Wall Street's "Uncontained Failure"

Qantas' Pilots vs. Wall Street's

Here's a thought, apropos of (almost) nothing:

The cure to our economic woes has nothing to do with finding exactly the right monetary policy, or getting the Chinese to price the Yuan "fairly," or bridging today's yawning political chasms to reach necessary compromises.

The first step is to seriously and completely address the mess (still) left over from the Crash of '08.

(Sorry, I'm not going for "The Great Recession" sobriquet. Recessions happen, like the weather; crashes have man-made causes.)

Which men? (and almost all of them were).

There's really not much mystery at this point.

"Uncontained Failure"

For those not up to speed, here's the basic narrative to date:

Wall Street's largest firms created an esoteric, unaccountable financial monster -- the likes exceeding even the excesses of the 1920's -- that made their executives (if not their shareholders) rich beyond belief.

It grew and grew and grew . . . and then it exploded.

Unfortunately, just like the A380 Qantas jet whose engine blew apart on departure from Singapore, the economy's "financial engine" explosion was an uncontained failure.

And still is.

Which means the explosion fragments and debris escaped the engine casing and compromised the rest of the structure (economy).

Wall Street Accountability

Like the exceptional Qantas pilots, this country's economic pilots now face a three-fold task:

Step 1: Assess the damage

Which instruments are still working?

Which electrical and hydraulic lines have been severed?

Does the landing gear still work?

Etc., etc.

Only once a proper inventory of the damage has been done, however hastily, can efforts turn towards devising an appropriate response.

In the case of the banks -- "stress test(s)" or not -- step #1 has yet to be tackled seriously and honestly.

Step 2: Isolate the damage

The Qantas pilots quickly shut down the exploded engine and transferred (as best they could) precious power and fuel to the remaining, viable ones.

So far, this country's leaders have done the exact opposite: focused all their attention on the doomed engine, and diverted crucial resources from the functioning engines towards the destroyed one.

Even after the travails of the last few years, the U.S. banking system numbers something like 7,000-plus banks.

The idea that there is no banking system without the Too Big To Fail Behemoths is arrogant, insulting, and blatantly wrong.

Step 3: (Re)gain control of the craft

Fortunately, the Qantas flight had two additional senior pilots on board.

We have access (still) to old hands like Paul Volcker, plus an entire, new generation of financial experts, academics, and civil servants -- just as talented and public-spirited as Volcker was when he was appointed.

Who don't work for Wall Street, and don't want to.

Put them in charge. Then listen to them. (Here's my list of luminaries, for starters: "Nine Better Choices to Investigate Wall Street").

Where the Qantas-Wall Street parallel . . . um . . . breaks down is that Wall Street's "pilots" also owned and (shoddily) ran the airline; designed the jet's defective engines (and the rest of the craft as well); and, just for insurance, paid off the safety inspectors and government regulators who oversaw them.

That nothing has happened to them -- that they remain at liberty, rich, and -- incredibly -- still in charge, suggests not just that our financial and political systems are broken, but that our legal system may be as well.

Financial e.coli

Laws, Sausages -- & Securitized Mortgages

Laws are like sausages — it is best not to see them being made.

--Otto Von Bismarck

To "laws" and "sausages," now add "securitized debt," circa 2004-2008.

It turns out that Wall Street's financial sausage factory was even more toxic and laxly run than previously thought.

The latest chapter is apparently a breakdown in the very essence of what makes a securitized mortgage, securitized: the link between the mortgage, and the property securing it.

Due to sloppy or non-existent documentation, investors in such paper may not have rights to the collateral -- millions of homes -- after all; if that's correct, "fasten your seat belts, it's going to be a bumpy night," as Bette Davis might put it.

Financial e.coli Outbreak

As the daily headlines (continue to) make clear, the financial e.coli outbreak traceable to Wall Street has sickened not just the U.S. economy, but a good portion of the world economy.

If a real sausage factory caused 1/1,000 of the harm, it would be shut down, fined into oblivion, and its operators jailed.

Much the same fate would befall the government inspectors responsible for overseeing the factory; the private company that put its Good Housekeeping seal of approval on the factory's output; and any other actors associated with the shameful enterprise.

How shameful?

Imagine the uproar if a corrupt food inspector -- charged with abetting food poisoning -- defended itself by claiming that its bogus ratings were "protected free speech," as the credit ratings agencies are now risibly arguing.

Calling Upton Sinclair

So, what's happened to Wall Street and its enablers, post-crash?

And exactly what is their defense to the foregoing?

In the hope that doing so would somehow revive the economy Wall Street wrecked, the Federal Reserve and Congress have actually showered Wall Street with more money since 2008 (courtesy of quantitative easing and TARP, respectively).

Meanwhile, Wall Street has escaped responsibility of any sort by arguing -- try to keep this straight -- that: a) the financial sausages it sold were not tainted with e.coli; but b) if they were, it was because investors wanted to buy tainted sausages; and c) should have known the sausages were tainted; because d) Wall Street told them they were.

Or not (see, SEC v. Goldman Sachs).

And "a." through "d." don't really matter, anyways, because of "e.": selling tainted financial sausages . . . was all perfectly legal.

Any political commercials out there discussing this??

I didn't think so.

P.S.: What do you do with an e. coli -tainted batch of (financial) sausage? Recall it.

Obama, Wall Street, & Public Perception

The Necessity of Choosing Sides

The guerilla wins if he does not lose. The conventional army loses if it does not win.

--Henry Kissinger

What does Kissinger's famous maxim about guerilla warfare have to do with Barack Obama and Wall Street?

That in every great engagement, there are always two battles being waged: the real one, and the one over people's perceptions.

It's this latter war that Barack Obama is losing badly vis a vis Wall Street (although the real war -- to tame and hold Wall Street to account -- ain't going so great, either).

The New York Times' Frank Rich cuts to the quick of Obama's problem:

Since Obama has neither aggressively pursued the crash’s con men nor compellingly explained how they gamed the system, he sometimes looks as if he’s fronting for the industry even if he’s not. Voters are not only failing to give the White House credit for its economic successes but finding it guilty of transgressions it didn’t commit.

--Frank Rich, "What Happened to Change We Can Believe In?"; The New York Times (10/24/2010)

Exactly.

President Obama, time to (re)read your Machiavelli (and Kissinger).

P.S.: best line from "Inside Job," reviewed on this blog previously: asked why there’s been no systematic investigation of the 2008 crash, economist Nouriel Roubini answers: “because then you’d find the culprits.” Graphic (above) from NY Times.

"Inside Job" by Charles Ferguson

See . . This . . Movie

Calling Charles Ferguson's "Inside Job" a documentary is like calling The Gettysburg Address a speech.

Bar none, it is the clearest, most succinct explanation of the Wall Street-engineered financial crash -- whose aftermath we are still very much dealing with -- that I have seen.

More than a movie, it is a public record -- a brilliantly spare narrative (with pictures!) explaining what happened, how, and who the principals were.

No Consequences

And still are.

As Ferguson correctly notes, the culprits are still mostly running things, with the exception of a handful of CEO's who were allowed to resign . . with eight figure golden parachutes (that would be between $10 million and $100 million).

"Inside Job" gets all the villains right -- people and institutions like Alan Greenspan, Goldman Sachs, Richard Fuld, Angelo Mozilo, AIG Financial Products, Robert Rubin, Phil Gramm, Larry Summers, and the credit rating agencies.

It also gets the much shorter list of heroes and good guys right: Brooksley Born, Paul Volcker, and Nouriel Roubini.

Ferguson also, I believe, correctly characterizes how history will perceive Barack Obama, at least when it comes to the economy: as the President who, instead of reforming Wall Street, recruited from and deferred to it (same as his predecessors, to be sure, but less acceptable from someone so identified with "change," in office when effecting real change was actually a possibility).

Academics-for-Hire

The only surprise, if you can call it that, is the spotlight the movie shines on the despicable -- albeit supporting -- role played by some of the nation's leading economists, in leadership positions at some of the nation's most influential universities.

Just like physicians who shilled for the pharmaceuticals without disclosing their lush consulting fees, people like Summers and Martin Feldstein (Harvard) and Glenn Hubbard and Fred Mishkin (Columbia) provided Wall Street with intellectual cover while getting rich serving as consultants, board directors, and academics-for-hire.

At least for me, watching "Inside Job" inexplicably conjured up emotions I recall from almost 40 years ago: a mixture of admiration, fascination, and disgust watching people like Howard Baker and Sam Ervin on TV conduct Congress' investigation into Watergate.

Echoes of Watergate

Watching them home in on the Nixon administration's deceptions, one got a sense that truth was finally being served, and that power was being wrested -- however painfully and slowly -- by the good guys from the bad guys.

Which also underscores the difference between Watergate and now: unlike the select Senate committee that Baker and Ervin served on, Ferguson is (only) a movie-maker.

Whether the indictment he so clearly lays out will be acted upon very much remains to be seen.

Attacking Wall Street's Attackers

"But isn't that . . . 'Socialism'??"

He who frames the question wins the debate.

I've been struck in recent months, talking to various people about the economy, by two things:

One. The generally limited vocabulary people have when it comes to understanding all things financial -- even people who are otherwise very sophisticated, well-educated, etc.; and

Two. The tendency -- again, amongst otherwise sophisticated people -- to somehow equate outrage about Wall Street misconduct and calls for genuine, structural reform with a "fringe" political agenda.

The "S Word"

So, what do you call someone who thinks:

--Hedge fund managers should pay a higher tax rate than teachers or firemen? (They don't; thanks to an especially sleazy tax break, their compensation -- called "carried interest" -- is taxed at 15%).

--CEO's shouldn't make literally *400 times what the janitor makes -- up from the 30x-40x that prevailed for almost half a century (roughly from the '30's to the '80's).

--Having half a dozen monster financial institutions -- whose balance sheets can literally be measured as a % of U.S. GDP -- is bad for our economy and political system.

Apparently . . . . "a socialist."

Sorry, folks, but we already have a socialist economy.

Except that it's socialism at the very top . . . and capitalism for everyone else.

*The 400 times is merely an estimate; the truth is, no one really knows, because executive compensation disclosure rules are exceptionally murky and porous.

It's also the case that CEO compensation is not set by the market; it's determined by captive boards of directors -- which is to say, the CEO's themselves.

"Microchips vs. Poker Chips"

Engineers, Financial & Otherwise

OK, so I'm not coming down on the side of buying more Intel stock (vs. selling what I did buy, way back in 1995; see, "To Buy Intel (or not) . . . that is the question").

But I still like what Intel does a whole lot better than what Wall Street does:

For a decade we sent our best minds not to make computer chips in Silicon Valley but to make poker chips on Wall Street, while telling ourselves we could have the American dream — a home — without saving and investing, for nothing down and nothing to pay for two years. Our leadership message to the world (except for our brave soldiers): “After you.”

--Thomas Friedman, "We're No. 1(1)!"; The New York Times (9/12/2010)

Brain Drain

My only quibbles with the above?

First, Friedman's casting his lot with the "we're all to blame" camp ("Wall Street may have been dealing the dope, but our lawmakers encouraged it").

I take strong exception to that analysis, for reasons discussed in "No (Financial) Cure Without Proper Diagnosis."

Second, Friedman's timeline.

I'd substitute "a generation" for "a decade" to describe how long Wall Street has been vacuuming up our "best and brightest" (albeit most morally bankrupt).

One of the more dismaying things about Wall Street continuing "business as usual" -- notwithstanding the economic carnage it's wrought on the rest of the economy -- is that it leaves that "brain drain" dynamic intact.

As Dan Quayle might put it, "what a waste it is to lose one's mind . . "

No (Financial) Cure Without Proper Diagnosis

"We ALL Caused This Mess??" Hardly.

Put me in the camp that says, without an accurate diagnosis, it's not possible to cure our current economic mess.

So, here are two competing narratives explaining how we got to this juncture, both courtesy of Les Leopold (thanks to Ned Krahl for forwarding the Leopold piece):

Narrative #1: 'We Are All to Blame'

"We Americans sank ourselves in debt. We consumed more than we produced. We bought homes we couldn't afford and used them as ATMs. Of course Wall Street did its part by offering us mortgages they knew we couldn't really afford. The government also contributed mightily by pushing Fannie Mae and Freddie Mac to underwrite "politically correct" loans to low-income residents who shouldn't have been buying homes at all. In short, we all are to blame.

--Les Leopold, "Why the Big Lie About the Job Crisis?"; Huffington Post (9/3/2010)

If the foregoing is correct, here's what logically needs to happen next:

The era of excess is over. We need to cut back on spending and borrowing. We need to reduce government debt by raising the Social Security retirement age and cutting social programs. We've got to streamline our public sector by laying off public employees and cutting back their lavish pensions. And all workers will have to adjust to an era of intense foreign competition: We've got to reduce our wage and benefit demands if our companies are going to compete globally. We have to live within our means.

In short, we gorged ourselves until the economy crashed. Now we've got to tighten our belts and accept less to get it going again.

--Les Leopold

Contrast that with Narrative #2, "An untethered Wall Street crashed the financial system (and broader economy) while engorging itself."

Starting in the late 1970s . . . the financial sector was liberated from its New Deal-era shackles. Freed from any limits on constructing complex new financial products, hedge funds and too-big-to-fail banks and investment houses created an alphabet soup of new securities with the sky-high yields. The rating agencies abetted the crime by blessing these flimsy products with AA and AAA ratings.

Wall Street built this flim-flam of finance out of junk debt -- like sub-prime mortgages -- which it could pool, slice, and resell for enormous profits. In fact, selling these bogus securities was the most profitable enterprise in the history of Wall Street. Wall Street wrapped credit default swaps and collateralized debt obligations into pretty packages so that they could literally sell the same underlying junk assets again and again.

The whole scheme worked just fine as long as the underlying collateral (our homes) appreciated year after year. But as soon as housing prices peaked, it was game over. The upside-down pyramid of debt and junk financial instruments came crashing down. The entire credit system froze, tearing a gaping hole in the real economy.

--Les Leopold

Guess which narrative I find more accurate?

Prescribing Cures

Only once the disease has been diagnosed, can a cure be promulgated.

Here is Leopold's:

Through steep progressive taxes on the super-wealthy, fair income taxes on hedge funds and transaction fees on Wall Street's proprietary trading, we can keep that bubble from reinflating -- and in the process raise the money we need to put America back to work. With the revenue we collect, we can hire millions of people to weatherize homes and buildings and rebuild our infrastructure. Instead of laying off teachers we can hire more, and provide them with better training and support. We can expand universities and colleges too, and allow people to go to college for free, which will improve our peoples' skills -- and keep young people off the unemployment rolls.

--Les Leopold

The only step Leopold omits is holding Wall Street accountable -- through appropriate civil and criminal remedies -- for its transgressions.

What Would "Opposite George" Do?

Recipe for Recovery. Not.

If you've been on a desert island the last three years or so, here's a quick synopsis of the financial crisis so far:

When the proverbial sh*t hits the fan, as it did beginning in early 2008, you:

1. Reward society's greediest and most reckless -- that would be Wall Street -- by giving them untold billions ("the greatest wealth transfer in world history," as Barry Ritholtz puts it, accurately).

2. Punish society's most frugal and conservative -- that would be its savers -- by reducing interest rates to zero.

3. Ignore voluminous, nauseating mountains of evidence of illegality -- quite an accomplishment, given who wrote the country's financial laws -- and prosecute no one.

As the saying goes, "how's that workin' out for 'ya?"

Doing the Opposite

So, here's an inspiration: do what "Opposite George" would do.

As Seinfeld's legions of fans doubtless already know:

George returns from the beach and decides that every decision that he has ever made has been wrong, and that his life is the exact opposite of what it should be. Jerry then convinces him that “if every instinct you have is wrong, then the opposite would have to be right”. George then resolves to start doing the complete opposite of what he would do normally. He orders the opposite of his normal lunch, and introduces himself to a beautiful woman by saying "Hi, I'm George. I'm unemployed and I live with my parents." To his surprise, she is impressed and agrees to date him.

--Wikipedia

It worked for George.

Maybe Barack, Ben, and Timothy should try it.

Wall Street & "The Pottery Barn Rule"

Earthquake on Wall Street

You break it, you own it.

--Thomas L. Friedman, "The Pottery Barn Rule"

Supposedly coined by Friedman in a 2003 Op-Ed piece, the "it" he was referring to at the time was Iraq.

His warning: if the U.S. goes into Iraq and bungles it -- it will bear responsibility for the consequences.

Watching stocks gyrate crazily yesterday as world markets wrestle with the growing sovereign debt crisis, it seems that The Pottery Barn Rule lives on.

This time, however, there's a new "it": the financial system.

"It": The Financial System

The system may indeed be on the verge of reform, however superficial or substantive that may be.

But what's clear is that up until this moment, the current financial system reflects the considerable best efforts and (self) interest of the folks on Wall Street.

Wall Street got the financial regulations it wanted.

It blocked the financial regulations it didn't.

And as a result we ended up with a crazily leveraged, unaccountable juggernaut that, not surprisingly, splattered -- but somehow left those most responsible fabulously wealthy (while impoverishing millions who had nothing to do with it).

Fine, Wall Street.

You break it . . . you're responsible.

Iceland's (Volcanic) Ashes

Iceland's Last Wishes

For connoisseurs of dark humor, there's a beauty on Twitter that apparently has gone "viral":

Iceland's last wish: to have its ashes scattered all over Europe" -- market analyst

For those who don't recall, Iceland's (ongoing) banking crisis makes the one in the U.S. look like a summer squall.

The 91% Solution

The Quick & Simple Way to Fix Wall Street

[Editor's Note: in a post last week, "Financier, Heal Thyself? Don't Count On It," I promised a part 2. This is it. Heads up: if you read this blog purely for real estate content, or want a post with a little levity -- skip this one.]

Want to test your knowledge of political Americana?

Answer this puzzler:

Which U.S. Presidential candidate endorsed a 91% marginal tax rate on income?

A. George McGovern
B. Dennis Kucinich
C. FDR
D. Dwight Eisenhower

Answer: D.

In fact, the question is a bit of a curve ball: Eisenhower never campaigned on a platform of 91% marginal tax rates -- he didn't have to. That's because Eisenhower inherited a 91% marginal rate from the Truman administration -- and saw fit to leave it there during his eight years in office.

Dwight D. Eisenhower: West Point graduate. Supreme Allied Commander in World War II. President of Columbia University. Two-term Republican(!) U.S. President . . . wealth-redistributing, Commie radical!

Beaver Cleaver

If you don't remember the '50's -- and you won't unless you're at least 60 years old -- it wasn't exactly a Communist love-fest.

On the contrary, that era notably witnessed the Cold War, "duck-and-cover," and Joe McCarthy and his anti-Communist witch hunts ("are you now, or have you ever been . . .?").

Some other tidbits of '50's culture: Beaver Cleaver, "Father Knows Best," Bob Hope, Doris Day, and drive-in movies. (And to be sure, "colored-only" drinking fountains, restrooms, etc. in the South.)

Still, not exactly Haight-Ashbury in the '60's.

And yet.

And yet society and its lawmakers saw fit to levy a 91% marginal rate on annual income over $400,000 (equivalent to about $3 million today).

What were they thinking?!?

Values, Then & Now

A couple things, perhaps.

--That the country's social fabric was more important than the (very) well-being of its richest .05%.

--That the pursuit of ungodly sums of money was unhealthy -- even corrosive -- to one's self, and one's larger community.

--That the ability to make such ungodly sums of money was itself due to a peculiar historical confluence of built-up legal and political institutions; heretofore unimaginable gains in technology and productivity; and the sacrifices of many, many preceding generations.

Isaac Newton said that "if I have seen further, it's because I have stood on the shoulders of giants."

Today's CEO's are pygmies who think they are giants -- and that modern economic life began with them (obviously not true, but if we're not careful, it certainly may end with them).

It's hard to tell which trait best defines today's CEO's: hubris -- or greed.

Financial Reform, Circa 2010

Which brings us back to financial reform.

First, three stipulations:

One. The current financial system is so enormous and complicated, and has so many moving parts and interconnections, that few people understand half of it. Unfortunately, almost none of those people are elected officials in Washington.

Two. Even if FDR and his brain trust somehow sprang back to life with a divinely inspired blueprint for reform, they would be thwarted by today's political system. Too partisan, too balky, too corrupt.

Three. More limited, strategic reforms have either been ineffective -- or backfired spectacularly.

Case in point: legislation passed by Congress in 1993 to limit executive compensation -- considered excessive back then, even though it was a fraction of today's levels.

Barred from deducting executive salaries greater than $1 million, publicly traded corporations simply switched to awarding stock options and bonuses to CEO's.

More accurately, CEO's -- via their handpicked boards of directors -- started paying themselves in stock options and bonuses.

The 91% Solution, or, "I Like Ike"

Add the foregoing "stipulations" together and what do you get?

A broken, dysfunctional financial system that cannot be fixed.

Or can it?

To paraphrase Albert Einstein, the problem of Wall Street cannot be solved at the same level of thinking with which it was created.

So, go up a level.

What is Wall Street ultimately about, at least today?

Not service to one's fellow man ("God's work" -- the real kind); one's country (the definition of patriotism); or even just providing and efficiently allocating capital to the rest of the economy (Wall Street's putative purpose and raison d'être).

It's all about making money.

Obscene, unprecedented tidal waves of money.

To pick just one example, last year -- not a banner year for most, to put it mildly -- the top 25 hedge fund managers averaged $1 billion in compensation. That they paid 15% income tax on.

$30 Million a Year

Such a financial bonanza also suggests the solution: go back to Eisenhower-era marginal tax rates.

Hell, bump them up 10-fold, just to account for today's more expensive luxuries and toys (tycoons really couldn’t buy Lear Jets in 1955).

So, the John Paulson's and Lloyd Blankfein's of the world can make up to $30 million annually before coughing up the lion's share of it to Uncle Sam. Thirty million a year -- still not too shabby.

Such a remedy has the virtue of being simple, efficient, and laser-focused on the underlying problem plaguing today's financial system.

Oncologists now understand that the best way to kill an advanced or otherwise inoperable tumor (because of its proximity to vital organs) is to cut off its blood supply.

Raising marginal tax rates to 91% will have the same effect on the metastasizing cancer that modern-day Wall Street has become.

Trading Parking "Birthright" for a Mess of Pottage?

Chicago & Privatized Parking

In an effort to streamline unethical practices and boost illegal profiteering, Mayor Richard M. Daley announced sweeping new plans Monday to overhaul his city's "antiquated" system of graft.

According to Daley, Chicago's once-great fraudulent institutions have grown obsolete, and City Hall is no longer bilking taxpayers out of as much money as it once did.

"It's been business as usual for too long in Chicago, and now it's time to find more efficient ways to misuse authority for personal gain," said Daley, who has served as Chicago's mayor since 1989. "We must modernize our illegitimate activities right now, today, before it becomes impossible for public officials to act in my best self-interests."

--"City 0f Chicago to Modernize Outdated Graft Programs"; The Onion (3/27/2010)

So, a financially strapped government facing a yawning budget deficit enters into a deal -- brokered by Wall Street -- to sell its rights to a steady stream of cash payments in perpetuity for a one-time, lump sum payment.

Greece, right?

Try, the City of Chicago and its parking system.

Since striking the extremely unpopular deal last year, Mayor Richard Daley has been castigated for selling the rights to the parking system for a relative pittance.

Exacerbating matters: the private corporation now in charge immediately raised parking rates city-wide, and extended metered hours (they now include Sundays, till 9 p.m.!).

Except instead of parking meters -- which were all removed -- there are now kiosks in the middle of each block (pictured above) that dispense stickers with timed expiration dates.

What's the significance of that?

With no more marked parking spaces, you can squeeze in more cars. And it does away with driver #2 inheriting any "unused time" left on driver #1's meter.

Good thing Minneapolis is running a budget surplus, and won't be tempted by such short-term gimmicks!

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.

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.

Wall Street, Girlfriends & Wives

Did the Girlfriend Already Get Everything??

A judge says that if Denny Hecker can afford a girlfriend, he must pay his estranged wife a nice amount, too.

--"At Issue: 2 Women, Money & Hecker"; Star Tribune (11/26/09)

What a perfect metaphor for our financial mess!

If you haven't been following the story, a Hennepin County judge just ordered Denny Hecker, a Minneapolis auto magnate/wheeler-dealer whose business empire crashed, to give his estranged wife a fraction of the money that he's illicitly been transferring to his girlfriend.

If a bankruptcy judge can force Hecker to support his wife, surely there's a way to make government "do the right thing" with respect to the reeling American middle class.

Unfortunately, there's ample evidence that the "girlfriend" (Wall Street) is still calling the shots.

Two other differences between Denny Hecker and Washington:

One. After Washington has lavished a virtually endless string of trillion dollar "baubles" on Wall Street -- much of it with borrowed money -- it's not entirely clear that there's anything left in the U.S. Treasury.

Two. The money Denny Hecker gave his girlfriend at his wife's expense putatively belongs to him. The money Washington is giving Wall Street comes straight from U.S. taxpayers.

P.S.: the bankruptcy code has something called a "fraudulent conveyance" which allows a judge to reclaim money from girlfriends and give it to wives. Hmm . . . perhaps that has some relevance for Wall Street.

Goldman Sachs & the Swine Flu Vaccine

Feeding the Hand That Bites You

Some of New York's biggest companies, including Wall Street giants Goldman Sachs and Citigroup, received doses of swine flu vaccine for at-risk employees, drawing criticism that the hard-to-find vaccine is going first to the privileged.

"Wall Street banks have already taken so much from us. They've taken trillions of our tax dollars. They've taken away people's homes who are struggling to pay the bills," union official John VanDeventer said. "But they should not be allowed to take away our health and well-being."

--"Goldman Sachs, Citigroup got swine flu vaccine"; Yahoo! News (11/5/2009)

I get "not biting the hand that feeds you."

What I find puzzling is "feeding the hand that bites you."

Not Just Dibs on Vaccines

Getting dibs on a scarce vaccine is the least of the harm that Wall Street does.

Much worse is the gravitational pull that it exerts on our capital -- and talent.

Jeremy Grantham puts it this way:

Every country needs a basic financial system to function effectively with letters of credit, deposits, and check writing facilities, etc. But as you move beyond that it is worth remembering that every valued job created by financial complexity is paid for by the rest of the real economy, and talent is displaced from real production, as symbolized by all of the nuclear physicists on prop trading desks. Viewed from the perspective of the long-term well-being of the whole economy, the drastic expansion of the U.S. financial system as a percentage of total GDP in the last 20 years has been a drain on the health and cost structure of the balance of the real economy.

--Jeremy Grantham, "Lesson Not Learned: On Redesigning Our Current Financial System"

FYI, "prop trading" refers to "proprietary trading," or bets that Wall Street makes with its own money.

Financial Res Ipsa Loquitur

Comparing Guns, Credit Derivatives

Guns don't kill people, people kill people.

--NRA bumper sticker

Credit derivatives don't blow up financial systems, people do.

--Wall Street mantra du jour

Despite the incalculable harm wrought by credit derivatives on the U.S. -- and global -- financial system the past two years, Wall Street is clearly resistant to the idea that credit derivatives are a destructive force that need to be reined in. Or simply banned.

Wall Street's argument?

Using credit derivatives to hedge risk is a legitimate financial function. Things go awry when credit derivatives are misused.

In the words of Jerry Webman, Oppenheimer's chief economist, credit derivatives are no different than gasoline. The same gasoline that powers your lawn mower can just as easily blow up a Molotov cocktail.

Examples of legitimate uses of derivatives include airlines that need to hedge their fuel cost; farmers who need to lock in the price of their harvests; and oil producers who need to sell their output.

Flaws in the Argument

The problem with the foregoing argument is that it ignores reality -- recent, catastrophic financial reality.

Imagine hearing the dirigible industry defending hydrogen as an inert gas, safely used with the right precautions . . . the day after the Hindenburg blew up.

The public wouldn't buy it.

So why, in the aftermath of AIG, Lehman Brothers, Bear Stearns, etc. isn't there a massive public groundswell demanding regulation of credit derivatives? Why hasn't Congress taken action?

Two reasons stand out: 1) credit derivatives aren't well understood outside Wall Street (and perhaps, inside as well); 2) Congress isn't protecting the public, but rather the financial industry.

Financial Res Ipsa Loquitur

When a patient emerges from surgery with a scalpel left in their back, they don't need to prove negligence because of a legal principle called "res ipsa loquitur" -- the thing speaks for itself.

In practice, res ipsa loquiter shifts the burden of proof from the patient, who normally must prove that the surgeon was negligent, to the surgeon, who must now prove that he wasn't.

Something similar is now needed to weigh the utility of credit derivatives. In this case, the surgeon is Wall Street; the patient would be . . . us (as in savers, investors, and taxpayers).

Society doesn't allow assault weapons on school playgrounds.

There's no reason to permit what Warren Buffett famously labeled "financial weapons of mass destruction" to wreak havoc on our financial markets ever again.

Worshipping Villains

Wall Street Self-Selection

The continued resonance of [Gordon] Gekko has “probably been the biggest surprise of my career, that people say that this seductive villain has motivated me to go into this business.”

--Michael Douglas, talking about his character, Gordon Gekko, in the 1987 film "Wall Street"; The NY Times (9/7/09)

“I can’t tell you how many young people have come up to me in these years and said, ‘I went to Wall Street because of that movie."

--Oliver Stone, "Wall Street" director; The NY Times (9/7/09)

It's startling to hear Douglas and Stone recount their startled reactions to the effect that their movie, "Wall Street," had on a generation of Wall Streeters: it inspired them.

In fact, Michael Lewis, author of "Liar's Poker," another insider's account of sordid Wall Street behavior, has reported the same phenomenon: instead of serving as objects of scorn and disgust, the villains in his book were embraced as heroes and role models.

And these are the people whose interests and morals are effectively steering U.S. financial policy??

But Are they Financial Carrots?

Name That Caption

Pick the best caption for the photo above:

a. Government incentives to investment bankers to fix the financial system.

b. Bugs Bunny's dream come true.

c. The "all carrots, no sticks" food stand.

d. A bumper crop of carrots at the St. Paul Farmer's Market this year.

Answer: credit given for any of the above, but technically "d" is correct.

Realtors, Wall Street & Fiduciary Duty

Goldman to Clients: You Shouldn't Have Trusted Us

If you didn't know, Realtors' owe their clients a fiduciary duty.

What does that mean?

Actually, quite a bit.

The legal definition of fiduciary duty has two components: a duty of loyalty, and a duty of care.

By definition, your Realtor knows more than you do about the housing market -- that's what you're paying them for.

The duty of loyalty means that they won't misuse that advantage.

On the contrary, Realtors commit to use their market knowledge and professional skills to serve their customers' best interests. As opposed to, say, their own.

Now segue to Wall Street.

Already, it's clear how Goldman Sachs, et al are going to defend themselves against the tsunami of lawsuits sure to be brought over trillions in securitized, mortgage-backed securities that Goldman helped sell.

As the world now knows -- and Goldman knew at the time, as evidenced by its bets against said securities -- the securities were ticking time bombs, destined to cost the purchasers -- their clients -- grievous losses.

Goldman's likely defense?

Not that it didn't do it.

Not that the housing market bust was an unforeseeable, one-in-a million occurrence (what statisticians call a "black swan event"). After all, Goldman not only foresaw the bust, but made billions betting on it.

But rather, that its clients were "big boys" -- sophisticated institutional investors who knew, or should have known, what they were doing. Boo-hoo.

Except that that's not what fiduciary duty is about.

Whether Goldman's clients were multi-billion dollar hedge funds or Daffy Duck, it was legally obliged to use its (undeniable) information advantage to act in the clients' best interests.

Instead, it knowingly harmed its clients while acting in its own interest.

If that doesn't constitute breach of fiduciary duty . . . the term's meaningless.