Monday, October 27, 2008

The occasional political and financial rant

I can’t help but feel anger at the news that our tax bailout dollars are going to pay bonuses at these brokerage firms our government is bailing out:

http://www.time.com/time/business/article/0,8599,1853846,00.html?xid=site-cnn-partner

I understand and agree with the argument that people who were not involved in questionable activities should not be penalized. But I think employees fortunes should rise and fall with those of the employer. If the employer is too broke to pay bonuses, that’s unfortunate but it happens every day. The government doesn’t give me bonus money to hand out when my company fails to make it.

I think it’s wrong for taxpayer’s bailout money to be used to fund bonus pools and the general operation of these firms. I firmly believe that these companies should be showing substantial sacrifice if they are to receive our dollars. Where’s the evidence of that? It’s certainly nowhere in the news.

What is this going to do to the image of the brokerage industry? It’s time for these people to wake up! We are going to have a whole generation of potential investors walk away from Wall Street and never look back. Those people may get bonuses this year, but I’d wager a large percentage of those jobs are going to evaporate next year. Why pay for financial advice if this is where it leads?

For years I trusted advisers to manage my investments for a 1% fee, or a 2% fee. Where did it get me? It got me to exactly the same place I’d have been if I’d just bought a stock market index fund and paid no fees. Except I have less money, because I paid thousands in management fees for what turned out to be no advantage.

My cynical friend Eddie says, “These stockbrokers are like race track touts. They don’t know anything. They get up and say sell to one guy, and buy to another, and they have to be right half the time!” While I’m sure many stockbrokers would disagree with that statement, it does reflect reality as far as I can see.

The fact is, no one really knows what the market will do, short term. History says it rises long term, but the degree of rise in the future is unknowable. So what should a person wanting to invest in the market do? People will answer that question in many different ways, but I am sure of one thing . . . the value people will place on the advice of brokers is going to be seriously diminished. This is too big a mistake for this generation to forget. The move to online trading – where anyone can make a stock trade for twenty bucks – will increase, and broker jobs will evaporate.

What kind of jobs will that leave at the heart of the brokerage business? I suspect there will be growth in computer network jobs, and huge cuts in sales jobs as that function is replaced with automation or simply shrinks from lack of demand. This market crash will precipitate the biggest change ever in the brokerage employment picture. Where will those displaced people end up? Will Greenwich, CT become like the suburbs of Detroit when the car plants went to automation?

It’s actually hard to imagine what all those displaced white collar workers are going to do. The general banking industry can’t absorb them – they have their own crises. What other fields do those skills translate into? Certainly the sales people can get into other sales jobs, but how quickly, and with how much disruption? With issues like that the effects of this economic crisis will ripple for years.

But with all that, there are still some bright sides.

I can now park on Northampton’s Main Street on the weekend. Traffic is thinned to a more manageable level.

The same thing has happened in restaurants . . . I can get seated for lunch without the previous 30 minute wait.

All I need now is some money to spend. Luckily for me, the demand for car repair rises in a falling economy. So my savings may have evaporated, but there’s work for Robison Service. And I hope people continue to buy my books. With any luck, we will all pull through this.

This afternoon I am off to Boston to attend a review of this summer’s TMS studies. Check back later this week for more news on our ongoing research.

Woof!

9 comments:

Stephen Parrish said...

Long-term stock market forecasts are just as reliable as long-term weather forecasts.

As for bailout bonuses, I like what Michael Moore said: socialism for the rich.

jess said...

wow, and i thought i was cranky before reading this .. hey, john, can you give me a hand tying this noose?

i think it's important to note that there's much more to the brokerage houses than the retail side that you decry here. much of the machinery of these firms is focused on the institutional aspects of the business .. those that keep the markets liquid and accessible (so that when you trade for 20 bucks online you have a reliable counterparty), that allow you to trade those index funds you mention (by creating the instruments that make that kind of trading possible on a retail level and then by making markets in them by trading the underlying stocks), that provide their capital (at great risk) to facilitate trades for the investment firms (mutual funds, money managers, hegde funds) who trade for pension funds, school endowments, charitable trusts, millions of little old ladies on fixed incomes in aggregate - in short, those who can't trade for 20 bucks online without causing massive price disclocation due to their size. in short, without the nuts and bolts of the institutional side of the brokerage business, the retail side can't function.

warren buffet had a brilliant analogy recently when discussing the perception of the division between wall street and main street. he described our economy as a bathtub. he said, 'you can't have cold water on one end and hot water on the other. what you have instead is a tub of warm water.' as all those mid level traders and bankers and brokers lose their jobs (those like me), more and more of those restaurants (and stores and small businesses everywhere) will be empty, along with the government coffers that all of those folks have been filling with their taxes all these years. these are not the guys flying around in private jets. these are the guys who had made a decent life for their families who were living relatively comfortably and who were therefore able to keep main street in business.

John Elder Robison said...

You know, Jess, I did think of you and people like you as I wrote that, in my Aspergianish sense of reality way. But like I've said when we've talked, I just think about the statistical group. I can't guess about individuals. You sales reps and midrange workers are indeed the ones who keep the brokerage houses running. I know all the thousands of midrange workers feel they earned their bonuses based upon performance and I don’t think anyone would disagree that they work as hard as any other group of workers.

But is it right to fund their bonus pool with taxpayer money when the brokerages fail? That’s the question. Why should they be singled out for salvation just because their industry is in a state of collapse? No one funded homebuilding executives when their companies failed. I am keenly aware of my obligations to my employees, and there is no one to bail me out if I fail. Why are the employees of a brokerage firm entitled to taxpayer bailout when other firms simply fail, leaving their employees high and dry?

The larger question also remains. I think we agree that the brokerage industry is going to shrink. So what happens to those displaced people? In your response you talked about some of the things those workers in the middle do. I know theirs are necessary functions, but I see the stock markets facing the same thing that happened to the commodities markets when they automated. It takes fewer people with different skills to run an automated market. I think this will be the precipitating event that tips that balance.

And that’s really the biggest point . . . this may be the first time a group of highly paid white collar workers has faced widespread evaporation of jobs. How will society cope with that? Clearly people will see this very differently from auto workers displaced by robotics but at heart, it’s the same.

I see the same thing coming in other fields . . . radiologists in American hospitals replaced by radiologists overseas. We already have software outsourcing to India. It’s a big readjustment. What will Americans do for work in 10 years?

John Elder Robison said...

Reading that post, I realize I did not make another important point clear . . . I have no issue with brokerage houses paying workers bonuses. It’s their company and their business. At least, it was until a few weeks ago. My issue – and this is a big deal for me – it that I don’t think it’s fair to me to have an involuntary tax assessment to fund them. What has my government done for me?

Strange Behaviour said...

Nobody's mentioned mentioned the recent bailout of for the regular people. I'm talking about that big, fat ol' Economic Stimulus Check! Woo hoo- let me tell ya, that sucker changed my life. I invested it, conservatively I might add. I watched it go bye-bye.

The change is this: I'm now considering if I shoud start stuffing cash in my mattress and to buy silver and platinum and bury it in my floorboards? It sorta worked for my crash of '29-era grandparents after all! They told me to save. Not invest. I always wondered why their mattress was so lumpy. Their shrewd advice: tighten your belt. Use it up, wear it out, make it do, or do without!

Okay, that and Grandma learned how to feed her family with only 1 can of SPAM.

Kanani said...

The problem is that these big brokerages ceased thinking of themselves as businesses but as public services. What a crock.

I'm as mad as you are over the whole thing, and my portfolio is down by almost 1/3.

There was an article in the LA Times yesterday about two Wall Street Wives who were "making do" on their husband's salaries of $200k and $125k respectively. One was so overwrought that she called her husband several times a day to pester him over whether or not he knew if they'd be getting bonuses.

Sorry bub. But that $200k and that $125k is far and above what I raise my kids on and pay the mortgage. I have no desire to pay your bonuses against their future, but wow, I guess with this stinking bail out, we have.

Frankly, I think the big problem is that we have way too many people working in the financial market. And why? Because it was touted as the world's best thing. When in fact what we need to do is bring back the trades. We need people who can fix things and make a darned good living doing it.

So as to the lady who is bemoaning the fact that her hubby only makes $200k, maybe she oughta sign up for beauty college and learn to cut hair.

Kim Stagliano said...

I'd call this socialism for real. It's one thing to use the bailout money to keep the company running - meaning to pay salaries. To use it to pay bonuses (bonus from the Latin for "good") is another kettle of stinking fish altogether. Now, people in the industry will argue that the benefits packages typically meant that salary was about 40% of your yearly pay and bonus 60%. That still does not justify using taxpayers' money - especially in the heart of capitalism. It's grotesque.

kyra said...

right on with the political rant! we need more ranting!

Polly Kahl said...

I like it when you rant. I say rant away.