Wall Street Insiders: The Conning of America

Thursday, October 16, 2008

Com’on. Admit it. Who among us doesn’t get a certain kick out of a good crisis now and then – as long as it doesn’t affect us personally. Other than for the beer and barbeque, people go to NASCAR races for the danger in which the drivers put themselves, and for the occasional times when they overdo it. Hurricanes are big news, not just to warn the people who may need to evacuate, but because the rest of us find it interesting. Did you see the dramatic pictures of the southern California fires on all the cable news websites? Oh, and then there’s the new reality series, “Celebrity Rehab.” Google it if you think I’m kidding.

Unfortunately, the current economic crisis is adversely impacting most, if not all of us in one way or another. It’s not funny, not at all, and yet there are some who would take advantage of the situation. Sure, there are always jerks and career criminals out there who will scam whatever they can. To them, I offer my apologies for implying any relationship to the people I’m really talking about, the scale of whose selfish deceit is infinitely more grand and despicable.

Everyone lately has been fixating on the stock market, wildly fluctuating up and down hundreds of points a day. The stock market has a real and a speculative component. The real component moves the prices of stocks based on the actual performance of their companies. The speculative component is driven by expectations which are usually based on more or less reasoned guesses about individual company and economic conditions – but not always. Right now the speculative component of the market has taken charge, fueled, in part, by irresponsibly negative rhetoric from our Administration, by Henry Paulson and Ben Bernanke in particular, by Congressional leaders and Presidential candidates, and by the media for whom all this drama is good for its bottom line. Some of these players don’t fully understand what’s happening, others do, but what they all have in common is the adrenaline rush, power trip and ratings these times afford them.

The stock market is not moving this radically because of day to day changes in the performance of corporate America – whose financial statements are only published on a quarterly basis. Nor is it behaving so radically because of the lightening fast, en mass reactions of ordinary Americans and traditionally conservative institutional investors who hold stock. So who does that leave? Who, not what, but who is propelling all this movement?

Unquestionably, our economy, more so in some sectors than others, is having problems, serious long-term problems we’ve been discussing, but doing nothing about for years and, in some cases, decades. The wild and erratic fluctuations in the stock market just isn’t one of them. How can I be so cold, so harsh when the life savings of so many ordinary people are in jeopardy? Because they’re not. Because the speculative panic we’re watching will subside and stock prices will return, eventually and probably sooner than you think, to where they should have been, all things considered.

Real or not, we focus on daily movements in the Dow and other market statistics because they’re more dramatic, more exciting than droll, monthly employment statistics. The thing is, while we’ve all been distracted by these market fluctuations, astute Wall Street insiders are taking advantage of these swings, and no doubt doing their best, within the law of course, to encourage them. Just today, the Dow Jones Industrial Average opened at 8,577, went as low as 8,198 (down 379 points), and then as high as 9,013 (815 points above today’s low), to close at 8,979 in, as they like to say, “positive territory,” finishing up 402 points. Breathtaking, isn’t it. And these are only the Dow Jones Industrials. Can you imagine what’s happening to other, less prominent stocks?

Certainly some of this volatility is the natural and unsuspicious behavior of an anxious and confused speculative market. But the rest of it, particularly the wild in-day and day-to-day swings, smacks of having been engineered, not by one person in particular, but by various and hopefully independent specialists who do all this for a living, and a very good living at that. Academicians please, there’s no need for any sophisticated mathematical model of speculative behavior, fodder for a future episode of “NUMB3RS.” Look to the obvious. Odds are that specific people are making this happen – our government leaders, their unwitting accomplices.

If only you had money, tons of money, so much money and expertise that you could leverage these swings to your advantage. Imagine if you were so good, you could see them coming. Think of the billions you’d stand to make, literally overnight or within a single day’s trading, by buying and selling at opposite ends of multi-hundred point swings. Somebody’s got to ask, which is what I’m doing here and encouraging you to do the same, who stands to benefit from speculative swings in stock prices this radical?

Hold on now. I not suggesting any conspiracy, any secret organization that is to blame. No. Not even close. What I’m talking about is a flaw in the system – more like a tear in the time-space continuum from the size of it – which allows for the triggering and support of dramatic, across the board shifts in stock prices having no foundation other than the leveraging of other stockholder anxiety for personal gain – without regard for the consequences. What do we know about the pattern, timing and sources of selling and buying initiatives? Who’s making money at the expense of the American psyche, without regard its real consequences for consumer confidence and business investment, and the effect on our economy?

Just because the Dow drops 777.68 points…

Monday, September 29, 2008

… doesn’t mean the entire economy is having a bad day.  Sure, if you’re holding stock that’s gone down, you’re net worth is lower – but then the market has a long history of coming back.

What it could also mean is that a lot of people were betting on the fact the government was getting ready to spread around some serious money.  That didn’t happen today and so lots of people got nervous and assumed that everyone else would get nervous, so they sold to get out ahead of the drop, and then the other people saw the prices falling and said, “I knew it!” and they sold…  Hey, it’s a speculative market.  What did you expect?

Actually, stock prices are driven by two factors:  real changes in the fortunes of our publicly held companies, and speculation.  Some of the speculation is about profits and potential growth, but a lot of it, especially in the context of wild ass (pardon me) doomsday language coming out of the Administration, is just pure speculation, plain and not so simple.  (Keep in mind that some people on Wall Street and elsewhere in investment banking make as much or more money during downturns than upswings.  Even among we ordinary people, who out there on isn’t wondering, “You know, honey, maybe this would be a good time to buy?” …”Don’t be ridiculous. Not until we redo the kitchen.”)

The point is, nothing has happened to the real component of our economy in the last few hours.  Prices will go back up, eventually.  They always have.  This is not the end of our economy as we know it.  Not even close.  (Citicorp helped out Wachovia today, and they did it all by themselves without government assistance.)

I’d like to personally ask Congress to avoid being distracted by stock prices, whichever way they’re moving, and focus on defining the extent of the current problem and evaluating alternative solutions.  To borrow a phrase from James Carville of the Bill Clinton campaign, “It’s about the economy stupid,” which is something much larger, much more powerful, much more deserving of your attention, than the momentary fluctuations of a very, very speculative market.

Secretary Henry Paulson: Is this the person we want devising a program to save Wall Street?

“He also owns options to purchase 680,474 shares of [Goldman Sachs] common stock, all of which [were] exercisable.”
Monday, September 29, 2008

Before we go any further, I don’t have an answer to the question posed by the title.

On one hand, it’s certainly a good idea to have someone with Secretary Paulson’s understanding of finance and our financial institutions handling the current crisis. On the other hand, do we really want someone this close to Wall Street in charge? The same Secretary of the Treasury who, for more than two years, has watched us inch closer and closer to the emergency he now tells us the worst peril for our economy since The Great Depression? Close advisor, maybe, but in charge? The primary source of information about the crisis on the basis of which our Congress is ready to spend $700 billion?

The first of the two enclosed PDFs is the Treasury Department biography for Mr. Paulson.* (I’m giving you the link to the PDF I made, but also to the website which contains the original material.) It confirms that, prior to assuming his current position at Treasury, he “was Chairman and Chief Executive Officer of Goldman Sachs since the firm’s initial public offering in 1999,” and where he had been employed since 1974.

What’s interesting is what the Treasury biography omits, that being any reference to the $492 million of Goldman Sachs stock Secretary Paulson sold when he was confirmed by the Senate, and his other Goldman Sachs-related holdings and options. See the Wall Street Journal “Market Watch” report I’ve included below.** Interesting reading, to say the least. Among other notable details, “He also owns options to purchase 680,474 shares of common stock, all of which [were] exercisable” as of the publication date, June 30, 2006.

Goldman Sachs Group (NYSE: GS) closed on Friday at $137.99. Over the past 52 weeks, Goldman Sachs has traded between $86.31 and $250.70.

So what do you think?

*Link to PDF… PDF Version of Treasury Biography
Link to original source… Original Treasury Biography

**Link to PDF… PDF Version of WSJ Market Watch Report
Link to original source… Original WSJ Market Watch Report

Thinking Out Loud About Our Government’s Turning Morgan Stanley and Goldman Sachs Into Banks

Monday, September 22, 2008

I’ve got to be careful here. Things are moving so fast in Washington that it’s hard to keep track of the specifics of what’s happening, let alone conduct a thorough analysis of the situation – all for what amounts to a hobby while I work, probably like you, 10+ hour days making a living doing something else. And then there’s the problem that, while my education and experience are helpful, I’m no world class authority on finance and banking. On the other hand, those shortcomings have never stopped me before, so, what the hell, here goes…

My gut and my brain both tell me that allowing Morgan Stanley and Goldman Sachs to function as banks may be a bad idea, certainly one that needs a lot more careful consideration on the part of the Bush Administration and Congress. True, as banks they will be more tightly regulated, and will have access to capital from depositors and from within the banking system itself the way commercial banks do. If only that was all there was to it.

1. Morgan Stanley and Goldman Sachs made some bad investment decisions. So, instead of allowing the economy to impose its own, naturally occurring penalties, we reward them by allowing them, in perpetuity, to be commercial banks.

2. In addition to allowing them to be commercial banks, are we also going to buy the bad subprime debt they’re carrying on their books?

3. There are other ways to regulate investment banking behavior other than turning the investment banks into commercial banks or “thrifts.”

4. In the process, we’re not only pulling the rug out from under Wachovia which was negotiating a merger with Morgan Stanley, we create two huge new competitors in a commercial banking system our own government tells us is already struggling. (Talk about interfering with the economy.)

5. I’m fairly certain our regular banks are constrained by law and regulation in their ability to also engage in investment banking and securities transactions. The idea is that we don’t want unacceptably high risks to be taken with our deposits. Doesn’t turning two of the world’s largest investment banks and brokerages into commercial banks fly in the face of that general principle? Are they no longer going to be allowed to do investment banking?

6. What about the other investment banking firms – such as Merrill Lynch and Lehman Brothers – who managed to save themselves without being allowed to be commercial banks? Are we penalizing them for having resolved their problems without public assistance?

Yes, I have more questions than answers, but the one thing I am sure about is that our government is moving way too fast. In what’s got to be the “bum’s rush” of the decade – any decade – the Administration is asking Congress to give our the Secretary of the Treasury what is basically unfettered authority to spend upward to $1 trillion dollars to resolve the current crisis – the extent of which, and the array of possible solutions for which, we have yet to confirm or debate. And they expect Congress to legislate this authority by Friday. One unnamed media contact in Congress went so far as to describe the legislation they have been asked to approve as a “Financial Patriot Act.” To quote from Senator McCain’s reaction, “We can’t solve a problem that has poor oversight with [a solution that has] no oversight.”

We need to calm down. Congress needs to stay all Administrative actions, including this conversion of investment banks into commercial banks, until it (Congress) has had time to study the situation more carefully.

Our Government’s Bailout Plan: The Assumption of Armageddon

“What if we just left well enough alone and let the economy do its thing?”
Saturday, September 20, 2008

Our government, which does not have a particularly good record for handling the economy, and whose policies almost certainly facilitated, in not outright contributed to the current housing and financial sector crises, is suddenly operating at warp speed on the assumption that we are teetering on the verge of the second Great Depression. I’m not exaggerating or jumping to conclusions. That’s what they’re telling us, but where are the signs of this pending financial Armageddon?

Keep in mind, our government’s bailout plan is coming from the same officials who didn’t see this crisis coming, but who are now in a panic to stop it. This isn’t studied management. It’s a knee-jerk, “Yikes!” reaction. If they were oblivious enough to have missed it or even contributed to it, why should we have any confidence in their ability to fix it? My overwhelming sense is that our government, at least in so far as the economy is concerned, is being run by people who have no idea what they’re doing.

Has it been too easy for too many people to buy homes? Sure. Have certain Wall Street firms gone nuts doing overly leveraged, high risk business that never should have been funded? Absolutely. Are there large numbers of innocent people who will suffer as a result of these Wall Street indiscretions who we need to help? Definitely. So, other than helping the innocents, what if we did nothing? On what basis are we getting ready to spend, by all accounts, between $500 billion and $1 trillion to save investment banking firms which clearly haven’t behaved in a way that justifies their continued existence? What if we just left well enough alone and let the economy do its thing?

At the risk of sounding like John McCain – not that there would be anything wrong with that – except for subprime mortgages, their implications for the housing sector and, most importantly, their relationship to our nation’s largest investment banking firms, the fundamentals of our economy are holding. The banking system, far from hanging on by a thread, continues to do business and is adjusting its behavior with remarkable speed. Two of our largest banks are swallowing up two of our largest investment banking firms – and doing it without government assistance. Bank of America has purchased Merrill Lynch. Wachovia is negotiating to acquire Morgan Stanley. Lehman Brothers has just been sold to Barclay’s Bank – again, without government assistance. If we can just get the government to procrastinate a few more months, the economy may resolve the current financial crisis on its own.

In the meantime, the availability of subprime mortgages is evaporating from the housing market. Families who shouldn’t have been able to buy houses will have to rent. Others will have to buy more modest homes. People’s expectations will have to be downsized, but then they were obviously out of line with reality, so they need to adjust. So there will be less personal and business credit available, at rates which more accurately reflect the risks which lenders are taking. Who knows, American’s might actually start reducing the extent of their personal debt in favor of saving. You remember savings? Maybe you don’t, but it’s a good idea, sort of like having an extra bottle of water or frozen Lean Cuisine dinner in your freezer, just in case. The point is, making adjustments is what a fundamentally strong, mostly free market economy does periodically to fix itself.

I just don’t see it. The stock market isn’t real. It’s a speculative market. Real is the way our domestic car manufacturers have failed to innovate. Real is our over-dependence upon foreign oil. Real is a struggling education system that is having trouble producing the work force we need for this generation, let alone the next one. Real is a lack of competitiveness in international markets. Real is our government’s inability to live within a reasonable budget – and these are the people we’re trusting to cure excess on Wall Street?

Let’s help the innocent who will be hurt by the failure of the Wall Street giants, but we need to demand that Washington calm down and prove that we really are on the verge of the next Great Depression before their actions put us into one – only to have them look back, retrospectively, and argue, “See, I told you so.”

If we’re hell bent on spending $500 billion to $1 trillion, there’s got to be something better we can do with it.

Our Government’s Bailout Plan: Holding our economy hostage.

To paraphrase the late Senator Everett Dirksen, “A trillion here, a trillion there, pretty soon you’re talking real money.”

Friday, September 19, 2008

This situation is beyond ridiculous.

I don’t know about you, but lately, ever since our national financial crisis started coming to a head, I’m been feeling a lot like a sap. I can’t get over the impression that the obviously overpaid managers of our most prominent financial institutions are holding our economy hostage to save their collective asses at our expense, that is, at the expense of ordinary Americans and our progeny for perhaps generations to come.

My gut tells me we should dismiss these troubled institutions with the old phase, “Never write a check with your face that your ass can’t cash.” (Don’t you just love that expression?) Unfortunately, we’re apparently now to the point that, if we don’t do something, large numbers of regular people will suffer. Okay, I get it, but would like to make a seasoned suggestion to at least minimize the cost of a solution while imposing some real, albeit minimum consequences on the firms that let all this happen.

Do not buy the bad debt these institutions are holding, and do not loan them money. It’s way too expensive, much more than we need to spend to fix the problem, and it sets an horrific precedent.

Instead of buying the bad debt, all our Government needs to do is insure – under carefully controlled circumstances to avoid cheating – the potential losses which these institutions might incur pursuant to an orderly, properly paced liquidation of their troubled assets. Losses pursuant to liquidation, particularly given that this bad debt is largely collateralized by real estate, are likely to be far less than the balances of these bad debts.

We can still protect these companies, but there’s no reason to put the cost of a solution up front, or to save them the effort of getting themselves out of trouble. Let the companies manage the liquidation of these assets at their own expense. Our government doesn’t do stuff like this well.

In return for this insurance against losses, all the offending executives are out, without their whopping severance and retirement packages. These executives are being fired, and should not be allowed to benefit from the extraordinary costs their greed and poor judgment have imposed upon the public.

And finally, we should demand a premium for this insurance in the form of a special, priority class of stock in these companies which we can eventually sell and which will assure us a reasonable share of these companies’ corporate profits which they will enjoy precisely because the American people have stepped up to save them.

There. How ‘bout them apples?

“I had no idea the SEC was reading my stuff.”

“Maybe there really is a Tooth Fairy, after all.”
Friday, September 19, 2008

Yesterday evening, I posted a short piece with the long title, “Crisis on Wall Street: Feeding the frenzy to make money at everyone else’s expense.,” which asked if someone, anyone, would please look into who is making money on the wild stock market swings which have characterized and, to some extent, helped cause the current crisis among our financial institutions.

This morning, to my pleasant surprise, I awoke to the headline, “SEC imposes emergency ban on short-selling.” I haven’t felt like this since I left my last tooth under my pillow. Maybe there really is a Tooth Fairy, after all. And to think, all these years, I thought my mother was just patronizing me.

Short selling is the practice of selling stock you don’t own in anticipation of a decline in the value of that stock. If and when it does fall, you can buy it at that lower price to fulfill your sales order. The spread between the sell and the buy price is your profit. “Sell high, buy low.” The problem is, selling short can actually help force the price of the stock down, and declining stock prices are contributing to the severity of the problems many of our financial institutions are now having.

Anyway, I want to thank SEC senior management for visiting the WordFeeder and for taking such prompt action on my request for which I take full credit.  Wow.  I had no idea these pieces we publish on the WordPress, hunched over our desks at the end of a long day, lost in the glow of our screens, could have such a profound and immediate impact.  I’m thinking I’ll stop writing so much about politics and start working on world peace.

-wf

Crisis on Wall Street: Feeding the frenzy to make money at everyone else’s expense.

Thursday, September 18, 2008

Open the PDF in the link below to take a look at the behavior of the Dow Jones Industrial Average in the past couple of weeks – at the fourth and fifth columns from the left. Down 345 points in one day. Up 290 points two days later, only to fall 280 points the next day, and then back up 213 points in the next two days. Down 504 points on Monday, up 142 the next day, down 449 points, and then back up 410 points today. Wow. All that motion to have dropped only 524 points in three weeks.

Recent Movement in the Dow Jones Industrial Average

Will somebody please look into who’s making money on these wild swings in the stock market?

Could it be that some of this volatility is being driven, not by real market forces, but by the independent actions of buyers and “shorters” who know perfectly well how to play the rest of us, how to time their purchases and sales to leverage the news just right? Start a downward trend on one day when bad news breaks, and then start buying at the bottom, creating an upswing the next day, only to sell again at the top. What’s wrong with that? Isn’t that just the stock market doing its thing?

Certainly destabilization is a real and sometimes natural phenomenon in any speculative market, but there are lines that shouldn’t be crossed, limits, common sense and legal, on how far players should go.

Does anybody really think the professionals aren’t making a fortune on all this panic selling and buying, at the expense of the rest of us who are just doing our best to hang on for the ride? Making money off of the hysteria they help create? Actually contributing to the demise of the finance sector companies whose difficulties and failures feed the frenzy even more?