound like the finale of the criminally under-watched movie Margin Call:

According to the Financial Times [search result]:

…before the troubles at the family office burst into public view at the end of the week, representatives from its trading partners Goldman Sachs, Morgan Stanley, Credit Suisse, UBS and Nomura held a meeting with Archegos to discuss an orderly wind-down of troubled trades.

The banks had each allowed Archegos to take on billions of dollars of exposure to volatile equities through swaps contracts, and Hwang was struggling to deal with margin calls triggered by a plunge in ViacomCBS shares.

An orderly wind-down would minimise the market impact and the hit to their own balance sheets as they worked to sell down stakes in companies that Archegos had amassed through the derivatives instruments.

It is unclear whether an understanding was reached but several sources said it was quickly clear that some banks had begun selling to stem their own losses. People familiar with the trading said Credit Suisse and Morgan Stanley both appeared to have unloaded small batches of shares in the market after the meeting.

“It was like a game of chicken,” one person said.

By Friday morning, any hopes of co-ordination had been snuffed out and the floodgates opened when Goldman began pitching global investors on billions of dollars of Archegos-linked stocks.

Morgan Stanley joined hours later, and the two sold roughly $19bn in big block trades that day alone, according to the people.

That was probably painful for those US banks, but not as much as for (European) Credit Suisse and (Japanese) Nomura.

The two non-US banks dragged their feet. Perhaps they are less familiar with the ruthlessness of Wall Street banks than are, um, Wall Street bankers.

Nomura says it may have lost as much as $2bn on the trades. Credit Suisse has reportedly lost between $3 billion and $4 billion.

And people said the Reddit traders had issues…

Marginalia

Some readers – even my co-blogger – often question how I can be so arrogant as to invest actively when I’m up against the smartest financial minds on the planet.

And it’s true, we all know the evidence shows that most active investors would be better off as passive investors.

But I’ve seen very little over the years to suggest this doesn’t equally apply to The Smartest Financial Minds On The Planet.

Perhaps I’ll just point them towards this article in the future.

As for the investment bank recruiters, maybe they should ask to see an applicant’s Netflix viewing record alongside their C.V.?

Viewing Margin Call should be mandatory.

Then again, the banks probably would have facilitated the trades anyway.

As Bloomberg notes:

…global banks embraced [Archegos founder Bill Hwang] as a lucrative customer, despite a record of insider trading and attempted market manipulation that drove him out of the hedge fund business a decade ago.

Sure, why not enable tens of billions of dollars in leveraged exposure with that guy? Bankers gotta bank!

And to think I struggled to get a mortgage.

p.s. I’m out with Weekend Reading early this week so I can spend a few days in various local gardens. Have a great Easter weekend everyone!

From Monevator

The Slow and Steady passive portfolio update: Q1 2021 – Monevator

From the archive-ator: A mortgage is money rented from a bank – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Boom! Liverpool house prices are up 16.7% since the first lockdown, followed by 15.7% in Oldham… – The Oldham Times

…while London led UK house prices down in March – Guardian

Will a law change relieve the plight of thousands of mortgage prisoners? – ThisIsMoney

Minimum wage rises for two million British workers – BBC

Pound at one-year high against Euro as prior UK growth figures are revised very slightly upwards – ThisIsMoney

How two decades of EU migration went into reverse [Search result]FT

Commission on Race and Ethnic Disparities: The Report [PDF]UK Gov

Zoom and other work-from-home tech darlings will suffer as the developed world returns to normal, judging by New Zealand – Yahoo Finance

Products and services

The shares ISA where going for a walk could reduce your fees – Which

PayPal launches crypto checkout service – Reuters

Three major banks now offer lottery-style savings accounts – ThisIsMoney

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

Beware the fake Royal Mail text message scam – ThisIsMoney

Taxes due on cryptocurrency holdings [Search result]FT

Growth house de jour Ark Invest has launched a [US-listed] Space Exploration ETF – CNBC

Comment and opinion

If you play with FIRE don’t get burned – Of Dollars and Data

Reconsider your retirement plan, says Vanguard [Search result]FT

Will the Treasury bond rout continue? – Morningstar

Beware of the bubble – Mr Money Mustache

Coiled spring, or a cautionary tale from a strange year – Simple Living in Suffolk

Could UK house prices really boom for another five years? – Simon Lambert

Not wanting something is as good as having it – The Escape Artist

How to be a good role model for your kids when you’re wealthy – Humble Dollar

An oversupply of NFTs is going to kill the golden goose – Marker

Can the stock market crash during an economic boom? – A Wealth of Common Sense

The case for ‘Fundspiracy’ – The Evidence-based Investor

Is there are replication crisis in finance? [Nerdy]Alpha Architect & Cliff Asness

You can’t take it with you mini-special

Enjoying life while best you can – Abnormal Returns

Sell your hotdogs at a loss – Incognito Money Scribe

Revenge spending money to get back at life – Financial Samurai

Naughty corner: Active antics

Diving into data on the dividend alternative decumulation – Getting Minted

Buy and hold no more: the resurgence of active trading – Andresssen Horowitz

When investment trusts fire their managers – IT Investor

My ABC of investing [preceded by a brief portfolio review]Maynard Paton

Earnings estimates are flying higher for US companies – Dr. Ed’s Blog

A review of an environmentally-friendly active portfolio – DIY Investor UK

Coronavirus corner

Germany suspends AstraZeneca jab for under-60s on rare blood clots… – Sky

…is there a blood clot risk? – BBC

The Sudbury street where neighbours eat, dance and party together – BBC

Kindle book bargains

Don’t have a Kindle? Buy one – they’re great and save a ton of space!

The New Corner Office: How the Most Successful People Work From Home – Laura Vanderkam – £0.99 on Kindle

Business Adventures: Twelve Classic Tales from the World of Wall Street – John Brooks – £2.99 on Kindle

[Sorry: dearth of very low price money and investing options this week!]

Environmental factors

Sewage discharged into rivers in England 400,000 times in 2020 – BBC

India says net zero carbon targets are “pie in the sky”BBC

Off our beat

Message in a bottle – Indeedably

Mr Brightside: the hit that just won’t die – BBC

Mapping the world’s key maritime choke points [Graphic]Visual Capitalist

“I tried the iPhone app that makes you trip”Vice

This is the sign of a great thinker – Inc.

John Stuart Mill’s philosophy of equality – Farnam Street

And finally…

“If at eighty you’re not a cripple or an invalid, if you have your health, if you still enjoy a good walk, a good meal (with all the trimmings), if you can sleep without first taking a pill, if birds and flowers, mountains and sea still inspire you, you are a most fortunate individual and you should get down on your knees morning and night and thank the good Lord for his savin’ and keepin’ power. If you are young in years but already weary in spirit, already on the way to becoming an automaton, it may do you good to say to your boss — under your breath, of course — “Fuck you, Jack! You don’t own me!””
– Henry Miller, On Turning Eighty

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{ 53 comments… add one }
  • 1 Andrew April 1, 2021, 6:04 pm

    What is so galling is this is all about the enrichment of a very small amount of people….These stories make me want to turn into a socialist.

  • 2 Matthew April 1, 2021, 10:45 pm

    These graduates going into active fund managing are well paid because they have a lot of responsibility for many people’s hard earned savings – they sell the lie that they’d keep the money safer or grow it more (even though the buck stops with the investor), and fundamentally that deep trust from many people is more valuable in people’s minds than what the engineer or scientist etc can do, so they get paid for that. It amazes me though how banks who should really know better are perpetuating this and being active more than they have to be. Maybe the bank’s traders fear becoming irrelevant if everyone cottened on. I do notice though how different investing adverts advocate different strategies so it’s hard for a newbie to choose, but on the other hand maybe it proves to newbies that even we don’t know.

    I believe though that regular Joes/Joesephines are more likely to invest in the first place if there’s an active manager at the helm, and at least they (& financial advisors) are doing the punters a great service in introducing them to the world of investing – perfection is the enemy of good and getting started is what matters most. I however see it as more risky to have a human there who potentially might be trigger happy at the wrong time.

  • 3 britinkiwi April 1, 2021, 11:12 pm

    I imagine we all feel a little schadenfreude at stories like this which tends to prove the point that all humans have feet of clay and that expertise is a relative concept – and also that satisficing and risk avoidance human behaviours change if you incentivise risk taking and avoid accountability.

    From your inks – that graph of Zoom use is probably reflective of business use in NZ – although I’m using Zoom regularly – and not just for work daily – but to chat with the rest home where my father lives and to play D&D online with mates – both in the UK of course.

    Some changes in behaviour caused by the pandemic will continue, albeit at a lesser rate. After all Zoom was virtually unheard of a year ago….

  • 4 Fremantle April 2, 2021, 1:18 am

    Finance and banking facilitate engineering, research and development. Without the liquidity of markets, there would be no investors.

    There is little to be gained in the practice of envy. Carve your own good life out as best you can and don’t begrudge the fortune of others.

  • 5 Matt April 2, 2021, 8:30 am

    I thought of ‘Margin Call’ when reading about Archegos this week – in particular Jeremy Irons talking about making money by being first – ie offloading all the crap before anyone else realises it’s all gone wrong. Glad it wasn’t just me!

  • 6 xxd09 April 2, 2021, 9:44 am

    Rather like your recent Tesla article this reinforces passive investing yet again!
    We amateur small timers do however need constant supplies of stories like these to reinforce this fact and enable us to keep our noses to the grindstone of the boring life that is the passive ethos
    Moral-get your kicks elsewhere -and certainly not in the stockmarket!
    xxd09

  • 7 Jon April 2, 2021, 10:35 am

    ‘Margin Call’ is a terrific film.
    Makes a cracking double-bill with ‘The Big Short’.

  • 8 Naeclue April 2, 2021, 10:45 am

    It is surprising how frequently this sort of thing happens and 9 times out of 10 it is for the exact same reasons. leverage, shorting or both. Whoever nodded through the Archegos credit limit at CS and Nomura is likely to be feeling embarrassed, to say the least 🙂

    It is hard to understand the mentality of people like Hwang. He already had a few billion, so why did he feel the need to take such risks? Making billions more was hardly likely to improve his lifestyle. Did he do this because he felt inadequate in the company of other billionaires? Or maybe he has a billion safely tucked away in tracker funds and his wild trading was just an entertaining game? Let’s see how big we can make this before it goes pop?

    I guess we should be thankful that Archegos did not get 10 times bigger before it went pop.

    I don’t really recognise your view of a brain drain. Competition for the good jobs in science and engineering is intense. I moved out of science into finance and there was no shortage of well qualified applicants to fill my shoes. Part of the reason I moved into finance was the amount of money I was being offered to do something less difficult than I was already doing, but it was mostly because of the abundance of opportunities available in finance, and an abundance of jobs that did not require me to relocate. Finance appeared to offer more long term security.

    A couple of my kids are in biotechnology. For science and engineering, biotechnology jobs look reasonably well paid, but from what my kids tell me competition for jobs is still intense. I hope they can stay in the field though as in the long term I think they will find biotechnology to be far more satisfying than finance, even if less well remunerated.

  • 9 BerkshirePat April 2, 2021, 10:54 am

    Oddly enough, I have ‘Margin Call’ downloaded from Amazon Prime – I will watch it tonight if I remember before the beer kicks in…
    There’s a possible article there – decent films about finance/business/investing. Pretty short list probably.
    Margin Call
    The Big Short
    Rogue Trader, perhaps (well I thought it was OK)
    Wall Street
    Trading Places !
    Any more?
    Anyone remember the TV series ‘Capital City’ from about thirty years ago?
    Happy Easter anyway, have a good break.

  • 10 ZXSpectrum48k April 2, 2021, 11:48 am

    Schadenfreude expresses this well. You do have to remember though that these banks were exposed to Archegos primarily due to them wanting it’s prime brokerage business. They made a lot of money facilitating his transactions over multiple decades. That model is based on picking up enough pennies, while avoiding the steamroller. Prime broke enough clients, some inevitably blow-up.

    I’m not sure the brain drain into finance exists now. It’s more into internet tech. The issue is that tyope of tech is evolving into something equally useless. Working for Facebook, Google or Twitter is turning out to no better for society than working for Goldman Sachs.

    The issue is we often pay smart people very poorly in society to do what they should be doing. Towards the end of my PhD in quantum field theory (late 90s), I was faced with the decision to carry on in ivory tower academia or go into finance/tech. The two-year post-doc at Cambridge paid £12k, which would be followed by me trying to find another post-doc or two and then trying to get some sort of permanent position. Just a very precarious career. If it all went wrong, I could find myself aged 30 with no job.

    By comparison, the investment bank was going to pay me £30k salary and a £10k bonus. For a working class guy that was serious money in the late 90s. The next year they paid me £40k salary and £40k bonus (total £80k), the year after it was £80k salary and £100k bonus (total £180k). So just three years in I knew that as long as I didn’t screw up, I was never going to earn less than six figures again (and I haven’t) and I would likely make far far more. Just so little downside risk compared to the academic path.

  • 11 Tyro April 2, 2021, 3:10 pm

    @ Berkshire Pat: ‘Anyone remember the TV series ‘Capital City’ from about thirty years ago?’

    Yes! At the time I worked for the production company that made it and acquired some props at the end of its run – of which I still have a notepad with the fictional bank’s name on (Shane Longman). Happy days. I’ve certainly never drunk as much Bolly since.

  • 12 BerkshirePat April 2, 2021, 4:15 pm

    @Tyro – that’s pretty cool! Was that Euston Films (‘Sweeney’ etc) ?
    I have a collection of notepads from our corporate lawyers – always end up with a few when I visit.
    I use them on train journeys, to make me more look more successful and intelligent than I really am.

  • 13 Owl April 2, 2021, 4:22 pm

    @BerkshirePat
    My additions to your movie list:

    Working Girl, Other People’s Money, Barbarians at the Gate, Cash McCall, The Toast of New York.

    Also, I think I actually enjoyed the Wall Street sequel more than the original.

  • 14 Keith April 2, 2021, 4:22 pm

    If you haven’t read it, I recommend The Glass Hotel by Emily St John Mandel. It’s based in some ways on the Madoff scandal. I like a lot of Mandel’s novels, but this one has an explicit investment finance angle. Her Station Eleven is also worth reading if you’re interested in an apocalyptic pandemic scenario.

  • 15 Tyro April 2, 2021, 4:27 pm

    @Berkshire Pat: Euston Films, yes. On the topic of freebies, I rather like the branded cloth bags that Baillie Gifford gives out at investors’ events.

  • 16 Gentleman's+Family+Finances April 2, 2021, 8:00 pm

    On the topic of the brain drain; I studied engineering and have had a good 15 years in industry and my career has been productive, stimulating and well paid.
    I’ve maybe been lucky and engineering is not the best career path for many.
    But does the world really need anymore bankers?

  • 17 John Charity Spring April 2, 2021, 9:24 pm

    > Young graduates from the best universities

    In technology at least, perhaps you’ll be pleased to know first hand that banks have a bigger problem attracting and retaining graduates than ever before since 2008. Google et al are far sexier and match or exceed salaries. Yet the industry is hugely technologically dependent and that is only increasing in size/sophistication.

    > lamented this brain drain. Finance takes too many clever people away from science

    This reminds me of: “don’t judge a man until you’ve walked a mile in his shoes”

    A friend gained her PhD and also hugely skilled technically, to help enable research into statistics/datasets in ways not possible without large scale computing. She even co-authored a Nature paper this work.

    Where does she work now? Banking. Money is part, job security another (research funding is meagre and capricious at best) but a much bigger part was that the “real” scientists regard technology as a side show, and a threat to walled research gardens. A glass ceiling is hit because she’s not
    seen as a “serious” scientist in a traditional sense. In fact, the work was even revolutionary in certain ways of approach, collating and sharing heterogeneous data that otherwise sits in hundreds of universities untapped and is only possible with the internet and modern tools. Yet this particular scientific area still had it’s approaches rooted in the Victorian era of its foundation.

    Whatever you may think of banking, it certainly leaves it’s presumptions at door – whatever makes money works – I only wish other industries were more pragmatic in their approaches rather than dogmatic – and indeed isn’t that also part of the success/rise of Google et al (for better or worse)?

  • 18 JimJim April 3, 2021, 9:09 am

    @Gentleman’s+Family+Finances, Your link made my weekend. Great musings on a weird year. Thank you, it was well worth the time it took to read it.
    I think a night with Amazon Prime is due for Margin Call, but like the Ermine possibly is now from his post, I will be voyeuristic in my viewing on this as risk off is now my position as I creep nearly to my number.
    JimJim

  • 19 The Rhino April 3, 2021, 9:45 am

    Margin Call is on BBC IPlayer until Tuesday

  • 20 The Investor April 3, 2021, 12:14 pm

    @The Rhino – Really? Great spot. I would urge anyone who is interesting in finance/markets/crisis to watch this movie. Obviously it’s a drama not a documentary, but I believe it gets the gist across brilliantly and I’ve been told the same from those close to this stuff.

    @Andrew — I know what you mean. I still believe full-on socialism is a worse alternative, but it’s not a great look for capitalism. With that said I don’t really care (apart from the brain drain aspect) so long as the burning of billions is kept among themselves (compared to, say, the sub-prime collapse).

    @Matthew — I agree historically people have clearly preferred to see an active manager at the helm, though that is changing fast. (Passive funds very close to tipping over the 50% market in the US, albeit that is including ETFs). I disagree that everyday people are happy that bankers are paid millions because society thinks they are worth it. I believe they are paid millions because they are in very close proximity to large amounts of money, and it’s easier to shave some of that money off (not illicitly, I just mean via pay and bonuses) then if you’re in close proximity to, say, a mass spectrometer. Perhaps you’re right though when it comes specifically to hedge fund managers, though. All we need to do is look at hedge fund renumeration despite the vast majority of most hedge fund money lagging trivially constructed passive portfolios. It’s effectively constituting a tax on wealthy investors with egos or cognitive dissonance.

    @britinkiwi — Interesting. I have quite often found myself sitting through Zoom chats where people are speculating whether, for example, Glastonury is dead. And I’m eventually allowed to bore everybody by saying “Look at New Zealand”, where festivals continue et cetera. But doubtless some existing trends have been accelerated. Maybe being in lockdown for most of a year leaves deeper behavioural scars, too?

    @Fremantle — I would *very* happily take my chances in a world with 90% fewer people working in the upper brackets (say £80,000+) of finance compared to 90% fewer scientists and engineers. Even more so, a world with the same number of people working in finance (I don’t deny they have a useful role) but with say half their total renumeration somehow transported over to the science and engineering sectors. 🙂

    @Matt — That Jeremy Irons section is a magnificent climax!

    @Naeclue — I don’t think it’s that hard to understand, really? Unless they got their first £1 billion by creating a tech company or similar, most billionaires — especially in the finance sector — are enormously motivated by money. I think it’s fair to say it’s a truism. I can quite understand how someone with that mindset and $1 billion in the bank gets fed up with hearing about Ray Dalio or Jim Simmon’s multi-billions.

    @BerkshirePat — Don’t forget the Billions TV series, although that is really silly and I think in as much as it comes close to reality it’s more a pre-07/08 era.

    @ZXSpectrum48K — Yes, steamrollers and pennies jumped to my mind, too. I don’t blame anyone in your position for choosing the finance route. I just don’t think the decision should be so clear-cut, because I don’t think finance should be able to offer such salaries in terms of value-add etc. I guess the old-fashioned word for what I believe the finance sector engages in on a massive scale is rentier-ism. I don’t think it’s all “socially useless” as was put a few years ago. Returning to @Fremantle’s comment, I understand how modern financial plumbing, securitization, risk markets et cetera have contributed to higher productivity and growth. But then, so has modern sewage. 😉 It’s the massive pay I object to. (Not quite as much as I object to massive non-founder/shareholder executive pay, but close). But I intellectually understand the argument that if the market can pay this, society is demanding it. Perhaps that reflects society’s murky thinking though? Who knows. By the way, saw your reply re: articles. Maybe I’m going senile but pretty sure we had a quick exchange after one of your peerless contributions on hedging or similar 2-3 years ago. But quite understand the risk/reward! Also it would fly over most readers’ heads, and probably mine. (If you ever do want a home for all that existing writing though, post-retirement… 😉 )

    @Tyro – Haha, proximity again! 😉 Better than working on a film about subsistence farming from a perks perspecitve. :-0

    @Owl – Barbarians at the Gate is maybe worth a watch, but I was surprised how much better/deeper the book was when I read it. (Versus, say, The Big Short, where I think both are equally good.)

    @Keith — Hmm, will check that out. What a beautiful name she has.

    @GFF — Not the developed world, no. Maybe the developing world. 🙂

    @John Charity Spring — Interesting and fair comments. I don’t think bankers are evil, or the system is corrupt or nonsense or anything like that. I mostly just think they’re hugely over-paid, and (though not anything like as much as pre-08) people have this idea that they are truly brilliant financial minds. Normally it’s very easily broken down. (E.g. Private equity = stock picking + networking + massive leverage). Science does seem pretty backwards in some respects, though to your own point (walking in the shoes) I expect in some areas that’s to the good. (E.g. Being slower than the likes of me to accept the latest new idea that comes along…)

    @JimJim — Seriously, watch it. It’s an easy watch if you’re into this stuff anyway. Avoid spoilers, and notice how it escalates ‘up the building’ very artfully. (Hmm, maybe that was a spoiler. Don’t think so. More a viewing tip! 🙂 )

  • 21 Matthew April 3, 2021, 12:56 pm

    @TI – Well I suppose because passive is demonstrably difficult in practise, ie sitting on your hands, and all the difficult humility, anyone who actually gets there earns their lower fees, active managers save people from having to do those mental gymnastics – society cannot value things properly when it doesnt want to think in detail about what it’s valuing. Indeed active managers are next to a lot of money, that is why they occupy a very responsable role, albeit a role that would be better performed by an empty chair.

    Take the queen – she has some power, but doesn’t use it, and in not doing so she denys opportunity to a potential tyrant we might otherwise have, and is the best monarch you could have doing the job and earns the money

  • 22 The Investor April 3, 2021, 2:19 pm

    @Matthew — I don’t think it’s true that “passive is demonstrably difficult in practise”.

    For example, Vanguard has repeatedly come out with statistics showing that the overwhelming majority of its investors just sit on their hands during crashes like March 2020. From memory (out and about so can’t Google) far fewer than 1% went to cash during the crash, which means more than 99% didn’t.

    I wouldn’t say something that 99% of people can do in the sharpest crash for decades is difficult.

    Active management gets money (and mints money) because it has a better superficially attractive marketing pitch.

  • 23 Matthew April 3, 2021, 3:07 pm

    @Ti – Thats the followers of the church of bogle though, could we say a crash is a crash because selling happened elsewhere in the market – albeit maybe increased by margin calls that people had.

    I mean most of us, even if we have a passive core, still dabble somewhere, you have to ignore financial headlines – the whole reason people still hold bonds in earlier accumulation is because they struggle to stay the course, or don’t have total faith that markets do recover, or are hoping for a market timing rebalancing bonus.

    Just that a lot of logic goes into passivism that investors may not have yet fully derived.

  • 24 The Investor April 3, 2021, 3:42 pm

    Thats the followers of the church of bogle though,

    @Matthew — Vanguard has at least $5 trillion in passive assets under management. These aren’t “followers of the Church of Bogle”. They are very mainstream.

    You are basically finding different ways of saying “people don’t know any better, so they invest actively.”

    Which I don’t disagree with, but it is not the same as saying that the financial sector is worth the many, many billions it earns every year from its activities, and especially not that this or that six-to-seven figure earner is ‘worth’ that annual income. (Leaving aside the fact that active management is only a part of that picture.)

  • 25 Naeclue April 3, 2021, 4:05 pm

    One of the reasons for high pay in finance is that, for much of it, price does not come under pressure from competition. Does an investment bank lower its fees for some piece of corporate activity for fear of losing the business to a bank with lower fees? Do active fund managers lower fees in order to attract more money? OK sometimes they do, but it is not appear to be the norm. I worked in a financial consultancy and not once did we lose business because someone offered to do work for less money. Unlike say an engineering consultancy, I don’t ever recall being invited to bid in a competitive tender. That doesn’t mean we would not offer discounts, in fact we almost always did as part of a buttering up exercise, but we never tried to undercut a competitor and AFAIK competitors never tried to undercut us.

    If anything, offering to do a job for less than the going rate might well work against you. The attitude in the City was more one of “If they are charging that amount they must be really good” instead of “How an Earth can you justify that?”.

    I have never really understood why competition does not work as one might expect it to, especially as finance is all about money!

  • 26 Matthew April 3, 2021, 4:31 pm

    @TI – these six/seven figure salaries (let alone the job at all) are coming from people’s voluntary choice to not chase fees, which has to be for a reason – fundamentally the public could defund them if they wanted. I agree they don’t improve returns but they must be selling an idea (might be a lie but it makes customers happy enough to keep willingly pay them). Psychological hope, a feeling that their money is doing something tangible, falsely believing that they are safer, falsely believing that market timing is essential etc – might be naiive, but they’re paying for it.

    The random BS jargon they always write about their choices makes people believe their money is well managed – they are selling people hope, faith, etc – valuable things for people’s life savings, valued at x%.

    Maybe these are high £ figures because there are relatively few active managers sharing in that x%

  • 27 britinkiwi April 3, 2021, 8:50 pm

    @Investor – Kia ora! I can’t comment on the scars of protracted lockdown as I’ve been lucky enough to live in one of the nations who seem to have had a better handle on Covid 19 – although no-one knew that in March 2020 when we went in to full lockdown as a nation for several weeks. As a health care worker I can confirm that an awful lot of thinking and preparation went on in expectation of having many, many hospitalised cases in a nation with around 150 ICU beds… Even so our PM, St Jacinda, gets critiqued for her governments handling of the pandemic by the opposition party and commentators……

    There is hope – despite all the concerns expressed, negative outcomes such as suicide have not worsened in either country and the recent good weather in Britain shows the appetite for normalising life…

    We’ve just had our summer and our festival season is over but there were a fair number around the country showing, at least in NZ, that normality was largely restored. My last one was MarchFest, the craft beer event in Nelson.

    I’d expect that, given the high vaccine take up in the UK, that BAU should be high on the authorities’ agenda, although seeing the news about an Easter service being disrupted by the police is a head palm moment…

    Wishing all your readers a Happy Easter Sunday!

    E noho ra.

  • 28 Tom-Baker Dr Who April 4, 2021, 12:42 pm

    @ZXSpectrum48k (#10) – More than a decade and a half ago, I came to the same conclusion as you regarding an academic career versus a financial industry one. It took me much longer to give up on academia though: a PhD in quantum field theory, 3 postdoc positions, scores of peer-reviewed papers, and a published book. I can’t complain about the money but l do realise now that quant finance is not, and will never be, even a tenth as interesting to me as Physics.

  • 29 Matthew April 4, 2021, 1:10 pm

    @tombaker – I used to take an interest in physics, to try to understand the world and advance technology, but I wonder if we’re reaching limits on how small we can probe and how we could make a machine that could probe dimensions that we can’t measure ourselves to calibrate. I think we have to accept there will be things we have no way of knowing.

    Also if the sciences are largely rule based, that’s perfect ground for automation – otherwise you have humans starting from zero and relearning everything already known/reinventing the wheel over and over again just to catch up to where the frontier in physics actually is before they can begin to make progress. An AI could learn equations much easier, formulate new ones randomly, test them out/devise tests, etc

  • 30 EcoMiser April 4, 2021, 1:35 pm

    Thanks to The Rhino, I watched Margin Call on IPlayer last night. Very interesting. And scary. Yes, I did notice the escalation up the building, then the fall-out down the building.

  • 31 Tom-Baker Dr Who April 4, 2021, 1:54 pm

    @Matthew – Particle accelerators are indeed soon approaching a limit where soon they will have to be larger than the Earth and use more energy than the whole world consumes in an year to be able to probe any further into the secrets of Nature. But just a little bit more energy might be enough to reveal a whole new world as the discovery of the Higgs boson demonstrated. Also observational Cosmology is now extremely precise and offers another way to test theoretical predictions. We have now a brand new window into Nature: gravitational waves. In the past the only way to find out about faraway places in the universe was through light.

    I think Physics is about to go through another period of great discoveries and paradigm shift. There are some very interesting unsolved problems. Perhaps the greatest (where the theory is about 120 orders of magnitude wrong when compared to precise measurements back in 1998 that gave a Nobel prize to the experimentalists) is the Dark Energy or Cosmological constant problem (what Einstein called his greatest blunder).

    Anyway, I’d better stop now and go down for our Easter Sunday lunch before this becomes too long for a comment!

    Happy Easter!

  • 32 Al Cam April 4, 2021, 2:31 pm

    @Tom-Baker (#31):
    I agree.
    If what we know about really is only some 5% of what there really is – then it is hard to imagine why we would not be in for “another period of great discoveries and paradigm shift”.

  • 33 JimJim April 4, 2021, 5:26 pm

    Watched Margin Call last night, my favourite moment was the expressions of realisation on Zachery Quinto’s face when he figured it out. Priceless.
    JimJim

  • 34 Matthew April 4, 2021, 7:13 pm

    @TomBaker – can you envisage how we might possibly make use of what we might learn? I think of bosons as being too small to manipulate in a useful way, although I suppose you could find some way of transferring energy efficiently like what the electron was to electricity?

    Apart from knowing what Dark energy does to the movement if things through space, does knowing why it does it help? Is it plausable to manipulate dark energy to deflect an asteroid or assist space flight?

    I believe though that it’d be difficult and probably unnecessary to go outside our solar system – intelligent alien life would be simply too far away to meet, and controlling our own climate would be far easier than terraforming a new one – only asteroid impact I think really threatens us while our sun is in its current stage of life.

    I believe though that in the search for life we’re limiting ourselves too much looking for carbon/water based when you could have silicon/ammonia/hydrogen sulfide as substitutes. Also life does not require a solid planet and there are parts of Jupiter, saturn, etc that would be an appropriate temperature.

    But I do believe that bacteria from earth’s atmosphere would be floating off and contaminating other planets – I wouldn’t be surprised to find similar bacteria elsewhere within our solar system.

  • 35 Naeclue April 5, 2021, 10:46 am

    This comments section is turning into a ex scientist confession forum. I confess that I was working as a postdoc in solar physics before I sold out.

    @tombaker, you have overlooked another way of observing the universe – neutrinos. When I was working in the field one of the great mysteries was the lack of neutrinos coming from the Sun. The main theories to explain the issue were that the solar standard model was wrong, the particle physics Standard Model was wrong, or the rate of nuclear reactions going on had substantially reduced (a very worrying prospect). It was with some satisfaction when I heard that solar physicists were right all along and the problem was with the Standard Model – neutrinos had mass. A problem particle physicists are yet to resolve?

  • 36 Matthew April 5, 2021, 12:01 pm

    @Naclue – is there a practical use you can imagine for neutrinos or standard model particles, if they dont affect the chemistry?

  • 37 Naeclue April 5, 2021, 12:07 pm

    @Matthew, well from time to time people look into the possibility of detecting secret nuclear reactors from the neutrinos emitted. Personally I think it would be simpler and much cheaper to offer a $10m reward and political asylum to anyone leaking details of such reactors!

  • 38 Matthew April 5, 2021, 1:04 pm

    @Naeclue – nuclear reactions to release energy, or to observe stars (for some reason? – predicting solar flares maybe?), or simply to make more of a valuable element?

    If it’s to release energy, is it to produce less waste or easier to handle waste, or better yield? or simply a faster reaction? or less steps involved?

  • 39 Vanguardfan April 5, 2021, 5:02 pm

    Thanks for the heads up about Margin Call. Enjoyable but not a patch on Big Short, which I loved.
    Maybe I missed the point but the end seemed kind of unresolved and unsatisfying.
    And I couldn’t work out whether ‘Will Emerson’ was a Brit with a lousy US accent or an American trying to play a Brit…channelling Dick van Dyck anyway!

  • 40 The Investor April 5, 2021, 9:20 pm

    @Vanguardfan — Will Emerson is the great-ish Paul Bettany! To be fair he has a sort of professional mid-Atlantic accent in films, after many a Marvel (non) appearance.

    I liked the end. Isn’t the point that we know what happens next: the big crash, and then ultimately business as usual?

    Jeremy Irons (I forget the character’s name) eating his breakfast…. Sort of a neat and sober mirror to the iconic Matthew McConaugh humming breakfast in The Wolf of Wall Street:

    https://www.youtube.com/watch?v=Jmz7noVP0Sw

    The Big Short was really great, too, of course.

    Margin Call for me is a quieter, more stage-like movie. Anyway glad you made use of the reference.

  • 41 BBlimp April 5, 2021, 9:35 pm

    @Berkshire Pat… ‘Too Big to Fail’ was my favourite

  • 42 Financial Samurai April 6, 2021, 3:59 am

    Hi guys! I appreciate the highlight!

    Is the housing market in London as crazy as it is here in many parts of America now?

    It feels like we’ve got many years to run.

    Sam

  • 43 Naeclue April 6, 2021, 10:39 am

    @Matthew, neutrinos rarely interact with anything, which is why they are so hard to detect, so it is not feasible to use them to initiate nuclear reactions. They are potentially useful in gaining insight into what is happening where we cannot see, such as deep in the Sun, or a supernova as the core collapses, or inside nuclear reactors.

    Solar flares are electromagnetic phenomena rather than nuclear so no neutrinos are produced when they are initiated. Neutrinos are produced later as the accelerated protons collide with other particles in the solar and our atmosphere, but that is far too late for an early warning system.

  • 44 Tom-Baker Dr Who April 6, 2021, 11:04 am

    @Naeclue – Yes, I forgot to mention Neutrinos. Thanks, for bringing this up! I remember reading about the solution of the great puzzle of solar Neutrinos ages ago here: https://physicsworld.com/a/solar-neutrino-puzzle-is-solved/

    The Italian physicist Pontecorvo proposed Neutrino oscillations back in 1956 but it didn’t fit the Standard Model because they needed to have mass as you mentioned.

  • 45 Tom-Baker Dr Who April 6, 2021, 11:10 am

    @Matthew – I think we are a long way from ‘manipulating’ the Higgs in practical applications because its mass is so large and it takes a lot of energy to create one. There is another boson that we have been manipulating in practical applications for a long time now: the photon.

  • 46 Al Cam April 6, 2021, 11:47 am

    @Tom-Baker, @Matthew, et al
    One thing I have learned along the way is that nobody knows what the future will bring. IIRC, Prof Higgs was rather sceptical that “the boson named after me” would be found in his lifetime. As it happened he was wrong about that – but not about the Boson though – which he predicted some years previously, in 1964!

  • 47 Tom-Baker Dr Who April 6, 2021, 12:24 pm

    @Naeclue – Yes, couldn’t agree more!

  • 48 Tom-Baker Dr Who April 6, 2021, 12:28 pm

    Sorry I meant:
    @Al Cam – Yes, couldn’t agree more!

  • 49 Al Cam April 6, 2021, 1:18 pm

    @Tom-Baker (#48):
    The quote I used at #46 was from the horses mouth – for want of a better phrase.

  • 50 Learner April 6, 2021, 2:44 pm

    Slate Money podcast has been doing a series on finance-adjacent movies lately with some good guests. The episode about Margin Call posted today: https://www.stitcher.com/show/slate-money-with-felix-salmon

  • 51 Learner April 6, 2021, 2:53 pm

    @Sam it’s really something huh. Denver up 7% in a MONTH. I started looking in Jan, even made an offer, and realized soon after that I’m out of my league and won’t be buying this year. It’s a step change.

  • 52 Matthew April 6, 2021, 10:27 pm

    Appreciate that there may be something useful to be learned about nuclear reactions or maybe a potential future use, and that potentially there might be a lot to be gained, although there’s a lot of If’s involved.

    Blue skies science = a form of Venture capital
    (appropriate for public sector funding?)

    When society needs other more certain things provided/improved – healthcare advances, industry advances, homebuilding, computers, agriculture, financing, etc, can we afford at this possibly still early stage of civilisation to be dedicating precious resources to blue skies science? Like during the dark ages civilisation grew in stability before it was ready for technology – and although we could now focus on science, it’d be costly in resources at the early stage in the human story that we’re at. (Not even a million years old as a species!)

    Blue skies should be the preserve of the private sector, I believe, i.e. Musk, to determine the value what the likely return is… or if it must be public, the military if they think it’s relevant to safety. If another country develops something first, it’ll be early stages of the technology, we’d have time to improve upon it, or buy the companies that develop it.

  • 53 Naeclue April 13, 2021, 9:05 am

    More info on Hwang from Bloomberg. https://www.bloomberg.com/news/features/2021-04-08/how-bill-hwang-of-archegos-capital-lost-20-billion-in-two-days

    This is one where the more that is revealed, the wierder it gets.

    Maybe he thought he was doing God’s work. And the blow up happened because God works in mysterious ways?

    He was done for insider dealing, aka theft, but is a devout Christian. His mother’s attitude was hilarious.

    GS saw the insider dealing as a red flag, but subsequently changed their minds. Greed/risk balance finally tilting towards greed?

    5 times geared in a concentrated portfolio, possibly with a S&P 500 short. It really was just a matter of time before it failed.

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