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.

Problems We Know How to Solve, “Social Security”

Social Security hits the ripe old age of 75 this year. Wingnuts on the left and right are sounding the alarm and coming up with ways to save it, threats to shut it down, everything but the obvious. Let’s begin by putting to bed forever the myth that Social Security and its brother Medicare are insurance policies. While it’s true that like an insurance policy these government programs take money in from a large group and pay it out when members of the group hit certain metrics. And that you might collect more or less than you pay into it. That’s it! End of insurance comparison.

Unlike an insurance policy, your money is not protected by reserve requirements. Nor is it in any special fund should you have need of it. The bucks you and your employer hand over to the feds for Social Security and Medicare go right into the hands of the Congress, and we all know how careful they are with our money. Right!

The solution to keeping these programs solvent is very simple, level the playing field. Certain folks were left out when Social Security was created in the thirties. For those with higher incomes there is a cut off in how much they had to pay each year, currently a little over $100,000 a year. That means the upper middle class and the rich don’t have to pay FICA taxes on much or most of their income.

Another birth defect was equally unintended. The thinking was that many in the public sector -legislative bodies and worker bees at the federal, state and local level- already had pension plans in place. Since it would not be necessary for them to collect from Social Security, there was no reason for them to pay FICA taxes. As it worked out, many of these folks leave public employment in their forties and fifties, their public pensions in place waiting for them to cash in. They move into private sector employment for ten years or more and collect Social Security benefits just like the folks who have been paying in all their working lives.

What has changed? Social Security/Medicare has become an income tax that pays benefits to nearly everyone but collects mainly from the poor and middle class private sector workers. This tax is at the root of the issue that has billionaire Warren Buffet sounding the alarm that he and all of his peers pay a smaller share of their income in taxes than their lowest paid employee. That is clearly wrong as he points out. Exempting certain folks in the public sector is equally wrong.

We can save the Social Security system by making it fair to all. Everyone should pay this tax on every penny of their income. That would be a well deserved birthday gift; fair to everyone at long last.

Problems We Know How to Solve, “Piracy”

A host of issues plague our nation that I have no idea how to cure. However, I can make some disappear. The ones I have in mind are protected by powerful special interests although it would be hard to find anyone who would consider them beneficial to society or our nation.

Piracy is generally frowned upon at almost all levels in America, indeed in the world. However, the same electronic trading that has modernized our capital markets has opened the way for traders flying the Jolly Roger to make a mockery of the market’s purpose. Be it stocks, bonds, commodities, derivatives (yes there are good derivatives), or anything other financial instrument, there is but one reason for them to exist; to support our economic system. To put the “Capital in Capitalism.”

Unfortunately that purpose has been lost in what has come to be known as the “Casino on Wall Street.” “Playing” the market, as it’s called, has long been a problem. A focus on short term gains has pushed aside solid growth as the players –it would be wrong to dignify them with the title investors– jump in and out of market instruments. But now a new breed of players using sophisticated software and massive computers have created a new way to game the system, High Frequency trading.

Algorithms allow them to race alongside the flow of electronic orders in the markets not unlike the sea going pirates of old that they emulate. They jump in and out in nanoseconds, thousands of times in a few minutes picking up a fraction of a cent here and there. They are daytraders on steroids. High Frequency traders contribute nothing to the companies they trade, worse they drive up prices for legitimate traders looking to improve their long term holdings. Often those entrusted with little folks’ life savings.

How does the Casino on Wall Street get away with gambling that is illegal in New York State as it is in most states? Simple. The United States Congress exempted this form of gambling from State Laws. While that legal loophole should be closed it is not the most effective way to curb this abusive practice.

A change in our tax code would pull down the Jolly Roger. Let’s eliminate all capital gains taxes on profits from investments held for more than twelve months. Tax profits earned from investments held less than a year at 35%; those held less than six months at 50%; those held less than 90 days at 60%; those held less than 30 days at 70%; those held less than seven days at 80%; those held less than 24 hours at 90%; and those held less than an hour at 95%.

High Frequency trading generates as much as 70% of the trading on Wall Street; one of these outfits is reported to make 20% of the daily trades. When you add in the daytraders, there’s not much focused on what should be the primary role of the market, raising capital to support our economy. It’s past time to shut down the Casino and pull down the Jolly Roger. That will take the focus off quarterly returns and allow management to look to long term growth.

As Clear As Mud

Sifting through mounds of media coverage on the Gulf Oil spill for the cause has proven almost as fruitless as watching the Congressional hearing participants play the blame game on who bears responsibility for this disaster. While it’s important to find out just what went wrong with the Deepwater Horizon last month –as it is to minimize the damage– the underlying cause is becoming quite clear. The ethical culture projected at the top by British Petroleum (BP) was not conveyed or perhaps enabled at the operating level. This disconnect becomes obvious in reviewing their operations on another Gulf rig, the Atlantis.

The company hired an independent firm headed by Stanley Sporkin, a former federal judge, to review a whistle-blower's complaints about the BP-owned Atlantis, stationed more than 150 miles south of New Orleans in over 7,000 feet of water. The gist of the complaint is that the Atlantis operated with incomplete and inaccurate engineering documents, which one expert warned could "lead to catastrophic operator error." Sporkin says that the whistle-blower’s allegation "was substantiated, and that's it." We are not talking about a paper here and a paper there. An expert who reviewed thousands of the Atlantis’ documents says that as many as 85% of them were flawed.

Not so according to an Associated Press report. Karen K. Westall, Managing Attorney for BP, says "BP has reviewed the allegations and found them to be unsubstantiated." Adding to the confusion, early this year a BP lawyer advised members of Congress that the company was complying with federal requirements. Furthermore the Atlantis received an award for safe operation from the Minerals and Management Service (MMS), the federal agency that oversees these rigs. Makes you wonder what they call that award, maybe “The MMS So Far, So Good Award.”

It all comes down to this. Ethical behavior ain’t cheap, but it’s a whole lot less expensive than the alternative as BP is discovering. When you’re in a hurry, or someone is pushing to save a buck, it’s too easy to cut a corner, or in this case thousands of corners. BP can talk the talk, but they are far from walking the walk. At this point they need to step full bore into the ethical model. They keep saying they will bear responsibility for all financial loss. That would be a big step in the right direction. It rings a little hollow, however, against the finger pointing they did during the Congressional hearing.

It’s time for BP to decide their future. If they do the right thing, tell their lawyers to “stuff a sock in it” and spread an ethical culture into every corner of their operations, they may be able to recover their reputation. That is an incredibly expensive alternative. Should they choose to stonewall, duck and dodge, the odds are they will destroy what little is left of their reputation and perhaps the company. A much more expensive alternative.

The True Believer

Embattled Goldman Sachs CEO Lloyd Blankfein has been in the media spotlight since he and his associates were sliced and diced on national television during an eleven hour Senate hearing. Blankfein went up to bat last; his underlings took a day long battering before he appeared alone at the end of the day. The Senators peppered him with the same stuff they had used all day and he fed back the same responses. No big surprise. Given the legal challenges Goldman faces, the company can’t be too careful about what they say.

The hand of Mark Fabiani, the so-called Public Relations “Master of Disaster,” can also be seen in the performances displayed by the Goldman cast of characters, especially that of Blankfein. Flash forward over the ensuing weeks and Fabiani really got Goldman’s top-gun in the grove. A humble, forthcoming Lloyd Blankfein conveyed a “Reasonable response for every question image” in the broadcast and print interviews Fabiani set up for him. And there have been plenty.

Blankfein was so omnipresent as to remind one of Dick Orkin’s 1960s radio superhero, Chickenman, “He’s everywhere! He’s everywhere!” From Charlie Rose to Fareed Zakaria, a soft spoken Blankfein has been everywhere with a well rehearsed explanation for every challenge. Frequently his response only obliquely relates to the question. An often increasingly frustrated host is left facing a mild mannered Blankfein in the role of the patient mentor explaining a complex world to a less than gifted underling.

While Fabiani offered him up to all the mainline interview and news broadcasts, the “Master of Disaster” kept him away from satirist Jon Stewart, who had skewered Blankfein and Goldman Sachs repeatedly. While Blankfein seems able to finesse questions from the real news guys, Stewart would make mincemeat of him. The Goldman team was probably afraid Stewart might ask about Goldman’s incestuous relationship with AIG that siphoned a ton of the taxpayer’s money into Goldman’s coffers. If Stewart was out of bounds, fellow Comedy Central star, Stephen Colbert was off the wall in his depiction of Blankfein.

The worst part of all this is that as I reviewed the history and the videos of Blankfein’s ongoing display of gamesmanship, the more I came to understand that the Goldman Sachs CEO believes every word that comes out of his mouth. I didn’t fully understand this until I saw an interview Blankfein gave to Bloomberg television. Under repeated questions about conflict of interest issues, the Goldman executive brought the issue around to the company’s success. In his eyes there can be no conflict if your customers keep giving you their money.

This convoluted view boils down to, “Anything we can get away with is OK!” How can Blankfein possibly believe this? It’s called “Cognitive Dissonance.” A wonderful human trait that leads us to increasingly believe that the path we have chosen is the right path. It frees us of unnecessary doubt. In modest doses it is a life saver. When taken to the extreme that Lloyd Blankfein displays, it is a disaster. Understand, the Goldman Sachs CEO is not alone; thousands of Wall Street types believe they are perfectly free to play games with our economy. And to be paid outrageous sums for gambling with the pensions and savings of hard working people. All the more reason that Mr. Blankfein’s mild mea culpas are not enough and Goldman’s plan to establish an in-house “Business Standards Committee” is laughable. The Master of Disaster probably came up with this scheme to stave off adult supervision. By now we know better. All of this obstructivity can be described with the four letter word that Goldman Sachs sales people used to describe the toxic packages they were peddling, S**t. Some of us might even preface it with “Bull.”

The Goldman SEC Case

The merits of the SEC case against Goldman Sachs aside, the ethical issues are crystal clear. Pushing investments that have a high probability of failure is just plain wrong. Blaming the rating agencies for putting their stamp of approval on these bundles of soon to be worthless mortgages is disingenuous at best.

Given the “pay grade” of those selling these investments wouldn’t you think they would do some due diligence on their value? Instead, those peddling this junk were said to be relying on the idea that real estate prices were going to rise forever.

Even if that dicey concept were true, much of what was in these packages could not stand the light of day. People in houses miles beyond their means; a $14,000 dollar a year farm laborer in a $750,000 house, others all across the country enticed by no money down, no closing costs, low payments for a few months and then wham! a recipe for disaster. Anyone who cared enough to look could see these bundles were a time bomb waiting to explode.

The banks, pension funds and other “sophisticated” types who bought this junk; should they have done their due diligence? You bet. People on all sides of this deal who were being paid hundreds of thousands of dollars, sometimes millions each year should have seen the risk.

Truth is much of this marketplace has nothing to do with investing. It is pure and simple gambling. Those involved didn’t even own the bundles of mortgages; they just bet on their value. It’s like picking out a house you don’t own and betting someone it will burn down. Goldman’s position is that they were just the bookie. The SEC thinks Goldman knew the house on was on fire. Thereon lies the case; fraud or not.

Who cares, other than the little old ladies, retired workers and other pensioners who lost their savings, not to mention the taxpayers worldwide who had to bail Goldman and other banks out when the world economy went south in large part because of these –too big to fail- bank’s gambling problems. In case you are wondering, why banks and others in the wonderful world of stocks, bonds, commodities and such are allowed to gamble in this manner when the rest of us have to go to a casino, there is a reason. When it comes to these securities Wall Street really is a casino, a legal casino.

The Commodity Futures Modernization Act of 2000 along with a 1992 Act overturned reforms enacted following the 1907 bank panic. That turned our financial system noted for its transparency and security into –well– an unregulated casino. So it may very well be that Goldman Sachs –and perhaps other big banks– did nothing illegal. Fleecing the suckers may be perfectly legal. Ethics, however are another matter.

Everyone from the folks who coached the $14,000 a year farm laborer on how to get a loan he could never repay, to the bank that originated the loan, to those who sold and resold it and those who bundled it with a bunch of other bad loans, and finally those in the too-big-to fail banks who acted as bookies or bet the savings of pensioners on these loans, every single individual in that chain was ethically bankrupt.

Let’s move away from the smarmy little characters at the beginning of each of these human tragedies who pushed foolish dreamers into deals that would ruin them. Let’s move up to the six and seven figure folk in their $3,000 outfits who turned these individual travesties into a nightmare.

Take Goldman Sachs forinstance. As a publically traded company under Sarbanes-Oxley (SOX) they are required to offer ethics training to their employees. It would be hard to imagine how anyone involved in this high flying flimflam could have considered any part of it ethical. Let alone how Goldman Sachs’ management could believe they have fulfilled their SOX mandated ethics training obligations.

Pharma, Where Ethics is a No-Brainer

It would be hard to imagine any element of our business community where ethical behavior is more important than healthcare. We aren’t surprised when some smarmy little guy is caught conning folks with some medical scam. What we should not be seeing are the big guys engaging in off-the-chart ethical no-nos. Last week’s announcement that Pharma giant, AstraZeneca would split a half billion dollar fine between Medicare and Medicaid was a stunner.

The company issued the usual “Without admitting any wrongdoing” settlement statement. Right! They are going to cough up that kind of money just for kicks. They were charged with “aggressively” pushing a psychiatric drug, Seroquel, that was FDA approved for schizophrenia and bi-polar disease. A class of drugs with a history of dramatic side effects.

AstraZeneca turned this drug into a cure-all for a host of diseases for old folks, veterans, and even kids. They played down the added weight and diabetes that showed up. Actually they acknowledged these problems to Japanese doctors in 2002, years before they stopped dismissing the same potentially deadly side effects in North America.

It turns out that this half billion is only half of the story. Last fall –October 2009– AstraZeneca paid out a half billion to settle two federal investigations and two whistle-blower lawsuits. That’s a billion dollars in less than a year. And there’s going to be more, there are close to 20,000 lawsuits lined up from folks who took Seroquel and believe they were harmed.

Makes one wonder how they can afford those kinds of payouts – until you look at the sales numbers. Worldwide sales of Seroquel are astronomical; it is the best selling psychiatric drug in the United States. How did AstraZeneca build this blockbuster? Well that’s reason AstraZeneca is in this mess. Basically they talked a lot of docs into prescribing Seroquel for all kinds of stuff that it wasn’t intended to treat. They took advantage of a loophole. Once a drug is approved by the FDA, doctors can prescribe it for anything they wish. Or in this case, anything the drug company can talk them into.

All drug companies push their products on the docs. Anyone who has ever spent time in a doctor’s waiting room has seen the Pharma sales folks. They come breezing in and too often head right back to the doc’s inner sanctum, the place you’ve been waiting hours to access. They are young, very well dressed, and as smart as they are attractive. They have a case full of goodies, samples, literature, pens, notepads - whatever pleases.

However, what AstraZeneca did went way beyond that. Even way beyond their sales people pushing docs to use Seroquel for conditions that it certainly wasn’t intended to treat. Some docs who slid into that rabbit hole were paid to give speeches at posh soirées urging their colleagues to do likewise. These thinly disguised bribes are at the heart of the government’s AstraZeneca settlement.

The whole thing reeks of unethical behavior; unethical behavior on the part of AstraZeneca, unethical behavior on the part of the docs who took the bucks, and unethical behavior on the part of the docs who wrote Seroquel scripts for conditions that it simply was not suited. AstraZeneca should never have allowed it to rise to a legal issue. And by the way, who is looking at the docs who played along.