Bill Gross: America requires more than a makeover or a facelift. It needs a heart transplant

Bill Gross dons armour and sword  again and cuts a bloody swathe through the rotten financial and political system of America. We like Bill Gross.

Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the “golden” route from Los Angeles to Honolulu. Today the yellow brick road begins on Wall Street or the City. Aside from supernova innovators such as Steve Jobs or Mark Zuckerberg, the money is made from securitizing things instead of booting and rebuilding America. The tallest buildings in almost every major city are banks, with tens of thousands of people shuffling and trading paper for a living. One of this country’s premier investment banks paid each of its 26,000 employees an average of $370,000 in 2010, nearly ten times the take-home pay of other American workers. Almost a quarter of the 400 wealthiest people on Forbes annual richest list make their money from money, whereas only 8% could make that claim in its first issue in 1982, and probably close to 0% when I first read my economic primer in 1966.

Financiers have lost their high ground and, if truth be told, we began to lose it a long time ago when we figured out that money was more than a medium of exchange or a poor substitute for a store of value. We figured out a turbocharged way to make money with money and proclaimed ourselves geniuses in the process. Well, we’re not. We may be categorized as “opportunists,” to be generous, but society’s “paragons” and a legitimate destination for a significant percentage of college graduates? Hardly.

This country desperately requires a rebalancing of priorities. After readjusting the compensation scales via regulation and/or free market common sense, America needs to anoint a new set of Mensans who can create something more than a cash machine and make this country competitive again in the global marketplace. We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again. We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship. We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up. America requires more than a makeover or a facelift. It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system. It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola. Are record corporate profits a fair price for America’s soul? A devil’s bargain more than likely.

Read the full article.

Loose Change 9/11: An American Coup

I have just finished watching Loose Change 9/11: An American Coup  which raises disturbing questions about the truth of the story of what happened on that day. I was already aware that the 3 Trade Centre buildings could only have collapsed as they did by controlled demolition after viewing a video a couple of years ago by Architects and Engineers for 9/11 Truth. Loose Change elaborates on that and introduces many other strange facts. We now know for example that explosive material has been identified in the dust collected from the falling towers.  Also that no identifiable plane wreckage (or human remains) has ever been found at the alleged crash sites of American Airlines flight 77 at the Pentagon and United Airlines flight 93 in Shanksville, Pennsylvania, something that has no precedent in aviation history.
The implications and conclusions that can be drawn are truly disturbing and you owe it to yourself to get informed and be aware of what has happened, what is happening and what may happen again. If enough people demand to know the truth behind 9/11 perhaps we can avoid a future 9/11 event and the war it leads to.

Quantitative Easing Explained in 6 minutes

I came across this video at Juggling Dynamite. It has ‘gone viral’ reaching 2 million views in the last week. Pass it on to your friends, you can’t make this up.

The BP Deepwater Horizon disaster - what really happened

At IKN (Inca Kola News), one of my regular financial haunts, I read this post about revelations from industry experts in the know about what really happened leading up to the explosion of BP oil rig Deepwater Horizon. In the comments section I found a link to  this article which sums up what happened in layman’s terms:

BP contracted Schlumberger (SLB) to run the Cement Bond Log (CBL) test that was the final test on the plug that was skipped. The people testifying have been very coy about mentioning this, and you’ll see why.

SLB is an extremely highly regarded (and incredibly expensive) service company. They place a high standard on safety and train their workers to shut down unsafe operations.

SLB gets out to the Deepwater Horizon to run the CBL, and they find the well still kicking heavily, which it should not be that late in the operation. SLB orders the “company man” (BP’s man on the scene that runs the operation) to dump kill fluid down the well and shut-in the well. The company man refuses. SLB in the very next sentence asks for a helo to take all SLB personel back to shore. The company man says there are no more helo’s scheduled for the rest of the week (translation: you’re here to do a job, now do it). SLB gets on the horn to shore, calls SLB’s corporate HQ, and gets a helo flown out there at SLB’s expense and takes all SLB personnel to shore.

6 hours later, the platform explodes.

What strikes me about this story is the probable role of morality in it and the consequences in the real world of moral and immoral decisions. Let me conjecture for a moment…

BP hires Schlumberger for their expertise to do a job. The Sclumberger man tells the BP man he should shut down the well because it is unsafe. Why would the BP man refuse? Schlumberger are the experts on that part of the operation. Could it be that Schlumberger has a company culture of safety first which allowed (and obliged) the Schlumberger man to refuse to work on the rig, whereas BP, as evidenced by the BP man’s decision, has a different culture?

The consequences of immoral decisions on Wall Street have no tangible, immediate, visible effects. The consequences of immoral decisions in the oil industry do: explosions, deaths, pollution, environmental disaster. Those things cannot be fixed by lowering an interest rate. Perhaps if the consequences of Wall Street immorality were a dozen dead brokers and a billion barrels of black crude floating down the streets of New York there would be a different Wall Street culture.

Image from Space Gizmo

Dark clouds over America - the fabulous Fabrice of Goldman Sachs

The dark, dark, dark side of Wall Street brought into the bright, bright, bright sunlight of day for all to see (from the New York Times):

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail…

The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market…

As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars….

Goldman let Mr. [John] Paulson select mortgage bonds that he wanted to bet against [for Abacus 2007-AC1] — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.

Mr. Paulson is not being named in the lawsuit.

A 31 year old Goldman Sachs employee (vice-president) Fabrice Tourre is named in the suit for his key role in negociating the deal with reputable capital management firm ACA (from the suit):

(Fabrice) Tourre was principally responsible for ABACUS 2007-AC1. Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. Tourre knew of Paulson’s undisclosed short interest and its role in the collateral selection process. Tourre also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting.

Felix Salmon sums it up well:

The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told ACA that Paulson had a long position in the deal when in fact he was entirely short.

Goldman Sachs has lost more than $10 billion in market capitalization today, in the wake of these revelations. Good. It can go long markets and it can go short markets. But it can’t lie to its clients. That’s well beyond the pale.

Beyond the pale indeed. What a sordid tale. Goldman Sachs may have lost $10 billion in market cap, but they have lost something even more valuable: integrity.

I found this passage in the S.E.C. suit particularly damning:

At the same time, GS&Co (Goldman Sachs) recognized that market conditions were presenting challenges to the successful marketing of CDO (collateralized debt obligation) transactions backed by mortgage-related securities. For example, portions of an email in French and English sent by (Fabrice) Tourre to a friend on January 23, 2007 stated, in English translation where applicable: “More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

You can say that again Fab. What a great man you are.

Read more at Naked Capitalism and Felix Salmon. Read the suit here.

Photo of Goldman Sachs tower by Tattooed JJ

Dark clouds over America - 3 million poor souls not worth counting

I came across the following video at one of my regular financial haunts, Danielle Park’s Juggling Dynamite. You may remember Danielle as the ethical financial advisor.

The interviewee is economist Stephen Roach. (That reminds me of a joke about economists, but I digress). Mr. Roach works for Morgan Stanley and after listening to him in this interview my opinion of Morgan Stanley has gone up a couple of notches. Mr. Roach rightly points out that the unemployment figures released recently of 9.7% take no account of the three million U.S. citizens who have given up looking for a job. “For some bizarre reason,” says Mr. Roach, “the U.S. statisticians do not count these poor souls as unemployed.” The actual unemployment rate is 11.5%.

So not only are detainees ‘not persons’, neither are the discouraged jobless. What happened to equality and justice?

Speaking of justice, Mr. Roach ironically ends his analysis with the injunction that, because of the ‘noise’ in the unemployment data, “It’s important for your viewers to keep watching the pithy commentators you get on your show for clarity, truth and justice.”

In other words, don’t expect it from your administration’s statisticians. Damn, I like that guy.

OK, here is my economist joke, but in honour to Mr. Roach, let’s make it a statistician joke instead, it’s much more à propos:

There are three kinds of government statisticians: those who can count, and those who can’t.

Dark clouds over America - Captain Bernanke and the Navy Rule

I recently read Paul B. Farrell’s article Warning: Captain Bernanke sinking the USS Titanic just before the reconfirmation of Ben Bernanke as Federal Reserve Chairman. Farrell compares Bernanke to Captain Queeg in the film ‘The Caine Mutiny’. I’m not familiar with the film but I can imagine Captain Queeg has some issues.

Worse, Obama's giving ol' Capt. Ben a second chance to pilot into new icebergs dead ahead. The Economist calls them "asset bubbles." Problem? Capt. Ben can't see through his ideological Greenspan/Reaganomics goggles, clouded by his obsessive allegiance to Wall Street's "fat cat bankers."
Nothing new: He failed to see warnings of "icebergs" back in 2007. Yes, and he'll miss any new icebergs, sink the global economy and plunge the world into the eerie depths of the Great Depression 2.

Farrell goes on to quote Jeremy Grantham in his recent letter to investors ‘Lessons Not Learned: On Redesigning Our Current Financial System.’

"Imagine the company representatives on the Titanic II design committee repeatedly pointing out that the Titanic I tragedy was a black swan event: utterly unpredictable and completely, emphatically, not caused by any failures of the ship's construction, of the company's policy, or of the captain's competence. 'No one could have seen this coming' would have been their constant refrain.'"
Sound familiar? You bet. Capt. Ben's "Titanic II design committee" would include his ol' buddies, Alan Greenspan, Henry Paulson, Lawrence Summers and Tim Geithner. "Their response would have been to spend their time pushing for more and improved lifeboats," says Grantham.

I have liked Jeremy Grantham ever since I saw him in this far-reaching interview at Wealthtrack after the meltdown last year (which I encourage you to watch in its entirety to get valuable insight into what has happened in this crisis, including utter condemnation of Greenspan and his protégé Bernanke). My favourite Grantham quote from the interview is this:

Interviewer: New rules of investing: is permanent bullishness about equities out?

I certainly hope it’s out. I like to say that in the short term we learn an enormous amount from these crises, and in the intermediate term we learn a little, and in the long term we learn absolutely nothing.

So a ‘nearly dysfunctional Congress’ dominated by special interests has plucked the Captain of the Titanic from the sea and has promptly given him command of a new ship. ‘Is that wise?’ you may ask. By pure coincidence I came across the following from (Warren Buffet’s partner) Charlie Munger’s book ‘Poor Charlie’s Almanac’:

I like the Navy’s system. If you’re a captain in the Navy and you’ve been up for twenty-four hours straight and have to go to sleep and you turn the ship over to a competent first mate in tough conditions and he takes the ship aground – clearly through no fault of yours – they don’t court-martial you, but your naval career is over.
You can say, ‘That’s too tough. That’s not law school. That’s not due process.’ Well, the Navy model is better in its context than would be the law school model. The Navy model really forces people to pay attention when conditions are tough – because they know that there’s no excuse.
It doesn’t matter why your ship goes aground, your career is over. Nobody’s interested in your fault. It’s just a rule that we happen to have – for the good of all, all effects considered.
I like some rules like that. I think that civilization works better with some of these no-fault rules. But that stuff tends to be anathema around law schools. ‘It’s not due process. You’re not really searching for justice.’
Well, I am searching for justice when I argue for the Navy rule – for the justice of fewer ships going aground.

Well, in the case of Captain Bernanke the Navy rule would doubly apply: the Captain was at the helm of his ship the whole time and was fully responsible for running the ship aground. The Captain would have been court-martialed, found guilty and dismissed the service. Next case. Instead, here we are again with the same captain, doomed to live through the whole scenario again. As Grantham points out, in the long term we learn absolutely nothing.



Image from Jeremy Gilby.com

Dark clouds over America - the annual tribute

I have been reading ‘The Essays of Warren Buffet: Lessons for Corporate America’. There is much gold to be mined here by the moral philosopher. Here is one important theme: the transfer of wealth from the US to the rest of the world.

In 2003 Buffet wrote:

(I)n recent years our country’s trade deficit has been force-feeding huge amounts of claims on, and ownership in, America to the rest of the world. For a time, foreign appetite for these assets readily absorbed the supply. Late in 2002, however, the world started choking on this diet, and the dollar’s value began to slide against the major currencies.

In 2004:

Last year we had $1.15 trillion of such honest–to-God trade and the more of this, the better. But, as noted, our country also purchased an additional $618 billion in goods and services from the rest of the world that was unreciprocated. This is a staggering figure and one that has important consequences.
The balancing item to this one-way pseudo-trade … is a transfer of wealth from the US to the rest of the world. … This force-feeding of American wealth to the rest of the world is now proceeding at the rate of $1.8 billion daily, an increase of 20% since I wrote to you last year. Consequently, other countries and their citizens now own a net of about $3 trillion of the US. A decade ago their net ownership was negligible.

Buffet goes on to project that a decade from now (in 2014) net foreign ownership of the US would amount to about $11 trillion and at 5% interest, the US would need to spend $.55 trillion annually to ‘service’ this foreign investment. With a GDP of about $18 trillion, 3% of GDP would go to the rest of the world as 'annual tribute’ for financing Americans’ overindulgences.

If the US were running a $.6 trillion current-account (trade) surplus, commentators worldwide would violently condemn our policy, viewing it as an extreme form of ‘mercantilism’…
Our spendthrift behaviour won’t, however, be tolerated indefinitely. And though it's impossible to forecast just when and how the trade problem will be resolved, it’s improbable that the resolution will foster an increase in the value of our currency relative to that of our trading partners.

In 2005 the situation continued to worsen and in 2006 Buffet notes another ‘milestone' in the deteriorating financial health of the US:

Already the prediction I made last year about one fall-out from our spending binge has come true: The ‘investment income' account of our country – positive in every previous year since 1915 – turned negative in 2006. Foreigners earned more on their US investments than we do on our investments abroad. In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the US will now experience ‘reverse compounding’ as we pay ever-increasing amounts of interest on interest.

This situation will only change if the US ‘massively under consumes and begins to run consistent and large trade surpluses’.

Buffet points out that the huge US budget deficits do not transfer wealth. Only when we buy more than we sell is wealth transferred to the net seller.

However, when we also borrow money to buy more than we sell, we are hastening our financial demise, and that is what we see today.

And let us not even mention what road we are taking if we don’t even borrow but merely print the money out of thin air…

I leave you with this video about the opening of the world’s tallest skyscraper in Dubai, the ‘Burj Dubai’. It is an impressive architectural achievement and a proud symbol of Dubai’s economic power. But while I watched in awe, I couldn’t help thinking that I was witnessing possibly the most spectacular manifestation of the transfer of wealth out of the US.