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Here’s the coverage from Business Insider.

Here’s the letter (also posted on Naked Capitalism):

Dear Mr. Pandit,

Last October, in an interview with Fortune Magazine, you extended an invitation to Occupy Wall Street for a face-to-face meeting. The Alternative Banking Group, an official working group of Occupy Wall Street, hereby accepts.

As CEO of Citigroup, you recently announced “a new Citi.” You said that you are now “working hard to create a culture of responsible finance.” Our mission as the Alternative Banking Group is exactly the same. We look forward to a fruitful dialogue.

Since this conversation is of importance to the general public, we will have a small camera crew with us to document it. The video will be shared on the websiteoccupy.com, an emerging media platform for the Occupy movement.

Please respond to this email at your earliest convenience to schedule a time and place.

Sincerely,
Cathy O’Neil
Facilitator
The Alternative Banking Group
Occupy Wall Street

Please comment with questions we can ask Vikram if he accepts our offer.

How cool is this?

Just in case you don’t know why they’re protesting, read this Bloomberg article.

If you look at this list of the 20 biggest donors of the 2012 election, and you scroll down to number 20, you’ll find out stuff about Robert Mercer:

Robert Mercer is co-CEO of the $15 billion hedge fund company Renaissance Technologies. In 2009, according to the New York Daily News, he accused a builder of overcharging him $2 million for a construction project in his mansion—a “museum-quality” model train display “about half the size of a basketball court.” During the 2010 midterms, Mercer was outed as the funder behind $300,000 worth of attack ads targeting Rep. Peter DeFazio (D-Ore.). In the 2012 election cycle, he and his wife Diana have given $150,000 to the Republican National Lawyers Association and $100,000 to the free-market super-PAC Club for Growth Action.
Total giving for 2012 race: $384,100
• Giving to outside-spending groups: $260,000
• Giving to candidates and parties: $124,100

First, if I’m the model train set guy from above, I overcharge Mercer $2M and hope that he’s too embarrassed to sue me. And I am wrong.

Second, let’s look a bit more into the attack ads against DeFazio. Why is he spending so much time to work against this guy? Oh maybe this explains it. DeFazio was trying to impose a small transaction tax to curb high frequency trading, and Renaissance Technology, where Mercer works, makes their money through high frequency trading on the futures exchanges:

Capitol Hill Democrats introduced legislation today that would impose a tax on financial transactions in order to curb high-frequency trading and force Wall Street to contribute a bigger share to the federal budget.

A measure written by Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Ore., would place a 0.03% levy on financial trading in stocks and bonds at their market value. It also would cover derivative contracts, options, puts, forward contracts and swaps at their purchase price.

So this is how politics works. As Sarkozy mentioned in this Bloomberg article where he was discussing imposing a similar transaction tax in France:

“If France waits for others to tax finance, then finance will never be taxed,” Sarkozy said today in a speech in the eastern French city of Mulhouse.

It seems like the Harkin/DeFazio transaction tax bill is still alive, for now. What’s so worrisome about it? To find out I registered to read this article from Investment News (registration is free), which starts out quite nicely:

Hark: Beware of Harkin tax plan

Investors, beware of the financial transactions tax proposed by Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Ore. The tax may appear to have no chance of adoption at present, with the Republicans in control of the House and in position to block many proposals in the Senate, but the situation could change after the 2012 elections.

If Barack Obama retains the presidency and the Democrats regain control of both houses of Congress, we could see a tax on securities trades, especially if the passions evidenced by the Occupy Wall Street demonstrations remain high.

Woohoo! I love it when people are afraid of Occupy Wall Street, especially when they think they are only talking to their insider friends. After explaining the scope of the tax (again, 3 cents on 100 dollars), the article goes on:

In a breathtaking display of economic ignorance, Mr. Harkin declared: “This measure is not likely to impact the decision to engage in productive economic activity. There’s no question that Wall Street can easily bear this modest tax.”

Does Mr. Harkin not realize that customers, not Wall Street, would pay the tax? As opponents of the proposal argue, the proposed levy — effectively, a sales tax — would increase the cost of investing and be passed on to the ultimate customer, not absorbed by the brokerage firms, hedge funds and other professional traders at whom it is nominally aimed.

In effect, it also is a tax on liquidity. As anyone who has studied economics knows, when you tax something, you get less of it, so the result would be less liquid markets and more-costly transactions.

The article then goes on to warn that such a tax would move business offshore:

Finally, a transactions tax might drive trading and investing offshore to financial centers, such as Singapore or Dubai, that don’t impose such taxes. Academic research suggests that after the imposition of a transactions tax, market volatility would rise, while trading volume —and with it, liquidity — declined.

Just in case you’re not sufficiently worried yet, the article makes some further scary suggestions, which bizarrely allows for the fact that the current plan is benign:

Other dangers regarding the transactions tax proposal are that the low initial tax rate, 0.03%, might be absorbed by investors without too much pain, leading it to be raised quickly to a more burdensome and damaging rate.

That is what happened with the income tax in the U.S., and, more recently, with the value-added tax throughout Europe.

Another danger is that a transactions tax could be extended quickly to other financial transactions, including credit and debit card transactions, checks and bill payments. These likely would be even more damaging to economic activity.

The financial services industry should continue to resist the financial transactions tax, even at the proposed low rate. Once the camel’s nose is in the tent, the whole camel soon follows.

I asked a quant friend of mine what he thought of this article, and he said the following:

I’m personally not a huge fan of transaction taxes because I guess I feel trades should be encouraged (people should, for example, be able to have an S&P500 account instead of a checking account, where you sell units of S&P each time you buy some milk) and in general tight spreads means more actionable information (in the sense of knowing whether a bank is solvent for example, or allocating resources to build a new power plant). In addition, they are often avoided at some additional cost to investors. In the UK, they have a stamp tax on equities, and as a result only a few people trade equities, and almost all funds trade “swaps” with some additional arb/copmlexity added to the system as a result.

That said, the doomsaying in the article is definitely overboard. It would certainly wipe out a lot of HF trading, which is of limited value to society (I think HF does make for better pricing, but the resources put into it might not match the societal benefit of the slightly more accurate prices).

This would cause some trading to go offshore. In the UK for example, various regulations were (a small) part of the reason ManU decided to list in Singapore. The loss in capital gain taxes are from a bunch of sources, but one of the major ones is sure to be deferred sales, meaning the taxes would just be paid later.

It does make some sort of intuitive sense to match the costs associated with overseeing transactions paid for by the transactions though. If you feel that financial transactions are burdensome and need more regulation, the people who are causing that burden should pay. Whether that should be via a transaction tax or by a profit tax or by an exchange/regulatory fee, I don’t know.

(You know my bias, that it’s really the hidden transactions that are the main issue, and so I think if anything you should be taking financial intermediaries for having illiquid/non-tradable assets on their books rather than encouraging them to have more of it).

I’m left kind of rooting for the transaction tax, personally, and it’s not just because I want to see Mercer miserable; it can be seen as a tax that most people will not notice but people who make enormous number of bets will be affected by. On the one hand, this means it’s a truly progressive tax, and on the other hand, it means you will actually need to think a trade is worthwhile before making it.

I’ve never understood politics, partly because they’re complicated, partly because the people who do understand politics are so heavily involved they don’t know how to contextualize for people like me. I’ve come to think of it as a lot like finance, where there’s power to be had by withholding information, and part of that power is wielded simply by inventing a new vocabulary that makes people on the outside feel tired and hopeless. You really need a tour guide, a translator, to walk you through stuff to achieve a decent level of understanding.

I now consider Matt Stoller my personal translator. Matt regularly contributes to Naked Capitalism, my go-to blog for informed, vitriolic insights into the corrupt world of finance. His recent post on Naked Capitalism concerning Ron Paul and liberals beautifully explains how confused modern liberals are when confronted by someone like Ron Paul, who is both unattractive and on their side for a number of reasons. I confess that I’ve been that confused liberal myself at many an #OWS Alternative Banking Working Group meeting, when the Ron Paul fans come and talk about Fed transparency.

But Matt doesn’t just tell a good story, although he does that. He also give you insight into the process of politics. He peppers his story with helpful, nerdy explanations like this:

An old Congressional hand once told me, and then drilled into my head, that every Congressional office is motivated by three overlapping forces – policy, politics, and procedure. And this is true as far as it goes. An obscure redistricting of two Democrats into one district that will take place in three years could be the motivating horse-trade in a decision about whether an important amendment makes it to the floor, or a possible opening of a highly coveted committee slot on Appropriations due to a retirement might cause a policy breach among leadership. Depending on committee rules, a Sub-Committee chairman might have to get permission from a ranking member or Committee Chairman to issue a subpoena, sometimes he might not, and sometimes he doesn’t even have to tell his political opposition about it. Congress is endlessly complex, because complexity can be a useful tool in wielding power without scrutiny. And every office has a different informal matrix, so you have to approach each of them differently.

Another recent Stoller post that really blew my mind was How the Federal Reserve Fights, which explained Matt’s experiences as a Senior Policy Advisor to Alan Grayson, a congressman on the Financial Services Committee in 2009-2011. Grayson teamed up with Ron Paul to force more transparency at the Fed. It’s an awesome story, but my favorite part, because I’m such a nerd and I love my nerd heroes, is the following:

When it gets down to crunch time, as a staffer going up against a big force of lots of lawyers, you get really tired and cut corners. One obstacle in legislating is that it is really hard to tell what bills do, because they have multiple provisions like “In Section 203, delete “do” and replace with “shall”. You have to constantly reference pieces of the code and compare changes, which gets confusing. It’s like doing “track changes”, but on paper and with multiple versions. This is a problem software could easily solve and I’ve heard that agencies and (probably the Fed) have such software. But I didn’t. So the Fed thought we would do nothing more than cursory reading of Watt’s amendment, and rely on their validators who told us the amendment would increase transparency. And this is where Grayson showed legislative genius. We were exhausted, but he got all the difference pieces of the law, and spent a few hours deciphering exactly what this amendment meant. And he figured out that not only did the amendment not open up the Fed facilities to independent inspection, it actually increased the secrecy of the Fed. If you want the gory details, here’s Grayson’s argument during the markup.

I’m kind of wishing Matt Stoller would write a book about “How Politics Works,” but then again does anybody read books anymore? Is it better for him to just continue to write timely blog posts? I’ll take what I can get.

When people ask me why the financial system is so complicated, I always say the same thing: because it benefits the insiders of the financial system to make it that way. The more complicated and opaque something is, the more opportunities to extract fees and withhold information. Or rather, to withhold information in order to extract fees.

In some sense you can think of the financial system as a huge “information loss” system, where people get paid based on how much more information they know than you do. Incidentally, this theory flies in the face of most economic assumptions of transparency, and explains the origin of the phrase “dumb money.” And it’s not my idea, it’s kind of an elemental fact for insiders; I’m bringing it up because I want to make sure people are aware of it.

As an analogy, think of the situation when you buy a used car from someone. They tell you some things, like its make and model, and they may let you test drive it, but you end up not knowing how many accidents it’s been in, and stuff like that. Your partial information in general lets them make money.

It’s kind of understandable why there’s so much insider trading going on. Insider trading is the ultimate and most efficient way to profit from information.

Another good example of information loss is with mortgages, and mortgage-backed securities. The original idea behind securitizing mortgages was that investors get to buy pieces of pools of mortgages, which “behave better” than individual mortgages: whereas an individual can refinance (and often does, when interest rates go down) or default, it’s less likely that a majority of the people in a pool refinance or default.

[Let’s ignore for now the issue that the banks got so high on the profits of securitization that the assumption of better behavior of pools got thrown out the window as the underlying mortgages became worse and worse – a gleaming example of information loss.]

In selling these pools, the banks were charging fees so that you, the investor, wouldn’t have to “deal with the details” of all of the individual mortgages in the pool. This is one way that people withhold information and charge a fee for it, by calling it a chore.

And it is a chore, if you actually do it. However, in the case of mortgages, lots of banks charged that fee for that chore and then never actually did the chore– they kept terrible accounts of the mortgages, and when they started to default in large numbers, started illegally pretending their papers were in order, through “robo-signing,” in order to foreclose quickly.

Here’s something you can do if you have a mortgage. Demand to see your mortgage note. It turns out there’s a legal way for you to ask your bank to trace the ownership of your mortgage through the securitization system, and you can do it for fun, you don’t need to be late on your mortgage payments or anything.

There does seem to be a risk associated with asking to see your note, however, namely to your credit score, which is bullshit. There’s also a form letter of complaint if your bank somehow doesn’t come up with the answer.