Goldman’s Rules of Acquisition(calacanis.com)
calacanis.com
Goldman’s Rules of Acquisition
http://calacanis.com/2010/05/03/goldmans-rules-of-acquisition/
7 comments
A computer can basically do four things: Load a value from memory, store a value into memory, add two numbers together, branch to another list of instructions if a number is 0.
So, if you understand those operations, you understand everything about computing, right?
The problem with the financial world wasn't that they built on incomprehensible primitives. The problem was the incomprehensible structures they built with them. Just like programmers and programs. A basic understanding of the primitives is necessary but not sufficient in either case. And the programmers have an advantage that all the source code they are running is in one place; to understand the financial system technically would require access to the whole, which you can not have.
(If you want to quibble with that list of primitives: Fine, just pretend I used your list instead. It won't change my point.)
So, if you understand those operations, you understand everything about computing, right?
The problem with the financial world wasn't that they built on incomprehensible primitives. The problem was the incomprehensible structures they built with them. Just like programmers and programs. A basic understanding of the primitives is necessary but not sufficient in either case. And the programmers have an advantage that all the source code they are running is in one place; to understand the financial system technically would require access to the whole, which you can not have.
(If you want to quibble with that list of primitives: Fine, just pretend I used your list instead. It won't change my point.)
Nice one. For me the big takeaway from all of this has definitely been that when things get too complex, all sorts of things that we rely on for the system to function properly stop working.
In particular, the hiding of risk removes a lot of the correcting mechanisms from the system.
Nassim Nicholas Taleb's argument that we should ban complex financial instruments and keep things very simple and close to those primitives makes a lot of sense to me.
Whether it's in anyway practical or not, I have no idea.
In particular, the hiding of risk removes a lot of the correcting mechanisms from the system.
Nassim Nicholas Taleb's argument that we should ban complex financial instruments and keep things very simple and close to those primitives makes a lot of sense to me.
Whether it's in anyway practical or not, I have no idea.
And yet a lot of the interviews I've heard about the crisis indicate a lot of the people dealing in them and rating them did not understand them.
Telling people that they should try harder is unlikely to solve the problem in the future I think.
Telling people that they should try harder is unlikely to solve the problem in the future I think.
I think it was the risks they didn't understand, not how the instruments worked.
Perhaps, but I would have put understanding the risks within the scope of understanding the instruments.
Nobody really expected everyone to default on their homes at once. It was unprecedented.
Right, so they didn't really understand the risks involved.
It's not like thousands of people woke up one morning and independently, by coincidence, decided to default on their homes.
It's a long complex causal chain, with snow-balling effects and the like, that very few people had an appreciation for because the instruments involved were very complex and there were too many layers involved.
This lead to a very non-linear system where it was impossible to have visibility over the whole thing.
It's not like thousands of people woke up one morning and independently, by coincidence, decided to default on their homes.
It's a long complex causal chain, with snow-balling effects and the like, that very few people had an appreciation for because the instruments involved were very complex and there were too many layers involved.
This lead to a very non-linear system where it was impossible to have visibility over the whole thing.
> It's a long complex causal chain, with snow-balling effects and the like, that very few people had an appreciation for because the instruments involved were very complex and there were too many layers involved.
You write that like it's unusual. It's not - it's how life works.
> This lead to a very non-linear system where it was impossible to have visibility over the whole thing.
Of course it's impossible. Complete visibility is the exception, not the rule.
If you want safe and visibility, buy T-bills.
If you want more return, you have to play against someone who thinks that you're incorrect and is willing to pay if they're wrong.
You write that like it's unusual. It's not - it's how life works.
> This lead to a very non-linear system where it was impossible to have visibility over the whole thing.
Of course it's impossible. Complete visibility is the exception, not the rule.
If you want safe and visibility, buy T-bills.
If you want more return, you have to play against someone who thinks that you're incorrect and is willing to pay if they're wrong.
> You write that like it's unusual. It's not - it's how life works.
True. How about substantially more so than usual?
> If you want more return, you have to play against someone who thinks that you're incorrect and is willing to pay if they're wrong.
I suspect that doesn't describe what most of the participants in the game or those that were collateral damage thought they were doing.
If things were simpler, then perhaps the participants would actually understand what they are playing I guess.
Which means regulation, ratings and market forces that are intended to stop things getting out of hand might function somewhat better.
True. How about substantially more so than usual?
> If you want more return, you have to play against someone who thinks that you're incorrect and is willing to pay if they're wrong.
I suspect that doesn't describe what most of the participants in the game or those that were collateral damage thought they were doing.
If things were simpler, then perhaps the participants would actually understand what they are playing I guess.
Which means regulation, ratings and market forces that are intended to stop things getting out of hand might function somewhat better.
> I suspect that doesn't describe what most of the participants in the game
This case involves folks who wanted to make billion dollar bets on the housing market. It involves folks who had personal attention from Goldman Sachs. (In other words, we're not talking a Schwab IRA with a $10k balance.)
If these folks can't be held responsible for their investment decisions, who can?
> Which means regulation, ratings and market forces that are intended to stop things getting out of hand might function somewhat better.
You're assuming that complexity was relevant even though there wasn't even a correlation.
Note that no one is forcing folks to do complicated deals. Moreover, simple deals are available.
I trash Warren Buffet fairly often, but he's correct when he says that you shouldn't invest in something that you don't understand. Folks who violate that rule should lose their money.
This case involves folks who wanted to make billion dollar bets on the housing market. It involves folks who had personal attention from Goldman Sachs. (In other words, we're not talking a Schwab IRA with a $10k balance.)
If these folks can't be held responsible for their investment decisions, who can?
> Which means regulation, ratings and market forces that are intended to stop things getting out of hand might function somewhat better.
You're assuming that complexity was relevant even though there wasn't even a correlation.
Note that no one is forcing folks to do complicated deals. Moreover, simple deals are available.
I trash Warren Buffet fairly often, but he's correct when he says that you shouldn't invest in something that you don't understand. Folks who violate that rule should lose their money.
Actually, there were people warning about it. Peter Schiff was one of many.
Housing prices doubled in many areas, far outstripping any increase in the rent they could earn.
And, probably the most powerful indicator of all, people went out of their way to make sure others were holding the bag on a supposedly safe investment. They did not believe it was safe either.
Housing prices doubled in many areas, far outstripping any increase in the rent they could earn.
And, probably the most powerful indicator of all, people went out of their way to make sure others were holding the bag on a supposedly safe investment. They did not believe it was safe either.
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I agree. Maybe what journalists really mean is that they can't understand them after spending the five minutes they allocate to understanding every topic.
These instruments were created to shift risk to those most naive about the housing bubble collapse.
Those who saw it coming knew there was great profit in getting others to take on that risk. Just pay them enough and they'll take it on.
Congress can't acknowledge its own role in creating the bubble so they're trying to regulate how people took advantage of it.
But its not the market's exploitation of our government's stupid actions that need to be fixed. They will always find a way. Our government needs to stop being stupid.
These instruments were created to shift risk to those most naive about the housing bubble collapse.
Those who saw it coming knew there was great profit in getting others to take on that risk. Just pay them enough and they'll take it on.
Congress can't acknowledge its own role in creating the bubble so they're trying to regulate how people took advantage of it.
But its not the market's exploitation of our government's stupid actions that need to be fixed. They will always find a way. Our government needs to stop being stupid.
simon_ I fully agree.
This is also what drives me nuts about, for example, NPR's coverage of the crisis. I love the Planet Money team for instance but they invariable do their "gosh can you believe how nuts this financial stuff is" schtick during each episode of what is otherwise a decent show.
I'm tired of hearing a procession of Ira-Glass-cadence-imitating NPR ingenues with gee-golly-wow attitudes interviewing financial pros.
Journalists serve as proxies for the reader/viewer/listener. When they do the "this finance stuff is just crazy" routine they imply that we shouldn't have been expected to understand and follow the finance industry in the first place. That implicit expectation of ignorance is the media equivalent of "math is hard".
We need to raise expectations of education and comprehension. It's entirely possible to understand this stuff in high school. We should be teaching it in every public school. Of course that would make it harder to get away with stuff. Not surprising then, that we don't teach it in schools today.
This is also what drives me nuts about, for example, NPR's coverage of the crisis. I love the Planet Money team for instance but they invariable do their "gosh can you believe how nuts this financial stuff is" schtick during each episode of what is otherwise a decent show.
I'm tired of hearing a procession of Ira-Glass-cadence-imitating NPR ingenues with gee-golly-wow attitudes interviewing financial pros.
Journalists serve as proxies for the reader/viewer/listener. When they do the "this finance stuff is just crazy" routine they imply that we shouldn't have been expected to understand and follow the finance industry in the first place. That implicit expectation of ignorance is the media equivalent of "math is hard".
We need to raise expectations of education and comprehension. It's entirely possible to understand this stuff in high school. We should be teaching it in every public school. Of course that would make it harder to get away with stuff. Not surprising then, that we don't teach it in schools today.
As another article recently linked from HN pointed out, even if you can get a basic understanding of CDOs and credit default swaps in a few hours, if you went to actually invest in one of the things, the legal documents defining your actual relationship with your counterparty were hundreds of pages long and filled with jargon.
Warren Buffet has said he doesn't understand CDOs. If he doesn't understand them, I think most people can be forgiven for not understanding them.
> Warren Buffet has said he doesn't understand CDOs.
Buffet has also said that he doesn't understand tech companies or computers.
Buffet is always playing angles. When you can't spot the angle, he's probably playing you.
Buffet has also said that he doesn't understand tech companies or computers.
Buffet is always playing angles. When you can't spot the angle, he's probably playing you.
This comes in handy for regular folks http://www.crisisofcredit.com/
I'm not a big fan of GS, or the current finance setup. That being said:
"These bastards are reveling in their financial mischievousness – they’re enjoying explaining exactly how they fucked us."
If you go up against people who are smarter than you, and greedier than you, and who know more than you, and you trust them not to fuck you, they will fuck you.
That's capitalism.
"These bastards are reveling in their financial mischievousness – they’re enjoying explaining exactly how they fucked us."
If you go up against people who are smarter than you, and greedier than you, and who know more than you, and you trust them not to fuck you, they will fuck you.
That's capitalism.
However, that doesn't make it right for them to fuck you. That's ethics.
> However, that doesn't make it right for them to fuck you. That's ethics.
The folks who lost were planning to keep their profits. They thought that they knew better than the other side of the deal. (And yes, there's always another side.)
You can't con an honest man.
The folks who lost were planning to keep their profits. They thought that they knew better than the other side of the deal. (And yes, there's always another side.)
You can't con an honest man.
It feels like Wall Street's moral benchmark has fallen from Gordon Gecko's credo, “greed is good” to "well, it’s not illegal."
Well said.
Well said.
Unfortunately like many others Jason is mis-informed about what was really behind this crisis. Let's not forget that the Federal Reserve has been maintaining exceptionally low interest rates for much of the last 10 years, with a few exceptions, and that both previous presidents cheered the rapid increase in home ownership rates seen in the early parts of the new millennium.
Don't expect things to change any time soon. The problem is systemic, on a global level. This is not just GS; they only happen to play the market better than most.
Banks have an incentive to take on greater levels of risk in order to attract deposits (which are a highly liquid, short-term source of capital); hence, investors must find a way to out-do the bank returns in order to justify their existence.
People can point to specific flaws within the system (of which there are many), but we live in a global economy with many banks competing for profits. Given that the possibility of eliminating greed is near zero, this really is a catch-22.
Global regulation (see the Basel Accords) would result in significantly diminished economic growth, but is the only viable "solution" (you can begin to see how Marx justified communism).
Result: the global banking system tends not to incentivise long-term investment, which then leads to asset bubbles. While we can not prevent bubbles all together, regulatory regimes can help to make them less frequent.
Banks have an incentive to take on greater levels of risk in order to attract deposits (which are a highly liquid, short-term source of capital); hence, investors must find a way to out-do the bank returns in order to justify their existence.
People can point to specific flaws within the system (of which there are many), but we live in a global economy with many banks competing for profits. Given that the possibility of eliminating greed is near zero, this really is a catch-22.
Global regulation (see the Basel Accords) would result in significantly diminished economic growth, but is the only viable "solution" (you can begin to see how Marx justified communism).
Result: the global banking system tends not to incentivise long-term investment, which then leads to asset bubbles. While we can not prevent bubbles all together, regulatory regimes can help to make them less frequent.
Has Calacanis ever written .. anything that didn't mention that he's wealthy enough to drive a Tesla?
An intelligent person willing to spend a few hours would have no trouble gaining a basic understanding of CDOs, credit default swaps, and the like.
There's no excuse for that kind of thing in mainstream journalism (where you often see it), and I'm kind of surprised that you hear it from Jason.