Last Thursday we read an article about Jefferson County Alabama and how it has become bankrupt at the hands of Wall Street financiers. So we wanted to write about the conflicts of interest that pervade our industry and how investors might be able to avoid them. The next morning the SEC announces fraud charges levied against Goldman Sachs. It seems they were alleged to help engineer financial products for hedge fund manager John Paulson and then sell them to their clients. What they failed to share with their clients is that Mr. Paulson not only bet against those securities, but decided which securities were in the pool. We guess that is a conflict of interest?
Having been a consumer of products for a while now, like most folks, we feel comfortable saying that every industry has its dark side and dirty little secrets. With so much money sloshing around Wall Street, we believe the industry possesses one of the darkest of the dark sides. Most of the time the dark side evolves out of a conflict of interest; the less a client knows the playing field, the more money an unscrupulous firm can make. That is the reason for the overwhelming amount of documents, many revolving around disclosure, necessary to open a brokerage or investment advisory account. As regulators and the public have gotten more educated the game of “hide the pea” has become more sophisticated. Building a product you are confident will fail and then betting against it we believe falls in that category.
Goldman Sachs is defending itself vigorously in the media and seems to have a point that everyone in that playing field were big boys and responsible for their due diligence. They feel not disclosing to the buyers of the program who actually engineered it was needed. There certainly is a look of a program being designed to fail so that key GS clients could profit handsomely. There also are some who feel the timing of the SEC was too coincidental to the Financial Regulation bill coming to fruition in Congress and grandstanding was in play.
We are a free market proponent and feel that capitalism is the most effective economic system…most of the time. We believe the last decade has revealed the flaws in capitalism in a most spectacular fashion. Enron, Worldcom, Bear Stearns, Lehman Brothers, and Countrywide among others are examples of how the drive for profits inspire players to shelve their ethics and trample over the fine line of where legal and criminal are difficult to distinguish. You infect enough players with this malady and you can bring the system down as we apparently were close to experiencing in October 2008.
Now these players have forced the hand of the politicians to implement regulations that hamper the workings of the free market. A possible problem with this model is that the guys on Wall Street are often a step ahead of the regulators. While the regulators attempt to put rules in place to minimize the possibility of the last melt down unfolding, the players on Wall Street are designing programs that are skewed in their favor and possibly setting up another meltdown.
Most players on Wall Street are not playing on the criminal side of the ledger. The system is set up to compete on an extreme basis and the measuring stick is profits. Finding new strategies that can provide the profits becomes a blur between imagination and an actual gaming of the system. The phrase “Everyone else is doing it” is not an uncommon rationalization squaring up the apparent disconnect in the collective conscience.
Dylan Ratigan of MSNBC did an analysis on his show I thought was revealing and you can access that here (MSNBC Video). He claims that these bad loans found their way to AIG who we all know had to be bailed out by the taxpayer. He then claims that the AIG paid Goldman 100 cents on the dollar from the taxpayer money. It certainly reads poorly especially when you consider some of these securities ended up in public pension funds. If the claims Dylan makes on his show are credible, Goldman certainly has some ‘splaining to do. Hopefully the outrage that reaches the halls of Congress will overwhelm the political contributions that tend to give Wall Street players what it wants. With the growing opposition to deficits and the coming higher taxes, this should add some fuel in keeping our elected politicians feet to the fire.
Here is the link to the article regarding the Jefferson County, Alabama article I mentioned earlier:
http://trueslant.com/matttaibbi/2010/04/01/on-jefferson-county/
Don’t want to be piling on Wall Street too much, but we think it is important that Main Street knows as mush as possible. It is important to note that some local Jefferson County officials were culpable in the process also. We probably will revisit this story a few times as the story unfolds.
Did You Know
JUNK BOND KING - 20 years ago this upcoming Saturday (4/24/90), Michael Milken pleaded guilty to 6 felony charges of securities fraud and conspiracy. Milken, who was 43 years old at the time of his plea, agreed to pay $600 million in fines and penalties. Milken had initially been accused of wrongdoing by the SEC on 9/07/88. He ultimately spent just 22 months in prison after facing up to 28 years behind bars (source: Mercury News Wire Services).
Final Thought
“Steal a little and they put you in jail, steal a lot and they make you king” – Bob Dylan
No comments:
Post a Comment