Shah Gilani
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The Goldman Rule: Don't Let This Puppet Master Pull Your Strings
Goldman Sachs Group Inc. (NYSE: GS) Chief Executive Officer Lloyd Blankfein was really on a roll speaking at an investment conference in New York last week.
Among other things, he said there's no way we can conclude that a slowdown in banking and trading businesses is "secular, rather than cyclical."
That alone was enough to make me laugh. But then he went on to address concerns about pending regulations that are coming as a result of the Dodd-Frank Financial Reform Act.
"In our conversations with clients, they have expressed several concerns on the impact to their businesses," Blankfein said, making it clear that his firm will make client interests a theme of its arguments against the regulations. "What Goldman Sachs does for our clients is even more relevant and important."
Now that should make you laugh – if, of course, you're not too afraid.
The truth is that Goldman Sachs and the rest of the big banks on Wall Street – in the inimitable words of author Michael Lewis from his seminal book Liar's Poker – invariably "blow up" customers to make money for themselves.
Not only do they run roughshod over their customers (trading partners) and clients (banking relationships), the big banks manipulate markets, industries, economies and countries to fatten their already gigantic bonus pools and personal fortunes.
Now, I'm not singling out Goldman Sachs because it's the biggest and baddest bully on the block, which it is. I'm not blasting Goldman because I once idolized the firm – its culture, its talent, its sheer money-making prowess – and have seen its vision blinded by greed since going public in 1999. I'm not saying Goldman is the only self-serving, greedy, and pretentious firm on Wall Street. And, I'm certainly not calling out Lloyd Blankfein, whose extraordinary accomplishments as a trader are legendary, but whose leadership of Goldman has been marred by what might generously be described as "PR gaffes."
What I am doing is using Goldman as proof positive that Wall Street banks are bad news.
In fact, rather than seeing them rebound we would all be better off seeing them unwound.
From Wall Street to K Street – And Back
Let me start with the nexus of power and money in this country. That nexus resides exactly where Wall Street and Washington intersect. Each serves the other and the middle-class be damned.
You see, the "revolving door" metaphor that's so often used to describe the relationship between Wall Street and Washington isn't exactly accurate.
The reality is that there is no revolving door. There are no doors at all. It is more like one giant corridor where all the water cooler talk is about paying for campaigns, paying lobbyists, and paying bonuses.
There's a reason why Goldman Sachs is derisively referred to as "Government Sachs." The flow of executives and operatives between Goldman and Washington, and even other world governments and central banks for that matter, is legendary.
I can't point out all the connections – there are simply too many. But I will point out a few that you may not be aware of.
Occupy Wall Street Protests: Want To Really Clean Up Wall Street? Here's What Your Demands Should Be
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Mortgages for the 'Middle-Rich' Are Class Warfare Ammunition
For weeks now I've been telling you the markets are broken.
Now I'm going to prove it.
Today I'm talking about the housing market. It's broken. The truth is Congress broke it. Of course, it had help from mortgage originators, banks, and a deliriously greedy public.
But now, amidst all the rhetoric about class warfare, wouldn't you know it, some congressmen want to further grease the wheels of an already slippery housing market for a class of homebuyers I call the "middle-rich."
It's just plain stupid. And not only will it add to our housing woes, it's ammunition for middle-class Americans, who rightly recognize they are the biggest losers in a class warfare battle they never imagined would undermine the American dream.
A Good Idea Gone Terribly Wrong
What's being debated in Congress is the maximum size of mortgages that Fannie Mae and Freddie Mac can guarantee.
The previous maximum mortgage eligible to be backed by the Government Sponsored Entities (GSEs) was $625,000. In the aftermath of the credit crisis and housing bust lobbyists easily got that maximum raised to $729,750.
The increased limit expired on September 30, 2011. But the usual lobbying forces – in this case that would be banks, mortgage originators, realtors, home builders and financial intermediaries that trade mortgage pools guaranteed by taxpayers – are pushing to extend the higher limit until at least the end of 2013.
It doesn't make sense for the government, or taxpayers, to guarantee mortgages at all. The whole scheme, which originated in the Great Depression and made good sense at that time, should have been phased out decades ago. Instead, it mushroomed.
The idea is simple enough. In order to drive money towards housing finance, the government establishes "conforming" criteria for mortgages. When mortgages conform they are believed to be of a certain standard and quality and can be packaged into mortgage-backed pools. The government guarantees the payment of principal and interest on those pools. Investors buy the pools because they are guaranteed, and the money they pay banks and originators for the mortgages in the pools goes back to originators and banks, which now have more money to make more loans to more homebuyers.
Taken at face value this isn't a bad idea. But as is so often the case with even the best ideas, there are unintended consequences. In the case of the government guaranteeing mortgages, there are plenty of very negative unintended consequences, like "moral hazard," for example.
That's why, after the horror of the Great Depression had passed, government guarantee programs should have been phased out, so that private markets could freely price the risk of originating and holding mortgages.
Unfortunately, that didn't happen. That's why we find ourselves in the situation we do today.
How JPMorgan Aided and Abetted the Largest Municipal Bankruptcy in U.S. History
Alabama's Jefferson County filed for bankruptcy protection on Wednesday, making it the largest municipal bankruptcy in U.S. history.
But believe it or not, that's not the biggest story here.
The big story is how JPMorgan Chase & Co. (NYSE: JPM) – specifically, JPMorgan's Securities arm – has a filthy hand in the whole Jefferson County saga.
This isn't breaking news. I've written about it before and so have others. You just may have missed it because the spin machine was so effective that the story got buried fairly quickly.
It's really an interesting story – albeit a long one. But unfortunately, I don't have the space and you don't have the time for all the grisly details, so here's the short version.
Jefferson County is full of characters – and a few who made it into the local government turned out to be good old boy crooks.
Jefferson County, home to Birmingham, had an aging and stinky sewer system. The Environmental Protection Agency (EPA) demanded that the county do something about it as far back as 1996.
And it did.
County administrators decided that a brand new sewer system needed to be built at an expected cost of about $1.5 billion. With that decided, the county commission had to decide who would run the financing operations, craft a plan to manage the debt, and float bonds to pay for the project.
Here's where I'm cutting out all the starch and getting to the meat of the story: Local politicians, who were in cahoots with local broker-dealers (securities firms), wanted a piece of all the money that was going to be sloshing around. They ended up demanding, and getting, hefty bribes from big securities firms to let them become the chosen ones to run this lucrative muni finance deal.
I'm not going to get into how Goldman Sachs Group Inc. (NYSE: GS) got involved in 2002 and ended up being paid some $3 million (some of which it passed along to "consultants") to get in on the deal – which incidentally it ended up doing nothing on, other than participating in a back-door swap arrangement with JPMorgan Securities. Nor am I going to get into Bear Stearns' dealings, nor the small securities dealers who acted as conduits for money being exchanged between JPMorgan and others.
Instead, I'm going to focus on JPMorgan, which ended up constructing the finance arrangements and doing most of bond deals that served to finance the building of the new sewer system – because that's where the story takes a truly ugly turn.
A Brave New (Broken) World
I said it the other day, and I'll say it again.
The markets are broken.
It's not that they're not functioning on a daily basis, pricing risk and assets and performing their price discovery duties. They are doing that – or at least trying to.
Those are the little, daily things that markets do, and there are things there that are broken. (I'll get to those things another time.) Think of these little, daily things as the "hows" or the "mechanics" of buying and selling.
Now think of the big things as the "whys" or the "psychology of investing."
Those are the things that are broken.
Until they are fixed, or "things" change drastically, we are in for some really wild swings in the months, quarters, and years ahead.
I'm going to point out all of these big things to you, over time. But right now, I'm going to focus on just two.
No More Buy-and-Hold Believers
First, there are two types of players in markets: investors and traders.
It used to be that investors dwarfed traders – by a huge margin.
But that's all changed.
There aren't that many truly long-term investors any more. It's too dangerous to be an investor in the traditional sense. That's why most investors, at least those that call themselves investors, are really all traders now.
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The Inside Story of How Our Financial Regulators Let Us All Down
Did you hear the story about MF Global?
No, not the headlines about its bankruptcy – the real story.
If you haven't heard it yet, it goes something like this.
MF Global became a primary dealer only eight months ago.
"Primary dealer" is an elite status. It means the firm is one of only 22 government bond dealers that trades directly with the Federal Reserve's New York trading desk.
Only, the Federal Reserve doesn't regulate or oversee MF Global, the Commodities Futures Trading Commission (CFTC) does – or rather is supposed to.
But, even more incongruously, the CFTC isn't the first overseer of MF Global . It ceded that responsibility to the CME Group Inc. (Nasdaq: CME), which owns and operates the largest futures exchanges in the United States. The designated self-regulatory organization for more than 50 futures brokers, CME was supposed to be the cop on the beat.
However, t he not-so-funny thing about the relationship between MF Global and the CME Group is that MF Global recently boasted on its Website that it "was the top broker by volume at CME's metals and energy exchanges in New York and in the top three at its Chicago exchanges."
So, is it any wonder that the CME just last week audited MF Global's segregated customer funds and found them to be in compliance?
These are the same supposedly segregated funds which the CME is now saying may have been tampered with. According to the CME:
"It now appears that [MF Global] made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection insofar as MF Global did not disclose or report such transfers to the CFTC or CME until early morning on Monday October 31, 2011."
How much money are we talking about? About $633 million – or 11.6% out of a segregated fund requirement of about $5.4 billion.
Do you see what I'm driving at?
So the real story is, t he Federal Reserve, which doesn't regulate MF Global but regulates all banks in the United States, lets a futures commission merchant with investment bank wannabe desires become an insider in its dealings. Meanwhile, a private for-profit enterprise that runs the self-regulatory apparatus that oversees its own customers steps in for a federal agency that's supposed to be in charge of commodities, futures and derivatives markets.
And that's only the tip of the iceberg.
Let me jump on the Securities and Exchange Commission (SEC) next, because you aren't going to believe this, either.
Subterfuge at the SEC
It's come to light recently that the SEC has been blatantly violating federal law for decades.
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European Contagion Turns Positive, Will it Last?
Everybody loves a rally.
After European leaders announced a plan to stem Eurozone and global panic over Greece's potential default and shore up capital at beleaguered banks, positive contagion is lifting stock markets from one end of the planet to the other.
What's not to love?
Well, the plan itself, for one thing. It's so full of holes that unless it's tightened-up, detailed, actually agreed to, financed and executed, it's nothing but an outline in the sand.
Don't get me wrong, it's a start. But, the question investors have to ask themselves is, if the plan isn't written in stone and if they've missed this rally, is now the time to jump back into equities?
The answer is yes and no.
Understanding where the risks are and how to position yourself to profit on the heels of this new global positivity requires looking at the European bailout plan as proposed, and measuring it against the realities constantly unfolding in the future.
Let's start with the plan and measure it against what you should be watching in the days, weeks, and months ahead.
The Devil's In the Details – Especially When There Are None
What has been proposed is a plan to ask private banks to "voluntarily" exchange some $300 billion (210 billion euros) of current Greek debt for new debt to be issued by Greece. The banks are being asked to take a 50% haircut. That means the debts they were owed will be cut in half. Instead of Greece owing $300 billion, the country will owe its creditors $150 billion (105 billion euros).
The two immediate issues here are:
Why a Year-End Rally Is More than Possible
Lately it seems everyone wants to know one thing: Are stocks going to rally through year-end?
The answer is an unqualified "maybe."
Last week, the Dow Industrial Average gained 1.4% to close Friday at 11,808.79. The Standard & Poor's 500 Index rose 1.1% to 1238.25. But the Nasdaq Composite Index fell 1% to 2637.46.
So while it seems like stocks have come a long way in a short time – and they have – in the big picture, we're still crawling and clawing our way up…
However, after hitting 5,048 in March 2000, the Nasdaq Composite is still almost 50% below that high-water mark.
It's the Composite's lack of traction that worries me.
It tells the story, not just of the tech wreck of 2000, but of technology and growth companies at the margins failing to get any meaningful traction. (And many are marginal indeed. Of the 3,000 companies in the Composite, most are smaller than the average companies in the S&P and Dow.)
Given that, you may find it hard to believe we can get back to old highs on the major industrial indexes.
But it is more than possible.
That's because so many of the companies in these indexes are "global" in terms of their inputs, sales, and revenues. And thanks (almost exclusively) to global growth, these big companies are momentarily well positioned. Thanks to overseas sales, their earnings have been strong. And when the revenue streams earned globally are translated back into cheaper dollars, currency gains make net profit numbers a lot stronger.
In this sense, actually, the Fed's quantitative easing programs helped hugely – both by lowering the U.S. dollar's value and by lowering interest rates. Low rates allowed companies to re-tool their balance sheets by retiring debt and reducing the cost of outstanding obligations.
Regarding this most recent rally, the European picture is what brightened the big-cap world and set the stage for this upward movement. Specifically, it's optimism that an effective backstop plan to save Europe from imploding continues to drive shorts to cover.
And if any plan put forward is even credible, it would set the stage for an even bigger market rally.
But we're not there yet…
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