Speaking truth to power

is this somehow a horrible anti-market sentiment?

Yes, because Obama means to undertake action to purposely shrink the sector to a size he is prefers. There's a difference between predicting that the sector will shrink (I think it will too - on its own) and using coercive government action to taking action to make it shrink.

It is disingenuous to claim hedge funds are not being bailed out

It is no more disingenuous than taxpayers' claiming that they aren't being bailed out of a worse crisis. Bailouts put a floor under the assets that some hedge funds held - but they also put a floor under the assets in your 401K. No hedge fund got TARP money. That's what Asness was talking about when he said Hedge Funds didn't get or ask for bailouts. Incidentally, despite much hand-wringing and grave warnings that Hedge Funds need to be regulated because they present so much systemic risk, they've been blowing up left and write with virtually no impact on the financial system. All of the risk and horror came from the most regulated section of the financial industry - the banks.

I believe Obama's comment was that he was frustrated hedge fund managers held out too long looking for a better deal than he was willing to offer?

That comment was pure political theater. although I fully sympathize with him - I too get very frustrated when people won't just bend to my will like a reed in the breeze. Chrysler is basically bankrupt. The Hedge Funds own senior debt. Senior debt is secured, thus in a bankruptcy Senior creditors are paid before unsecured creditors and unsecured creditors are paid out of the remainder after the secured creditors are paid. That's why Senior creditors are willing to accept a lower return on their loans. The UAW is an unsecured creditor. Obama's proposal effectively switches the order of the creditors by giving the UAW a 55% equity stake (a controlling stake, mind) in the restructured company while offering the senior creditors only 29 cents on the dollar. The senior creditors believed that the assets of the firm (which secure their loans) are worth much more than that and they will do better by rejecting the deal and going to to bankruptcy.

So, 29 cents may be all Obama is willing to offer, but Obama's deal is not the only option. Of course, the administration is now actually threatening the creditors, inducing one of them to cave to the deal. Unsurprisingly, the government is acting just like the mafia.

It is disingenuous to claim hedge funds are not being bailed out when the whole story is that they, the investors, were holding out for a better bailout deal for their investment. I believe Obama's comment was that he was frustrated hedge fund managers held out too long looking for a better deal than he was willing to offer? Am I alone in thinking hard negotiation is not a bad thing and that if a deal doesn't bring enough benefit to make it happen then it is better it didn't?

And as far as Obama's comments about wanting some people to diversify out of financial services, I thought he was just saying the industry has been in a bubble like tech in the late 90s so he is glad the bubble has burst and labor won't continue to be overallocated to financial services- is this somehow a horrible anti-market sentiment?

>>> "but if they give away their clients’ money to share in the “sacrifice”, they are stealing..."

And if they make decisions not to take a little money when zero money is imminent, that's also stealing.

BTW, Methinks,

If you hear of anyone in your circle of acquaintances that has a Primus that is in good condition, I might be in the market.

"I am ready for my “personalized” tax rate now."

That line is priceless, cause sure as God made little green apples he'sa gonna get one.

Those comments were exceptionally positive compared to most of the comments I read in other places. Check out the diatribes at Zero Hedge for a sampling of truly negative comments. They seem to be the majority opinion and I think we're cooked.

I commend you all for starving the troll.

Asness for president, but he'd better change that name.

I was shocked to read all the negative feedback he got. If that really represents the majority opinion in this country, it's all over.

The Reticulator asked: Obama said the financial sector needs to shrink? Wow. I didn't know he was that bad. When did he say this?

A few days ago. Here's a link to a summary.

coming from an industry that froze client withdrawls and forced them to watch as the managers continued to lose their money.

The reason for freezing withdrawals isto limit losses. When a fund is faced with large withdrawals, the manager may be faced with a situation where he creates more losses in the portfolio as he is forced to sell out of positions not judiciously but at any price - this is especially true for portfolios of less liquid assets or at a time of lower than usual liquidity. At that point, the fund manager has a fiduciary obligation to slow withdrawals in order to manage the portfolio in the best interests of all of his investors. The right to do so is written into the operating agreement of the fund.

All the hedge funds I know who needed to but did not freeze or slow withdrawals did so to create the illusion that they were doing better than they were, to the detriment of all of their investors. They have all liquidated since.

Hedge fund managers often don't have that much skin in the game themselves - save deferred compensation which is invested in the fund. But they always have a fiduciary duty to act in the best interests of their investors. Always.

Morgan, I'm not that much of an original thinker, so it's not a "methinks original". In fact, Veritas is getting at the same thing in the post above.

Broadly: investment bankers bring together parties who need capital with parties who have capital. Exchanges and market makers provide a secondary market for those investments so that investors can monetize their investments, reducing their risk for the investor, lowering the required return and thereby lowering the cost of capital for companies. Market makers on exchanges compete with each other and other market participants to provide bids and offers to lower transactions costs and price risk for those who wish to buy or sell a company's security. Those bids and offers carry vital information - the fair value of the security - which aids in price discovery and ensures that a buyer or seller transacts at or close to the fair value. Hedge funds pool capital to place competing bids and offers for the securities.

Venture capitalists and private equity funds provide a concentrated source of capital for start-up businesses.

Liquidity is the lifeblood of the market and the participants are the pathways by which capital flows from investors to producers in order to finance their production. This is why countries with underdeveloped capital markets will never have economic prosperity - lack of liquidity limits access to capital.

Skin in the game is a GOOD thing!

Alignment of interests!

Risk vs. reward!

Hedge fund managers need to keep their own wealth in their funds. When the fund loses, they lose along with their investors.

Many corporate structures today are misaligned, but hedge funds are nearly perfectly aligned.

Hedge fund billionaires have more "skin in the game" than folks like Muirgeo will ever acknowledge.

That is an almost oxymoronic thing to say. Of course they have skin in the game. That is how they are able to siphon off such vast sums each year for fun and profit. It's sick and you should know better. Obama is trying, in a minuscule way to put a damper on it. I think he'll fail because money talks and he's only half black. He wants to start by shutting down offshore tax havens. I think he'll fail at that, too. Yes, I think we are doomed. But I'm an optimist in thinking that if things get bad enough a new society will emerge from the ashes. If the Great Depression hadn't been so rudely interrupted by WWII we might have seen the necessary changes take place then. Unfortunately Keynes and FDR wanted to save capitalism, and Hitler had different ideas entirely.

This was a great response to Obama's criticisms and I'm glad to see it posted here. I've passed it on to friends, and its been submitted to Digg, so hopefully more people will be exposed to it!

He is correct, of course, but it is funny to hear it coming from an industry that froze client withdrawls and forced them to watch as the managers continued to lose their money.

Not all of them; just a bunch of them.

"...what financial people produce is a little understood product - liquidity."

Now that's a very interesting take, which I will happily spend some time chewing on. Is it a Methinks original?

Risk Management.

That is what financial services offer.

You can plan for retirement and not have to work your entire life.

You can protect yourself against depreciating currencies and assets.

You can leverage your own credit and buy things NOW, while paying for them LATER.

Everyday we are the beneficiaries of a fine tuned financial industry.

They are the ultimate risk takers.

Hedge fund billionaires have more "skin in the game" than folks like Muirgeo will ever acknowledge.

Their professional reputation and their own personal assets are on the line every day the market is open.

The returns from hedge funds are vital to non-profit foundations, universities, and pension funds just to name a few.

They're not called the financial services for nothing.

Obama said the financial sector needs to shrink? Wow. I didn't know he was that bad. When did he say this?

If he really and truly wants it to shrink, he could simplify the tax code so that not so much time and effort need be wasted learning how to deal with complicated regulations and "incentives." But that wouldn't mean we don't need a financial sector, just that its time would be better spent.

Obama is tapping into the sentiment oft expressed by George here that financial people don't do anything productive,

That's because what financial people produce is a little understood product - liquidity. Liquidity is like air . You can't touch it, feel it, see it or smell it. You can only feel its effects in other things. Without air you die. Without liquidity, cost of capital skyrockets along with risk and access to capital dries up like a leaf in autumn and so does prosperity.

Russ,

Thanks for posting that letter. I was hoping you would.

http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html

This link is correct one.

One idea I find interesting lately is Obama's theme that the financial sector needs to shrink. Obama has said recently that people with aptitude in mathematics should become scientists or computer programmers instead of flocking to Wall Street.

Obama is tapping into the sentiment oft expressed by George here that financial people don't do anything productive, making the obvious comparison to the C- student who gets a union job bolting bumpers on green cars that nobody wants to buy.

It's a hysterical premise. Seriously, if Obama could take all the useless financial workers and put them in unionized green jobs, those financial workers would easily find a way to gain some advantage that George can whine about in 5 years. Does anyone seriously think the outcome would be remotely egalitarian?

http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html

Friedman said it better 39 years ago. Many business ethics class start out with that essay then spend the better part of the semester trying to come up with a more humanistic definition of "social responsibility of business." In this decaying world of ours, I think it is still time well-spent because some people can only see a world of sex and dollars signs.

The male of the species is more guilty of this than the female.

Cut to the chase! Bravo!

Let's not be nice to greedy Wall Street types - string em up from the nearest lamp pole.

/muirgeo

Wow. He doesn't mince words, does he?