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Wall Street made this mess. Wall Street must pay for it

Am I the only investor sick of hearing financial industry insiders bleating that the US Federal Reserve must do more to ease their pain? Am I the only stock market investor who would like to see the world’s major indices fall hard to purge and punish the companies – and polices – that set the stage for the credit crunch?

Apologies to my regular readers for what really will sound like a rant. But responsible investing for the long-term by implication means taking an interest in – and having faith that – the market system will not destroy itself during your lifetime through greed and incompetence.

This current debacle is the most serious threat to Western capitalism since the Berlin Wall came down. So please, let me explain why I’m angry.

From sub-prime fiasco to prime-time TV

Watching financial television can seriously damage your wealth. With all the flashing lights, scrolling stock price tickers, and 50-word-to-the-dozen motormouth presenters, it’s hard for a viewer to just sit there and Do Nothing.

As a vaccination against the wiles of financial TV, I like to remember that Warren Buffett, the world’s richest man, lives in Omaha – a US State so out of the way it probably hasn’t yet been hooked up to cable. And while Buffett clearly isn’t the dear doddering granddad he likes to pretend to be, he certainly didn’t get where he is by Selling Stocks and Investing In Commodities Now But Being Prepared To Pull Back Into Mutuals By Half Past Two Next Wednesday Afternoon If The Dow Falls By A Gnat’s Whisker, as per the typical 15-minute financial television bulletin.

If you treat financial television like you’d treat a comic book, it’s pretty entertaining…

Indeed, as a further precaution against the potentially impoverishing affects of CNBC and Bloomberg’s bias to action, I only ever watch financial television before work, whilst I’m half-asleep and eating a comforting bowl of porridge, and preferably wearing furry slippers. I like to feel as dozy as possible. I’d take sedatives if I didn’t have to operate a vehicle.

If you treat financial television like you’d treat a comic book, it’s pretty entertaining. In recent months though, my contentment has too often turned to rage, thanks to the ceaseless procession of bankers, analysts, financial CEOs and other special interest groups for Wall Street and the City of London lining up to explain that the taxpayer, via the Central Banks, must continue to bail them out of the mess they collectively have gotten us into.

Jim Cramer’s infamous rant on CNBC from last year is still perhaps the most pure expression of what’s secretly going on behind these bankers’ bland exteriors. Seven months on, we now see three things:

  1. Cramer was right. The financial situation was much worse than the consensus believed. In the UK, we’ve even seen the FTSE 100 bank Northern Rock (eventually) nationalised as a result of the credit crunch.
  2. Even in hindsight Cramer doesn’t seem at all concerned about unemployment, stability, mortgages or long-term savers. He seems to me most concerned that his buddies in hedge fund land keep their snouts in the trough whatever the weather.
  3. A combination of (1) and (2) has set the tone for much of the discussion ever since.

Oh, of course the bankers are cunning; there’s a reason that Cramer is on TV these days, not fronting up an investment bank. Real bankers like to affect the air of a kindly old institutional uncle in public, now that the wheels have come off their behind-the-scenes testosterone-fueled machinations.

“Dear me yes, the credit crunch is now hitting Main Street,” the bankers tag on to the end of their pleading, pointing to the US sub-prime mess that their own incompetence, in conjunction with an era of unrealistically low interest rates, directly caused. “You really need to make us an offer we can’t refuse, or else your daughter might get a visit from the bailiffs,” they add.

“Cut interest rates!” they cry. “Please make the pain go away!”

Or they say, “The US is being held hostage by foreign sovereign wealth funds”, not bothering to mention that countries like China and India can afford to splash the cash over here not just because of their booming economies, but also because their citizens have a culture of saving, rather than the spendthrift mentality that our financial services have nurtured and grown fat on in the West.

And do we see investment banks, mortgage issuers, hedge funds and the rest on CNBC making a case for tighter regulation over financial services? Of course not. “Cut interest rates!” they cry. “Please make the pain go away!”

What about the workers?

The irony is, of course, that financiers’ special interest demands are made despite the savage way that markets respond to, say, industrial hardship or trade union wage bargaining.

While the UK was running down its industrial heartlands in the North and Wales (rightly, in my view), the City was amok with chortling fat cats laughing off the hardship such destructive capitalism inevitably caused. “No Pain, No Gain!” could have been their motto. Anyone who buys shares and has seen the markets’ invariably positive response to a company slashing its workforce or outsourcing its manufacturing will know what I’m talking about.

That’s fine, that’s capitalism, only where are the newspaper headlines telling us that the financial companies are now shedding 50% of their staff as a result of the credit crunch? Nowhere, just the vague threat on page five that Things Will Get Worse.

Sure, bank share prices have been plummeting, but dividends have kept rising; as an investor in banks that obviously pleases me, but as a citizen I want to see the wilder adventures of these companies reigned it.

Yes, the horse has bolted, but that’s no reason not to muck out the stables.

Admit it: They earn too much money

Of course, profits will fall. And with luck those insane salaries will, too. The disproportionate amount of top university talent that Wall Street, London and the other major financial capitals suck in is a disgrace.

This view is always dismissed as motivated purely by envy, but I think it’s perfectly justifiable. We spend billions training our brightest in science, engineering and the arts, only to see them totter off to get rockstar salaries by simply shuffling money about in increasingly arcane and lucrative ways.

Why are bankers now rewarded as handsomely as our best entrepreneurs?

Be under no illusion – that’s essentially what they’re doing. I understand that banks and investment houses are the ultimate providers of liquidity to the capitalist system, but people have won Noble prizes proving the limits of any individual player’s influence. So why are they rewarded as handsomely as our best entrepreneurs?

Morever, it’s a zero sum game. If one bunch of bright young Cambridge graduates turned hedge fund managers win billions from their peers over the road, nobody except themselves and their company’s shareholders are made wealthier. In the meantime, the cancer they might have been curing or the carbon-friendly engines they might have developed or even the poetry they could have written is lost forever.

In the old days – up until the late 1970s – a job in Britain in finance was the traditional career backwater for sociable but rather slow chaps of moderately wealthy parents, probably privately educated, certainly not expected to otherwise go into brain surgery. What’s changed to justify a new aristocracy to arise unchallenged?

Yes, the financial game has become vastly more complex, but I’d argue that’s a symptom not a cause of all the rocket scientists that finance has been sucking in. Faced with a zero sum game and an opportunity to make fortunes at almost every turn, they’ve looked to play the system just as avidly as the most cunning welfare cheat or tax avoider. Mega-salaries allied with overly-lax regulation has been a recipe for gamesmanship on an awesome scale.

As for the defense that “it’s all risk versus reward: they’ve no job security”, don’t even start with that. For example, the generation of new graduates who entered finance when the dotcom bust caused some constipation in the sector were given (sometimes paid) sabbaticals by their employers, which they used to travel the world. Those who wanted to return were back in their seats in 18 months.

I’ve yet to meet anyone made poor by a decision to work in the city. Ask a miner, a farmer, an estate agent or a secretary if you want to know about job security, not a city whiz kid. For all he worries about it, he probably thinks Job Securities are something they trade in Chicago.

Bonus insecurity, well that’s another matter. And it’s hardly a case for the defense.

We can’t get even, but we can get angry

This rant – and I can’t claim it’s anything but that – will strike financial insiders as hopelessly naive. That’s partly because they’re too close to their creation. They genuinely believe their own nonsense.

But equally, it’s because they’re right. I am over-simplifying the situation because I am angry.

  • I’m angry that incredibly clever people who might have been solving real problems in the real world instead spent time devising murky financial instruments that led to the cynical selling of mortgages to poor people who should never have been offered them. And that they then gift-wrapped the resulting financial poison in tissue paper and passed it on to other institutions around the world.
  • I’m angry that the Fed will almost certainly keep cutting interest rates back down towards around 1% because it has no choice but to do so to ward off even greater turmoil caused by this upscale skull-duggery.
  • I’m angry that the Wall Street CEOs who have fallen on their swords have nevertheless had the blow softened by disgracefully vast multi-million dollar fortunes that completely insulate them from their company’s dangerous decisions and the consequences.
  • I’m also angry that capitalism, which I believe is the best system we’ve got for growing prosperity, must seemingly go hand-in-hand with being held hostage to a termite-like financial sector that ceaselessly looks to make a fast buck before adding value, and that remains so loftily disdainful of any suggestion that it might be required to take its own medicine.

I’m an investor, and I’m a capitalist. I fully believe citizens should be rewarded for risk-taking, for building real wealth creating enterprises, and for reasonably deferring consumption today by saving and investing for a greater reward tomorrow.

I accept that means we need independent profit-motivated banks to raise money, and to take risks and be (reasonably) rewarded for distributing it through the system.

But I don’t believe that requirement entitles financial institutions to be a breed apart, both for moral reasons, and because the last thing the world needs is another Great Depression caused by recent feckless high-rollers.

Let’s hope the good times really are over for such David Copperfield banking. Stripping away the glamour that’s been awarded to them in recent decades, banks simply provide the plumbing that makes the capitalist world go around. Excuse my French, but it’s high time they realised their shit smells too.

Update: US Treasury Secretary (and ex-investment banker) Henry Paulson has promised to overhaul the mortgage securities market, and to strip out some of the complexity. It’s a start.

Update 2: Yes, I’m aware that companies like Bear Stearns, right now being bailed out by the Fed and JP Morgan, will ultimately pay a price in terms of ownership for their exposure. But unless burned shareholders have good memories and regulators are able to enact an appropriate price – tighter regulation and less unrestrained profiteering from the banks – we’ll be here again in a decade.

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{ 13 comments… add one }
  • 1 misanthropope March 15, 2008, 9:10 am

    look, lets review the central fact of the matter: monetary policy is set, not by elected (hence recallable) officials, but by a very small number of representatives of a very small number of very large businesses. you are not their constituency, and you ought not to think that the policy has your best interests at heart.

    governmental collusion is also the case, and it is indefensibly obscene, but really it is the Fed that is the prime mover here.

    have a lovely day

  • 2 MoneyEnergy April 28, 2010, 6:12 pm

    Nice rant – calling all that before the real shoes dropped in September 2008 (but of course, those of us who were paying attention – like you and I – saw the trouble coming even before the Bear Stearns collapse – that was the confirmation of what we knew was on its way).

    I probably agree with a lot of what you’ve written here – there’s a serious lapse in ethics involved, and while I’m not so much focusing on the side of “punishment,” this lapse in ethics must be corrected for going forward. It kills me to see the current discourse around the so-called “PIGS” when Goldman Sachs was involved in helping disguise Greece’s debt woes. WTF?

    The ECB can also print as many euros as it wants, as can all the central banks around the world, and we’ll have a nice round of relative inflation, perhaps being in an absolute debt position not much worse than where we all were before… it’s been called exporting inflation, and it’s largely been led by the US government (even before the Lehman collapse and TARP bailouts, HCR etc.).

    I’m just tired of seeing the US consumer as the beneficiary of all this nonsense while the rest of the world ends up paying higher fees for everything and in Greece’s case, gets further punished for it.

    You know that California, New York and Illinois states are all broke or just on the verge of it, right? Many individual towns in the US are also about to see bankruptcy protection. LA is scheduled to run out of money on May 5th, according to its budget office. I wonder how much of that is heard on the international scene.
    .-= MoneyEnergy on: Different Banking Cultures Around the World =-.

  • 3 The Investor April 28, 2010, 7:36 pm

    @MoneyEnergy – Thanks for reading the post, and glad you liked it!

    To continue our Twitter conversation, I think I have to say we’re going to agree to disagree.

    As I say, the US versus Greece situation is entirely different. The US can print its own currency. This makes technically defaulting entirely optional. The way it would default is by printing so many dollars that they fall in value (which is arguably already happening). But that’s not a pure default. It can also be downgraded because investors fear that will happen, which again is like a default but isn’t really a default, but rather a confidence cut leading to a de-rating of its debt, higher yields etc.

    Greece cannot print its currency, because it’s in the Eurozone and only the ECB can do that. This means it CAN technically default because it runs out of money. It can also suffer in the same way as the US can/could – from a lack of confidence and the selling of its debt. That’s what’s already happened, in fact.

    The European Central Bank could print more money like the US to pay Greece’s debts, as you tongue-in-cheek suggest. The trouble is that what’s good for Greece would/could be bad for other countries in the Eurozone. As confidence deserted the Euro, the yields of all Euro-denominated bonds would go up, which would increase the debt burden for all European nations. Very unlikely.

    In my view what’s far more likely is Greece will agree with its creditors to take a haircut of say 30% on debt, and lots of aid. There has to be a chance it will be ejected from the Eurozone. (See my article from March 2nd on why it’s great the UK ISN’T in the Euro for these reasons, for more on my view… 🙂 ).

    RE: The US being like Greece, sorry to be blunt but I couldn’t disagree more. Don’t believe everything the blogosphere says, would be my cheeky advice.

    Yes the US has tonnes of debt, but it’s not making the world poorer, it’s making future US citizens potentially poorer. The US is effectively selling its assets / writing IOUs to have more stuff now. If it’s richer in future, arguably no problem. (Obviously there’s a limit to how far this strategy can be allowed to run).

    As for the rest of the world, I think you’ll find the hundreds of millions of Chinese and Indian poor who have been lifted out of poverty in a boom predicated in China’s case almost entirely on exporting stuff to voracious US citizens are very happy the US is so willing to borrow!

    Economically speaking, Greece and the US are worlds apart. The US has the world’s largest economy, many of its greatest and most innovative companies, assets everyone in the world would love to own, a young-ish well educated population, and a fairly lean welfare system. Plus it’s the only superpower, though that’s not massively relevant here.

    Greece has no productive industry except arguably tourism. Many of its citizens are used to retiring in their early 50s. Its public sector workers have seen their pay near DOUBLE in a decade (where inflation was low like everywhere). It’s basically borrowed tonnes of money on the cheap because Germany and to a lesser extent France’s success has kept European interest rates low.

    This is not the Greek citizens’ fault in that it’s hard to ever say it’s Joe Bloggs’ fault when their Government does something, but the Greeks did do it to themselves by living way beyond their means (much worse than the US) and consistently refusing to accept reality (do you see Americans striking and rioting with the highest unemployment in 30 years and cuts ahead? No they’re not. Different culture).

    IMHO you’re on much stronger ground with the California analogy. That is indeed like the Greek situation — California can’t print its own currency to pay debts, so it is relying on the central US government to bail it out, which introduces moral hazard and the risk it will have to bail everyone out. But even then it’s still not comparable.

    Just as Warren Buffett says he would prefer to pay (say) $10 billion for the rights to the Coke logo and not $1 for a bottling plant, so I’d happily buy the super-powerful US.

    As I say, this isn’t to say the US deficit isn’t big and real etc. But it’s more like a high-rolling 40-year old executive earning say $100,000 a year but with say a $750,000 mortgage. We think he’s got a bright future, his salary is increasing — but what a risky mortgage!

    Greece is more like a 60-year old ex-Walmart checkout worker earning $10,000 with a $50,000 mortage still to pay off.

    (I could be clever and match these salaries/mortgages with the national debts, but I’m too lazy… 🙂 )

    Sorry for the ramble, and appreciate as I say we may need to agree to disagree on this one. 🙂

  • 4 OldPro April 28, 2010, 9:59 pm

    The only hand left is for JC Trichet and the ECB to start buying greek govvie bonds…. Yes QE goes Greek!

    Thats sure to put some puff back into the greek govvie bonds… if stavros et al can stop rioting and put a bit of backbone in too.

    US v different. A problem but a v different problem.

  • 5 Lemondy April 28, 2010, 10:01 pm

    Greece vs US comparison, hah.

    Greece’s problems can be summed up in one word: corruption. This is an internal problem which you cannot blame on Goldman Sachs. A good background story is here:

    http://online.wsj.com/article/SB10001424052702303828304575179921909783864.html

    Corruption is the ultimate cause of the Greek debt crisis.

    Credit ratings tell you one thing and one thing only: the ability of the borrower to repay. They are not giving you a rating of the quality of governance, of the character of the citizens, or of the weather conditions. The ratings agencies are surely morally bankrupt but without doubt they have been overly optimistic about the situation in Greece for a long time, not overly harsh.

    The US government is the definition of triple A. It will remain so. All’s fair in love and finance.

  • 6 Lemondy April 28, 2010, 10:03 pm

    And, by the way, the people I have most sympathy here are the German taxpayers who look like they will end up on the wrong end of the stick in this year’s Big Adventure Moral Hazard.

  • 7 MoneyEnergy April 29, 2010, 12:30 am

    I didn’t realize we were disagreeing:) – I never said that Greece could print its own money – only the ECB can – as I see you are just broadening the issue out further than I had initially stated it, which is fine. There are definitely many more levels on which to compare the US and Greece. Would be good to hear some comments from Greeks on here:)

    But you can’t brush off the world reserve currency status. It’s a major factor in the US being able to print more of its own money.
    .-= MoneyEnergy on: Different Banking Cultures Around the World =-.

  • 8 Len Penzo April 29, 2010, 3:05 am

    “Yes the US has tonnes of debt, but it’s not making the world poorer, it’s making future US citizens potentially poorer.”

    Almost right, Investor. Remove the word “potentially” and you are spot on.

    No, the US is not Greece, but this unabated printing of dollars is completely unsustainable and the collateral damage will be felt by those of here in the States – especially us savers.

    That is the real issue, in my opinion. Whether or not the country will technically end up in default is immaterial to me. Who cares whether we are in default or not if the US dollar is devalued to such a degree that it eventually becomes worthless? Talk about cold comfort.

    I’m afraid that if we don’t put the reins on the Fed, this is going to end very badly.

    You and I both know, Investor, that the US government has no incentive to control the inflation that eventually has to come in a world awash with too many dollars to count. Why should they?

    To a gov’t that has committed itself to throwing financial discipline out the window (like the USA), inflation is a beautiful thing because:

    1) Inflation is a method of taxation without representation.
    2) Governments do not feel the effect of inflation since they can print the money
    3) Best of all, government debt to its citizens is eroded away through inflation.

    The losers are the little people.

    All the best,

    Len
    Len Penzo dot Com
    .-= Len Penzo on: The Great Paper Towel Test: What Brand Is Your Best Value? =-.

  • 9 Faustus April 29, 2010, 4:02 am

    I have to agree with monevator. There is a lot of bluster and rubbish comparing the UK situation to that of Greece. The reasoning behind the speculation that the UK will default is wrong, but the scaremongering may paradoxically be beneficial in keeping our eyes in on the need for public spending cuts in the UK.

    Five crucial differences:

    i) Greece is stuck in a continental single currency with very little control over its own monetary policy which severely limits what they can do to reduce their deficit. The UK by contrast still has full control over its monetary policy (one thing for which we can thank Gordon Brown).

    ii) the Greeks were dishonest and fraudulently misreported their public accounts for years to make things seem much better, which has angered the Germans and frightened investors

    iii) The Greek public finances and economy are worse than in Britain; their GDP is still contracting unlike Britain; and their national debt to GDP ratio is far higher than in the UK.

    iv) UK gilts have perhaps the longest maturation rates in the developed world, which means we have far longer to refinance our debts and so are less vulnerable to short term speculation in the bond markets.

    v) the Greeks have a history of defaulting on their debts; the Bank of England has never done so in the 316 years of its existence. Confidence matters.

  • 10 Mickey April 29, 2010, 7:06 am

    It is strange that the Americans refuse to place any blame on the mortgage writers without whom there would have been less chance of this crisis. As we watch Goldman and others being hauled over the coals it is notable to me that the experts (Senators and Regulators!) are failing to investigate the ‘root’ causes, thus avoiding there own responsibility in all of this.

  • 11 Simple in France April 29, 2010, 1:05 pm

    I was going to add this about Greece, but Faustus had already mentioned it:
    “the Greeks were dishonest and fraudulently misreported their public accounts for years to make things seem much better, which has angered the Germans and frightened investors”

    I think the fraud is part of the problem. As well as the fact that something is afoul when you look at the numbers of wealthy Greek citizens (or those who declare themselves as such) actually paying taxes. My guess is that there is some serious black market activity going on there. At least here in France, there is the sense that the Greeks need to tighten the belt a little bit to pay for the crookery of their government. I mean, retirement ages here in France are heading up, health care coverage is dropping. People have to make ends meet.

    That said, I’d love to see Goldman Sachs get roasted for this . . . or some other technicality. As for the US government. . .URGH. I’m just glad to be overseas right now.
    .-= Simple in France on: Radical simplicity, frugality–for couples only? =-.

  • 12 The Investor April 30, 2010, 7:39 pm

    Thanks for your thoughts everyone. I was listening to a shocking show on BBC Radio 4 last night revealing some more of the craziness of the Greek situation.

    For instance, the civil service jobs really are for life – it’s very nearly impossible to get sacked. So many of them simply stop going to work, and then get another job! For years and years on end, paid by the Government for not even showing up, and for their new employer.

    Sorry but the idea that the Greeks and the US are in the same boat – or that the Greeks have suffered through no fault of their own – gets less tenable with every new fact!

  • 13 David May 5, 2010, 4:38 pm

    Getting paid to not go to work and getting another job! That really is crazy!

    I am pro Euro integration for the economic efficiencies, but it seems like we were too quick to do our due diligence before allowing countries to join.

    Cracks are showing with Spain and who knows what problems there may be with other countries.

    The German parliament has agreed to the Greek bailout but if another country needs financial support it will probably be much harder to get support and I wonder what would happen to the Euro economy then?

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