After Madoff

The catharsis of Bernie Madoff's sentence was short lived. It didn't take long for the victims to swing into action, commenting on every news article about Ruth Madoff or their sons that they too should be put into prison. But really, what is going on here, according to Frank Rich's fabulous op-ed piece in the 5 July 2009 New York Times, is that we are hungering for something to be done to the wizards of Wall Street who keep gyrating the world's economy and particularly ours, through these boom and busts.

Yet, nothing happens. In fact, banks and financial institutions have increased their lobbying capacities in Washington, DC, watering down any possible legislation that may regulate their secretive and outlandish practices. Meanwhile, in anticipation of even the minor tweaking the Obama Administration has done to these institutions, banks are raising rates on credit cards, fees for accounts, and even the privilege to withdraw your own money. Think about that. You have to pay to get your money!

Henry Blodget, a former securities analyst on Wall Street, made millions during the last bubble induced by the financial industry, the dot.com era. His analysis caused stock brokers to recommend a feeding frenzy for small start ups, and when the dust settled and there was no "there there," Blodget was charged by the New York Attorney General for stock manipulation because he, among other stock analysts, didn't believe in the hype they were selling. He settled the civil case. However, the irony is, Henry Blodget is a talk-head analyst for NPR. NPR! Explaining how the financial industry is creating bubbles, again!

It seems we can not quite clean our closets. The next thing you know we'll have Enron executives on NPR giving us advice on how to speculate on commodities.

So it seems that as each day passes from the Obama inauguration, nothing happens to prevent these kinds of bubbles from happening again. Frank Rich is right, we would probably cheer for a John Dillinger these days, just as much as people did in the 1930s. Someone who had the guts to take it to the banks just as much as the banks and financial industry continue to take it to us.

Another article which demonstrates that nothing has changed is a fascinating account of how Goldman Sachs has been at the bottom of every bubble we have recently experienced. Yet the company and their executives (the roll call of former Goldman Sachs execuitves who have gone on into powerful government positions is breathtaking: Jon Corzine, Governor of New Jersey and former US Senator, Robert Rubin and Henry Paulson, Secretaries of Treasury...). Why would we regulate a cash cow for the powerful?

Ever get that sinking feeling that nothing will change? Remember, unemployment is rising, foreclosures are rising, your bank is charging you more for less....

Right Direction?

Perhaps it is just my simple mind, but I keep thinking that trying to merely right the ship and add a few more crew members to monitor the sails, isn't going to create a healthy economy.  But it seems that is the direction the Obama Administration is taking.  It is their hope, through guaranteeing private investors buying up the so-called toxic assets on financial institutions ledger sheets, and by adding more regulatory authority, more referees if you will, that the same markets that got us into this mess will get us out of this mess.

While I am all for innovation and creativity, I keep wondering whether those attributes are a good thing in the financial sector.  It seems to me that every boom and bust we have had during the past two decades have been caused by reckless innovation in the financial markets, whether it was using leveraged money to come about with whacky ideas for Internet marketing during the dot.com boom and bust, or whether it was the slicing and dicing of mortgages and other debts (consumer credit, student loans, Lord knows what else) into securities that were sold, insured, and leveraged more times than probably anyone knows, it seems the financial industry's creativity knows no bounds.  While that may be fine and good if they are gambling with their own money, their own retirements, their own homes, it's not good when it is playing with teacher's retirements, a janitor's home, and deposits in a bank.  

I keep coming back to a more holistic view of economy.  That is, we can not continue to rely on selling services.  Over 70 % of our economy was about consumer spending.  And what we exported became the Lords of Wall Street, financial services and the related businesses such as lawyers.  In order to create something fundamentally sustainable, to avoid these huge, massive, booms and busts, it seems to me we need to reign in the financial industry's creativity and develop more production of stuff, things other people will buy, here and abroad.  

Stocks and securities must be about long term investments in companies that are, to use an overused word that essentially has no more meaning, transparent.  We should invest based on profit and earnings, not some wild idea that goes public, makes a few kids under the age of 30 millionaires and later goes bankrupt leaving retirement accounts empty.  We should not allow mortgages and credit card debt to be traded like baseball cards, but rather the lender assesses the risk and holds the card.  It's the only way loans can be made responsibly.  

Until we all learn how to behave I think righting the ship isn't enough.  We need to come to shore, get off, and learn how to sail, safely.  In the meantime, to join the world economy, we need to stop being the consumer and begin, again, to produce.  We can not continue being reckless in our consumption, ruining other countries as we binge on buying cheaply made crap.  

These changes are to the very core of an economy.  It's time we realize the fixes will be an over haul.

Populist Anger

Well, it's starting.  Populist anger taking the form of vandalism. The former head of the Scottish Bank apparently refused to return his huge pension after the British Government bailed out his bank.  Last night, a group broke the windows to his home.  

In a carefully negotiated press conference last night, President Barack Obama agreed that people have a right to be angry over the AIG bonuses, but that investors also have a right to make a profit.  In other words, be angry, but not too angry.

In today's Wall Street Journal, Thomas Frank, the author of What's Wrong With Kansas? opines that the regular folks got it right about Wall Street.  That the  anger we all feel is spot on in analyzing the "case study" of poor management, absent risk assessment, and sheer greed that controlled most if not all the financial institutions for the past two decades.  Many "populists" manage the family finances, weighing risks in light of obligations, and while they may enjoy making a profit, they don't sink the ship for short term and short sighted gains.  Therefore, in examining what it is we know so far about the individual behaviors of management in AIG, Citibank, Goldman Sachs, Lehman Brothers, Bear Stearns, Merill Lynch, Bank of America, IndyMac Bank Countrywide...down to the shark mortgage broker keying in on making a big killing on an outrageous refinance...most populists realize the folks in charge were, well, only trying to make as much money off the back of the rest of us as they could.

I suspect if the Obama Administration neglects to listen to this anger, and adopt policies which not only prevent future behaviors but also lean heavily to help the average person dig out of this morass, there will be more broken windows.  

What was the line? I'm madder than hell and I'm not going to take it any more!

Financial Melt Down

Lots to write about as we ease into the New Year.  Of course, there is more than enough material on the economy.  But first, this just in, the financial system upon which ours and the global economy is based, is in a melt down!

Yesterday, in the New York Times Michael Lewis wrote a fantastic piece focused on the lack of regulatory oversight on the financial markets: banks, hedge funds, the stock markets.  It is, in my opinion, a must read.

Two salient points in his article.  First, something we have all known, but the revolving door between government and the industries (we saw this a lot with high powered Senators and Congressmen becoming lobbyists for the very industries they used to legislate) government regulates is a huge problem.  Lewis focused primarily on the Securities and Exchange Commission, but this regulator becomes highly paid employee routine exists in all sectors, not just finance.  It goes without saying, but Lewis drills in the point, that regulators are loathe to enforce when they know they will be seeking lucrative jobs from the very industries they are monitoring.  In the case of the financial sector, particularly the risk markets such as stocks and securities, the enforcement of regulations has become, according to Lewis, a joke.  Unfortunately, it became a very very scary joke as we now are having to deal with all the failures.

Because of the cozy relationships between regulator and regulatee, Lewis maintains the SEC has become more about protecting "predator" corporations from the public rather than the public from predatory securities schemes.  My aside to that reflection is that it is true for much of government regulatory agencies.  If you can afford a lobbyist presence in Washington, DC, you have more access to government "protection" than the rest of us.

Second, and in my opinion the more important point made by Lewis, was the emphasis over the past two decades on corporations short term gains.  The incentives for CEOs, boards of directors, and managers, is to work toward quarterly profits rather than long term health of the company much less (and this is my gripe not Lewis's) producing anything of lasting value.  And when you're driving for immediate results, you of course tend to do things which are not in the best interests of anyone other than your own wallet.  

It seems to me that the current melt down is an opportunity to re-build the whole mechanism, not just tinker trying to instill confidence.  I'm not sure, frankly, we can instill confidence in something so broken.  I am also not sure layers and layers of regulation are the answer, but I do think we need to enforce the laws we have.  At the risk of sounding harsh, it seems to me the enforcers failed.  Do they still have jobs?  Are they still monitoring banks, companies, the stock market?  In any other situation, if there was such a large and massive failure, jobs would be lost.  So, let's get new people in those positions, someone who ensures they do their job, and Congressional oversight to make sure the boss is actually accomplishing something.  But we also need to re-think how we want corporate America to act as well as how we save, borrow, and lend money.  

In the meantime, real people are enduring real pain.  If we don't spend the time, now, working on re-building, you can bet we'll be looking at the smoldering rubble again.