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THE
OBVIOUS IS OBVIOUSLY WRONG
The
most common and most difficult problem is to not confuse Cause and Effect
because in so doing, we can never uncover the real underlying problem. Unless
we can get to the heart of the matter and uncover the REAL problem, we will
continuously get caught up in a vicious circle of regulating Effects instead
of the Real problem and in so doing, we end up in a slew of unintended
consequences as we get more and more mired in a mass of Socialist (feel good)
regulation which is, by its very essence, designed to fail.
A.I.G,
Lehman, Fannie, Freddie etc. - WHY DID THEY FAIL?
Unless
and until you can answer this question properly, it is impossible to come up
with any decent new regulations. Hindsight is 100% you say? Well, that is
just not so. When you don’t know what to look for and you confuse cause
and effect, there is no way you can create decent, effective regulations. In
this case it seems that the primary objective is to place blame and punish
someone; the shareholders (who are the only ones that are completely
blameless) while allowing the big-wigs to slither off into the night with
their giant severance packages and past unearned bonuses, only to resurface
again in a few years.
INCEST
and CONGRESS
The
real problem is the incestuous (non-sexual) relationships between Congress,
Wall Street, Washington and Wall Street Lawyers and their appointed
regulators: All of whom are “frat buddies” out of the
country’s premier Ivy League Schools and all steeped in Keynesian and
Galbraithian economic theory and principles. I just finished listening to
Barney Frank who couldn’t wait to politicize the issue while performing
his Massachusetts Two Step, second only to the Texas Two Step as he called
for more regulation pointing to the Insurance Industry as an example. I guess
he didn’t realize that the Insurance industry is regulated by the
States and not the Federal Government.
Did
any of you notice that he mentioned a sort of Resolution Trust Corp. as a
potential solution, but could not answer any questions as to how it would
work. Instead he side stepped into it by saying it was the responsibility of
the next Congress. Does he not think that he will still be the head in the
next Congress? Perhaps he may have read my last letter where I suggested an
RTC solution, but purposely did not go into too much detail.
NOTE:
Congress makes all the Laws that everyone has to follow except of course
Congress itself. They have exempted themselves from all laws that the rest of
us must follow including the one about lying under oath, which of course they
never do - take an oath that is! Can you just imagine if somehow a Law got
passed that anytime a Congressman spoke in public it would be that same as if
he was under oath? Can’t Happen, besides our Jails are already
overcrowded.
THE
SECURITIES ACT OF 1933-34
It’s
time to stop with the generalities and become more specific. The 1933-34 Act
came about as a result of the 1929-32 Stock Market Crash. Somehow they got it
right and it worked for more than 50 years. Eventually Congress succumbed to
Wall Street pressure, backed by 100’s of millions of political
contributions, and decided to gut the Act and eliminate its best and most
important provisions, especially Glass Stegale.
What
exactly was there about Glass Stegale that was so important? GLASS STEAGLE
prohibited the merging either directly or through holding companies of
Investment Banking Companies, Banks, Insurance and Mortgage Companies. When
it came to mortgages, the Savings and Loan Industry was created to provide
low cost mortgages. However, they could not engage in other banking business
other than accepting deposits and they were given the right to pay higher
interest rates than could the commercial banks.
THE
SAVINGS AND LOAN CRISIS
Everything
worked precisely as planned until the 1980’s. As inflation and nterest
rates took off, investors could now get a higher return by buying Treasury
Bonds than what the Savings and Loans were allowed to pay. However, the
minimum Treasury Bond was $10,000, precluding the small saver from getting
the higher rates. That became a political football and without thinking
through all of the unintended consequences, the Usury laws were abolished.
Without going in to too much detail, the Savings and Loan crisis was soon
upon us for the same reasons as today. They were caught holding long term,
low interest mortgages that they were funding with short term deposits and
borrowings and their fate was sealed. Naturally, Congress (the real people at
fault) soon found a number of scapegoats (like Keating) to be the RED
HERRINGS so that no one would even look for the real problem and those
responsible, congress. By not learning from our mistakes we were setting the
stage for the problems that we are facing today.
GLASS
STEAGLE
Not
being an Ivy League Graduate and therefore not an insider, I cannot tell you
how long and hard Wall Street, their lawyers and their bought and paid for
Congressmen worked in completing the gutting of Glass Stegale. Once the dam
was broken the rest was easy -taking less than 10 years to open the flood
gates to all the mergers and acquisitions that the ACT was designed to
prevent (lessons learned form 1929). Today’s problems became
inevitable.
ELLIOTT
SPITZER
He saw
some of the problems, so he took on Wall Street but unfortunately, he was
more interested in becoming Governor on his planned path to the Presidency.
He collected a few $billion that was paid by the shareholders while senior
management remained untouched as a couple of highly paid analysts were
sacrificed (while being well paid to keep quiet). However, he did manage to
establish a Chinese Wall between Research, Underwriting and the Retail
Broker, all of which was nothing more than a sham. A Big Joke, but
who’s laughing?
UNINTENDED
CONSEQUENCES
(The
Good)
Believe
it or not, sometimes the unintended consequences turn out to be good for all
concerned. When I started my brokerage career, commissions were as high as
$0.80 /share, with no right to negotiate regardless of the size of
transactions. Volume on the NYSE was under a million shares a day. We used to
have a pool every week as to who would get the first order of the week. Then
along came Spitzer and others before him who dragged Wall Street kicking and
screaming (small Stock Brokers, Mutual Funds and Insurance Companies who had
more political clout than Wall Street) into negotiated rates that dropped
trading costs drastically and volume exploded. Spitzer then forced Wall
Street to narrow the spreads and eliminated ¼ point quotes droping them
down to as low as I penny.. As any good economist can tell you, lower the
cost of doing business and business will explode, which is exactly what
happened.
(The
Bad) You Ain’t Seen Nothing Yet!
If the
whole world’s financial system and especially our own were not all
cross collateralized, we would not be experiencing the problems we are having
today!
Once
Glass Stegale was shattered, the mergers began and with it came cross
collateralizations. Banks merged with Brokers, Brokers merged with Insurance
Companies (1st one was Prudential and Bache), Mortgage Companies with Banks
and Brokers and all kinds of permutations and combinations. The end result
was a bunch of dealmakers heading up these companies who were only interested
in their options and their stock prices. They cared very little and
understood even less as to how to run their new, highly complex, worldwide
conglomerates. Risk Management, what’s the problem? You just package
it, pay the rating agencies (another Sham) to give it a AAA rating a sell it
off to someone else. Eventually, they got to believe their own B.S. and
started buying their own JUNK. When it came to AIG, Spitzer got rid of the
one man, who over a 35 years, had built his company from the ground up for
strictly political reasons. Take notice that Greenberg has never been charged
and although he is by far the largest single shareholder, he was barred
without any hearings by the SEC from holding office in any public company.
Had Greenberg still been in charge of A.I.G., I am convinced no FED bailout
would have been needed.
This
is not something new. Martha Stewart and her friend, the president of the
company that discovered the single best anti-cancer drug and which was just
bought out at $70/share, both went to jail because they were high profile
scapegoats and along with Koslowski and Ken Lay, acted as red herrings so as
to keep the focus off Congress and placate the public.
IT
WASN’T LACK OF REGULATION THAT CAUSED ALL THE PROBLEMS
It was
a lack of enforcement and the cancellation of existing regulation that was at
fault. All of which was due to the incestuous relationships between the
Regulators and the Regulated. Who are Rubin, Paulson, Greenspan and Bernanke
- if not good old boy, Ivy League “frat buddies”. Do you really
expect them to turn against their friends and their own previous companies in
which they hold tons of options? How could any Government Over-Sight
Committee and their Regulators that report to them, have allowed a completely
unregulated Derivatives Market to expand into the 100’s of $ trillions
without a single bit of regulation or oversight? And now they wonder what
happened? As Derivatives began to expand at an exponential rate and when even
I could not fully comprehend what was going on, I began to warn about the potential
danger when that market was only approaching $ 1 trillion and still had the
potential to .either be managed regulated or stopped.
CREDIT
DEFAULT SWAPS
How
many people even know what they really are or how they work? It is obvious
from listening to the financial media that no one I have ever seen on TV
does. What is even more frightening is watching a bunch of journalists who do
not have a clue about C.D.S’s. talking and attempting to influence
policy, when they do not have enough knowledge to ask intelligent questions
from guests who might be able to give them answers. It was the Derivatives
that allowed for the Carry Trade to expand exponentially and it was the Carry
Trade that allowed the US to keep interest rates low and continue to spend
like drunken sailors (I apologize to all sailors – at least they were
all spending their own money). The name of the game has always been buying
votes and raising political contributions. How else can a person earning
$35,000 per year come to Washington be worth $104 million after only 8 years
in office?
THE
DECADES OF THE 1920’s VS 2000’s
The
similarity between the 1920’s and today is downright uncanny and
terrifying. Will the 2010’s be the same as the 1930’s? HISTORY
REPEATS. The question is will we ever learn? 1928 saw a Republican
Hoover, a Socialist, become president who then instituted in 1929 what
President Harding refused to allow him to do in 1919 when Hoover was
Secretary of Commerce. The Depression of 1919-1920 lasted only a little over
18 months even though the initial drop was sharper than in 1929, that
Depression never suffered the massive unemployment of the 1930’s for
the simple reason that wages were allowed to fall along with the prices of
all other goods. However in 1929, it was Hoover who started the New Deal and
when the Republicans naturally lost in 1932, FDR took over and greatly
expanded the New Deal which included strengthening the unions, cartelizing
companies, passing laws forcing companies to maintain prices, disallowing
discounting, burning crops and pouring milk into the streets in an attempt to
maintain farm prices. He confused cause and effect. He thought since LOW
prices and Depressions went hand in hand, if he could maintain prices, he
could avoid Depression. The rest is History.
Today,
we have a Democratic controlled Congress who are already writing bills to
strengthen the Unions by eliminating the secret ballot and canceling the
NAFTA free trade agreements. They have already killed the 7 years of Trade
negotiations and are blocking trade agreements with our South American
allies.
McCain
is socialist, just like Hoover was, so it does not really matter who becomes
president. If McCain wins, it will be an exact replay of 1928. Depression is
already backed into the cake.
OUR
ONLY POTENTIAL SALVATION IS SARAH PALIN: How good is she
really? After all, Alaska is just a wee bit smaller than the USA and how much
influence will she have over McCain should they win the election? More
importantly, can they also win back control of the Senate? Without both
things happening (winning control of the Senate and McCain listening to
Palin), it will be an exact replay of the 1930’s. WILL WE EVER LEARN?
KUDLOW
AND CRAMER
While
watching TV this evening, I noticed that both Kudlow and Cramer mentioned an
RTC type solution as a possible way out of our current real estate and
financial crisis. Was it just a coincidence that an RTC type solution was
part of my focus in my last two letters or is it possible that they have been
reading my stuff on one of the many websites that publish my musings?
WHAT
TO DO NOW
Don’t
you think it’s about time you all subscribed to my letter UNCOMMON
COMMON SENSE and got the straight talk two weeks before everyone else reads
it? GET OUT OF DEBT, BUY GOLD AND WEAR DIAMONDS !
Aubie Baltin CFA, CTA, CFP,
PhD.
UNCOMMON COMMON
SENSE
2078 Bonisle
Circle
Palm Beach Gardens FL.
33418
aubiebat@yahoo.com
561-840-9767
Also
by Aubie Baltin
Please Note: This
article is for education purposes only and is designed to help you make up
your own mind, not for me to make it up for you. Only you know your own
personal circumstances so only you can decide the best places to invest your
money and the degree of risk that you are prepared to take. The Information
on data included here has been gleaned from sources deemed to be reliable,
but is not guaranteed by me. Nothing stated in here should be taken as a
recommendation for you to buy or sell securities.
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