Tag Archives: Trust

Rotten Apple


Gimme your Money...and your house

Gimme your Money...and your house

Ever pick up a seemingly perfect apple only to start peeling it to find some small bruises underneath the skin.  Of course you can continue to peel the apple, grab a small paring knife and cut away the rotten parts.  What you will be left with is a delicious apple.


But imagine you are told to stop peeling that apple immediately, glue the old skin over it and wait until the rotten part reverts back to good apple.  Ridiculous huh.


Well that is exactly what we are doing in the economy.  In late 2006, the first layer of the rotten housing market was revealed, sub-prime.  And rather then continue to peel the apple of housing, revealing all the rotten and bruised portions we have been told these rotten parts are only temporary, just stop peeling and surround the rotten parts with additional apples waiting for the good ones to cover for the bad until they all miraculously turn good.


There are two types of people who don’t like throwing $700,000,000,000 of our apples into a basket with all the bad apples.


The first, like myself, have spent years studying finance and economics, look carefully at the legislation and can form smart arguments about why this plan will not work.


The second, and far more important, is the average “Main Street” American who isn’t confused by all the details.  They simply recognize the extortion for what it is.  For them it’s simple.  They DO understand that Wall Street impacts Main Street.  In fact they feel better if Wall Street might actually share their economic misery.


And are you for it?  They you must be scared and trust the same con-artists who got us into this mess or you ARE the con-artist.


Additionally, all you Supply Siders were sorta right.  Except rather then the billions made by the rich trickling down, the economic suffering of the middle class over the last ten years is trickling up.


Now that is something that everyone should understand.


When do the honest become the blind?

Paul O’Neill, the former truth speaking Secretary of the Treasury, had a good analogy to explan why the subprime issue has spread to the rest of the economy (h/t my dad).

To paraphrase: imagine you had ten bottled waters; one of which contained poison.  Without knowing which one, would you take a drink of any?

This would be a good analogy were sub-prime mortgages truly the only issue.  In fact, O’Neill is blind to the reality of much wider problems.

A more accurate analogy would go as follows:

1.  Imagine you have ten bottle waters and you are told by the Federal Water Reserve that one contains poison.

2.  After watching someone pick one of the bottled waters and then promptly die, you then observe another person pick a different bottled water and then promptly die as well.

3.  Would you drink from any other bottles?

All houses are infected with the poison of bubble prices.   Those in the sub-prime category were just the first to become insolvent and the only ones without a PR firm or lobbyists to defend them.

Homeowner = Smoker

Is it really appropriate to use the same “should have known” language for people with negative equity or too high a mortgage payment that is has been used for a smoker with emphysema?

If so, should we also blame victims of medical malpractice for failing to understand their own medical procedures?

Of course we can blame any lay person for mis-applied trust, but what is the end result?

The regulatory environment that arose during the Great Depression (Securities Exchange Act of 1934, Securities Act of 1933,) came about to restore trust in stocks and the stock market.  It’s a testament to their effectiveness that it took over seventy years for Wall Street to subvert them.  There will always be people willing to break the law, the problem arises when you can commit fraud without technically breaking the law; as evidenced by stock brokers in the 1920’s and mortgage brokers in this decade.

Hopefully, we will have the same political will, as in the 1930’s, to close this loophole without the financial upheaval of yesteryear.

How to Steal Money Without Really Trying: Auction Rate Securities

“Everybody talks about the weather, but nobody does anything about it.” – Mark Twain

I had been trying to get my head around this whole issue with Auction Rate Securities. Once again, the Time’s Gretchen Morgenson covers the basics of another investment shell game in her March 9th article: As Good as Cash Until it’s Not.

Ms. Morgenson classifies the misrepresentation of Auction Rate Securities as a Wall Street problem: “The investments, which Wall Street peddled as a cash equivalent, are known as auction-rate notes.” As a former ethically inflexible broker myself, my perspective is that this is just another example of rewarding unethical, and most certainly illegal, behavior on Wall Street. By classifying it, incorrectly, as a Wall Street problem, the article takes an editorial stand that the Auction fiasco in not the result of unethical and most likely illegal, behavior but standard Wall Street operating procedure.

Isn’t fraud a common law principle still contained somewhere in the American legal canon? I’m sure the Times isn’t asserting that fraud is standard operating procedure on Wall Street.

Broker Example:

Broker A: Our Money Market Yields 3.5%

Broker B: Our Money Market Equivalent yields 4.5% (never revealing the, now realized, pitfall of zero liquidity)

Allow this behavior for too long and eventfully Broker A will be either be out of business or begin changing his ethics he can compete with Broker B.

On the other side of these transactions are hundreds of municipalities. Similarly caught in this Interest Rate shell game, these municipalities are facing situations analogous to a mortgage borrower with a 7, 14 or 28 day ARM.

Investment Banker Example:

The town of Springfield is trying to build a monorail and needs to raise $30 million dollars.

Investment Banker A: Offers to issue $30 million in 10 year fixed bonds @ 6%

Investment Banker B: Offers to issue $30 million 10 year Auction Pfds @ 4%

Just as Broker B does in the previous example, Investment Banker B never emphasizes the con, only highlights the pros, of these Auction securities. The con being that if no one buys at the next auction the Investor loses liquidity and the Issuer (municipality) gets the exorbitant penalty rate.

Of course prior the recent failed actions (70% failure by some estimates), the Investment Banker assures Springfield that the weekly or monthly auctions have been successful for three decades and the exorbitant failed auction rates, possibly as high as 20%, are only just so much legalese. Just like fraud, I’m pretty sure the word fiduciary is still in our legal cannon.


The Time’s article acknowledges that investors were intentionally misled:

“In interviews, investors who own these securities say they weren’t warned that they might not be able to sell them if an auction failed. They say they were told that the instruments were as safe and liquid as — yes, you guessed it — cash.”

No mention is made of any investors who knew the true nature of these investments. It seems that all current investors are the poor schmos who order the fish of the day not realizing it’s really the fish that went bad yesterday. Most likely, informed investors were smart enough to exit this market months ago.


Neither is there any mention in the Time‘s article of any informed brokers who advised their clients to exit this market in the months preceding their failure. I guess there’s a thin green line preventing them from outing their corrupt brethren.


Of course these tactics not only allow the less informed ,or less ethical brokers, and investment bankers to steal business from the better informed and more ethical, it also happens to generate hugely exorbitant fees. Again Ms. Morgenson notes:

“Wall Street made generous fees issuing these securities and running the auctions — as long as there were bidders. After the bidders vanished, some firms stepped in and bid for the securities for a while, giving investors a way out.

No more. What’s the sense stretching your already-thin balance sheet just to keep a market open for your customers? “

A favorite of marketers is the term built in obsolescence. Take a product that lasts for years and turn it into a product that has to be repurchased every couple of weeks; sharpening a straight razors sucks…get a new blade for your Mach 3 every two weeks.

Someone must have realized that a 30 year bond issued at a fixed rate once at inception doesn’t generate as much fees as a 30 year issue that needs to be reissued every week or month.

This behavior makes an investor want to learn how to use a straight razor like a certain Sweeney Todd.

Ms. Morgenson asserts, hopefully incorrectly, that Broker B and Investment Banker B are representative of all of Wall Street. After all she said “Wall Street convinced investors that they were just as good as cold, hard cash.” Individuals people and Individual Corporations committed this fraud and individuals should be held accountable, not “Wall Street”.

In closing, companies and individuals on Wall Street will continue to convince their clients to do things against their own interests so long as it is rewarded handsomely for that behavior. And the ethical and honest will continue to leave Wall Street. Investors must insist that individuals like Broker B and Investment Banker B are held to account in civil, if not criminal, court.

Crime and Punishment…or No Punishment

A)Huffington Post 2/27/2008 : US Imprisoning More Than 1 In 100 Americans

“For the first time in U.S. history, more than one of every 100 adults is in jail or prison, according to a new report documenting America‘s rank as the world’s No. 1 incarcerator.

B) Leonard Lopate Show 2/28/2008 : Unfair Crack and Cocaine Sentencing Guidelines

“According to current federal sentencing guidelines, convictions for the sale of 500 grams of powder cocaine – and only 5 grams of crack cocaine – both result in a 5-year mandatory minimum sentence. Jesselyn McCurdy, legislative counsel for the ACLU, explains why this sentencing disparity is unfair and fails to address the larger problem of the drug trade. Karen Garrison is the mother of 2 sons who are each serving long sentences in federal prison for non-violent crack cocaine offenses.”

C) Bloomberg 12/13/2008 : Bush Fraud Probes Jail Corporate Criminals Less Than Two Years

“Median sentences for white-collar crime changed little in the 1990s, holding in a range of 12 to 13 months, commission data shows. That number increased to 15 months in 2001 and reached 18 months last year, reflecting the new guidelines…On July 17, the task force’s five-year anniversary, then- Attorney General Alberto Gonzales announced that the department had obtained 1,236 corporate fraud convictions….”


I’ll leave it to someone else to crunch the numbers thrown out in all these stories. It should be obvious that with 1,236 corporate convictions of less then two years, on average, would account for less the 0.0001 percent of the current prison population.

Even the high profile convictions of Enron, Ebbers and Conrad Black do not change the profitability of corporate crime.

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If it is not Illegal, than it is not Unethical?

From Bloomberg: SEC Struggles to Pin Insider Trading on Fund Sales Simply put, Hedge funds that make money on inside information and inside access to private stock offerings escape prosecution. Just another example of eroding trust in the financial markets.