Published in CommPRO.biz 2013.08.28

The Customer Is Not Always Right

Let’s review – America has been struggling to rise out of what has been called the Great Recession. A recession brought on by a systematic dismantling of safeguards that protected us for decades after the Great Depression. Engineered by lobbyists working for Wall Street banks and the super rich –the 1% of the 1%– this tearing down of the walls was not intended to cause a recession, just to allow those at the top to make more money.

The recession was an unintended consequence. The big banks had been buying up mortgages to create bundles that investors, pension funds and the like could stash away and collect interest on month after month. What could be safer, we all know real estate never loses value; it always goes up, right? Besides, the banks had these packages checked out; the credit rating services marked them AAA.

This new idea caught on like wildfire. Pretty soon the supply of mortgages wasn’t keeping pace with the need. So the banks pushed the mortgage brokers down the line for more and more mortgages. The brokers urged people to buy, coaching them and fudging the numbers when they didn’t qualify. The banks learned to pile the mortgages with the not-so-nice on the bottom. The rating services were overwhelmed. Under intense pressure from the banks to anoint the investment packages with top ratings, it appears that the services buckled. Soon packages the bankers were calling “Crap” were gaining AAA ratings and being sold by those same bankers to trusting customers.

To understand why the rating services would hang a AAA on what the bankers called “Crap,” we have to look at their business model. The banks asking for AAA ratings paid for them. The banks are the rating service’s customers. They feared that saying no to the banks would just send them to another rating service. They anointed the “Crap” AAA to keep the bucks coming through the door.

That’s pretty much what the Justice Department is saying that Standard & Poor’s did when they sued the rating agency for $5 billion. The DOJ and 14 states are suing S&P, the largest of the rating services. The other two, Moody’s and Fitch, are likely to be next. The $5 billion suit is moving through the California court of District Judge David Carter. S&P rated $4 trillion in various bank investment vehicles over the four years leading up to the collapse.

While S&P is facing the $5 billion lawsuit, keep in mind that the real bad guys are the handful of monster banks that put together the piles of crap and coerced an AAA out of the rating services. What’s more the same banks are back at it– gambling wildly secure in the knowledge that we will have to bail them out again when they stumble. We like to think that doing the right thing is easy. It’s not, what’s easy is taking that first step in the wrong direction

The Rich get Richer, Redux

We’ve been reading a Merrill Lynch Global Wealth Management report on High Net Worth Individuals (HNWI). There are a number of metrics to define this group, but most include those who have at least a million bucks to play with. That’s a million+ not counting homes, yachts, private jets, etc. Then there is a subset, Ultra High Net Worth Individuals (UHNWIs), those with 30-50 million in play money. There are about 10 million worldwide in the HNWI playpen; North America has by far the most, over 3 million.

The HNWIs took a hit when the economy collapsed. Not that they had to make any lifestyle changes, but it got their attention. Not to worry, you’ll be happy to hear that this report shows they pretty much recovered from the beating they took — within one year. The Merrill Lynch study was just released but it covers the HNWI world as it was in 2009, just one year after the collapse. At that point the HNWIs were up 18.9% with a total of $39 Trillion in their piggybanks. The subset UHNWIs were up 21.5%. Apparently the Joneses couldn’t quite keep up.

What are they doing with their money? Here’s what Merrill Lynch sees in the research, “By 2011, HNWIs are expected to further reduce investments in their home regions and look to those regions in which growth is expected to be more robust. While HNWIs from the mature economic regions of North America and Europe are expected to continue increasing their allocations to Asia-Pacific in search of higher returns, HNWIs in Europe are also likely to increase their North American holdings to inject stability into their portfolios.”

So Merrill Lynch says the 1% of Americans who have almost all the bucks are going to invest in Asia. Their tax advisors will -of course- have them leave their profits offshore so they aren’t bothered by those pesky IRS types. On the other hand, the HNWIs from Europe will be investing over here; in our Treasury Bonds if they are looking for stability. One way or the other, none of the HNWIs are doing anything for our economy, except maybe for Tiffany & Co. along with all the others in the booming luxury markets.

None of this creates the jobs we need. Small businesses create jobs and there are precious few small business owners in the HNWI class. Most are lucky to take home healthy five figure paychecks and everything they have is in their business. To grow they need help from the banks whose coffers are bulging with bucks (thanks to the tax payers), but they aren’t lending. So the folks who create jobs are stuck, in many cases barely hanging on in a slow economy the banks created.

If the HNWIs think they are immune from the growing discontent rising in America they are mistaken. If they believe they have no responsibility to restore and maintain the safety nets put in place following the Great Depression, they are mistaken. “With great power there must also come great responsibility,” so saith Peter Parker (AKA Spiderman). That is the essence of ethics.  

W.T.”Bill” McKibben is a Buffalo based author. © 2011 GLG