Sound investment

[unixronin]

This article, which specifically discusses Goldman Sachs' defense of the charges against it, reveals what I consider to be a strong element of what's wrong with the financial markets of today:  It's considered OK to make bad investments, because you can always bet against them or find other ways of pushing the risk off onto someone else.

Wouldn't it be better to research potential investments more thoroughly and only invest in the ones that seem sound?

Of course, when you can't trust the bond ratings, how do you know?

Well, then perhaps it might be better to just stay away from financial derivatives altogether?

Comments

[merlinpendragon]

Here is an idea: make it illegal for corporations/banks to buy stocks they know will loose value. Make the penalty for banks knowingly investing in a bad stock equal to double the amount of money the stock looses.

[luke-jaywalker.livejournal.com]

Call me an idealist, but, see, I always had this weird notion that that was what investment banks *did.* Find sound investments. Divert money from unsound companies into sound ones.

Perhaps make decisions for various types of clients - "OK, you want high-risk high-return, we're going to put your money into specific biotech companies and venture capital funds that we have evaluated as having better risk/return ratios than other investments of that type."

I have some idea of what the MBA core curriculum involves. Most of the quantitative stuff, certainly at schools like Sloan and Harvard, consists of the math and methods required to make just that kind of evaluation.

That's what these people are supposed to be *paid* for. To be a sort of financial-evaluation gyroscope, diverting investment in general towards efficient, productive uses and away from inefficient wastes.

...sometimes, like I said, I can be very idealistic.

[randwolf.livejournal.com]

Goldman was never an investment bank like Morgan--their forte has always been dealmaking. See:
http://delong.typepad.com/sdj/2010/04/methinks-felix-salmon-confuses-goldman-sachs-with-jp-morgan-ca-1900.html

[unixronin.livejournal.com]

And I have no problem with that.

What I have a problem with is the invention of ever more complex, ever more abstract derivatives to construct house-of-cards financial structures whose whole purpose is to create imaginary money that exists only on paper, backed with imaginary money that exists only on paper, backed with imaginary money that exists only on paper, backed with imaginary money that exists only on paper, backed with ....

It's a recipe for disaster. As we've just seen. Especially when you add into this the idea that all financial risk can be defined and repackaged away and made Somebody Else's Problem. And ESPECIALLY when you add in the idea that the companies doing this are "too important to fail", and therefore can afford to lose their financial gambles because they know that WHEN, not if, it all goes pear-shaped, they'll be bailed out with other people's money.

[polaris93.livejournal.com]

That applies to just about everything we do today -- so many people are convinced that if they get stupid and hurt themselves or get killed by it, they or their estate can sue the bejayzus out of somebody, which will take care of everything. This negates everything we learned over four billion years in Evolution 101: actions do have consequences, and some of them are both extremely important and subject to great big Darwin Awards if we guess wrong. One more excellent reason for tort reform: at least in the long run, self-chlorination of the gene-pool is never a bad idea.

[rain-manpnw.livejournal.com]

I wonder ...

"... you can always bet against them ..."

By this I believe you are referring to short-selling, yes?

What if we just banned margin accounts entirely? Or allowed margins accounts for betting on the upside, but banned short-selling?

[unixronin.livejournal.com]

Short selling, credit default swaps, and I believe there's a couple of other instruments of this type too. (Though IANAIB, thank all that's good.)