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.

Matt Taibbi on "Wall Street's Big Win"

The New Financial Crisis, Same as the Old One?

Don't have time to read thousands of pages of (purposefully) arcane legislation, to figure out whether the financial reform bill Congress passed this Summer really reforms how Wall Street does business? (I guarantee you that few if any members of Congress read the bill in its entirety, either).

Here are the Cliff's notes, courtesy of Matt Taibbi (now infamous for calling Goldman Sachs “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells of money") :

What happened to our economy over the past three years, and is still happening to it now, was not an accident or an oversight, but a sweeping crime wave unleashed by a financial industry gone completely over to the dark side. The bill Congress just passed doesn't go after the criminals where they live, or even make what they're doing a crime; all it does is put a baseball bat under the door and add an extra lock or two on the doors. It's a hack job, a C-minus effort. See you at the next financial crisis.

--Matt Taibbi, "Wall Street's Big Win"; The Rolling Stone (8/19/2010)

In damning (and depressing) detail, Taibbi lays bare how senior members of both parties gutted the so-called "Volcker Rule" and the "Lincoln Rule" -- the bill's two provisions aimed at shutting down proprietary trading and derivatives trading, respectively.

As Taibbi, Michael Lewis, Barry Ritholtz and numerous others have now chronicled in great detail, it was precisely those two activities that lay at the foundation of the financial melt-down that started in 2008 and is still plaguing our economy.

Here is Taibbi's sum-up:

Over a long year of feverish lobbying and brutally intense backroom negotiations, a group of D.C. insiders fought over a single question: Just how much of the truth about the financial crisis should we share with the public? . . . Do people need to know the real version, in all its majestic whorebotchery, or can we get away with some bullshit cover story? In passing Dodd-Frank, they went with the cover story.

--Matt Taibbi

Besides the sheer skulduggery of what transpired on Wall Street, what I find most dismaying is that the most vocal and impassioned critics -- still -- are people like Jon Stewart, Matt Taibbi, and Ritholtz.

In other words, entertainers, journalists, and bloggers far removed from the actual levers of power.

It's as though we're living through a financial Watergate, but this time the Woodward's and Bernstein's are being muscled aside.

Financial Reform and Straw Cattle (er, Men)

WSJ: 'Financial Reform Hurts Farmers'

"Finance Overhaul Casts Long Shadow on the Plains"

--Headline, The Wall Street Journal (7/14/2010)

So, according to The Wall Street Journal, regulating derivatives -- as the financial reform bill before Congress weakly proposes to do -- will in fact hurt Midwestern farmers.

That's because it will cost them more to hedge the sale of their crops, livestock, etc.

There are only two problems with that argument:

One. It's far from clear that regulating derivatives will make them more expensive.

In fact, buried in the Journal's own article are quotes from several experts who argue that better regulation and more transparent trading will make derivatives less expensive.

Two. The cost of not regulating derivatives (just so far) has come to trillions in new federal debt, a crashed financial system, and a nasty, ongoing recession.

Not exactly good for farmers -- or anyone else!

P.S.: my alternative -- and more correct -- headline: 'Finance Overhaul Lifts Long Shadow Over the Plains.'

Obama, Lincoln, & Financial Reform

George McClellan Redux?

Politicos will recall that much was made of Barack Obama's admiration of Abraham Lincoln during and just after the 2008 Presidential campaign.

In particular, Obama was said to have been influenced by Doris Kearns Goodwin's book, "Team of Rivals," which studied Lincoln's management style.

Clearly, in picking former adversaries like Hillary Clinton for his Cabinet, Obama showed that he subscribes to a similar philosophy.

Ironies

Almost two years later, the parallels with Lincoln's administration look apposite, indeed.

Unfortunately for Obama, the historical figure he is starting to most resemble isn't Lincoln, but George B. McClellan, Lincoln's top general during the early stages of the Civil War.

Like Obama, McClellan was a hugely popular figure; also like Obama, he lacked the "go for the jugular" instinct needed to vanquish a mortal enemy (Lincoln famously said of McClellan, "if General McClellan does not want to use the army, I would like to borrow it for a time").

Of course, Obama's foe isn't the Confederacy.

Rather, it's Wall Street -- and the rigged, stupefyingly complex financial system it designed and (still) sits astride.

The turning point in the Civil War only arrived once Lincoln installed Ulysses S. Grant and William Tecumseh Sherman as his top generals (after running through a series of others).

It remains to be seen who will be the U.S. Grant and William Sherman of financial reform, circa 2010.

Wall Street's "Advise and Consent" Role

"Enjoying Virtually Front-Door Access"

Executives and political action committees from Wall Street banks, hedge funds, insurance companies and related financial sectors have showered Congressional candidates with more than $1.7 billion in the last decade, with much of it going to the financial committees that oversee the industry’s operations.

In return, the financial sector has enjoyed virtually front-door access and what critics say is often favorable treatment from many lawmakers.

--"Financial Overhaul Bill Poses Big Test for Lobbyists"; The New York Times (5/22/10)

Since when did we give Wall Street a say -- the say -- in regulations purporting to regulate it?

I know the U.S. Constitution gives the Senate an "advise and consent" role -- but where it does it say anything about Wall Street??

And yet.

And yet the financial reform legislation just passed by the Senate apparently must now run the gauntlet of industry lobbyists, who would weaken (if not gut) it.

Why is this, exactly?

Oh, yes: because these guys finance our politicians' election campaigns . . .

European Bailout

One Helluva Round-Trip

Want to know what stocks are going to do?

Forget financial analysis.

It's all about political analysis: on the strength of a European bailout (announced over the weekend), worldwide stocks are going crazy -- this time on the upside.

Personally, as a long-term, buy-and-hold investor (vs. Wall Street trader), it all has me reaching for the Pepto Bismol.

The large size.

Just call it the "Pepto Bismol" stock market, I suppose . . .

Next!

On to Financial Reform!

With Health Care now out of the way, we can get to what I consider to be the more important issue: Reforming Wall Street and the banking sector . . . Essentially, I am advocating a “Do Over.” Reverse the past 3 decades of radical deregulation. The alternative is an even bigger financial crisis, and sooner than you imagine. The next time around, I plan on watching it all unfold from St. Barts.

--Barry Ritholtz, The Big Picture

My sentiments, exactly.

The only thing I would substitute in Ritholtz's quote is "Palm Springs" for "St. Barts" (I prefer the desert -- and U.S. soil!).

P.S.: stray tidbit -- St. Bart's was named after Christopher Columbus' younger brother, Bartolomeo.

Robins, Flamingos, and Penguins

What Does a "Bird" Look Like?

Before you pose the question, "What does a well-designed financial system look like?," first ponder the question, "what does a bird look like?" Seriously.

Robins, flamingos, and penguins bare little resemblance to one another.

Yet scientists classify each as birds, and each could be called an environmental "winner": endowed by evolution with a cluster of traits and survival strategies that make it well-adapted to its particular environment.

So it should be no surprise that there can be different models for successful banking systems.

Consider Paul Krugman's take on the Canadian model:

Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk.

More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.

--Paul Krugman, "Good and Boring"; The New York Times (2/1/2010)

Krugman goes on to note that Canada's "boring" financial system has held up just fine even though, with just five, dominant banking groups, "essentially all the Canadian banks are too big too fail."

Sweden is another country that has accepted a highly concentrated -- albeit heavily regulated and "boring" -- banking industry.

Unfortunately, we in the U.S. have ended up with the worst of both worlds: dangerously -- recklessly -- big and inter-connected financial players on the one hand, and light to non-existent oversight on the other.

You might call such a combination a "Turkey" of a design.

Or a Dodo bird . . .

Paul Volcker: 'No Substitute for Structural Change'

Volcker's Clarion Call

Imagine being able to consult Albert Einstein about a physics conundrum, or FDR or Lincoln about an existential national emergency (like the one we're facing now, perhaps).

Having Paul Volcker, the 82 year-old former Fed Chairman, still on the scene and available to advise and guide is truly a stroke of good luck.

So what is he prescribing?

Basically, the same thing he's been saying for over two years, only now with a little more traction:

I am well aware that there are interested parties that long to return to “business as usual,” even while retaining the comfort of remaining within the confines of the official safety net. They will argue that they themselves and intelligent regulators and supervisors, armed with recent experience, can maintain the needed surveillance, foresee the dangers and manage the risks.

In contrast, I tell you that is no substitute for structural change, the point the president himself has set out so strongly.

I’ve been there — as regulator, as central banker, as commercial bank official and director — for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.

The implication is clear. We need to face up to needed structural changes, and place them into law. To do less will simply mean ultimate failure — failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future.

--Paul Volcker, "How to Reform Our Financial System"; The New York Times (1/30/2010)

Let's see . . . as a nation, we can heed the distilled wisdom of one of the country's wisest, most successful financial stewards and public servants . . . ever.

Or, we can do what Wall Street wants (basically, nothing -- but keep the government backstops and free money flowing, thanks very much).

Not much of a choice.

P.S.: If you read the entirety of Volcker's piece, you'll note that he demurs -- because of space limitations -- on a number of thorny issues, including revamping how U.S. home purchases are financed:

We also face a large challenge in rebuilding an efficient, competitive private mortgage market, an area in which commercial bank participation is needed. Those are matters for another day.

Let me translate the above: 'Fannie Mae and Freddie Mac are toast. Time to start over' (as even Barney Frank now admits).

Paralysis by (Financial) Analysis

Instant Amnesia -- Or Something Worse?

If it exists, it's possible.

--unknown

Believe me, it's not what it is.

--caption, New Yorker cartoon (what husband caught in bed with another woman says to his wife, standing in the doorway).

Let's see: as every investor, saver, employed person and sentient being knows, the U.S. financial system -- indeed, the global financial system -- effectively crashed in mid-September, 2008.

The proximate cause was the failure of Lehman Brothers, which set off a horrific series of financial dominoes that threatened virtually every major global financial institution.

To stem the panic, sovereign governments around the world, led by the U.S., intervened with an unprecedented series of financial injections, guarantees, bailouts, etc.

Those actions appear to have stabilized the (economic) patient, but the prognosis -- not to mention the staggering costs of said intervention(s) -- have yet to be sorted out.

So, what are the defenders of the status quo, opposed to breaking up so-called "Too Big to Fail" financial institutions, calling for?

More study (just like global warming skeptics).

Consider this op-ed, from Friday's Wall Street Journal:

Congress, as part of its reform legislation, should mandate the creation of a new expert commission designed to fully investigate the extent and consequences of interconnectedness before any new regulation of systemically important institutions is actually adopted.

--Hal Scott, "Do We Really Need a Systemic Risk Regulator?"; The Wall Street Journal (12/11/09)

Do we really need a "new expert commission" to tell us, years from now in mind-numbing jargon, what we just collectively witnessed?

Does this guy live in the real world??

Actually, he doesn't: he's a Harvard Law School Professor.

"Our" New Paymasters?? Define, "Our"

Confusing "Us" and "Them"

Today's Wall Street Journal is running a house editorial decrying government wage controls on the top 175 executives at seven companies that are still using money from the Troubled Asset Relief Program ("TARP").

The title of the piece?

"Our New Paymasters: wage controls are politically easier than genuine reforms."

I can see how if you're one of the 175 affected executives, it would certainly seem like the government was your new paymaster.

But where does "our" come in?

"Our" presumes an "us."

"Us," of course, would be the 99.9999% of Americans who don't make millions annually running banks that were bailed out by the government, and are being sustained even now by free money from the Federal Reserve.

Paul Volcker

Paul Volcker, Window Dressing (Sadly)

[Former Federal Reserve Chairman Paul] Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.

--Louis Uchitelle, "Volcker’s Voice Fails to Sell a Bank Strategy"; The New York Times(10/20/2009).

I don't have many heroes, political or otherwise.

Teddy Roosevelt. FDR. Abraham Lincoln. (If you're keeping score, that's two Republicans and one Democrat.)

My list of living heroes is even shorter.

But Paul Volcker's on it.

His leadership as Fed Reserve Chairman in the early '80's was perhaps the crucial piece in subduing inflation -- which threatened to spiral out of control at the time -- and thereby helped set the stage for an unprecedented 20 year-plus period of prosperity.

Now, he is on record recommending that too-big-to-fail financial institutions be broken up; that commercial banks, whose deposits are federally insured, not be allowed to use that money to make risky financial bets; and that credit derivatives be strictly regulated (and in many cases, banned).

Hard to argue with any of that.

But none of these proposals are going anywhere, because Volcker and others like him no longer have any power.

We are all poorer, in many ways, for that.

P.S.: Near the end of the Reagan administration, when Iran-Contra and other scandals were undermining Presidential authority, a satirical bumper sticker came out saying, "None of this would be happening if Reagan were still alive." Today, substitute "Volcker" for "Reagan."