Opposite Economic Views

~ Informed investors make stronger markets. ~

The old adages, "Everything is timing" & "90% of what happens is due to attitude" is very pertinent to smart investing. Economic pendulums swing back from going too far in either direction - its just a matter of attitudes gathering speed. Much depends on consumers.

Bear market money-makers see global economies continuing to contract well into late 2010. They expect consumers outstripped their ability to pay huge levels of debt after a decade of decadent spending like there's no tomorrow. They expect most will spend only on necessities to pay off credit card debt & car loans, but those w/low-paying or no jobs will default. They believe this process will stretch out over several years - slowing annual growth to 1.0% (down from 3.5%), and that stock prices have not yet fully priced in this timing.

Speakers' motives at the Reuters Investment Summit play a huge role. They all try to influence their particular markets up or down depending on their strategy to make money. Never mind there are few alternatives for that big load of money flowing out of hedge funds.

Bears like Atteberry, who runs a $2 billion bond fund at First Pacific Advisors in LA focused on income funds, hopes to gain more institutional & high-value clients disenchanted with hedge funds & seeking safe harbors. Taylor, an old guy who trades currencies with a $14 billion hedge fund, hopes global traders will dump currencies so he can buy cheaper.

Bullish speakers like O'Shaunessy are also trying to influence managers of institutional & high-value clients to release their big load of money to buy equities now, which would drive those market up. Even if growth in spending slows to a crawl, they believe it will pick back up so best to get into equities of companies with solid fundamentals while their stock is undervalued. How severely undervalued is the question here.

Fox Guarding Henhouse - Explained

After our nation's "henhouse" was cleaned out in 1929, trust in banks was destroyed by 1934 when the SEC was formed to restore confidence to battered investors. Pres. Roosevelt appointed Joseph P. Kennedy its first Chairman; and when asked why Kennedy, a stock speculator, FDR said simply – “Set a thief to catch a thief.”

How well has that worked? History repeats itself – in 11 stock market crashes since WWII. Now trust in government is gone bust & trust in banks is once again hanging by a thread. Whatever happened? Farmers Bush-Cheney & Company (Farmer Bush & Team) ignored history in the name of eradicating that ultimate evil - regulation. Our nation’s 5 largest investment banks complained of burdensome regulation… poor babies whined!

The Fox – the nation’s largest banks - had already formed “holding companies” to shield themselves from oversight of subsidiary “regulated” banks. In 1999 under Sen. Phil Gramm's leadership, the Gramm-Leach-Biley Act allowed financial holding companies to offer banking, securities, and insurance products under one corporate roof. The law didn’t permit the SEC to examine holding companies’ books nor require sufficient equity to meet the SEC’s capital requirements. The SEC needed new legislation to close that gap – especially after global hedge fund, Long-Term Capital Management (LTCM) collapsed in 1998, and the following stock market mini-crash in 2000.

The gap in SEC enforcement was left gaping by the Senate Committee on Banking (Financial Institutions, Securities & Investments Subcommittees) and the House Financial Services Committee - which have jurisdiction over the SEC & Securities Investor Protection Corporation. These Committees are responsible for oversight of government-issued securities, financial exchanges and markets, financial derivatives, accounting standards, and insurance. Who was in charge of the henhouse?

By 2001, Fox knew Farmer Bush & Team had locked the “shotguns” away rather than “keep it behind the door” as earlier SEC Chairmen did. Still believing Fox is best at catching a thief in the henhouse, Farmer Bush & Team - armed with a Republican majority in Congress - sat on the porch smoking… what? Pot???

In 2005, the year after the SEC tossed out capital requirements, Farmer Bush & Team Congressman Christopher Cox in charge of guarding the henhouse. Rep. Cox (R-CA) spent years leading efforts to block investor lawsuits & investigation of complaints, and to keep rules favoring executive stock options. Yep… Rep. Cox was a true Friend of Fox (FOFox).

As new SEC Chairman, FOFox Cox dismantled the risk oversight office assigned by former Chairman Donaldson, and then fully embraced Bush & Team’s new Treasurer, Henry Paulson. Paulson, Uber-Fox at Goldman Sachs, master-minded gutting of capital requirements in 2004. Not too surprising that FOFox Cox also embraced Uber-Fox’s ultimate plan to lock up ALL shotguns in Farmer Bush Team’s Cabinet, too. Farmers Bush-Cheney & Company quickly shushed complaints.

Fox & Friends were free to gorge on chicken to the point of becoming very sick. With bellies full of the offending evidence, Fox & Friends went to Uber-Fox who took it up with Farmer Bush & Team to… what? Put them out of their misery? Nope… Uber-Fox begged them to buy more chickens while Fox & Friends upchucked all over the farm & then some. GM-Fox will be next after gorging on SUV profits. With Paulsen’s blueprint, will there be ANY chickens left to reproduce a brood???

What would George Orwell say today? He’d probably repeat what he wrote in Animal Farm – “Some animals are created more equal than others.”

Loose Rules Sink Ship - Part II

And now ... for the rest of the story since 2004. Did Henry Paulsen see the financial markets imploding when he accepted appointment as Sec. of the Treasury in 2006? Doubt it. How much did Annette Nazareth know & when did she know it? When she resigned in 2007? Good questions & only she would know... unless of course someone sues & they all get hauled into some federal court with jurisdiction. Where would that be? Can our government be hauled into the Brussels International Court? ... More & more questions come to mind as I type. The New York Times reporters - bless their little hearts - have begun a series - "The Reckoning" - trying to answer some of my many questions. It will make the movie "Wall Street" look pithy & pale. Get front row seats & read all about it. Good night & good luck!!

LOOSE RULES SINK SHIP

3-6-09 Update:  Former U.S. Securities and Exchange Commission member Annette Nazareth took herself out of the running to be Treasurer Geithner’s deputy after concern about public scrutiny over her SEC work and frustration at the length of the selection process.  Smart move!

SEC’s Loose Rules: WHO wanted looser capital requirement?

Answer: Follow the money back to 2004 - when the fix was in.

In 2004 the SEC Commissioners decided to loosen capitalization requirements -- after only 1 hr. & slight discussion. The 5 largest investment banks had urgently asked for an exemption to hold larger amounts of riskier assets... increasing leverage by taking on more debt - $30 to every $1 of equity - greatly increases profits, too... IF nothing caused the markets to fly off the shelf that is.  The banks wanted to swap older objective rules with their own subjective computer models to measure financial risk.

Henry Paulsen of Goldman Sachs headed the banks’ effort & Chairman Donaldson led the charge for him.  He succeeded & was named Secretary of the Treasury by Pres. Bush in 2006.  No wonder the President was letting him hang out there to take the heat.

One Commissioner - Harvey Goldschmid, law professor at Columbia (Democrat) – raised concerns (“We said these are the big guys that clearly will be involved here, but that means if anything goes wrong, its going to be an awfully big mess...” – a twitter can be heard).  They did have one letter from Leonard Bole, a software consultant from Indian, warning the computer models proposed would not work to determine risk. Bole stated the models could not correctly anticipate market turbulence. The Commissioners simply ignored it. 

Annette Nazareth, Director of SEC’s Market Regulation Division, also backed the banks. (1)  Her staff explained that their proposed computer models would track variable risk, replacing previous strict capitalization requirements. Annette assured the Commissioners it was okay (“we have very, very broad discretion & will be meeting with these firms on a monthly basis… so, hopefully, we’ll have a lot of early warnings & ability to restrict activity that we think is problematic”). 

Again, Goldschmid pointed out he was uncomfortable with the risk - “This is going to be much more complicated – compliance, inspection, understanding of risk – more than we’ve ever had to do.” Then he caved in reliance upon staff’s explanation.

They reassured the Commissioners the changes were not only for the better, but necessary. Staff explained they had hired mathematicians & auditors to review everything, “So we’re going to going to depend on the firms, obviously the front line. They’re going to have to develop their entire risk framework… we’ll be reading that first & they’ll have to explain that to us in a way that it makes sense… then we’ll do the examinations of the process in addition to approving their models & their risk control systems.” Ultimately they would have to rely on the firms to police themselves!

WHAT?!! Voluntary self-supervision??!  What a novel regulatory concept! 

(1) Annette Nazareth:   J.D. Columbia Law - Held various positions in major NYC/DC law firms & government.  She is married to Roger W. Ferguson, Jr., former vice chairman of the Board of Governors of the Federal Reserve and current CEO of TIAA-CREF.  Reference: SEC Meeting 4-28-04 - Final Item #3 on the agenda: Alternative Net Capital Requirements for Broker-Dealers that are Part of Supervised Facilities and Supervised Investment Bank Holding Companies (Division of Market Regulation).  Explanation | NYTimes Video

Whaaa's Up Wall Street?

Perhaps the investment banking debacle will force the political chatter off-stage for awhile until it gets digested by the Chattering Masses on NonsenseNews. Reagan's trickle-down economic theories (voodoo economics) that have dominated markets & regulations for 28 yrs. are much like Rev. Wright's "chickens coming home to roost."

McCain's good buddy, Phil 'Nation of Whiners' Gramm of TX led the Republicans to sponsor & pass the Financial Services Modernization Act of 1999. It passed on a vote of 54 (GOP) to 44 (Dem) w/2 present. [S. 900 An Act to enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, and other financial service providers, and for other purposes. Ck out the Roll Call Votes]

These "trickle down" economic policies were bound to get on that "free market" slippery slope leading to this mortgage/derivative debacle. So, now Wall Street's 'Welfare Kings' cry, "HELP US!" - maybe we do need regulatory babysitters after all.

McCain has indicated he will appoint Phil Gramm as Treasury Secretary! BIG reason to support Obama - smarts, resilience & demeanor attracts the best brains in the country to work with him.