Why Wall Street Needs More Independent Thinkers

This is an enjoyable time of the year. It's when families gather together to share a wonderful holiday meal and exchange presents. After all, who does not love to tear the wrapping off their presents to see what's inside? It is really fun to see the excitement of small children as they open their presents.

This type of excitement was on display this past week as little Ben Bernanke unwrapped his present. It brought a tear to my eye as I saw the sheer joy on little Ben's face as he gazed at his present – a shiny, brand-new helicopter! Little Ben screamed “Mommy, mommy, look at my new helicopter! Now I can dump all the money I want out of my new helicopter and make everyone happy”!

Yes, this was the week that the Federal Reserve entered uncharted territory and in effect lowered interest rates to zero. This event had been predicted in my prior Absolute Zero article and by others here at Oxbury Publishing.

I'm sure this action by the Federal Reserve was wildly cheered in the executive suites of firms such as Citibank (C) and Bank of America (BAC). Speaking of those two shining examples of American “extreme” capitalism, there was an interesting tidbit about them in the Financial Times.

The Financial Times cited one recent estimate which looked at those two firms' total leverage ratios. The total leverage ratio looked at both firms' on-book and off-book assets and exposure and divided that figure by tangible equity. The leverage ratios were an outlandish 88:1 for Citibank and 134:1 for Bank of America. Is it any wonder that our financial system is in such dire straits?

Wall Street Children

The children, otherwise known as money managers, on Wall Street were also unwrapping their presents this past week. It was amazing to see the children's reaction to the hot new Wall Street board game, Lose Your Clients' Money.

What glee! What excitement! “Look mommy, I invested billions of dollars of clients' money into Treasury bills at a negative rate of interest! I wanted the money to be “safe” because that bedtime story I read, Grisly Tales of Deflation, really scared me”!

Yes, the numbskulls on Wall Street continue to miss the very obvious fact that the so-called liquidity trap is quickly turning into a liquidity flood. Did they not see Ben Bernanke gassing up his shiny new helicopter? Did they not notice that Ben's new helicopter was armed with Hellfire missiles which he fired on the dam, unleashing a flood of liquidity?

It's a basic economic fact that in a fiat money system central banks can easily create an infinite quantity of money at no cost. So central bankers can reduce the value of the money they are creating in effect to zero, if they wish. In other words, in a fiat money system such as we have, curing the much-feared deflation disease is child's play. Yet, the Wall Street children cannot seem to grasp this. Why is this?

Mommy, I'm Scared!

As I've stated in prior articles, I firmly believe that our financial system is plagued by a lack of independent thinking and this lack of independent Wall Street thinkers has played a major role in the current financial crisis.

I believe this is especially pertinent in today's society. People are exposed to Wall Street group think through media outlets such as CNBC and they also become “infected.” Therefore many individual investors also do not think for themselves and their thoughts simply line up with Wall Street's thoughts. That's why so many people have bought fully into the deflation myth.

The Bernie Madoff Ponzi scheme is just the latest example of how willing Wall Street money managers are to invest in something that their peers appear happy with, without doing the necessary due diligence themselves. This “herd” behavior again highlights the lack of independent thought on Wall Street.

This “herd” behavior also explains why Wall Street money managers are currently piling into Treasuries, even at negative interest rates. If “all” of the money managers are in the same investments, they are safe. That is, their cushy jobs are safe.

The money managers can simply say “But mommy, everyone else was doing it too, so you can't blame me for the huge losses.” If Wall Street money managers dare have an independent thought and they are wrong, they soon lose their cushy jobs. Most Wall Street people will simply not risk it.

So the Wall Street money managers' jobs are safe but the same cannot be said for their clients' money. I want to emphasize again to investors that the number one priority for Wall Street money managers is job preservation. Preservation of clients' capital is well down on the list. Therefore it is of utmost importance that investors get input from independent sources (such as Oxbury Publishing).

My own experience is a real life example. In my final year of twenty years at a brokerage firm, I got into lots of trouble with the new managers they had hired. Why? I was told that I was “wasting” far too much time meeting with clients and helping the clients set up investment plans to meet the clients' financial goals!

They wanted me to spend more time bringing assets in the door. I asked – “What about when the assets are in the door, what then?” Management's reply - “Once the assets are here, who cares? Most people are too lazy to transfer their account”! Needless to say, I moved on shortly thereafter.

Twas the Night Before.....

I wanted to leave everyone with some holiday cheer - a poem. My apologies to the original author which most people believe was Clement Clarke Moore.

Twas the night before Christmas, when all through Wall Street
Not a creature was stirring, not even a rat called Dick Fuld;
The stockings were hung by the chimney with care,
In hopes that Santa Ben with sacks full of money would soon be there;
The bankers were nestled all snug in their beds,
While visions of perks and bonuses danced in their heads;
When out on the lawn there arose such a clatter,
The bankers sprang from their beds to see what was the matter.
When, what to their wandering eyes should appear,
But a miniature limo with eight cylinders under the hood,
With a bald-headed, bearded driver, so lively and quick,
The bankers knew in a moment it must be Santa Ben.
Down the chimney came Santa Ben with a bound.
A bundle of money he had flung on his back,
And he looked like a peddler just opening his pack.
He spoke not a word, but went straight to his work,
And filled all the stockings with billions of dollars;
And giving a nod, up the chimney he rose;
He sprang to his limo, and away he flew.
As he drove out of sight, he was heard to exclaim,
“Happy Holidays to all, and to all a good night”!

Happy Holidays Everyone.

Disclosure: no positions

Comments

[Jason Rines...:]

Hey it sounded like your fundamental ideals of providing value to a customer where not appreciated. Fear not, the country will need people like us at some point. In between, we are in the last parts of the 'cover your behind stage' to protect your dough from 21st century financial pirates. Try to stay positive, I know it's hard in this culture right now. The country is heading back to Save and Invest and your correct insights into value propositons will pay dividends.

2008 Dec 24 09:25 AM

[John Lounsbury:]

Tony Daltorio - - -

You wrote: "They wanted me to spend more time bringing assets in the door. I asked – “What about when the assets are in the door, what then?” Management's reply - “Once the assets are here, who cares? Most people are too lazy to transfer their account”! Needless to say, I moved on shortly thereafter."

This exactly why I gave up my Series 6,7,63 licenses more than 8 years ago and went independent, fee only.

A second point: So many of us see the reservoir of new money being collected behind the banks' dams of insolvency fear. The big debate among these many is how long the dam will hold. If it holds long enough, the resulting deflationary spiral will encourage further hoarding of an appreciating commodity, the dollar. If the air to ground missles you mention break the dam, the inflationary flood ensues.

In real estate, it's all location, location, location.

In reading the ecomic tea leaves, it's all timing, timing, timing.

Good comment kudos to IThinkBig.

Merry Christmas to you both!

2008 Dec 24 01:24 PM

[Did U Think...:]

I am going to say this slowly so that you understand: the stock market is not a fountain of wealth. It is a Ponzi scheme based on greater fool theory. For every winner there is a loser and vice versa. There is no magical pool of value on wall st.

Where do you people think the money it "earns" for people who make money in it comes from anyway? Unless you are dividend investing (which few people are and which does not require much in the way of a money manager IMO), you are speculating. Speculating is another name for gambling. What is gambling? Using the laws of probability to do something. To do what, exactly?

Screw the other gamblers out of their money.

Honestly, is that so hard to understand? So when you say we need more independent thinkers what does that really mean? More "financial innovation" like MBS and CDS? Really, think about it, what you are asking for, basically, is just a more sneaky operator for the 3 card monty tables. What qualities do you think a "better" money manager should have anyway?

Are you starting to get it yet?? Here are the generally accepted purposes of money:
- Measure of value
- Means of exchange
- Store of wealth (storing excess value produced from work today for later)

Notice that no place on that list does it say "generation of additional value". You know why? Because money does not make value. Money is just paper and numbers in a computer. PEOPLE, through the effort of their intelligent labor make value. The only way that wall st con artists "make" any money is by fooling some other money manager into selling when he should be buying or buying when he should be selling. But no matter what, for every winning speculator there is a losing one.

So again, what would this new money manager of yours do differently? There are only so many ways a con can be played and wall st has played them all. That is why you see big pieces of wall st shutting down now. They know that there are no more greater fools to be had for a Looooooong time now that the boomers have been fleeced. Hedge funds are closing down even if they haven't lost out big time yet. Wall st investment banks are turning into commercial banks. The grift is coming to a close for this session. The con is ending. The mark has been fleeced.

Are you starting to get it yet or do you really think that wall st is something more than a gov't backed con game? Time to start using your heads people. If you cannot answer my original question which was "Where do you people think the money it "earns" for people who make money in [the stock market] comes from anyway?" then you are still a sucker, a mark. WAKE UP CRAMERICA, IT'S A SCAM!

2008 Dec 26 02:10 AM