UNCOMMON
COMMON SENSE
FOR
PEOPLE WHO THINK
BAILOUTS, REGULATIONS
AND RE-REGULATION
THE OBVIOUS IS OBVIOUSLY WRONG
The
most common and most difficult problem is to not confuse Cause and Effect
because in so doing, we can never uncover the real underlying problem. Unless
we can get to the heart of the matter and uncover the REAL problem, we will
continuously get caught up in a vicious circle of regulating Effects instead of
the Real problem and in so doing, we end up in a slew of unintended consequences
as we get more and more mired in a mass of Socialist (feel good) regulation
which is, by its very essence, designed to fail.
A.I.G,
Lehman, Fannie, Freddie etc. - WHY DID
THEY FAIL?
Unless
and until you can answer this question properly, it is impossible to come up
with any decent new regulations. Hindsight is 100% you say? Well, that is just
not so. When you don’t know what to look for and you confuse cause and effect,
there is no way you can create decent, effective regulations. In this case it seems that the primary
objective is to place blame and punish someone; the shareholders (who are the
only ones that are completely blameless) while allowing the big-wigs to slither
off into the night with their giant severance packages and past unearned bonuses,
only to resurface again in a few years.
INCEST and CONGRESS
The
real problem is the incestuous (non-sexual) relationships between Congress,
Did
any of you notice that he mentioned a sort of Resolution Trust Corp. as a
potential solution, but could not answer any questions as to how it would work. Instead he side stepped into it by saying it
was the responsibility of the next Congress. Does he not think that he will still
be the head in the next Congress? Perhaps he may have read my last letter where
I suggested an RTC solution, but purposely did not go into too much detail.
NOTE:
Congress makes all the Laws that everyone has to follow except of course
Congress itself. They have exempted themselves from all laws that the rest of
us must follow including the one about lying under oath, which of course they
never do - take an oath that is! Can you just imagine if somehow a Law got
passed that anytime a Congressman spoke in public it would be that same as if
he was under oath? Can’t Happen, besides our Jails are already overcrowded.
THE SECURITIES ACT OF
1933-34
It’s
time to stop with the generalities and become more specific. The 1933-34 Act
came about as a result of the 1929-32 Stock Market Crash. Somehow they got it right and it worked for
more than 50 years. Eventually Congress succumbed to Wall Street pressure, backed
by 100’s of millions of political contributions, and decided to gut the Act and
eliminate its best and most important provisions, especially Glass Stegale.
What
exactly was there about Glass Stegale that was so
important? GLASS STEAGLE prohibited the merging
either directly or through holding companies of Investment Banking Companies,
Banks, Insurance and Mortgage Companies. When it came to mortgages, the Savings
and Loan Industry was created to provide low cost mortgages. However, they
could not engage in other banking business other than accepting deposits and
they were given the right to pay higher interest rates than could the
commercial banks.
THE SAVINGS AND LOAN
CRISIS
Everything
worked precisely as planned until the 1980’s. As inflation and interest rates
took off, investors could now get a higher return by buying Treasury Bonds than
what the Savings and Loans were allowed to pay. However, the minimum Treasury
Bond was $10,000, precluding the small saver from getting the higher rates.
That became a political football and without thinking through all of the
unintended consequences, the Usury laws were abolished. Without going in to too
much detail, the Savings and Loan crisis was soon upon us for the same reasons
as today. They were caught holding long term, low interest mortgages that they
were funding with short term deposits and borrowings and their fate was
sealed. Naturally, Congress (the real
people at fault) soon found a number of scapegoats (like Keating) to be the RED
HERRINGS so that no one would even look for the real problem and those
responsible, congress. By not learning from our mistakes we were setting the
stage for the problems that we are facing today.
GLASS STEAGLE
Not
being an Ivy League Graduate and therefore not an insider, I cannot tell you
how long and hard Wall Street, their lawyers and their bought and paid for Congressmen
worked in completing the gutting of Glass Stegale. Once the dam was broken the rest was easy -taking
less than 10 years to open the flood gates to all the mergers and acquisitions
that the ACT was designed to prevent (lessons learned form 1929). Today’s problems became inevitable.
ELLIOTT SPITZER
He
saw some of the problems, so he took on Wall Street but unfortunately, he was
more interested in becoming Governor on his planned path to the Presidency. He
collected a few $billion that was paid by the shareholders while senior
management remained untouched as a couple of highly paid analysts were
sacrificed (while being well paid to keep quiet). However, he did manage to
establish a Chinese Wall between Research, Underwriting and the Retail Broker,
all of which was nothing more than a sham. A Big Joke, but who’s laughing?
UNINTENDED CONSEQUENCES
(The Good)
Believe
it or not, sometimes the unintended consequences turn out to be good for all
concerned. When I started my brokerage career, commissions were as high as $0.80
/share, with no right to negotiate regardless of the size of transactions. Volume
on the NYSE was under a million shares a day. We used to have a pool every week
as to who would get the first order of the week. Then along came Spitzer and
others before him who dragged Wall Street kicking and screaming (small Stock
Brokers, Mutual Funds and Insurance Companies who had more political clout than
Wall Street) into negotiated rates that dropped trading costs drastically and volume
exploded. Spitzer then forced Wall Street to narrow the spreads and eliminated
¼ point quotes droping them down to as low as I
penny.. As any good economist can tell you, lower the cost of doing business
and business will explode, which is exactly what happened.
(The Bad) You Ain’t Seen Nothing Yet!
If
the whole world’s financial system and especially our own were not all cross collateralized,
we would not be experiencing the problems we are having today!
Once
Glass Stegale was shattered, the mergers began and
with it came cross collateralizations. Banks merged with Brokers, Brokers
merged with Insurance Companies (1st one was Prudential and Bache), Mortgage
Companies with Banks and Brokers and all kinds of permutations and
combinations. The end result was a bunch of dealmakers heading up these
companies who were only interested in their options and their stock prices. They cared very little and understood even
less as to how to run their new, highly complex, worldwide conglomerates. Risk
Management, what’s the problem? You just package it, pay the rating agencies
(another Sham) to give it a AAA rating a sell it off to someone else. Eventually,
they got to believe their own B.S. and started buying their own JUNK. When it came to AIG, Spitzer got rid of the
one man, who over a 35 years, had built his company from the ground up for
strictly political reasons. Take notice that Greenberg has never been charged
and although he is by far the largest single shareholder, he was barred without
any hearings by the SEC from holding office in any public company. Had Greenberg
still been in charge of A.I.G., I am convinced no FED bailout would have been
needed.
This
is not something new. Martha Stewart and her friend, the president of the
company that discovered the single best anti-cancer drug and which was just
bought out at $70/share, both went to jail because they were high profile scapegoats
and along with Koslowski and Ken Lay, acted as red
herrings so as to keep the focus off Congress and placate the public.
IT WASN’T LACK OF REGULATION THAT CAUSED ALL THE
PROBLEMS
It
was a lack of enforcement and the cancellation of existing regulation that was
at fault. All of which was due to the incestuous relationships between the
Regulators and the Regulated. Who are Rubin, Paulson, Greenspan and Bernanke -
if not good old boy, Ivy League “frat buddies”. Do you really expect them to
turn against their friends and their own previous companies in which they hold
tons of options? How could any Government Over-Sight Committee and their
Regulators that report to them, have allowed a completely unregulated
Derivatives Market to expand into the 100’s of $ trillions without a single bit
of regulation or oversight? And now they wonder what happened? As Derivatives
began to expand at an exponential rate and when even I could not fully
comprehend what was going on, I began to warn about the potential danger when that
market was only approaching $ 1 trillion and still had the potential to .either
be managed regulated or stopped.
CREDIT DEFAULT SWAPS
How
many people even know what they really are or how they work? It is obvious from
listening to the financial media that no one I have ever seen on TV does. What
is even more frightening is watching a bunch of journalists who do not have a
clue about C.D.S’s. talking and attempting to influence policy, when they do
not have enough knowledge to ask intelligent questions from guests who might be
able to give them answers. It was the Derivatives that allowed for the Carry Trade
to expand exponentially and it was the Carry Trade that allowed the US to keep
interest rates low and continue to spend like drunken sailors (I apologize to
all sailors – at least they were all spending their own money). The name of the
game has always been buying votes and raising
political contributions. How else
can a person earning $35,000 per year come to
THE
DECADES OF THE 1920’s VS 2000’s
The
similarity between the 1920’s and today is downright uncanny and terrifying.
Will the 2010’s be the same as the 1930’s?
HISTORY REPEATS. The question
is will we ever learn? 1928 saw a Republican Hoover, a Socialist, become
president who then instituted in 1929 what President Harding refused to allow
him to do in 1919 when
Today,
we have a Democratic controlled Congress who are already writing bills to
strengthen the Unions by eliminating the secret ballot and canceling the NAFTA
free trade agreements. They have already killed the 7 years of Trade
negotiations and are blocking trade agreements with our South American allies.
McCain
is socialist, just like
OUR ONLY POTENTIAL
SALVATION IS SARAH PALIN:
How good is she really? After all,
KUDLOW AND CRAMER
While
watching TV this evening, I noticed that both Kudlow
and Cramer mentioned an RTC type solution as a possible way out of our current
real estate and financial crisis. Was it just a coincidence that an RTC type
solution was part of my focus in my last two letters or is it possible that
they have been reading my stuff on one of the many websites that publish my
musings?
WHAT TO DO NOW
Don’t
you think it’s about time you all subscribed to my letter UNCOMMON COMMON SENSE
and got the straight talk two weeks before everyone else reads it? GET OUT OF DEBT, BUY GOLD AND WEAR DIAMONDS
GOOD
LUCK AND GOD BLESS
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Aubie Baltin
CFA, CTA, CFP, PhD.
aubiebat@yahoo.com
561-840-9767