Bill Herbert

How Can We Regain Confidence in Financial Professionals?

Bogle is correct - we need to emphasize the "looking out for the shareholder" and policing of the natural tendency toward self-dealing and corruption in the corporate suites of American business.

We also need to clean up the 'auditing' profession and put severe restrictions on brokers and other advisers in terms of their ability to deceive clients and present phony financial information about their own performance or the potential profitability of investments being sold by the brokers.

I am in favor of completely eliminating stock options for executives or any other employees of publicly-traded companies (PTCs). They work great to incentivize key people at entreprenurial start-ups owned by VCs, but have proven to be an avenue for corruption and despicably poor management decisions at a variety of public companies, and a ripoff of the shareholder base to boot.

For my money, I wouldn't mind leverage restrictions in the capital structure as well for PTCs - part of the recent problem was a bunch of self-dealing execs who levered up companies and tried to cash in on massive stock option positions. These manipulators typically pressure accountants and auditors to generate phony financials, and have no long-term interest in the health of the company they are running - it is merely a financial play geared toward filling their own pockets.

Many formerly strong companies have been hampered, or in some cases bankrupted, by the reckless and corrupt execs who have hijacked the Board and the company at the expense of the shareholder base. This should be criminal, but unfortunately it is not, and as a matter of fact, the Fox News crowd pats these jokers on the back more often than not!

As to "certifications like the CFA and MBA"" - don't make me laugh. Most MBAs are worthless in terms of the theory and methods learned - they may have sheepskin value as a way of promoting one's career or connecting with other grads in the networking game. The CFA is a very rigorous exam, but much of it is focused on the wrong things - and it does not automatically make somebody a great analyst or money manager, not by a long shot. It is more about memorization of terms and ability to do number crunching - valuable basics, but only part of the game. Bill Miller anyone?

Hedge Fund Eton Park Saw Golden Opportunities in Q109

Mindich looks like a real idiot with this portfolio.

Long Goodyear. Long Viacom.

And long POT Puts.

Good Grief!!!

It's hard to imagine how this guy is managing so much money, unless it's one of those kickback deals we keep reading about.

I hope Cuomo throws all these crooked creeps in jail for a good long time. That's where they belong.

Break Up the Big Banks

Avery,

Absolutely outstanding article, and all good points!

To preserve a healthy economy and to wrest control from a small group of very wealthy racketeers, the U.S.A. must move immediately to bust up the Wall Street banks, and begin prosecuting all the criminal activity that has taken place over the past two decades. That's a huge job, but it must be done.

I'm heartened to see that people are finally discussing serious reform at the SEC, which has been so long in coming.

Again, great article.

Financial Elites and the Enronization of America (Part II)

>>The Enronization of America has happened under President Clinton’s watch, it continued under President Bush’s watch and it is now progressing under President Obama’s watch. Until we wake up and correct many of the flaws in our thinking and in our justice system, the Enronization of America will continue.<<

Actually, I believe that it began during the Reagan administration, with the strong attempts to destroy the unions, ship jobs overseas, thwart the power of the IRS to collect taxes owed, cook the books of major corps, and play financial games with the capital structure of corporate America.

The eighties was also when the leveraged buyout craze began, whereby American jobs were lost forever to foreign companies, many of which were set up by the same people who took control of formerly great companies here in America. It was basically just a huge financial shell game.

The whole leveraged buyout phenomenon was about extracting value from companies and deriving enormous "profits" through leverage and tax deferral, while often leaving a smoking, debt-laden ruin that used to be a strong, viable company where thousands of hard-working Americans made their livelihood.

The Reagan gang also allowed the first massive real estate bubble to occur, by steadfastly refusing to provide adequate regulation to the S&L sector, which devolved into a free-for-all crime spree of money stolen from depositors through numerous bogus real estate deals. Then the "RTC" sent the bill for all the shenanigans to the American taxpayer.

"Diamond" Don Regan, a former Merrill CEO, was named Treasury Secretary and promptly loosened many controls on Wall Street, including Reg-T oversight, short selling, and conflicts involving investment banking and research. The SEC became a joke under Reagan, and has remained so. The IRS was deliberately marginalized and underfunded, as was the SEC. Let's also not forget the massive defense spending, much of it at truly ludicrous prices, that enriched many CEOs and investors, but started America on its way to becoming the largest debtor nation in world history.

Ironically, it was George Bush #1 who decried the "Voodoo Economics" that he saw would lead to financial ruin down the road. The real reasons the nineties were so successful for many Americans were the collapse of the Soviet Union, which was a fifty-year meltdown that finally ended, and the "tech" boom that gave America the jump on the rest of the world in everything from PCs to the internet to industrial robotics, all leading to real gains in efficiency and prosperity. Neither of these had much of anything to do with the massive neocon-inspired defense buildup which was mostly squandered money, or the 'free market' economics that were championed under Reagan - although the Fox News crowd tries to turn Reagan into some kind of hero for simply being in office while these events occurred.

George Bush #1 lost a close election to Clinton, thanks to Ross Perot and a general distrust of wealthy elites by the broad populace. It was time for a guy who grew up poor and made his own mark by hard work and political savvy, not by inheritance and Wall Street connections. Clinton was a fairly successful President, but you are right, he did almost nothing to stop the financial abuses, concentration of power, corruption on Wall Street and the credit card industry, and so on.

George Bush #2 was obviously a wall-to-wall disaster for America, and now all the chickens are roosting and we have a huge tab to pay - thanks to corporate thievery, massive tax dodging, and extremely wasteful spending on many boondoggles and our military machine.

It's not pretty, and there are no quick fixes - Obama was dealt a hand full of bad cards, and the answer to the debts will be massive inflation - it always has been, and will be again. Given time, and a less corrupt Congress, we can solve the problems and restore financial sanity and a modicum of integrity to our society. It won't be easy, but recognizing the problem is the first step.

Congratulations on the two great articles.

Financial Elites and the Enronization of America (Part I)

J.S. - Great Article!

There has been a growing corporate crime wave in this country for roughly the past 25 years. As you say, it seems to get worse as time rolls along, or at least the obvious problems have a way of not getting fixed if they put money into the pockets of the wealthy or those who can control the laws and the distribution of true economic profits, which are often not "earned" in any true sense, but merely siphoned off to the powerful and corrupt.

I look forward to reading Part 2.

FASB Unlikely to Suspend Mark to Market

As a CPA, I am 100% in favor of modifying Mark to Market Accounting for circumstances such as we are now in. To pretend that we have anything resembling a normal market is utterly laughable, and therefore it is ludicrous to mandate that a bank must take a very low mark on an asset pool that, as one poster says, has a much higher PV based on cash flows, given all known defects and reasonable expectations.

The SEC has been an abomination for years, and I frankly don't think much of FASB either. The SEC has completely dropped the ball in its most important function, which is of course to police markets and try to eliminate front-running, market manipulation, fraud and so on. They have done an absolutely terrible job at that task for at least ten years, and worst by far under the term of Cox and several of the disgraceful Republican 'free-market' commissioners of the past few years.

So what did they do? They decided to implement FASB 157 in a strict sense without having any guidelines as to market effects or illiquid markets. Thereby, they created an enormous self-feeding financial panic that has so far led to grievous harm and tremendous economic loss.

I cannot blame them entirely for the conditions that led up to the panic - grossly off-the-charts fraud and corruption on Wall Street and the mortgage markets. Part of the bad behavior was due to sheer greed and flawed models, and even a very effective regulator would have stopped a good bit, but not all.

I liken it to striking a match after allowing a bunch of vandals to pile up tinder and douse it with kerosene. The SEC in its perverse way did great harm to a market that they were supposedly trying to help function effectively.

FASB on the other hand has a long history of issuing very long, complicated and sometimes tortuously contradictory "statements" that make accounting cumbersome, way too open to different interpretations, and often very easy to manipulate. The FASB really needs a complete overhaul - I would suggest that they get rid of most of the academics and theorists, many of whom have never done much more than issue a bunch of white papers at universities - and put a panel together consisting of industry controllers and CFOs, as well as a few executive types, like for instance Larry Bossidy.

I would also include several ombudsman-type people from the real world, who might best be described as "investor representatives" who would ensure a common thread of transparency and accurate reporting that is useful, relevant, and very accessible to the average investor.

They would certainly benefit somewhat from suggestions from Wall Street, but that should be limited to a comment period. Nobody who is a banker or has a large financial interest in a company should be allowed to help write the accounting rules, especially not brokerage execs.

Mark to Market should be modified to ensure that there is an active, functioning market, to be used as a reference - when there is none, it simply doesn't apply.

Off Balance Sheet entities are a complete joke, always have been, and should be immediately scrapped.

The whole idea should be to simplify instead of compound the problems and complexity, which is what FASB seems very good at doing.

It should also greatly simplify and streamline the Sarbanes-Oxley documentation process, establishing a clear standard and usable templates, so that the "Big 4" accounting firms can stop ripping off their clients by forcing them to jump through 100 useless and totally insane hoops, all while the accountant's meter is running.

No wonder people hate accountants - they did it to themselves through the utter stupidity and self-enriching nature of the system they constructed for the business world.

How the U.S. Banking System Was Madoffed by the FASB

Excellent article. The credit function is critical to our economy, and as you say, the ill-fated FASB rules played a very large part in the system breaking down.

But it's also true that the massive corruption on Wall Street and in the mortgage origination business, both basically un-regulated by the Bush administration for eight long years, was a huge force in misdirecting investment, rewarding criminal behavior, and destroying investor confidence.

Tangible Common Equity: How Much Is Enough?

Mark,

I agree with your premise that banks are woefully under-capitalized and need some serious reform.

Would you be in favor of a requirement that made banks have a certain minimum of permanent equity capital, and not rely on so much debt which as you say, always wants to get paid and exit the corporation once the weather turns cloudy?

And perhaps we should also have certain restrictions on the types of 'securities' and investments the banks can invest in, like in the old days. What happened to good old fashioned lending?

I see the current banking crisis as largely being a serious breakdown in regulatory standards, as well as executive stupidity, malfeasance, and the pursuit of bonuses based on phantom derivative profits, rather than sound banking. The past 10 years or so have been an episode in banking nonsense.

Finally, if you could comment on the conversion of what used to be "investment banks" to regular banks, which is what Paulson rammed through in desperation to save Goldman and Morgan Stanley. I consider that an outrageous move that simply puts the taxpayer at further risk down the road - the last thing I want is for GS or MS to take time deposits so that they have capital to invest in the next wave of dotcoms or Countrywides.

What do you think?

Rethinking Subsidized Finance

>>In any of the two cases, the govt will nationalize the "grid" if any catastrophe of the like blows up and harms lives, almost without a thought. Why won't we do the same to banking industry?

I want to emphasize that we're back to 1997 DOW people!!! And still going back! Talk about time travel backwards economically, sheesh!

With such destruction (more than a decade of destruction in the USA; more than TWO decades of financial wasteland in Japan) wrought, why do we still want to do the same thing?

I agree with the author that banking seems to be a net, capital, money and sanity losing proposition for the whole economic system.<<

Banking works OK if you have honest, capable bankers trying to do the right thing for shareholders, and society, and make a decent living doing that.

Unfortunately, it seems to attract some of the sleaziest elements of the corporate world, looking for get-rich quick deals and obviously open to massive corruption. That's why it needs to be tightly regulated.

When Bush came in, the rule book was thrown away, and the green light for rampant fraud and speculation was turned on. The regulators took long lunches and played a lot of golf on Vegas junkets, sponsored by the bankers!

Then all the $hit hit the fan - now we pay for the most incompetent administration in history.

Sad, isn't it?

Mr. Market Has Spoken

Bill,

Excellent article.

You're right, we have been hosed by the bankers beyond belief.

I for one would like to see the entire racket busted for good, never to return in its present form.

Nationalizing the U.S. Banking Sector: There's No Choice

I agree with the author. It's time to face reality - most of the really bad assets will never recover, and playing a hope-and-denial waiting game is just exacerbating the problem.

We are seeing massive job losses and a stagnant economy. Nobody wants to spend money - and THAT is the biggest problem of all!

If you keep going this way, we will have the dreaded "tsunami" of foreclosures some time next year, along with 20% unemployment and a total wipeout of many insurers, including a lot that have promised annuities to people who are soon to retire.

Think about that - we are in danger of really tanking our economy, just because a bunch of lying egomaniacs won't admit their ridiculous blunders, and are desperately trying to hang on to their jobs.

I say throw the lot of them out on the street, and start over.

That will also expose the fact that many of these joker CEOs and CFOs and "managing directors" are still being paid ten times what they are truly worth!!!

Goodbye Vikram, bye Ken, bye Jamie, and all the rest of you who got us mired in this toxic derivatives swamp.

You deserve to be kicked out the door.

Contemplating the Demise of Bank of America, Citi and JPMorgan

>>The United States, despite acting faster than its European peers to battle the credit crisis, is *** dangerously close to following them down the path of nationalization and must take whatever measures necessary to avoid such an event.*** <<

Where on Earth do people get the idea that nationalizing banks is somehow bad?

What we have just been through should clearly prove to anyone that, given the chance, the people who run ** private ** banks will favor their own personal interests, including huge bonuses based on clear-cut fraud, and essentially rip off the public for their own benefit. In the end, the taxpayer is asked to clean up the mess. Check the history books, this has happened over and over in the past.

We have been left with a "banking" system that is trillions in the hole, a smoking ruin of self-dealing, crime and mismanagement on a truly grand scale, and THAT is what you want to preserve at all costs???

Who are you, one of the Bushes?

Banks: Nationalize, Cleanse and Get It Over With

It is clear that the banks should be nationalized, for we are already on the hook for a great majority of the losses. Let the equity holders take it in the shorts on this one, I say.

My solution is to nat the banks, fire the incompetent top managers (and bar a number of them for life from ever being an officer at another bank or any public corp) and then install a Board of Overseers at each bank to get the thing back to its original function. That would be making prudent loans at reasonable rates, to those individuals and businesses with a very strong chance of being able to repay the loan.

The corrupt bankers, of course, got us into this horrid mess by intentionally mis-interpreting the CRA to mean that they had been "ordered" to make loans to deadbeats and the jobless, which was never the case. Now their neocon and nincompoop apologists (like Glenn Beck) are screaming socialism, while at the same time trying to make it appear that the Govt was at fault for all the fraud, gross mismanagement, and utter lack of competence by the Bush admin.

Where Citigroup Went Wrong

>>But in late 1998, after announcing the biggest merger ever, ***Weill and Dimon sparred over Weill's daughter, Jessica Bibliowicz. Dimon refused to give Bibliowicz the job of chief asset manager of Travelers***, as Weill demanded. What's more, Dimon also wouldn't agree to ***promote Weill's son, Marc, to head up Salomon's bond group.*** Weill demanded that Dimon resign.

Jessica went on to run National Financial Partners (NFP), a $100 million financial advisor that has seen its stock swoon by 93% in the past year as Barron's has written negatively about its future prospects. Having left Citi in 2000, Marc now heads a small money management firm in Greenwich, Conn., called City Light Capital.<<

Nepotism rears its ugly head once again.

Jessica B is skank, thoroughly unqualified to run anything important at Citi, or anywhere else. I don't know much about Marc, but it sounds like maybe he would be driving a cab or waiting tables if his Dad hadn't been a domineering dealmaker on Wall Street.

Look people, we absolutely MUST get nepotism out of our financial markets - and our politics - it is getting critical, to say the least, to address this problem ASAP.

George W. Bush is barely qualified to manage a Kroger store, yet due to family name he ends up as the POTUS!!! Just freakin' incredible! And the damage is HORRENDOUS.

And Weill, after getting to the top of the pack, whether deserved or not, tries to put his daughter and son into positions that they have neither the resume nor the talent to deserve. The result? An atrocity at Citi, a very large factor in the financial crisis, maybe the biggest of the problems, judging by recent actions. And again, the damage is HORRENDOUS.

Case closed.

Citigroup's Derivatives Reduce Bailout to a Non-Event

>> It is becoming quite clear that there needs to be more **regulation** in the banking industry in the area of CDS's. We haven't seen this bubble implode yet. However, we are now seeing the very real possibilities that such an implosion could mean to the US economy (and world economies). It is also clear that banks, especially Citi, have taken much more risk than any banking regulator would ever agree to.

The reason was obviously greed...<<

Well, you got the last part (greed) right, at least.

What we need to do is to TOTALLY SHUT DOWN the poisonous CDS market - it is an absurdity, and very dangerous to many elements in society.

It has already tanked the world's largest insurance company, which is still hopelessly insolvent, despite the lies by its execs on CNBC and to the various regulators. It has imperiled many banks here and abroad, and led to a disastrous freezing of legitimate banking activity. As a side note, I must say that it is just an abomination to have Pandit or any of these other hedge fund gamblers running a bank - they are a menace to society, and have created a host of problems - jail would make more sense than the executive suite for many of these jokers.

Having said that - Citi should be broken up into several pieces - a commercial bank, a regulated brokerage/money manager, and a pile of toxic waste that is managed by the govt to salvage whatever value is there. No money should be paid out to the hapless victims of the other side of ludicrous swaps and other forms of pernicious gambling. Let the losses register where they belong, and incarcerate those who have broken the law.

One final thought - why do so many people assume that, whatever the idiots at hedge funds and the spec-trading community dream up, it is our job to "regulate" it, rather than to shut it down?

An analogy would be as follows - if hundreds of people decide on a mass suicide by jumping off of an 80-story building, is it society's job to clear the sidewalks below, and put up safety nets to catch the falling bodies?

Or is it better to take steps to prevent the madness in the first place? The CDS market is rife with corruption and speculation that is mainly about deriving huge bonuses from 'winning' bets, while dumping the losses on the govt, and then moving on to another fund or trading desk. It is thoroughly corrupt, and just because we have shady facilitators like Hank and Ben helping to keep the game from collapsing, doesn't mean that it is in any way an honest game, or of any significant benefit to society.