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    • Rationality Is A Process, Not A Conclusion (Nuclear Weapons Edition)
      A lot of mistakes come from assuming rationality means “thinks the same way I do” rather than “reasons from premises I might not share.” Left than 1/1000 economists predicted the financial collapse, because they reasoned from assumptions like “the market is self-correcting” or “housing prices never go down.” (Sometimes both at the same time, which is rarely […]
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Wall Street + Stock Buy Backs => Cookies of the Apocalypse

Greed has consequences.  The definition of success also has consequences.  When people judge their success in life by how much money they are making instead of what they contribute to the well being of the society they live in, they can have unintended consequences for other people who they don’t even know in fields they couldn’t care less about.

Let’s follow this trail, shall we?

Matt Taibbi writes another scathing critique on the lack of character on Wall Street.  This is where the worldview is developed and the flawed value system starts.  In this little snippet about John Paulsen and his incredible haul of obscene gobs of cash, we are to feel sympathy for the pain he has suffered for all the gobs of cash he lost on bets that didn’t pan out last year:

Look, the financial services industry should be boring. It should be quaint. Let’s take the municipal debt business. For ages, it was a simple, dull, low-margin sort of industry, in which banks arranged municipal bond issues and made small but dependable profits as cities and towns financed improvements and construction projects.

That system worked seamlessly for decades, until people like Sherman’s interview subjects suddenly decided to make the business exciting. You know what happens when you make municipal debt exciting? Jefferson County, Alabama happens. Or, on a macro level, Greece happens.

When making a few points on mere bond issues stops being enough, and you have to cook up crazy swap schemes and indices to bet against those schemes, ingenious scams allowing politicians to borrow billions of dollars that they will never in a million years be able to pay back, you might end up getting a few parks, schools, and subways in New York.

But what you get everywhere else is a giant clusterfuck that costs the rest of us years and even more billions of tax dollars to remedy.

This is what the protests are all about – it’s anger that Wall Street has been profiting from an imaginary economy that leaves bankers overpaid, but creates damage everywhere else. Sherman doesn’t get this. He seems to subscribe to the well-worn straw-man position that protesters are simply upset that bankers and financiers make a lot of money. Take for example his view on John Paulson, the hedge fund titan who was involved in Goldman’s infamous Abacus deal:

In October, a thousand protesters stood outside John Paulson’s Upper East Side townhouse and offered the hedge-fund billionaire a mock $5 billion check, the amount he earned from his 2010 investments. Later that day, Paulson released a statement attacking the protesters and their movement …. The truth was, Paulson was furious that the protesters had singled him out. Last year, he lost billions of dollars on bad bets on gold and the banking sector. One of his funds posted a 52 percent loss. “The ironic thing is John lost a lot of money this year,” a person close to Paulson told me. “The fact that John got roped into this debate highlights their misunderstanding.”

Hey, asshole: nobody misunderstands anything about John Paulson. They’re not mad that he made billions the year before, and they’re not happy that he lost money this year. They’re mad that the way he made his money in previous years – which involved putting together a born-to-lose portfolio of toxic mortgage bonds and then using Goldman Sachs to dump them on a pair of European banks, who in turn had no idea that Paulson was betting against them.

Matt Taibbi is using harsh curse words.  How declasse.  The fundies react with shock and horror.  Is there no civility on the internet?  Paulsen is rich.  Surely this man deserves respect.

Moving on.

Derek Lowe at In the Pipeline wrote a rather longish post for him about the pharmaceutical companies buying back stock in what looks like a desperate attempt to push up the stock price and keep more for the executives.  Lovely.  And this is made easier by assuring investors that they have cracked down on research costs, by golly.  We’ll have none of that wasteful spending here:

He has some figures from our own industry: From 1997 to 2009 “Amgen did
repurchases equal to 99 percent of R&D expenditures, Pfizer 67 percent, Merck 62
percent, and Johnson & Johnson 57 percent.” It could be worse – companies in the IT sector have often managed to spend even more than their R&D budgets on repurchases, partly because they increased the number of shares outstanding so hugely during the dot-com boom years.

One complication with the market-manipulation view is that stock buybacks don’t correlate very well with total stock returns. If anything, the correlation is negative: companies (and sectors) that spend the most on repurchases have lower returns. Of course, there’s a correlation/causation problem here – perhaps those returns would have been even lower without the buybacks. But there’s clearly no slam-dunk financial case to be made for repurchases.

Except one: that they’re often the easiest and least controversial use of the money. Companies get criticized if they sit on cash reserves, and they get criticized for missing earnings-per-share numbers. Why not try to address both at the same time? And without having to actually think very hard about what to invest in? I think that Pfizer’s Ian Read is being truthful when he says things like this:

Pfizer declined to make an executive available to discuss its policy. But in a statement, the company said it “remains committed to returning capital to shareholders through share buybacks and dividend payments.”

As for the cut in research spending in February, Pfizer said it has “accelerated our research strategy and made important changes to concentrate our efforts to deliver the greatest medical and commercial impact.”

In a conference call with analysts this month, Pfizer’s chief executive, Ian C. Read, said his company would “continually look” for acquisitions that would increase revenue growth. But in deciding how to use the proceeds from recent asset sales, he said “the case to beat is share repurchase.”

And that, truly, is a shame.

Oh, well, it’s not like the executives are going to stick around to see what a shame it is.  As the following animation suggests, they will be sitting on a beach in the Cayman Islands ideating and leaving the company to hobble toward some finish line on its own:

{{catching breath, wiping eyes, clearing throat}}  Ahem, geek humor and all that.  Too funny, or it would be if so many of us “ancient ones” weren’t out of work.