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A world without suckers

Michael Lewis notes that after fighting hard to make sure their proprietary-trading desks survived FinReg, the big banks are closing those desks down. That seems a bit odd, no? But fear not. "There are any number of explanations why Wall Street firms are all at once letting it be known they intend simply to walk away from what has been, until very recently, their single most lucrative line of work," writes Lewis. Here's my favorite:

A general malaise has come over the world of big-time financial risk taking. Everywhere you look, hedge funds are either closing or shedding employees or, most shockingly, cutting their fees. At the bottom of this new trend lies a deeper problem: a scarcity of suckers.

The proprietary trading business turns in part on one's ability to find the fool -- to find people willing to take the stupid side of the smart bets you are placing. One of the side effects of our seemingly endless financial crisis is to wash a lot of fools, many of them German, out of the game. It's as if a casino owner awakened one morning to find the tourists had all gone, and the only remaining patrons were pros counting cards.

Though I'm sorry to say that's not the one he finds most convincing.

By Ezra Klein  | October 20, 2010; 10:00 AM ET
Categories:  Financial Regulation  
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Comments

When people walked by Merrill Lynch in NYC they would comment about how all the yachts in the dock down the street were owned by the brokers. Then, as the old joke goes, "Funny how I don't see any yachts owned by their customers!"

Posted by: chrisgaun | October 20, 2010 10:18 AM | Report abuse

chrisgaun seems to have it right. Shorter version of Lewis's conclusion. it's getting hard to find suckers among the people you cold-call, so the investment banks are doing what the retail-heavy brokerages have known about for years and looking for suckers among people who already trust them.

Posted by: paul314 | October 20, 2010 10:22 AM | Report abuse

The past two years will probably be known as the Years of Barnum: there were suckers in the financial "industry" buying worthless securities, there were suckers investing in Internet businesses [Facebook, Twitter, etc.] which generate little to no non-investment revenue, there were suckers in academia professing that phrenology ["Obama's head is too big for his brain"] is a science and that human activity appreciably affects global climate, and there were suckers in the political market believing that foreign money goes to Republicans, that the PPACA would bend the health care cost curve downwards, etc.

The silver lining is that non-believers are beginning to stand up.

Posted by: rmgregory | October 20, 2010 12:07 PM | Report abuse

This is true, actually. I knew prop desk guys at Saxobank and they said the whole profit model is just based on taking the other side of retail traders.

Posted by: bdell555 | October 21, 2010 3:35 AM | Report abuse

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