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The Smoking Gun by: Charles Payne

|Includes: AA, BAC, CVX, EA, GME, GOOG, GS, HIG, JPM, KB Home (KBH), MS, TIF
You know after the crash of Wall Street Franklin Delano Roosevelt poured it on, blaming Wall Street for the woes of the nation. However, a commission was put together to actually go beyond simply blaming everyone on the Street and instead focus on how the crash happened. This commission came together in a Republican controlled Senate but was a disaster out of the gate. After losing two chief consultants because of ineptness, and another who resigned because he wasn't given broad subpoena powers, the commission cobbled together the information and handed it off to the assistant district attorney of New York County, Ferdinand Pecora. After determining the investigation was incompletely done, Pecora talked the commission into letting him finish the job. The hearings became a spectacle that captured the imagination of a suffering nation and forever marked Wall Street as a place of unlimited greed in the eyes of many in the general public. While greed isn't illegal, there were several smoking guns unearthed that eventually led to the Security Act of 1933 and the Security Exchange Act of 1934.

Cast of Characters

Charles Mitchell was CEO of hard-charging National City (known today as Citigroup), which opened offices all over the world. He paid his traders an advance of $25.0 million (more than $300.0 million in today's dollars) even as politicians were trying to get Wall Street to slow down in 1929. It turns out that he and other executives at National City had piles of cash in the form of interest free loans from a special bank fund. The government went after Mitchell hard with assistant U.S. Attorney Thomas Dewey (yes, the same man who won the White House according to the Chicago Daily Tribune), getting a trial for tax evasion and other criminal activities. Mitchell beat the tax charge, but ended up paying millions of dollars to the government. Senator Carter Glass (yes, from the Glass Steagall Act) said Mitchell, more than any 50 men, was responsible for the stock market crash.

Albert Wiggin was a real hotshot, and was the youngest vice president in the then history of Chase National Bank before becoming its chairman in 1911. He was eventually busted for selling short his own company stock through a Canadian shell company. He profited $4.0 million from shorting 42,000 shares.

Arthur Cutten was a major success story as a legendary trader who formed trading pools and made millions of dollars. Not only did he lose $50.0 million during the crash, but he was also tried for income tax evasion.
So let's fast forward to the crash of 2009

This time around the government hasn't even bothered to have a commission as President Obama and the media have stated this whole thing is Wall Street's fault. However, where are the smoking guns? Last week, a huge smoking gun was uncovered but it implicated Timothy Geithner as head of the New York Fed. It's amazing to think that the Fed would tell AIG to withhold information about a questionable policy of paying off CDS at 100% on the dollar. Not only was that a terrible decision but it led to a string of terrible decisions, including continuing TARP. Still, the focus of the administration has been pushing through regulation of Wall Street. Heck, there is a fight going on over whose going to have the pleasure of wielding more power to tame the beast of Wall Street. And what exactly is the focus on? Wall Street pay. While Main Street slips further into the abyss the focus is to level some kind of economic justice. Everyone is getting into the act. The FDIC is flirting with the idea that those banks that don't play ball will be made to pay extra insurance premiums.

It's a silly idea, and only means higher fees for banking customers or more creative payout schemes on Wall Street. I realize that the massive payouts announced thus far have been great political fodder but it's really time to figure out how to go beyond crafting bad guys and pointing blame. Of course, nobody's going to be happy on Main Street when Bank of America (NYSE:BAC) pays out huge bonuses. There is no way to argue the Morgan Stanley's (NYSE:MS) bonuses ($10.9 billion by the end of 3Q09) are based on merit, although Goldman Sachs' (NYSE:GS) bonuses are earned even if they are going to be eye-popping (the firm's bonus pool was $16.7 billion by the end of 3Q09). Still, all of this pales in comparison to the completely illegal and unethical shenanigans back in 1929. Maybe at some point there will be a commission, but the penalties are already in the works. How funny since the smoking guns point to government officials behaving badly in the Bank of America and AIG sagas. I guess guilty until proven innocent unless you try to blow up a plane.

I don't want to defend big Wall Street banks, they make much more money than I do, but I do want to defend what is right and wrong. I think that the myopic focus on how much money Wall Street makes when the rest of the nation is drowning is way off base. Should we be trying to score political points or figure out how to fix the nation? Stoking more anger and finger pointing either delays or derails the real work that still needs to be done. Still, New York Attorney General Andrew Cuomo is asking eight banks for details on their bonuses. Still, the administration says that it's crafting something special in the budget to get back taxpayer money. That's all fine and good but (NYSE:A) we shouldn't have forked over the dough in the first place, and (NYSE:B) the companies in question have paid back TARP money. I don't get where these guys are coming from when they talk about Wall Street having a tin ear and are going back to their old ways. Was there ever a doubt? Wall Street has been the bad guy for more than a century; maybe days after trading began under that buttonwood tree in lower Manhattan.

By the way, after JP Morgan saved the country he was rewarded with the Pujo Committee Hearings, where it was discovered officers of the company sat on 112 corporate boards worth $22.5 billion in market cap (the entire cap for the NYSE was $26.5 billion). It was during these hearings in frail health Morgan uttered: "Before money or anything else. Money cannot buy it, a man I do not trust could not get money from me on all the bonds in Christendom."

No matter how much they play the politics of envy and class warfare the fact is that Americans don't trust Washington anymore than Wall Street. Moreover, I keep hearing how much Main Street hates Wall Street but when Main Street erupted at Washington it was dismissed. I don't care how much Wall Street bankers make as long as they are allowed to fail if greed and stupidity sends them over the edge again.

Struck Out

I wonder if there is any way Google (NASDAQ:GOOG) could change its stock symbol to AAA so it could report earnings before Alcoa in the future. Actually, I'm not sure why AA is first as I doubt it has anything to do with the symbol, but as a leadoff hitter it leaves much to be desired.
  • Alcoa (NYSE:AA) posted a net earnings number adjusted for one-time items of $0.01 per share on $5.4 billion in revenue, in the process blowing out top line expectations for $4.86 billion. Somehow, however, the company missed on the bottom line by $0.05. Go figure. Free cash flow was $761.0 million, and the tone of the quarter was upbeat, but the stock was off 4.5% in after hours trading,
  • Electronic Arts (ERTS), citing weakness in Europe and a shift to lower margin products, cut its FY10 revenue and earnings estimates. Management now sees revenue in a range of $4.125 billion to $4.2 billion and earnings $0.40 to $0.55 per share. Previous guidance was $4.40 billion in revenue (high-end) with as much as $1.00 per share to the bottom line. Consensus estimates were for $4.26 billion in revenue and $0.75 per share in profit.
  • Chevron (NYSE:CVX), while not offering a specific number, cited "significantly weaker" margins in its refining business. The Street is currently modeling for $1.75 per share on $43.5 billion in revenue.

Tuesday Morning Musings
By: Brian Sozzi, Research Analyst
  • No major downgrades on Electronic (ERTS) shares post an alarming holiday quarter earnings miss. At this point, I think analysts are looking beyond the near-term noise and paying attention to a world of increased digital game adoption and a rising console base in 2010 and 2011. Either way, the videogame sector as an investment has been very disappointing during the current console cycle that began in 2005.
  • An earnings warning from the U.K. version of Gamestop (NYSE:GME), Game Group, underscores the competition inflicting traditional retailers. Companies in the videogame sector, for instance, are losing share to online retailers, mass merchants, and to sites that operate their own gaming fantasy worlds.
  • Futures were under pressure early on as Alcoa's bottom line miss ignited uncertainty about the pace of the U.S. recovery. However, the company did strongly beat on revenue, suggesting the earnings miss may be more mismanagement than an indication the world is falling apart yet again.Other news out this morning has been mixed. KB Homes (NYSE:KBH) posted a convoluted number but that stock is edging lower. Tiffany (NYSE:TIF) and Hartford (NYSE:HIG), however, both raised guidance substantially. There is also some economic data out today as well (we will delve into that in the afternoon report).
  • Was the CEO of JP Morgan (NYSE:JPM), Jamie Dimon, hinting in a speech yesterday that the company's earnings this Friday may be above consensus? It's an interesting thought as most comments made by Mr. Dimon implied the worst is well behind the company. Surprisingly, he noted that while commercial real estate is a "train wreck", the negative impact of haircuts on a huge portion of the book was largely in the rear view mirror.
  • Tiffany & Co's (TIF) strong annual guidance revision this morning is indicative of a company executing superbly and benefiting from weaker operators leaving the market at the start of 2009.
Other news out this morning has been mixed. KB Homes (KBH) posted a convoluted number but that stock is edging lower. Tiffany (TIF) and Hartford (HIG), however, both raised guidance substantially. There is also some economic data out today as well (we will delve into that in the afternoon report).




Disclosure: None