Notebook 28 July 2012: “It is our job to make money”

At one point in HBO’s version of Too Big To Fail, Jamie Dimon, sitting in a meeting with a dozen other bankers trying to come up with a plan to help Barclays buy Lehman. By the time he says this, Dimon’s had enough:

We’ve been here a long time. Let’s stop fucking around. Main Street wants Wall Street to pay. They think we’re overpaid assholes. There’s no politician who’s going to sign off on a bailout—why would you bailout people whose sole job is to make money? So. Let’s make this real simple. Hank thinks he can sell the good parts of Lehman to Barclays but someone has to take the real estate crap that’s weighing down the company.

I know, it’s only a movie, so who cares? Except I’ve heard the exact same sentiment in real life from businessmen. A leaflet dropped on Occupy Chicago protesters read:

We are Wall Street. It is our job to make money.

Excepting pure traders, this isn’t true at all and betrays a confusion of the roles of institutions, product providers and money, and eliminated a vital component in that group entirely, the consumer.

A pure trader doesn’t have a customer, only a counterparty, and the transaction both undertake can be weighed solely in monetary terms, because neither party is concerned with the underlying value. Let me repeat this: traders don’t give a damn about the underlying value of an holding as long as there’s no undiscovered landmine which might destroy the buyer’s ability to offload the instrument later—to another trader who cares just as little. The traded instrument could be a block of shares, an option or some kind of swap or derivative. This is what distinguishes trading from business. The work of traders is to make sure the portfolio of instruments they hold can be sold for profit. Their job is to make money, but even a trader needs to be mindful of selling while there’s still some upside. Any trader who correctly identifies a market top often enough is one to avoid trading with.

For the rest of the business world, and this includes all of banking outside of any kind of trading operation the bankers undertake isn’t making money. Money is only a measure. The business of business is creating value. Of course, value has neither a definition nor a measure, and this is the only reason I can think of why markets are useful. The measure of value, which changes constantly, is the pricing mechanism that some, and only some, markets provide.

What is an iPhone worth? Or a head of lettuce? Or a car? Money isn’t really a good measure of value. It’s usefulness comes from its convenience. It’s really just a number allowing some sort of quantification of value. Not money’s fault at all, because people aren’t capable of coming up with a clear definition of the worth of something. Documented many, many times, the best we can do is come up with relative value. The best we can come up with is to say x is worth ore than y. In stock markets, this is expressed in volatility and the Random Walk hypothesis.

Value (ie: utility) is the business of business. How do you know if a company creates value? You don’t. Not by looking at the price, anyways. The best evidence we have is market share, not price, and even the market share measure is hugely flawed. The iPhone example rests on a series of transactions with carriers, labor conditions in China, the weakness of competitors like RIM’s blackberry and the outcomes of legal actions like this.

Value is subjective and unmeasurable, yet it is the only business of business, the only job most of us have. It is the foundation of business, not just a marketing campaign or public relations exercise. We are in this mess today because people ignored this. People who continue to see their job as only to make money need to be sent to a re-education camp, and institutions whose model is based on trading need to be shoved (not eased, not pushed, but slammed) aside. Traders do not get a seat at the table. All sorts of policy positions, all sorts of public and private institutions exist due to this. Volcker moves trading away from banking’s core lending business. Glass-Steagall separated the two completely. TARP was enacted to save the business side of banking, which real businesses, especially those in retail, rely on daily—as well as everybody’s job and their ability to house, feed and clothe themselves and their families.

We are in a mess today because the trading ethic (and as we’ve seen, there’s no ethic whatsoever) infected the very heart of Main Street and that needs to be fixed. For this reason, my own preferred policy positions on banking tend to seem draconian, but I know business, and that Wall Street mindset needs to be eliminated from Main Street.

Customers are rightfully much, much more than the counterparty standing in front of a cashier.


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