Why Are Retail Investors Skeptical?

It's Supposed to Work in the Midwest, at Least

One of the all-time high school pranks growing up -- at least according to urban legend -- was going to the mall and acting like you lost a contact lens.

Step 2: a couple confederates join your "search."

What's supposed to happen next is, clueless passersby join the search while the perpetrators withdraw to the sidelines and watch (and suppress their snide laughs).

The Bernanke Stock Market

Having seen two bubbles -- in tech stocks and then housing -- in the last decade, not to mention the predations of Goldman Sachs, Angelo Mozilo and scores of others, my guess is that "retail investors" (you and me) are now asking themselves two things:

One. Is there really a contact lens in the middle of that growing crowd (read, the now-advancing stock market)?

Two. How expensive is it going to be -- this time -- to find out?

To paraphrase that expression, "fool me twice, shame on you. Fool me three times, shame on me."

P.S.: I can already answer question #3: 'Will anything happen to those responsible?' Answer: 'Nope.'

"Our" Banks, Warren? No, YOUR Banks

Warren Buffett's Freudian Slip

This land is your land
This land is my(?) land
From California to the New York island
From the red wood forest to the Gulf Stream waters
This land was made for you (and me?).

--Lyrics, "This Land is Your Land"; Woody Guthrie (tweaked by Ross Kaplan)

The first time I read "Pretty Good for Government Work," Warren Buffett's defense of the bank bailouts in The New York Times this week, it all seemed perfectly reasonable and logical: the system truly was on the verge of a melt-down in September, 2008, and doing nothing surely would have brought on -- if not a financial apocalypse -- something very, very nasty.

But re-reading it, I couldn't help coming back to a single, offending word: 'our.'

Here's the context:

Just over two years ago, in September 2008, our country faced an economic meltdown. Fannie Mae and Freddie Mac, the pillars that supported our mortgage system, had been forced into conservatorship. Several of our largest commercial banks were teetering. One of Wall Street’s giant investment banks had gone bankrupt, and the remaining three were poised to follow. A.I.G., the world’s most famous insurer, was at death’s door.

--Warren Buffett, "Pretty Good for Government Work"; The New York Times (11/16/2010)

I suppose if I owned tens of millions of shares in Wells Fargo, Wachovia, and Moody's (the credit rating agency); $10 billion in Goldman Sachs bonds that I very much wanted repaid; billions in credit default swap positions, etc. etc. -- I would start to think of the financial system as "our" financial system, too.

But in reality, it's "their" financial system.

They own it, they derive the lion's share of benefits from it, and they -- quite logically -- defend it.

Bailout Red Herring

The second canard buried in Buffett's apologia is the inference that critics of the bailout advocated doing nothing.

Hardly.

Away from the Op-Ed pages of The Wall Street Journal and The New York Times, there has been a deafening chorus -- nay, consensus -- on what government properly should have done -- in fact, should still do now -- in response to the Wall Street-engineered financial melt-down.

Of course, that's after acknowledging that the very best course of action would have been actually trying to prevent it in the first place (vs. enabling it).

In a mythical letter addressed to "Uncle Sucker," Blogger Barry Ritholtz puts it best:

When the crisis struck, you did not seem to understand the role you should play. Instead of stepping up to halt the financialization, to unwind it, you gave away the shop. You failed to extract concessions from firms on the verge of bankruptcy. Your negotiating skills were embarrassing. In the face of meltdown, you panicked.

You could have undone the decades of radical deregulation at that moment. You could have fired the incompetent management, wiped out the shareholders who invested in insolvent companies, gave the creditors and bond holders a major haircut for their foolish lending. Instead, you rewarded them for their gross incompetence.

The solutions you ran with were ad hoc, poorly thought out, improvised. You crossed legal boundaries, putting the Fed in the position of violating its charter and exceeding its mandates. You created a Moral Hazard, the impact of which may not be felt until decades in the future.

--Barry Ritholtz, "Dear Uncle Sucker . . ."; The Big Picture (11/17/2010)

There are no Pulitzers -- yet -- for blog posts, but if there were, I'd nominate "Dear Uncle Sucker."

Read Buffett's piece, then Ritholtz's in its entirety, and decide for yourself.

P.S.: Dear RE/MAX and Coldwell Banker Burnet: looking for an experienced -- albeit opinionated -- Twin Cities Realtor (and blogger)?

If my boss, Mr. Buffett, reads this, I may be available (Buffett is chairman of Berkshire Hathaway, the ultimate parent company of Edina Realty).

(Corporate) Waste Not, Want Not

Corporate Campaign Contributions

In Citizens United v. Federal Election Commission, the Supreme Court decided that corporations could spend as much as they wished at any time, assuming there was no direct coordination with the candidate. In doing so, the court overturned its own precedents and refused to distinguish the free speech rights of corporations and unions in any way from those of actual people.

The problem with this logic is that corporations have a legal duty not to spend money unless it is likely to improve profits. Unions, too, are expected to make only contributions that will benefit members.

--Scott Turow, "Blagojevich and Legal Bribery"; The New York Times (8/18/2010)

Turow provides the ultimate rebuttal to those who would argue that allowing corporations to spend unlimited amounts on campaign contributions -- now the law of the land -- has no corrupting effect on democracy.

The argument is based on a legal term called "corporate waste."

Just as former attorney Turow notes -- there are a lot of us former attorneys out there -- corporate waste forbades companies from spending money on anything that doesn't further their profit-seeking agenda (sidebar: profits are good -- it's when they come from political suasion that they become bad).

No shareholder, to my knowledge, has ever brought suit against a company arguing that its campaign contributions were frivolously spent.

Ergo, campaign contributions are money well-spent.

Return on Investment

How well?

Staggeringly well.

To pick just one example, the $500 million or so that big Wall Street firms have given both parties the last decade or so loosened something like $2 trillion in U.S. aid and financial subsidies, both direct and indirect (TARP, ZIRP, guaranteed loans, AIG-style infusions, etc.).

And that's just since 2008!

If you do the math, that's a 40,000% return on investment.

Makes you wonder what business Wall Street's really in . . . .

P.S.: Did you know that, according to the Supreme Court, companies like Goldman Sachs, AIG, and BP are "legal persons" just like you or me?

Funny, I don't recall ever attending a wedding, going to a funeral, or having a farewell office party for someone named "Goldman Sachs."

Contrite Goldman? Think Again

Still Calling the Shots

Goldman Sachs has inundated the Financial Crisis Inquiry Commission with data — about five terabytes, equivalent to several billion printed pages — and dragged its feet on answering detailed questions about derivatives securitization and other business activities, two panel members told reporter on a conference call.

“We did not ask them to pull up a dump truck to our offices and dump a bunch of rubbish.” the Panel Chairman added, “This has been a very deliberate effort over time to run out the clock.

--"Financial Panel Issues a Subpoena to Goldman Sachs"; The NY Times (6/7/2010)

No, I haven't studied the minutiae of the financial reform package making its way through Congress now.

But when I read how Goldman Sachs is plainly thwarting the Financial Crisis Inquiry Commission . . . . I don't have to. (Its tactic, well-known to litigators: 'the data dump.')

If the Commission had any legal authority or political clout, it would slap Goldman with the equivalent of contempt of court sanctions.

Rays of Hope on Wall Street: Goldman Sachs Criminal Charges?

"Better Late Than Never" Dept.

No, I'm not wishing that the stock market goes down.

But at least it's going down today for a "good" reason: it's being pulled down by a sharp drop in the price of Goldman Sachs stock, which may now be charged criminally (it is already the subject of civil fraud charges).

While the criminal charges are long overdue, they are certainly welcome -- what's that line about "justice delayed is justice denied?"

Also heartening:

--Judging by the abrupt price drop today, nobody got tipped off early.

Unfortunately, it's now common practice to witness seemingly inexplicable moves in stocks ahead of significant news. So, maybe some honesty and propriety really is creeping back into the market.

--A drop in Goldman Sachs' stock -- everything else being equal -- means that the company has less money to spend on politicians, lobbyists, and defense lawyers.

Not to mention hiring (warping) the nation's supposed "best and brightest," who have responded to the siren call of Wall Street riches in record numbers the last, oh, 30 years.

To paraphrase Martha Stewart, "that's a VERY good thing."

Pearlstein: 'Profitable Goldman Better for Taxpayers'

Post's Pearlstein Gets It Very Wrong

Much of [yesterday's Senate] hearing focused on how Goldman went from having billions of dollars of exposure to the subprime mortgage market in the first half of 2006 to posting big profits from the implosion in that same market by the second half of 2007.

The more benign way to look at this dramatic rebound is that it speaks to Goldman's knack for anticipating the market and its willingness to break from the Wall Street herd. Many of us may be jealous of Goldman's success or suspicious of exactly how it came, but surely we are all better off than if Goldman had remained long on mortgages, tumbled into insolvency and required a big taxpayer bailout.

--Steven Pearlstein, "Two planets collide for three hearings on Goldman"; The Washington Post(4/28/2010)

Of all the myths and misconceptions about Goldman Sachs' role in today's financial crisis, the one perpetuated (above) by the normally astute Mr. Pearlstein is the most infuriating and pernicious.

That's because society is patently NOT better off because Goldman Sachs profited from the housing bust.

By figuring out how to make money off of "shit" -- Goldman Sachs' word for their mortgage-backed securities, not mine -- Goldman stoked demand for . . . . more shit.

That assured that even more oceans of capital would flood into the housing market, driving prices even higher -- and making any crash harder.

Ironically, the higher the housing market went, the more potential to "short," or bet against it, which sucked in even more capital.

Doomsday machine, indeed.

Instead of viewing Goldman's obscene profits as averting another taxpayer bailout, as Pearlstein does, they need to be viewed in the larger context of causing trillions of dollars of (additional) carnage in the housing market and broader economy.

And Pearlstein is dead wrong that Goldman didn't get bailed out.

What else do you call pumping $185 billion(!) into AIG; allowing Goldman Sachs to become a bank holding company virtually overnight and borrow for free from The Fed; beggaring savers with zero percent interest rates to resuscitate the banks; using The Fed's balance sheet as a dumping ground for Goldman (and other banks') toxic assets.

And on and on . . . .

"Shitty" doesn't begin to describe it.

Goldman Sachs: 'Let's Be Aggressive Distributing Things'

"Distribute?!?" How About, "Palm Off?"

Dis-tri-bute: 1 : to divide among several or many : apportion
2 a : to spread out so as to cover something: scatter; b : to give out or deliver especially to members of a group.

--Merriam-Webster dictionary

According to The New York Times, as early as 2006, "company email messages show Goldman executives discussing ways to get rid of the firm’s positive mortgage positions by selling them to clients. In one message, Goldman’s chief financial officer, Mr. Viniar, wrote, 'Let’s be aggressive distributing things.'”

No, Goldman Sachs' definition of "distribute" isn't the dictionary version, or the meaning you and I associate with the term.

Rather, as used by company executives, it means "palm off on unsuspecting customers."

Commit Fraud, Get Free Money

Borrow at 0%, Lend at 3%, Make Billions

Is it customary, when someone is charged with fraud and awaiting trial, to leave them in possession of the victim's credit cards, and, indeed, to continue to allow them to spend and gamble the victim's money?

In the corporate arena, apparently the answer is "yes."

U.S. vs. Goldman Sachs

While the putative victims in the SEC's fraud case against Goldman Sachs are two institutional investors, the real victims are the millions of Americans who've lost their homes and jobs due to Wall Street's role in causing The Great Recession.

Yet Goldman Sachs, by virtue of its status as a "bank holding company," continues to have direct access to the Federal Reserve's discount window, where the cost of money is . . . . nothing (not coincidentally, what millions of thrifty Americans are currently earning on their hard-earned savings).

Goldman Sachs and other too big to fail banks can then take that free money and turn around and lend it back to the government -- taxpayers -- for a risk-free 3% (more if you add leverage).

How much of Goldman Sachs' just announced $3.5 billion quarterly profit was made in such a fashion?

How about, just for the sake of decorum, suspending Goldman Sachs' access to free Fed money, until it's cleared of the charges pending against it?

Whose Laws? The Political (vs. Business) Case for Ending TBTF

The Too-Big-To-Fail Debate

Advocates for cutting so-called "too big to fail" financial institutions down to (less threatening) size -- I'm one of them -- have rightly focused on the systemic risk such entities pose; the unfair, distorting effects on competition such a policy causes, due to the implicit federal guaranties backing TBTF companies (which drives down their borrowing costs); and the monopoly profits TBTF companies enjoy simply as a result of having survived when their smaller ("not-TBTF") competitors have all perished.

But there's an even more compelling reason to break up TBTF entities.

Namely, entities like Goldman Sachs wield far too much political power, which they've clearly used to game the system. (From Wall Street's perspective, showering money on politicians is no doubt just an especially shrewd form of "reinvesting profits.")

"Thumb -- and elbow, and thigh, and . . -- on the Scale"

Perhaps the most insidious aspect of the financial debacle the last two-plus years is to read about some especially egregious Wall Street conduct -- is it still possible to be shocked anymore? -- then to hear the perpetrators claim that "no laws were broken."

As a former corporate lawyer, I take strong issue with that: even given the watered-down (or non-existent) rules governing Wall Street, I can still toss out -- practically in my sleep -- multiple grounds for suing various investment banks.

Like breach of fiduciary duty; conflict of interest; self-dealing; fraudulent and/or misleading disclosure; gross negligence . . . . and ???

Still, my best guess is that the legion of clients screwed by Goldman Sachs and its ilk aren't suing -- yet -- not because of some decision on the legal merits, but: a) because they're broke; and b) Goldman Sachs very much isn't.

Litigation is a financial marathon, and there are plenty of plaintiffs who've walked away empty-handed and financially drained, years later, not because their arguments lacked merit, but because the defendants had more staying power (can you say, "Exxon Valdez?").

Who Made the Rules?

That said, there's no denying that Wall Street got the financial rules that it wanted the last 20-plus years.

A partial list would include:

--Repeal of Glass-Steagall, allowing commercial and investment banks to combine.

--Lax accounting rules for banks, allowing them to substitute "mark to make-believe" for "mark to market."

--Amazingly, no regulation --still -- of credit derivatives -- the instruments at the heart of the AIG debacle (and dubbed "financial weapons of mass destruction" years ago by Warren Buffett).

--Wall Street-engineered exemptions on leverage, allowing Lehman Bros., Bear Stearns etc. to borrow as much as $40 for every $1 of their own money.

So, the next time you hear someone on Wall Street defend their latest skulduggery by saying "no laws were broken," stop to ask, "who made the laws??"

Financier, Heal Thyself? Don't Count on It

Cutting Wall Street's Gordian Knot

Call me a skeptic when it comes to financial reform.

If health care consumed a solid year of legislative maneuvering, how much time will it take to carefully consider the various and sundry proposals to rein in Wall Street, which is infinitely more complicated?

Which is kind of the point, actually.

Wall Street and modern-day finance are so mind-numbingly complex that you need to enlist Wall Street-types to oversee it.

So, that's how you get former Goldman Sachs and other financial executives in dozens of senior government positions, influencing -- and setting -- U.S. policy towards the financial industry.

Wall Street is also so complicated that you need Wall Street's expertise to help reform it.

Which is, as they say, "the rub."

Giving Wall Street insiders a seat at the financial reform table -- as it clearly now has -- virtually assures that any legislation that emerges from Congress will: a) be weak; and b) contain sufficient ambiguities and loopholes that it will effectively be "business as usual."

After the biggest financial crash since The Great Depression.

That result simply isn't acceptable.

My proposal?

Part 2: The 90% Solution

What Killed the Woolly Mammoths?

"Mammoths & Mastodons" Exhibit at Field Museum

I always learn something new at a great museum like Chicago's Field Museum, and today's visit was no different.

Going through the new "Mammoths and Mastodon" exhibit, I learned that there are five primary theories about what killed the mammoths and mastodons, the last of which disappeared in Siberia about 3,000 years ago:

1. Climate Change
2. Disease
3. Over hunting
4. A meteorite
5. Goldman Sachs

Apparently, scientific evidence is leaning towards theory #5.

Saving States & Countries vs. Investment Banks

Discretionary vs. Non-Discretionary Bailouts

Watching the latest round of debt problems emerge -- this time involving sovereign states like Greece -- reminds me of my not-so-happy experience as a "newbie" landlord a few years ago (turned off by the experience, I quickly sold the property).

Immediately after taking title, my (long-term, holdover) renter started presenting me with a long list of not-so-dire problems: a squeaky shower door one week, worn (but still decent) carpeting the next, etc.

Interested in keeping her happy, I erred on the side of being accommodating. Too accommodating.

No sooner were the "discretionary" items addressed, than the real, non-discretionary items showed up: a major plumbing issue that was brewing, an expensive HVAC problem that the former owner had thoughtfully deferred, etc.

It could just have been my imagination, but I quickly discerned a strategy: my renter "led" with the discretionary items, because she knew my patience (and money) would be depleted by the "big ticket" items if those were addressed first.

Cue Greece

What's all that got to do with Greece, and broke U.S. states (like California and New York)?

In the big scheme of things, "recapitalizing" (translation: showering with money) then-teetering banks like Goldman Sachs and J.P. Morgan Chase was akin to fixing a squeaky shower door: a nice thing to do -- for them -- but certainly not required for the long-term health of the world financial system.

As numerous financial experts have opined, there were many, less expensive alternatives to shoring up the financial system, starting with actually focusing on saving the system, rather than individual entities. A system which, trillions later, arguably still needs fixing.

Of course, now that trillions have been committed (borrowed, really) toward making Wall Street whole -- surprise, surprise! -- the truly systemic threats to the global financial system have come into plain(er) view.

Those include the plight of sovereigns like Greece, and over-a-barrel states like California and New York -- entities whose duress, incredibly, have been exacerbated by shady credit instruments created by guess who?

Maybe we tell the latest busted entities -- truthfully -- that Wall Street already got their bailout money.

Call it the "I gave at the office" excuse.

Taibbi on Wall Street, Addicts & Con Men

Guess Who the Addict Is?

No, Matt Taibbi hasn't mellowed since his infamous Rolling Stone article last summer ("Inside the Great American Bubble Machine").

Here's an excerpt from the sequel:

Instead of liquidating and prosecuting the insolvent institutions that took us all down with them in a giant Ponzi scheme, we have showered them with money and guarantees and all sorts of other enabling gestures.

Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back.

--Matt Taibbi, "Wall Street's Bailout Hustle"; Rolling Stone

Elsewhere in the piece, Taibbi poses a question that I've also addressed on this blog ("Dealing with the Devil: Why be a Goldman Sachs Client?"):

Why big institutional investors like pension funds continually come to Wall Street to get raped is the million-dollar question that many experienced observers puzzle over.

I think my explanation is still the most plausible:

Presumably, Goldman Sachs' clients have decided that it is better to be on the inside of whatever scam(s) Goldman is running -- presumably benefiting from them -- than being on the outside, victimized like everyone else.

--Ross Kaplan, "Dealing with the Devil"; City Lakes Blog (9/25/2009)

Key word from the above: 'presumably.'

Even if you don't like Taibbi, read his piece for his primer on street scams and hustles.

"Perfectly Legal": AIG Redux

Goldman Sachs & the 4 Not-So-Little PIIG's

Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal.

--"Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis"; The New York Times(2/14/2010)

We all know the basic story line by now.

Some systemically-important entity is left, hemorrhaging and in financial shock, on the side of the road, the victim of (yet another) financial hit-and-run.

Yesterday, it was AIG; now, it's Greece.

Tomorrow, it will be one or more of the other "PIIGS" (Portugal, Italy, Ireland, Spain).

The license plate of the well-appointed, luxury car just disappearing over the crest clearly reads "Goldman Sachs." The forensic evidence at the crime scene (make that "non-crime scene") further implicates it.

Yet when the cops pull over the speeding, inexplicably damaged vehicle, the driver explains, quite calmly and rationally, that "no laws were broken."

And the cops -- and the rest of us -- are left scratching our collective heads.

(Actually, that last part about the financial cops is wishful thinking -- it turns out that they work for Goldman Sachs, used to . . . or want to).

"Non-Crime Scene"

As always, Goldman Sachs' defense is a bit more subtle and multi-layered (see the "It's Not My Dog Defense.")

Appearances notwithstanding, Goldman Sachs was actually speeding to get help.

Oh, and the injured pedestrian was carelessly walking in the road.

Or they suddenly ran in front of the car, deer-like, and there wasn't time to stop.

Because, after all, driving conditions were terrible.

Which brings up the possibility (likelihood?) that other cars may have been involved.

Which doesn't really matter, anyways, because the patient, now lying near death, was already suffering from terminal cancer.

And even that doesn't matter, because Goldman Sachs had Greek law changed to make committing financial hit-and-run . . . perfectly legal (Oops! That would be U.S. law).

And so on.

A-r-g-g-h-h!! Enough already!!

Chapter 2: Different this Time?

What's different this time is that apparently it's up to ordinary Germans to decide whether to front Greece the money it foolishly promised to re-pay its Wall Street loan sharks, led by Goldman Sachs.

Of course, when the prey was AIG, Goldman Sachs merely had to pick up the phone (walk down the hall?) to make sure that it's predatory bets were made good by the U.S. government (and the taxpayers standing behind it).

But what sway does Goldman Sachs have over 80 million German taxpayers?

Perhaps more to the point, what leverage does Goldman Sachs have over the German government?

Here's a guess: its best instrument and lever is none other than the very same, bought-and-sold U.S. government that delivered Goldman Sachs -- rather amply -- from the fallout resulting from its disastrous AIG hit-and-run.

How much more of this does anyone possibly need before revoking Goldman Sachs' driver's license, for good??

How and whether to save the PIIG's remains to be seen.

This time, however, the entity that should be presented with the clean-up bill -- whether it's for the funeral or the hospital -- is Goldman Sachs.

"Restraint," Wall Street-Style

Wall St. Pay: the (Dis)Honor System Lives!

So, how do people on Wall Street -- and their defenders, like The Wall Street Journal -- define "restraint?"

A. Turning down the heat to 65 degrees.
B. Cancelling their cable subscription.
C. Taking public transportation to work, instead of the car.
D. Paying one's self only $9 million, instead of $68.5 million like in 2007 (when A LOT fewer people were paying attention).

If you need an answer key . . . you're a newcomer to this blog!

And exactly who is this paragon of virtue and self-restraint?

None other than Lloyd Blankfein, CEO of Goldman Sachs.

The Journal was quick to paint Blankfein's 2009 bonus (yes, we're talking about a bonus -- not base pay, not benefits, not lots of other goodies) . . . . as an act of sublime selflessness.

The steep drop from 2007 pay was a "bow" to public pressure, it declared in its headline.

Not only that, the compensation was all-stock.

The Journal's not-so-subtle (or convincing) defense of Blankfein's pay continues:

As Goldman rebounded in 2009 to its most profitable year ever, the 55-year-old Mr. Blankfein became the focus of anger about sky-high bonuses on Wall Street. That criticism continued even after Goldman said last month that it would make the smallest employee payouts relative to to revenue since the firm went public in 19999.

--"Goldman CEO Bows on Pay"; The Wall Street Journal (Feb. 6-7, 2010)

How reasonable of Goldman and Blankfein.

How fair of them.

How disgusting.

Party Like It's 2007

The truth is, Goldman and Blankfein's record 2007 compensation was a lot like popping champagne on the Titanic at midnight the night it sank.

Incredibly, instead of feeling horror and shame for steering the financial system into an iceberg -- and make no mistake, Wall Street was doing the steering -- Wall Street effectively engineered a bailout that made itself (more than?) whole.

At the taxpayers' expense.

And they're still at the helm! (versus, say, in jail, or, banned from the financial industry for life, like disgraced Merrill Lynch analyst Henry Blodget was for causing .000001% of the havoc.)

As I said before, "disgusting."

Pro Athletes' Pay

I remember a cartoon that ran several months into the last baseball players' strike (in the early '90's?), when ballplayers made a whole lot less than they do now.

The cartoon showed an unshaved, unwashed baseball player knocking on a suburban front door, with the caption, "mow your lawn for $25,000, Ma' am?"

In fact, I don't begrudge pro athletes a dime of what they make, because: a) it's not coming out of my pocket; and b) it's truly set by the marketplace.

For the vast majority of pro athletes, stratospheric pay is also extremely short-lived, and limited to a handful of truly gifted, high-performing individuals.

None of the above is true of Wall Street pay.

"Loss Transmitters and Accelerators"

Goldman-Speak for "Mug"

Too-big-to-fail firms have become loss transmitters and accelerators to the rest of the system.

--"An Ex-Goldman Partner Lets Loose on Wall Street"; Time (2/2/2010).

Hmm . . . "loss transmitter and accelerator??"

By the same logic, I suppose that the recent, devastating Haiti earthquake was "a focused diffusion of geologic energy."

Or the Hindenburg explosion was a "sudden metamorphosis of volatile gases."

The Pentagon spending $20 billion on an obsolete weapon is an example of "transmitting and accelerating losses to the rest of the system."

Saddling U.S. taxpayers with trillions in losses and debt to clean up the financial mess Wall Street just made is something much, much . . . grander -- and nefarious.

It's one thing not to hold Wall Street accountable for its actions.

It's entirely another to mislabel and minimize what it did, and is continuing to do.

At least the "accelerator" part is right: an accelerant is what arsonists use to quickly spread a fire.

Prediction: No More Goldman Sachs

"Pulling an Altria"

Here's a bold prediction: Goldman Sachs won't be around in 5 years.

No, I don't think the government is effectively going to revoke its corporate charter, putting it out of business (basically, what happened to Arthur Andersen in the wake of the Enron debacle).

Nor do I think the government is going to break it up into smaller, less "Octopus-like" constituent parts.

Rather, I think the name "Goldman Sachs" isn't going to be around.

Just like reviled cigarette maker Philip Morris spun off its food division, Kraft, and renamed the remnant "Altria," Goldman Sachs is likely to spin off something -- anything -- to appease the government, then re-name the surviving company.

If only changing your stripes were that easy . . . .

Today's Guest Goldman Basher: Thomas L. Friedman

Friedman on Goldman Sachs

Tired of me (deservedly) bashing Goldman Sachs?

Here's what the eminently fair-minded Thomas L. Friedman has to say about them:

The behavior of some leading Wall Street banks, particularly Goldman Sachs, has been utterly selfish. U.S. taxpayers saved Goldman by saving one of its big counterparties, A.I.G. By any fair calculation, the U.S. Treasury should own a slice of Goldman today. Goldman has been the poster boy for banks behaving by “situational values” — exploiting whatever the situation, or rules that it helped to write, allowed.

--Thomas L. Friedman, "Adults Only, Please"; The New York Times (1/27/2010)

Unfortunately, at least on this issue, I put Friedman in the camp that "just doesn't get it."

Unplugging the Monster

Why?

Because he still thinks carrots -- rather than sticks --are the way to get bankers to start making loans, and start reviving the economy.

Dear Tom, I have a news flash: we're just about out of carrots.

Which is not to say that I'm endorsing sticks.

What we really need is an altogether different banking system: one that's less centralized, less politically powerful, and most importantly of all -- less capable of wreaking havoc on the general economy.

The monster that today's Wall Street has become doesn't need to be tamed or placated -- it needs to be unplugged.

Part II: 'It's the Internet, Stupid'

Giving Populism a Bad Name

"Random Attacks on Enterprise & Capital"

You know that Wall Street is feeling at least a little heat right now because the Op-Ed pages and blogs (at least certain ones) are ramping up their attacks on what they take to be misguided "populist fervor."

Typical on this score is David Brooks, The New York Times' "house conservative":

The rich and powerful do rig the game in their own favor [but] simply bashing them will still not solve the country's problems. Political populists never . . . seem to grasp that a politics based on punishing the elites won’t produce a better-educated work force, more investment, more innovation or any of the other things required for progress and growth.

--David Brooks, "The Populist Addiction"; The New York Times (1/26/2010)

Brooks goes on to vaguely warn that "if populists continue their random attacks on enterprise and capital, they will only increase the pervasive feeling of uncertainty, which is now the single biggest factor in holding back investment, job creation, and growth."

So, Mr. Brooks, when disgusted taxpayers finally begin to insist that their government protect them from (still more) Wall Street looting, they're . . . "populists?!?"

And when they demand that a broken, dysfunctional financial system be reformed, they're engaging in mob rule?

And when voters demand that Wall Street lawbreakers be held accountable and the nation's laws enforced, they're guilty of . . . "bashing?"

Not So Random

Actually, what Brooks labels "random attacks on enterprise and capital" are anything but; they're aimed at specific companies, like Goldman Sachs, and have a specific, core agenda.

Namely, that too-big-to-fail -- not to mention anti-competitive -- financial institutions be . . shrunk.

That savers' deposits not become chips for Wall Street gamblers.

That epic Wall Street leverage -- as high as 40:1 -- be curtailed (that means not being able to buy $1 of assets with 2 pennies of your own -- and 98 cents of debt).

And that the nation's financial laws be drafted and enforced by someone other than . . . Wall Street.

Far from being a radical agenda, the foregoing principles have been enshrined as the law of the land for much of the last century.

Indeed, when it comes to what Mr. Brooks calls "attacks on enterprise and capital," it would be hard to top Wall Street's recent record.

How to Break Up Goldman Sachs

How to Break Up Goldman Sachs?
Let Them Figure it Out

As we drill down into the details of ideas for breaking the economic and political power of over sized banks, we need this litmus test against which serious suggestions should be judged: Does a proposal, at the end of the day, imply that Goldman Sachs should break itself up?. . . . If the answer is yes, we are making progress in moving our financial system back toward where it was in the early 1990s, when it worked fine . . . and was much less threatening to the global economy. If the answer is no, we are merely repainting -- ever so gently -- the deckchairs on the Titanic.

--"Obama’s Plan to Be Judged by a Goldman Breakup: Simon Johnson"; Bloomberg (1/22/2010)

My award for "quote of the week" (even year, at least so far)?

The one above from Simon Johnson, former chief economist at the International Monetary Fund and now MIT Business School professor. In other words: one smart guy!

Even people who agree with his sentiments are likely to be tripped up by the complexity of the undertaking.

They shouldn't be.

I personally don't have a blueprint for breaking up Goldman Sachs into say, $20 billion relatively nonthreatening "Baby Sachs" (given its current balance sheet, it would spawn about 30(!) progeny).

But I can think of a great way to come up with one: let them figure it out.

After all, they're supposed to be smart guys (or at least, they keep telling us).

Just to keep it on the up and up :) . . . let a three-person Super-VIP Commission sign off on whatever Goldman proposes.

My nominees: Paul Volcker, Nell Minow, and Simon Johnson.