"Civil," Indeed

Mozilo Settles With SEC for $68 Million

The best way to rob a bank . . . is to own one.

There's a reason why bank robbers -- at least the "blue collar" kind -- get charged with criminal (prison) rather civil penalties (read, fines): if it were otherwise, they'd just write a check if/when they were apprehended, and go on their merry way with whatever was left, net of attorneys fees.

So, no, I'm not impressed that former Countrywide CEO Angelo Mozilo has settled, civilly, with the SEC by paying a $68 million fine.

Not only does the settlement outrageously not require Mozilo to admit guilt -- it explicitly says that he doesn't -- it allows him to keep, and enjoy, another couple hundred million he harvested even as his bank played a major role in blowing up the housing market.

"Flash Crash" After-Shocks

Plugging That OTHER Hole
(the Regulatory One)

Remember the SEC's press conference last week announcing that it had isolated the cause of the "flash crash" May 6, and unveiling a sweeping set of financial reforms designed to prevent a recurrence?

Me, neither.

That thought comes to mind as I see that the Dow Jones is already down about 250 points (so far) today.

Would-be bottom fishers don't want to wade in just as the bottom potentially falls out (again).

Michael Lewis Deconstructs Goldman Sachs

SEC vs. Goldman Sachs

Confused about why the SEC sued Goldman Sachs for fraud, and what it means?

Here's about as succinct a summary as I've seen, from the inimitable Michael Lewis:

Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done.

That just changed.

--Michael Lewis, "Bond Market Will Never Be the Same After Goldman"; Bloomberg (4/22/10)

Brilliant -- and exactly right!

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?

SNL on Goldman Sachs

Betting On Its Own Lawsuit??

Best line (to date) about the SEC's fraud case against Goldman Sachs is this nugget from "The Weekend Update" segment on Saturday Night Live:

Goldman Sachs was accused Friday by the Securities and Exchange Commission of fraudulently selling mortgage-backed securities to its customers. If convicted, the firm stands to make $10 billion.

Can The Onion top that?

Goldman Sachs, Briber Par Excellence

A Cut for Everyone But the Taxpayer

"Bribe" (verb): to induce or influence by or as if by bribery.

"Bribe" (noun): money or favor given or promised in order to influence the judgment or conduct of a person in a position of trust.

--Webster's Dictionary

Of course, the whole thing is that "no laws were broken." And there's the rub.

But what else do you call showering money on legislators, credit rating agencies, and your own employees (past, present, and -- in the case of many government officials -- future), all toward the end of crafting a financial system to your liking?

Just consider all the ways that Goldman Sachs' lucre and ingenuity have rotted out the foundations of the American system of governance:

Rating Agencies. No, Wall Street couldn't have sold trillions in mortgage-backed securities all by itself -- it needed the credit rating agencies' seal of approval.

Which was simple enough: Wall Street was the client!

Moody's & Standard & Poor's didn't just rake in billions for giving Triple A ratings to dreck.

Thanks to the magic of the stock market, which values companies based on P/E ratio's, every incremental dollar the credit raters earned from Wall Street created as much as a 20x jump in their market cap's.

Financial Alchemy

What's the significance of that?

It translated into tens and sometimes hundreds of millions(!) in extra compensation for company exec's, whose pay included huge slugs of stock.

Politicians. President Obama's biggest corporate campaign contributor? Goldman Sachs. Ditto for practically every senior Democratic member of Congress (and many junior ones).

The really sad part is how cheaply Congress can be bought: a couple hundred million in campaign contributions, tops.

The return?

If the upside includes your company's stock market capitalization (see, above), tens of billions in annual compensation, and double that in profit . . . trillions.

Return on investment?

I don't know -- infinite??

Regulators.

Once upon a time, the Securities and Exchange Commission, conceived during the last financial upheaval during The Great Depression, protected investors' interests.

Now, it does those same investors a double disservice: 1) by not doing its job (see, Madoff, Bernie and many, many other examples); and 2) by giving at least some investors the mistaken notion that their interests are being protected, thereby creating a false sense of security.

What might explain regulators who don't regulate?

A lot of these folks aspire to "graduate" from Washington to Wall Street. An aggressive stance towards your future employer is not a good career move.

Diagnosis & Prescription

If you're keeping track, that's two out of three branches of government thoroughly compromised by Wall Street money (call it 3-for-3 -- a hat trick! -- if you consider Congress' role selecting and confirming judges).

Which suggests the solution.

Take the money away from them.

Step #1: break up Goldman Sachs.

"Really, Wall Street, Really??!!

"Learning to Love Insider Trading"!!??

Want to keep companies honest, make the markets work more efficiently, and encourage investors to diversify? Let insiders buy and sell.

--Donald J. Boudreaux, "Learning to Love Insider Trading"; The Wall Street Journal (10/24/2009)

Goldman Sachs director Stephen Friedman resigned from the New York Fed in May, after The Wall Street Journal reported he had bought more than 50,000 shares of Goldman stock following AIG’s takeover.

--Bloomberg.com (10/29/09)

One of the technology industry's highest-profile executives has become ensnared in an alleged insider-trading case that is shaking the corporate and financial worlds.

--"Ex-Chief of AMD is Linked to Galleon"; The Wall Street Journal (10/28/2009)

One has to conjure up Jon Lovitz' infamous Saturday Night Live character, "The Pathological Liar," to properly respond to Donald Boudreaux's assertion (above) that investors who put their faith in fair markets and "a level playing field" should, well . . . get over themselves.

"The market's perfectly fair to rank-and-file investors right now," The Pathological Liar would say.

"In fact, small shareholders have it too good.

Negative returns on their stocks for a decade?

Zero interest on their savings?

Why, the spoiled jerks. They should be grateful to get any of their capital back!"

"Really, Wall Street, Really??!!

Moving on to CEO pay:

"CEO pay, at 600 times the average worker's salary? Why, the employees are lucky to get paid anything. Make the pay ratio 1,000:1! Better still, 5,000:1. That'll teach 'em who calls the shots.

"In fact, executive compensation now is an insult! Executives should make even more money, by front-running other investors trading their own company's stock before publicly disclosing material news.

"Yeah, that's the ticket. Why should companies have to disclose anything?"

And so on.

About all I can figure out is that, the SEC's recent track record is so abysmal enforcing insider trading laws, it has decided to mount a rear-guard action arguing that insider trading is benign, or -- cue The Wall Street Journal article -- actually good for the markets (and average investors).

To channel another, more recent Saturday Night Live bit:

"Really, Wall Street?? Really??!!

FDR, Obama & the Cost of Consensus

The Age of Regulatory Capture

Millions of Americans lose their homes and jobs, Wall Street devours trillions in government bailouts while its leaders pay themselves billions . . . and there's still no discussion of meaningful financial reform?

Incredible.

Here's a quote from one of the best Op-Ed piece I've seen this Summer, contrasting the style and attitude of FDR then and Obama now:

The principal legislative innovations of the 1930s were enacted over the vigorous opposition of a deeply entrenched minority. Majority rule, as Roosevelt saw it, did not require his opponents’ permission.

When Roosevelt asked Congress to establish the Tennessee Valley Authority to provide cheap electric power for the impoverished South, he did not consult with utility giants like Commonwealth and Southern. When he asked for the creation of a Securities and Exchange Commission to curb the excesses of Wall Street, he did not request the cooperation of those about to be regulated. When Congress passed the Glass-Steagall Act divesting investment houses of their commercial banking functions, the Democrats did not need the approval of J. P. Morgan, Goldman Sachs or Lehman Brothers.

--Jean Edward Smith, "Roosevelt: The Great Divider"; The New York Times (9/3/09)

Too many details?

How about, "you can't make an omelette without breaking some eggs."

China, cont.

"Geithner Says China Has Faith in U.S."
--headline, The New York Times (6/3/09)

[Editor's Note: Sorry, I'm on a China kick -- just one more in that vein. And yes, it does bear on real estate. In fact, whether China keeps buying U.S. debt -- and therefore whether mortgage rates stay low -- is probably the single biggest variable affecting U.S. housing prices right now.]

Just two thoughts on the above headline:

One. Wouldn't it be more reassuring if it read, "China says China Has Faith in U.S."??

Two. Actions speak louder than words.

Some of the most flattering things you'll ever hear about a publicly-traded company are analysts and major stockholders praising it as they seek cover to dump their shares (or recommend same). Or buy credit derivatives that appreciate as company shares tank, which is effectively the same thing.

You'd think that the Securities and Exchange Commission ("SEC) would police that (and a lot of other things), but there's plenty of evidence that they don't.

"Over a Barrel"

So here's what you're left with: don't listen to what Chinese leaders say, watch what they do.

Of late, they've been pushing to have their own currency, the renminbi, included in a basket of world currencies to serve as a meta "reserve currency." That's significant because it would supplant the U.S. dollar as the de facto world reserve currency.

Why does that matter?

A key difference between, say, Albania, and the U.S., is that the latter's debts are denominated in its own currency. If the U.S. debt becomes unmanageably large -- one of the big concerns at the moment -- it always has the option of printing more money. For now, at least.

One last quote regarding China, which already owns a trillion-plus in U.S. debt: 'if you owe your bank $1,000, they've got you over a barrel; if you owe them a couple trillion, you've got them over a barrel.'

Unfortunately, there's a crucial difference between dumping what you already have -- and buying more.

Bernie Madoff & the Path to Recovery

Stock Buyers Strike . . . For Good Reason

When will the stock market finally bottom?

Here's a thought: it won't be when P/E ratio's hit some magic level, or market cap's (capitalization's) become tantalizingly low, or even when the housing market finally stops falling.

It will be when Bernie Madoff is in prison, and he and his family are stripped of their -- his clients' -- assets. (Just plain stripped would be even better.)

For now, Madoff sits, under house arrest, in his $10(?) million Manhattan penthouse while his lawyers plea bargain and argue, however implausibly, that his wife should be allowed to keep $67 million now titled in her name.

And Madoff's victims?

Three months after their money disappeared, they are selling their homes to raise cash. I personally know of four such houses on the market in the Twin Cities, and wouldn't doubt that the number nationally is in the hundreds (don't expect an accurate tally, because in most cases, you'll never know).

Who wouldn't pull their money out of such a market?

What sane person would commit fresh money?

No wonder the stock market is suffering from the granddaddy of all buyer's strikes.

And that's before the debacle that has befallen investors in financial stocks, whose primacy in today's market was even greater than tech stocks' in the late '90's -- and whose subsequent fall has been harder.

"Madoff Homes"

Investors are right not to trust a market where the top securities cop, the SEC ("Securities and Exchange Commission"), outsources its "whistle-blowing" function. Actually, it doesn't even do that: when someone credible like Harry Markopolos presented it with credible evidence of fraud . . . it did nothing.

Meanwhile, our legal system allows well-heeled defendants to make a mockery of the presumption of innocence. Even if Madoff hadn't confessed -- which he did -- there'd be no doubt as to his guilt. (If it's all a big misunderstanding, somebody had quick better tell all those people selling their homes.)

In the meantime, any rational, functioning system would: 1) promptly incarcerate Madoff; 2) trace any assets attributable to his victims, and label them as fraudulently conveyed; and 3) confiscate such assets, and put them in trust for his victims. Done. End of Story.

Instead, Madoff is clearly using his clients' money to pay for expensive legal maneuvering. Instead of Madoff selling his homes, Madoff's victims are selling theirs. Watching all this, one would be forced to conclude that, at best, the authorities are impotent; at worst, they're corrupt.

The New Testament famously says "the poor will always be with us." It doesn't say anything about scoundrels like Madoff.

Until investors are satisfied that the Madoff's of the world have been dealt with appropriately, and convincing steps have been taken to assure that there won't be any more . . . don't hold your breath waiting for a sustainable stock market rally.