

Nicholas Taleb: The Great Bank Robbery  - yarapavan
http://www.project-syndicate.org/commentary/taleb1/English

======
Spyro7
Dr. Taleb's book, Black Swan, was a truly interesting treatment of long-tail
statistical events and how humans perceive said events. It is unfortunate to
see him indulging in so much hand waving in this article.

 _"For banks that have filings with the US Securities and Exchange Commission,
the sum stands at an astounding $2.2 trillion...... is directly transferred
from the American economy to the personal accounts of bank executives and
employees"_

I don't understand where this number is coming from. According to the data
from the 2007 Economic Census[1], the U.S. commercial banking sector employed
(approx) 1.6 million employes and compensated them with a total payroll of
(approx) 95.8 billion dollars. Total payroll for the finance and industry
industries is $502 billion for 6.2 million employees.

What is this $2.2 trillion that he is referring to? In his opening statement,
he makes it sound as if this amount is direct compensation, but the actual
numbers for the industry make that figure seem unlikely. (I am not an
accountant, but I seriously doubt that some type of compensation that doesn't
appear on the annual payroll is going to make up the bulk of that difference.)

 _"That $5 trillion dollars is not money invested in building roads, schools,
and other long-term projects"_

First of all, this $5 Trillion dollar number is a projection, and projections
need to be analyzed critically[2]. Second of all, this is wrong (as pointed
out by yummyfajitas elsewhere in this thread). So long as money is not being
(quite literally) stuffed into a mattress, it is doing something in the
economy. Now whether that something offers benefits over opportunity cost may
be a product of market failings and questionable regulations, but that can
hardly be blamed on the banking industry.

 _"It is (now) no secret that they have operated so far as large sophisticated
compensation schemes, masking probabilities of low-risk, high-impact \“Black
Swan\” events and benefiting from the free backstop of implicit public
guarantees."_

I think that it is disingenuous to paint the entire industry as being composed
of individuals out to cheat the system. I think that it makes more sense to
note the behavioral economics at work.

A disturbing number of financial institutions were making money from home
mortgage loans. Any financial industry not doing so would be left out of the
crowd. Regulations allowed for massive leveraged financial positions to be
taken in the market. Financial companies became more and more aggressive
(after all, the models say everything is fine, and if we don't play along
shareholders will question our financial performance). The bottom fell out and
everyone got clubbed (but some worse than others).

There is no great, malevolent force working in finance. The industry was
governed by (and possibly still is) some pretty lackluster regulations, but it
is a questionable premise to paint the entire industry as willfully
fraudulent.

 _"it also has provided secret loans of $1.2 trillion to banks."_

Activity by the Fed is not "secret" but rather it is a matter of public
recored: <http://www.federalreserve.gov/>

(Or, more specifically:
<http://www.federalreserve.gov/releases/h41/current/h41.htm> )

 _"We don’t believe that regulation is a panacea for this state of affairs.
The largest, most sophisticated banks have become expert at remaining one step
ahead of regulators"_

This is not really the case. It is more the case that the regulators are often
underpaid (relative to what they could make in the private banking industry)
and over-worked (due to staffing cuts). This creates an accelerated revolving
door between the public and private spheres. This revolving door makes it very
hard to get any good regulations out of our current institutions.

 _"A well-functioning market would produce outcomes that favor banks with the
right exposures, the right compensation schemes, the right risk-sharing, and
therefore the right corporate governance."_

A well-functioning market would favor the banks that offer the best risk-
return ratios. Now whether or not the measure of risk is correct will only be
obvious in hindsight, but market outcomes are a product of aggregate
information on a grand scale. Exposures, compensation schemes, risk-sharing...
These are not the kind of factors that are rewarded in a free-market (unless
his definition of well-functioning is some variation of central control).

If you want to institute a change in the incentives within the finance and
banking industry, just institute a very, very small transactions tax. This
would decrease the viability of trading for its own sake (make enough trades
fast enough, have a slightly more than random number of successes, and
profit).

It wouldn't fix everything, but if you are a critic of the current structure
of the industry, then a small transaction tax is the thing that is most likely
to move the industry further away from the temptation to function like a
glorified roulette wheel.

I'm not even going to address the problems with Dr. Taleb's proposed solution
to problems in the banking industry (last three paragraphs of the article). It
makes no sense.

[1] 2007 is the most recent data available. It is not the most up to date (the
banking sector is likely a bit smaller now), but it is worth using some actual
facts and figures. Direct access here (industry code 522110 for commercial
banking):
[http://factfinder.census.gov/servlet/DatasetMainPageServlet?...](http://factfinder.census.gov/servlet/DatasetMainPageServlet?_program=ECN&_tabId=ECN1&_submenuId=datasets_4&_lang=en&_ts=246366688395)

[2] <http://xkcd.com/605/>

~~~
gavanwoolery
Respectfully, I think you are overanalyzing something that is very simple.

1) Humans are very good at cheating the system. In fact, we are built to
cheat, and we have come up with amazing ways of cheating and scamming people
out of their money. To ignore this is to ignore hard facts that are right in
our face.

2) Most people are honest. But it only takes a few dishonest people to do a
lot of damage. And with the right amount of money, you can get away with
anything in this country.

3) Corruption is the most seductive activity you can engage in with your
clothes still on.

4) It goes beyond conspiracy at this point - we can literally see money
transferring hands. Is it not funny that almost everybody was against the
bailouts, but the govt. green flagged them regardless? Is it also not a bit
strange that every past Secretary of Treasury for the past few decades has
been affiliated with Goldman Sachs?

As for free markets and regulation:

Do you believe in evolution? I do. Evolution gets a LOT of things wrong in the
beginning, but in the end, it usually produces pretty ideal designs. Evolution
is what happens when you have an environment free of artificial contraints.

Likewise, I think that the best economy will be produced by many mistakes, and
learning from them. One thing I am pretty sure we will learn is that no
corruptible entity should ever control an economy, because corruption is
always the end result. (All hail our new robot overlords :D)

And I will just leave this here:
<http://en.wikipedia.org/wiki/Friedrich_von_Hayek> I'm sure you have probably
read up on this guy.

~~~
Spyro7
I appreciate your thoughtful reply. While I am making the transition to a web
developer at the moment, I have a graduate degree in Economics and I have
spent some time working in the investment industry (Main St, not Wall St). I
would just like to share an alternative viewpoint with you:

1) I wouldn't think of it as "cheating the system", but I would think of it as
rational self-interest. Given a set of constraints, people will optimize for
the best personal outcome.

2) People maximize their utility (utility is a measure of happiness). Whether
someone is honest or dishonest is nothing more than a preference input into
their utility maximization functions.

What this means is that if the punishment for breaking some law is exceeded by
the benefits (to the individual) of doing so, then that individual will break
the law. Think about how many people casually drive 5 to 10 miles over the
speed limit (or 20 to 30 down here in Texas).

With that said, whose dishonesty is responsible for the housing collapse:

* Were the homeowners dishonest for taking on loans they could not afford to pay back?

* Were the lenders and real estate agents dishonest for making the loans to the home owners?

* Were the finance guys responsible for thinking that risk could be mitigated using the tools of finance?

* Were the investors being dishonest for cheering on returns that were above market-average without considering the risk?

Painting a market with the brushes of corruption and dishonesty does very
little to advance an understanding of how the event happened and what can be
done to prevent it in the future.

4) Professionals with an understanding of the financial industry were
generally in favor of the bailouts. The government listened to the
professionals.

Goldman Sachs hires _a lot_ of economists and finance guys, and they hire the
people with the best resumes. One should hardly scream conspiracy if it turns
out that some of these "cream of the crop" individuals end up working in the
treasury. Statistically, the probability of it happening randomly is actually
quite high.

 _"Likewise, I think that the best economy will be produced by many mistakes,
and learning from them."_

I completely agree with this.

 _"One thing I am pretty sure we will learn is that no corruptible entity
should ever control an economy, because corruption is always the end result.
(All hail our new robot overlords :D)"_

There is no need for us to resort to robots. We simply have to understand that
people are self-interested and build a system that channels this self-interest
into outcomes that are efficient for society as a whole.

 _"And I will just leave this
here:<http://en.wikipedia.org/wiki/Friedrich_von_Hayek> I'm sure you have
probably read up on this guy."_

Hayek was an amazing logician, but the application of his theories to the
modern economy is unproductive. The questions that he asked have been answered
by modern economics in the 50 years that have passed since he asked them.

I consider myself an advocate for breaking down the wall that exists between
modern economics and people that would like to increase their understanding of
modern economics without being economists themselves. If you have anything
that you would like to ask me about anything that I wrote above (or any of
Hayek's specific points), then I would be happy to answer them (regardless of
the beating that my karma takes).

~~~
iand
"There is no need for us to resort to robots. We simply have to understand
that people are self-interested and build a system that channels this self-
interest into outcomes that are efficient for society as a whole."

Here's the difficulty that Hayek was pointing out in his book Road to Serfdom.
Who gets to decide what the right outcomes are and whether they are efficient?

~~~
Spyro7
_"Who gets to decide what the right outcomes are and whether they are
efficient?"_

Whether or not an outcome is "right" is subjective, and is more in the field
of law and philosophy than economics.

Whether or not an outcome is efficient for society does not need to be
determined as it can be measured. An outcome is efficient for society if it
makes at least one individual better off without leaving any other individuals
worse off. (This is Pareto efficiency).

Of course in the real world, there will almost always be winners and losers
with any policy change. The solution is thus to make sure that the total net
benefits of any policy change is positive.

The net benefits are the benefits (both implied and explicit) of a policy
minus both the costs of doing the policy and the costs of potential gains that
could have been had by pursuing alternative policies. Both the costs and the
benefits should be aggregates that include the costs and the benefits to all
parties affected by a policy.

One thing that I think is worth thinking about when you look at recent
developments in the markets is this. From the time period of roughly the 1950s
to roughly the 1980s this form of detailed cost-benefit analysis was popularly
employed by both governments and private companies. (I am not actually this
old, but I have heard this story multiple times from economists considerably
more seasoned than me).

Unfortunately, starting in the 1980s, a more expedient form of cost-benefit
analysis that focuses mostly on the immediate costs and benefits to the
organization conducting the analysis began to dominate. This type of analysis
was championed by the finance and accounting oriented economists that began to
spring up at around this time. (Disagreement over this and other issues led to
university economics departments around the nation dividing from business
departments and finding a new home - and less funding - with the liberal arts
and social sciences.)

It is expensive and time-consuming to conduct a thorough impact analysis, so I
can understand why the more academic approach would fade away in favor of
something more expedient. However, I think that a lot of the recent problems
we see in governance can be traced to this fast-food economic analysis:

* Lack of investment in infrastructure? - Well, this report on my desk says that it will be expensive to fix those roads and the ones we have now seem to be holding up just fine

* Internet providers want to throttle bandwidth based on its source? - Makes sense, according to this report on my desk providing bandwidth obviously costs money - why not charge for it?

* A tax on transactions? - Well, this report on my desk says that would make it more expensive to trade stocks - there's no way this could be beneficial.

While the right answers to many of these questions can be found either in
economic journals or by speaking with an independent consultant, policymakers
rarely have the enthusiasm for a topic to dive so deeply.

I hope that soul-searching due to the financial meltdown brings the old
approach back in favor. It is sorely missed.

------
Adam503
Here's one investment banker's first hand version of what investment banking
really has become...

"...My first job out of Cornell was on the trading floor at UBS. So when news
would hit the wire about an American company closing a domestic factory, I
felt a good deal of conflict as I watched the company’s stock price go up as a
result. Those sorts of factory closings had ruined my neighbourhood, my city,
and many of the people I’d grown up with. I was not alone in this feeling, but
there were not many of us, either. One of my British friends from the training
programme, who later became a currency trader, once told me: “I mean Christ,
mate, every time they close a factory in Wales the goddamn market goes up. The
whole system’s a little fucked, don’t you think?” And of course it was. The
question was how to deal with it.

The easiest thing was buy into the system, convince ourselves that there was
no other way to live. A few semesters worth of economics classes certainly
helped; the in-house economics classes taught by the bank helped even more.
The financial markets operate on the principle that, at our core, we’re all
basically shit: selfish, self-interested creatures. There’s a whole branch of
economics devoted to proving that if you help someone, say, run in front of a
speeding train to push another person out of the way, you are actually acting
out of self-interest, not altruism; that what most of us would consider
humankind’s cardinal virtues - love, honor, compassion - do not actually
exist.

The idea that we’re nothing more than selfish animals is an attractive
philosophy to a person pulling down a few million dollars a year. It is a
philosophy that negates guilt. The guilty feeling a normal person gets while
visiting a Third World country is the same feeling a senior investment banker
gets when they see a working class neighborhood in Birmingham or Philadelphia.
When your paycheck could cover the salaries of a few hundred nurses or
teachers, you need some explanation for why that’s okay. The only one that
really works is that life is a pure meritocracy. That whether rich or poor,
we’re all getting what we deserve.

The fact is, I became pretty good at making this argument myself. Until a
roommate of mine, a guy named Mark Brewin, asked me: “So is that really what
you want to be? A selfish animal?” “It’s not like we have a choice,” I said.
“No,” he said. “You always have a choice. It’s just easier to pretend that you
don’t.” Ouch. The strangest thing was, this thing I’d wanted for so long, this
chance to become wealthy, was causing me more internal conflict than anything
I’d ever done. I began writing a second novel, about a kid from the provinces
who comes to Wall Street and is both drawn in and horrified by the culture of
excess.

I understood it well. I put on 45 pounds in my first year at the bank, and, as
you might guess, it was not from eating McDonalds. Occasionally I ate stuff
like sushi, but mostly it was steak. We went to the good places like Sparks,
Peter Luger’s, and the Strip House. We tended to look down on chains like
Morton’s and Ruth’s Chris-they were for car dealers or stock brokers, not
traders. Regardless of where we ate, we ate in quantity. My standard strategy
was to order half a dozen appetisers, plus a steak and lobster, plus a few
desserts and much wine as I could drink, as long it was under a few hundred
dollars a bottle. Followed by a digestif, typically a 30-year-old port.
There’s not any way to justify this except to say I was trying to catch up to
my colleagues. We would treat those restaurants like Roman vomitoriums. And it
wasn’t the food so much as the wine. Being a junior employee, I couldn’t
really order bottles that cost more than a few hundred dollars, but the senior
guys could get nicer stuff - Opus One, Chateau Latour. As long as we were out
with a client, the bank paid. I remember being stunned the first time I saw a
dinner bill for ten grand. But that was just the beginning.

What it boiled down to was austerity for everyone else and rampant consumption
for ourselves. I never saw anyone literally set fire to money, but I did drink
most of a bottle of 1983 Margaux ($2,000)...."

[http://www.independent.co.uk/news/world/americas/american-
ex...](http://www.independent.co.uk/news/world/americas/american-excess--
a-wall-street-trader-tells-all-1674614.html)

~~~
Adam503
That's what we're cutting Social Security and Medicare for... so some Goldman-
Sachs or UBS investment banker can guzzle $1000 bottles of wine and vomit them
back up again.

------
sambeau
‎$5 Trillion is a lot of money even over 10 years.

It's 7 years and 35 days worth of ALL the U.S.A.'s collected taxes. It's
~$25,000 paid by each adult in the U.S.A.

It's $1M every day for the whole of humanity's 5,000,000 year existence.

Paid to the already wealthy shareholders and employees of a few banks…

~~~
iand
I think there might be an error in your maths :)

5M years times 365 days times $1M is 1825 trillion dollars or just under 2
quadrillion.

Actually I just realised that you probably meant to write "year" instead of
"day"

~~~
sambeau
oops… I stuck the numbers into Wolfram Alpha. Must have made a boo-boo. I'll
recheck and re-edit.

~~~
sambeau
No I won't. It won't let me edit it. My foolishness can live on for posterity.

------
cHalgan
My biggest concern about 2007 collapse is that we DID NOT reform financial
system after the collapse. Everything remains the same. The banks still
operate in same way as before 2007.

And everybody should be careful to bet on recovery: we have a financial system
which relies on public funds to be viable. We did not envolve.

We should do two things:

\- allow failed banks to fail (ok maybe some gov oversight but essentially
they should be broken up and sold in pieces)

\- the regulatory system must be reformed (reform credit rating agencies,
etc.)

~~~
Bricejm
Ratings required by the SEC, and the public, should not come from 'for profit'
companies (S&P, Moodys, Fitch)when investment banks are allowed to shop around
for the best rating. Blatant conflict of interest.

------
othermaciej
I was hoping this would be a quality piece of investigative journalism, but it
seems very heavy on editorial content and unsupported assertions; and very low
on reporting of facts. Just to give one example, it is not even explained
where the headline figure of $2.2 billion comes from.

I was very disappointed because I am sure Taleb has enough command of the
facts to write an article on this topic that is actually informative.

------
yummyfajitas
The article makes a very strange assertion:

 _That $5 trillion dollars is not money invested in building roads, schools,
and other long-term projects, but is directly transferred from the American
economy to the personal accounts of bank executives and employees._

What does the author believe the bank executives and employees do with that
money? Some of it is spent on consumption, but most bank executives consume a
far smaller portion of their income than anyone else. [1]

Whatever they don't consume is reinvested in the economy.

[1] If you disagree with this claim, then it logically follows that the best
form of Keynesian stimulus is tax cuts for bank executives.

~~~
jamieb
_Whatever they don't consume is reinvested in the economy._

You'd be forgiven for saying that because thats always been the case. Until
2009.

<http://research.stlouisfed.org/fred2/series/EXCRESNS>

The banks don't spend the money, they stuff it in the Fed. The bankers dont
spend the money (as you point out), they put it in bank, or in treasuries, or
they buy stock (and then the seller puts it in a bank, or in treasuries, or
they buy stock). Or they pay off some debt. Sometimes, rarely, the money is
invested in a small company that actually creates jobs. However, if I was rich
and didn't give a shit about my fellow citizens, I'd be investing in emerging
economies, not the USA. Any evidence bankers are like that?

New jobs come from small businesses. $5t would jump start a lot of small
businesses.

The irony is that if that $5t were invested in small businesses etc, the
bankers would probably be making just as much if not more.

~~~
waterlesscloud
What are Treasuries, exactly?

~~~
trevelyan
Strange circular reasoning. Why should taxpayers pay the banks to lend them
money at interest?

The Fed has been doing this as a backhanded way of recapitalizing the
financial sector (lending money at extremely low rates which banks then pour
into liquid but higher-paying investments like Treasuries along with more
speculative leveraged plays against the USD).

It isn't hard for players with privileged access to capital to print money in
this situation, and this is what makes the exorbitant compensation rankle: if
the unstated justification for the money pump is to recapitalize the financial
sector the constant hemorrhaging of assets on personnel compensation is
parasitic and abusive.

------
AJ007
Banks lend out more money than they have. They report to their account holders
that they have the money on hand. That is both fraud and a ponzi scheme.

This is the root of the entire problem. Until fractional reserve lending is
frowned upon internationally, as money laundering is, this problem will not
end.

Of course, there is no political will to end fractional reserve lending. Both
politicians and those who elect them demand economic growth today, and in as
much volume as possible. As we are seeing now, the results of a bust only
serves to aggregates this problem while during a boom the system appears to be
fully functional and healthy.

So build your companies for wealthy bankers.

------
caffeine5150
I share the authors' concerns however I'm not so sure that investment managers
can be relied upon to make the investment decisions they have described. Like
the large bank executives, investment managers earn large sums of money and, I
believe, are likely to identify with bank execs in that regard. People who
earn huge amounts of money tend to rationalize their compensation. They
believe they are worth it. In fact, Taleb makes this point in one of his books
when describing successful traders. In fact, most of the people in a position
alter the state of affairs in compensation disparity are the 'winners' in
terms of power and/or money and would seem unlikely to want to change things.
The remarkable thing is that America has lasted so long without the huge
income gulf that exists in other countries. Not sure what the answer is, but I
don't think it's from within the 'winners'.

------
omouse
I just realized something, back in 2001, the day before the terrorist attack
on the World Trade Centers, Donald Rumsfeld said that the Pentagon lost $2.3
trillion dollars.

It's funny how that same sum comes up again:

 _the elephant in the room is the amount of money paid to bankers over the
last five years. For banks that have filings with the US Securities and
Exchange Commission, the sum stands at an astounding $2.2 trillion_

The government seems to keep losing its money through malice and corruption.

~~~
jacques_chester
There's a difference between "lost" and "qualified audit".

------
oh_no_my_eyes
so.. what are you guys gonna do about it?

~~~
jberryman
Apparently our politicians are going to continue to get paid by bankers to
manufacture class warfare narratives that will get one half of the dying
American middle class screaming at the other, allowing further decimation of
organized labor by these same politicians, further enriching the bankers and
ultra rich, etc.

------
jvandonsel
I don't think Taleb has ever written a book or article that didn't use the
phrase "Black Swan".

------
gavanwoolery
I don't care if you are a Republican, Democrat, Libertarian, Totalitarian,
Socialist, Communist, or Anarchist. You should be angry. Very angry.

I don't even think it is a conspiracy at this point - there is so much in
plain sight.

Everyone with me:

I'M MAD AS HELL AND I'M NOT GOING TO TAKE IT ANYMORE! :)

[http://www.youtube.com/watch?v=q_qgVn-
Op7Q&feature=playe...](http://www.youtube.com/watch?v=q_qgVn-
Op7Q&feature=player_detailpage#t=126s)

------
retube
Oh give me a f __king break.

> That $5 trillion dollars is not money invested in building roads, schools,
> and other long-term projects, but is directly transferred from the American
> economy to the personal accounts of bank executives and employees.

This argument applies to any salary paid by any firm. Plus of course salaries
are spent and invested, which is the very definition of a successful economy.

> In other words, banks take risks, get paid for the upside, and then transfer
> the downside to shareholders, taxpayers, and even retirees.

Right. Just like any other public company.

This guy has made a career out of one single, simple premise, which through
fortuitous timing on his behalf, made him a lot of money.

It's also extremely trite to be dissing the banks like this when everything he
is is thanks to the banks. Doubly so as he profited from shorting the equity
markets.

Whilst I'm not saying that banks don't have a fair amount to answer for, his
arguments and assertions are bullshit, more characteristic of a hack
journalistic seeking to sensationalise and troll, not a "Professor of Risk
Engineering" at a top University. For some great comment on this and why
Washington have a lot to answer as well, see Alastair Heath's piece [1] in
today's City AM - a great journalist whose editorial column I read nearly
every day and someone who actually knows his stuff.

1\. [http://www.cityam.com/news-and-analysis/allister-
heath/how-w...](http://www.cityam.com/news-and-analysis/allister-heath/how-
washington-created-sub-prime)

~~~
gavanwoolery
I don't think you understand...

The government is funneling tax-payer money into privately-owned
organizations, like banks. Normal tax-payers are not reaping benefits from
this (such as roads, schools, etc). But even then, I suspect most of this
bailout money is going into golden parachutes for executives or bailing out
bad/risky investments.

The original logic behind these bailouts is that it would somehow keep the
economy more stable and "save" the companies - the latter part is a joke
though because most of the bailed-out companies now trade as junk stock
(Freddie Mac, Fannie Mae, etc).

~~~
retube
Are you seriously trying to tell me that the banks are the only industry which
either a) has been bailed out at some point or b) receives government
subsidies?

~~~
maxxxxx
It's probably the industry that gets the biggest bailouts, the fastest,
without any serious questioning and without having to make any changes. I
would have been OK with the 2008 bailouts if there had been any serious reform
of the banking sector. I think they should have reinstated some version of
Glass-Steagall.

