Published CommPro.biz 2014.05.06

Walking the Edge of the Razor Blade

It would be hard to find anything gone farther astray from its intended purpose in our society than our capital markets. The New York Stock Exchange and all other such entities in the world of finance as played in the United States have forgotten their purpose, to create a source of capital for Capitalism. Instead they have succumbed to enriching the players. Those who manage the markets have allowed the investment banks and the traders to run the show. The exchanges’ purpose is to support the companies listed, not the bankers and traders.

The investment banks have strayed far from their purpose to aid in the creation of capital and to “make a market” for those “going public.” They have wandered off into the world of legalized gambling, having convinced the Congress that laws against gambling should not apply to them. It was a easy step from there into the toxic derivative instruments that plunged the world into the recession where we little folk still struggle. Traders serve little or no purpose except to generate fees for the markets and their middlemen. This is especially true of the latest breed, those rigging the markets with penny skimming high-speed trading.

These ills are just the latest in the distortions that have increasingly plagued the markets. The whole crazy focus on “Playing the Market” instead of investing has corporate management aiming for short-term goals instead of long-term growth. All it takes to unseat an otherwise great CEO is an unexpected-could-happen-to-any-company event. Take Target’s CEO Gregg Steinhafel, who joined the giant retailer right out of college and worked himself up the ladder. Since moving into the top job he has been walking the razor sharp edge between upscale department stores and grungy discounters.

Steinhafel has moved Target deftly along, playing the quarterly results game and introducing new merchandise lines without losing the chain’s flair for quality and value. His foray into Canada has not gone as well as hoped, but it’s not altogether bad and it’s far from a bad idea. Then came the massive waiting-to-happen-to-someone breech of Target’s credit card systems. While the chain lost volume, it’s a testament to Steinhafel’s solid management style that Target did not lose more. And truth be known, the fault lies more with our banking sector’s refusal to move to a more secure RFID based credit card system a generation ago with the rest of the world.

We understand that in the current climate Gregg Steinhafel had to pay the price for what happened under his watch. But there is a lesson to be learned here, and every publicly held corporate CEO has to be thanking their lucky stars that they aren’t in his shoes. They should take the ethical and moral high ground and use their clout with the Congress to focus on long-term financial health. The Wall Street anything goes Wild West financial world is bad news for everyone, for the people, for investors, for corporate America.

 It Doesn’t Change The Facts

Published today in CommPro.biz http://www.commpro.biz/news/tuesday-october-30-2012/ 

 

Remember last March when a Goldman Sachs executive very publicly resigned with a scathing OP-ED in the New York Times? Well, last week (2012.10.23) Greg Smith released a book fleshing out his description of Goldman’s decay over the twelve years of his impressive career from the heady time when he made the cut and became an intern. Prior to the book’s release, Goldman fired back. They deny that they play any of the smarmy games that Smith claims are routine.

The investment banking firm paints Smith as a disgruntled employee who left not out of disgust with a deteriorating culture, but because he was refused an increase in his annual bonus from a half-million to a million dollars. Smith doesn’t deny that request, but suggests that instead of select items, Goldman should release his entire personnel file. He says it will show twelve years of rave reviews.

While smearing Greg Smith may blunt his criticism, the fact is, Goldman has paid out more than a half-billion dollars to make charges of the very kind Smith hangs his arguments on, go away. Goldman CEO Lloyd Blankfein told the Times of London, that he is “just a banker doing God’s work.” Comedian Stephen Colbert noted that “Blankfein had not indicated which god. Perhaps Shiva, Lord of Destruction.”

Blankfein has hired a lawyer with a history of defending high profile corporate crooks; not what those working in God’s vineyards normally do. On the face of it Greg Smith has an impressive track record. During his twelve years at Goldman he rose from intern to a high ranking position in their London office. He was chosen as one of ten out of more than 30,000 Goldman employees to appear in their college recruiting video. He was certainly a key player.

A Congressional investigation detailed that Goldman routinely sold packages of crappy investment vehicles to their customers (AKA “Muppets”) all the while betting that they would fail. Testifying before a Congressional Committee, CEO Blankfein denied knowledge of these practices. However, the Committee trotted out internal documents putting his denial in “Pants on Fire” territory.

So it comes down to this. Greg Smith’s motivation for leaving may or may not have been pristine. However, his motivation does not make his claims untrue. Goldman Sachs is not a nice outfit. They are not doing God’s work. They grind out huge profits moving money around. In Goldman’s case not a role that contributes to the well-being of society.

Understand, many investment banks play an important role. They provide bucks to keep major organizations in business and serve as advisors to businesses and to institutional investors. Problem is Goldman Sachs and some other bottom feeders play both sides of the street. The game that regulators during the Great Depression decided was a really bad idea. The laws set up back then to protect against the activities Greg Smith sees as toxic were swept away in the 1980’s and 90’s, leading to the recession we are struggling to overcome. Bad idea? You bet! Once a bad idea, always a bad idea.

They’re Back – 
Run For Your Lives!

What do you think our leaders would do when confronted by the imminent collapse of a sector of our economy whose assets are equal to 56% of our GDP? Given what they did in 2008 –properly we think– we can safely assume they would prop up the institutions at risk. Are you surprised that five of the banks we rescued in 2008 now have assets equal to 56% of our GDP*? In 2006 -before the collapse- these same five banks’ combined assets equaled 47% of our GDP*.

Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, and Wells Fargo, five of the players whose reckless actions drove the world economy off the cliff, are lined up to do it again. Their assets grew more than 40% from 2006 through 2011*. Why? That’s no mystery, the banks know and investors know that if there’s another collapse we will bail the Zombies out again. With the taxpayers on the hook, big banks are gambling with the same risky stuff that led to the 2008 collapse –derivatives, swaps etc., the stuff the bankers refer to as “crap.”

If it goes all wrong, the bankers and their investors have the taxpayers ready to bail them out again. Where else would investors put their bucks, high returns no risk? Published reports say all three rating services along with a covey of regional Federal Reserve presidents, see a bailout for the Zombie Banks down the road. Meanwhile, your neighborhood community bank –the bank down the street on the corner– doesn’t have an investment (AKA gambling hall) division; putting them at a distinct disadvantage in finding investors and customers.

We know how to solve this problem, been there, done that. Eighty years ago when the wheels fell off our economy our nation faced the same dilemma. They busted up the big banks and made them choose the sector of the banking world in which they wanted to operate. The Glass-Steagall Act separated investment banks from the regular commercial banks that we ordinary folk deal with.

During the 1990s’ deregulation frenzy the investment banks –Goldman Sachs in particular– pressed hard to break down this wall. In 1999 they succeeded Glass-Steagall was repealed. Then they convinced the Congress to exempt them from the gambling laws and they were off to the races. Take any risk, bet on any crazy thing, as long as you could call it an investment – it is legal. Within a few years they distorted the derivative and commodity markets turning them into Zombie bank gambling halls. Here’s the catch. They know they can’t lose. They know the suckers (AKA customers) take the losses. Worse comes to worse the taxpayers will be stuck with the mess. The bankers and investors will be just fine.

We all know what happened in the decade following the repeal of Glass-Steagall. We had to bail the banks out and now they are fine; back doing the exact same things that drove us off the cliff. Meanwhile the rest of America –and the world– is working its way out the hole they left us in. They are not doing anything illegal; however, ethically it stinks. It’s time to break up the Zombie banks and put them back in their cages, investment banks on one side of the business and commercial banks on the other. If not, we’ll be bailing them out again. They are counting on it

 *Bloomberg 04.19.12

First Things First

While the players are frantically filling the air with chaff, it doesn’t take much to see that investment bankers pay a lot more attention to their own money than they do to those who entrust them with cash to invest. The latest smarmy deal to ooze into public view is a little (just a couple billion bucks) deal that the folks at J.P. Morgan profited from to the tune of a billion or two, while JPM clients took a half-billion dollar hit.

They began sorting it out in Federal Court last week. The investors claim JPM should never have put their bucks into so-called Structured Investment Vehicles (SIVs) issued by an outfit called Sigma. It may very well be that JPM will skate on this one. There seems to be no question that shortly after they plugged the investors’ money into Sigma, JPM could see that Sigma was headed for the rocks. That insight was so clear, JPM bet over $8 billion that Sigma was breathing its last. In return for their eight big ones JPM latched onto Sigma assets that the investors say netted JPM a couple billion.

JPM says Hey, the guys who put our clients into Sigma are in one division of our company (apparently the not too bright division) and the guys who made the other deal (the smart guys) are in another division. Sort of their right hand didn’t know what their left hand was doing. What’s more, they point out, they are required to maintain a “Chinese Wall” between these divisions (they have to keep their right hand behind their back). One division isn’t allowed to talk to the other. That may actually fly in court and JPM may walk on this one.

There are a host of reasons why it won’t fly anywhere else. First off, a lot of people at JPM, including their CEO, knew about both sides of this deal. According to a New York Times story, JPM’s top credit officer pointed out the dilemma only to be told by the bank’s top risk guy, “JPMorgan needed to protect its own position and not worry about what its clients were invested in.”

And in those words lies the key to what’s wrong with the investment bank sector. The same kind of conflict was at the core of the financial collapse that is still inflicting suffering across our land and most of the rest of the planet. Investment Banks (who are fine, completely recovered thank you) should be focused on helping their clients grow capital, not running trading desks with their own bucks. It leads to actions and behaviors that may legally pass muster, but morally and ethically are disgusting. Chinese Walls don’t work, these banks need serious adult supervision.