Monday, November 17, 2008

Terrific article

If you want to read a well written article about the Financial mess Wall Street created for itself, you could do worse than to read this article:

The End

It is chock full of straight talk and interesting tidbits like this one:

In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

and this one:

Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.

I think it is behavior like this that has led Robert A.G. Monks to believe that credit reporting agencies are a salvation to the market, along with participation by owners (investors). Here is a recent post incorporating a suggestion for the new administration:

Third Way

I think that his suggestions are wise, but suspect they require regulatory muscle to implement. His life might even make my case. He, even paired with a Rockefeller, has had little success modifying the behavior of Exxon/Mobil. There is a thick layer of institutional arrogance that meets investors with stage-managed contempt.

Part of the problem is that shareholders don't want to rock the boat when the bubble is inflating, or even believe the Truth when that involves understanding a threat to their profits, and that makes it hard to organize enough resistance to avoid a catastrophe when it matters.

This is how a wise regulator can have a positive impact on the economy. Suppose the SEC head realized it is systemically risky to allow a CEO to serve as CFO, and then suppose he created and enforced a rule forbidding the practice? Or, alternatively, suppose he simply did his all-out best to use his bully pulpit to warn shareholders of the practice, thereby helping to organize them against such practices?

Wouldn't that safeguard some of Exxon/Mobil's extraordinary gains?

In the second case, the unregulated case, I expect the SEC head would need to be widely respected by investors (because of a successful track-record). Someone like Warren Buffet commands enough respect to be heard when the gravy train is rolling along. In the current crisis someone like Steve Eisman might be a great choice, but I don't know if he has the name recognition for the unregulated sage. Certainly he knows where our regulators are failing (i.e. converting BBB bonds to AAA bonds by spending unwarranted trust).

Many choices in life are false choices, especially those presented as mutually exclusive. I think we need a president that picks good financial people that puts marketplace stability first, working in conjunction with the shareholders and regulators to keep the market fundamentally sound, and by fundamentally sound I mean fundamentally honest.

Even a crook wants an honest man to count his money, and I think that forces which act to keep the market honest are beneficial whether corporate, shareholder, press, or governmental. It might even be better to have a multi-directional assault.

My disclaimer is this, I say this all as a checked-out investor. I don't find accounting exciting and can find little pleasure watching the contents of my egg basket. Perhaps I have some faith in regulation because I have little in myself?

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Foot Quotes

"Ignorance more frequently begets confidence than does knowledge"

Charles Darwin