Off The Run

We watched the Inauguration on Tuesday with the same sense of respect and awe that most Americans felt.  Respect for the man who had been elected and awe at the 43rd peaceful transfer of power in our nation’s history.

We have listened to President Obama’s first addresses and read about his first proclamations with a profound sense of hope.  He is saying and doing many of the things we think will help the nation through the present mess.  At the same time, we are fearful that he has sown the seeds of his own limitations.  Let us explain.

The current problem is largely the fault of the Republican Party, its ideology and its ideologues, which have been in power for the past eight years.  They built on the Clinton-era deregulation of securities markets to create an almost totally unregulated financial environment.  They cut taxes for the well-to-do to levels that defy comprehension.  They pushed an agenda of free-trade and war to the detriment of the nation.  They pushed a muscular foreign policy that was really bare-knuckled or knuckle-headed  The problems we now face on the financial, economic and national security fronts are the direct result of Republican actions and agendas.  We say this as life-long Republicans who are disgusted with what Mr. Bush and his minions have done to this country.

Our fear is that as President Obama proceeds on his task of leading the nation on a new course, repudiating the Bush legacy as he goes, the establishment may push back, since they will correctly sense that their own legacy is in danger.  President Obama has gathered around him quite a few people who are part of the Bi-Partisan Establishment, people like Larry Summers, Tim Geithner, Hillary Clinton and Eric Holder.  These are intelligent, capable, people, no one questions their intelligence or determination.  What is in question is their objectivity, their ability to strike out along a new path, one that represents a clean break with a tainted past, since they are, in part, responsible for the mess we are currently in.  In essence, President Obama is asking the people who got us into this mess to get us out of it and to disavow the ideologies that gave these actions legitimacy.

Our fear is that the Bi-Partisan Establishment will put up subtle and not-so subtle speed bumps or road blocks, will seek to slow down the pace of change or even prevent it from happening.  Our sense of President Obama is that he knows where he wants to take the nation and is confident he can accomplish the goals he has set for himself.  We hope he doesn’t lose his ability to sense when there is another agenda operating or his ability to excise that other agenda and its master when he finds it.

 Time will tell.

We caught a segment of “60 Minutes” the other night, the segment dealing with the recent runup in oil prices.

For those who have been somewhere else for the past year, we’ll recap beiefly by pointing out that crude oil went from $50 a barrel to $150 a barrel back to $50 a barrel with no real change in global economic fundamentals.  A reasonable person would ask if there was any speculation going on, but the Powers That Be have shouted that down, crying in unison “It’s Supply and Demand, Stupid!”

Well, as they say on the ranch, hold your horses.  Turns out that there is a bit more to this story.

Firstly, the program pointed out that the largest oil company in the country is Morgan Stanley.  Yup, THAT Morgan Stanley.  Turns out that they hold a whole lot of oil and have been active in the futures markets to boot.  (We wonder if they have any drilling rigs.  We haven’t seen any on 57th Street; maybe they park them in Queens.)  Of course they deny any involvement whatsoever in the recent oil bubble, one of their guys even going so far as to testify before Congress to that effect.  Turns out he was lying.   Oh Shock!  Oh Horrors!  Perjury, anyone?

We’ve been sceptical of the “supply-demand” argument all along; the price ran up too fact on no change in the fundamentals and fell too far on the same lack of fundamentals.  We figured there was a lot of funny stuff going on and it appears we were correct.

We therefore renew our call for increased — or any — regulation of futures markets.

We would like to see the old distinction between speculator and commercial user resurrected.

We would like to see daily reporting of futures and related positions.

We would like to see different rules for commodities players with a legitimate commercial interest than for speculators. 

We would like to see very tight controls on who is designated a commercial interest.

These are the very barest start of the regulatory changes we should make, but they would be enough to prevent the most recent bubble from inflating.  The whole package might be sufficient to prevent a new bubble from forming.

We call for President Obama, when he takes office, to go against his advisor, Larry Summers, and appoint Brooksley Born to head the Commodity Futures Trading Commission once again, only this time with the backing of the President and with expanded powers.

We call for President Obama to ask Congress to repeal Gramm-Leach-Bliley and to enact legislation to bring all futures tading under the CFTC.

Seven More Days and They’ll Be Out.

As schoolkids we used to sing something very much like this during the days leading up to Christmas vacation.  Only this time, it’s the the Bush Administration and the financial wunderkinds Henry Paulson, Neel Kashkari and their helpers that we are singing about, in fervent hope that they will leave quietly before they do even more damage to the nation and the world.

What has us frightened, indeed scared to death, is that Paulson is hectoring congress for the rest of the TARP money, some $350,000,000,000.  Can you imagine the damage he could do with that much money in such a short period of time with no effective oversight and no accountability?  He refuses to tell us what he did with the first batch of money, but reports have come out that whatever he and his minions have done, it has either not worked or has been the wrong thing or both.  Kash and Karry has even gone so far as to tell the press not to bother him, for he is far too busy and important to have to put up with them. 

Ellen Brown, of the excellent web site http://www.webofdebt.com/ and in an excellent article in Global research,  http://www.globalresearch.ca/index.php?context=va&aid=11746 has raised serious questions about the thrust of the TARP spending and the effect it is having and will have on the financial system, and thus on the economy in general.  Her point, and it’s one we’ve wondered about, is that the bailout has allowed the few large banks that have received money, the ones that are in the most dire straits, to buy the solid smaller banks, the ones that have been well-managed, thus spreading the contagion to the hinterland, as if they didn’t have enough to worry about.

She makes further mention of the ongoing destruction of the manufacturing sector in the United States, correctly alluding to the fact that unless someone makes something and adds value, there is no economy, just speculation and paper shuffling.  Hank and the boys don’t seem to understand this point.  They worry about lending the auto companies a few billions while they shovel money to the guys on Wall Street and in the big banks, the ones who got us into this mess.  What are we missing?  Cronyism?  Corruption?  Favoritism?  We obviously don’t really understand the situation. 

We can only hope that Congress doesn’t give Hank the rest of the money and that he and his henchmen are shown the door very early on January 20, 2009.

Oh Dear!  Oh Heavens!  The news has been really bad for two stalwarts of the financial realm.

We read that Robert Rubin, a former Secretary of the Treasury under President Bill Clinton, has decided that he’s done enough damage to Citigroup:  he’s quitting.  His statement at the time of his resignation shows that he has no remorse and does not believe he was in any way, shape or form responsible for the catastrophy that befell Citigroup while he was a “senior advisor” to the company.   To quote the New York Times article,

“This is not a decision that I have come to lightly.  But as I enter my 70s and with all that is now in place at Citi, I believe the time has come for me to make these changes.  My great regret is that I and so many of us who have been involved in this industry for so long did not recognze the serious possibility of the extreme circumstances ehtat the financial system faces today.”

This is the most fatuous, disingenuous tripe we’ve read in a long time.  Here is a man who pushed to tear down regulation after regulation, to prevent any extention of regulation of new financial products, who cheered as the credit and housing bubbles inflated, and now he says “What?  I was supposed to see something?”  Citi paid this guy well over $150,000,000 for his efforts and in return they got stock price of $2 and over $65,000,000,000 in losses.  Great trade, Citi.

In the other news, J. Ezra Merkin, the investment wonderkind of GMAC, has also resigned.  Seems that in the two years J Ezra has been at GMAC, the compnay has lost about $8,000,000,000.  J Ezra has also been tagged as one of the guys who took investor money and gave it to Bernie Madoff to run, but collected management fees from his investors.   Two Atta Boys! for J Ezra.

To both, we say good riddance and don’t let the door hit you on the way out.

Let’s hope that this isn’t a case of “After changes, we are more or less the same.”  (From “The Boxer,” with appologies to Simon and Garfulkle and Emmylou Harris.)  The financial world has been ruined by the thinking exemplified by these two; it is truly time for a change.

Since we’ve brought up the Madoff thing, new evidence has come to light indicating that Peter Madoff, the younger brother to the infamous Bernie, may have been aware of the scam and not told authorities.  We wonder if this might not be the opening scene in an Opera Bouffe, which, as we read here;, started in a lunatic asylum in Paris.   Certainly fitting, eh?  Next scene may have Peter saying that he may, just might, have heard an itsy bitsy rumor about Bernie being resonsible for something as inconsequential as, oh, maybe a parking ticket, but then dismissed it out of hand, since Bernie was a genius.  Then Scene 1 Act II will possibly have Peter recalling that, yes, maybe he did have a key to the mysterious secret floor, but he never used it.  Later on, in Act IV, we will learn that he, in fact, had an office there, while in the denouement in Act V we may learn he designed the systems that collected the information for the spurious client reports and was, in fact, central to the scam.  This is our speculation, but we base it on observation after observation of the way these things go about revealing themselves, much like peeling an onion or delving into Matryoshka dolls.   

Ah perfidy!  Thy name is greed!  While Rubin, Merkin and Madoff are together responsible for billions or trillions of dollars of lost wealth and thousands or millions of ruined lives, none of them has shown the slightest understanding of the consequences of their actions and seemingly have no idea that they were in any way responsible for the death and destruction around them.   Is this a manifestation of simple schizophrenia?

We think the Opera Bouffe is an apt analogy.

Oh Joy!  Oh Rapture!  New York may get another Kennedy as a Senator!

Yes, faithful reader, Ms. Caroline Kennedy, former mistress of the pony Macaroni and daughter of President John F. Kennedy, has declared herself entitled to the Senate seat to be vacated by that other long-time New York resident and Senator, Hillary! Rodham Clinton.

This got us to thinking evil thoughts about the Bushes and the Clintons and political succession and the state of the world in New York and Washington.  See if the following makes sense to you.

John Kerry may have won the 2004 election, but the vote counting was so confused and messed-up that the Bushes may have been able to pull the same deal in 2004 that John Kennedy pulled in Chicago in 1960 and become president.  We’ll never know, because all the records now “sleep with the fishes,” as we say here in New Jersey.  No one was sorry to see Kerry lose, except maybe the people of Pittsburgh, and a deal was semi-struck.  (A semi-struck deal is one that no one has enunciated but everyone knows is binding.)  George W Bush in 2004 and Hillary! in 2008.  We believe that the deal was GWB in 2000 and 2004 and Hilary! thereafter, until Jeb Bush was ready in 2016.  Chelsea, wait your turn.

Enter Obama.  No one told him about the deal.  Now Hillary! is out for good, unless Obama doesn’t make it to 2016, and the possibilities are really interesting.

Gov. Patterson on New York has to appoint someone to the Senate seat.  Sweet Caroline wants the seat, nay, feels entitled to the seat, and is striving mightily to prove that she knows where Cheektowaga Central School District is and, if you believe it, even cares that there is no half-day Kindergarten offered.  That’s a tall order. 

But the deal is even more interesting, because Gov. Patterson is himself the beneficiary of a vacant position.  In Patterson’s case, he got his when Elliot Spitzer resigned in disgrace.  The governor thus has to worry about getting elected in his own right in the upcoming election without ever having headed a ticket.

However, Gov. Patterson is facing a potential opponent in Andrew Cuomo, the Attorney General of the State of New York and the ex head of HUD.  His tenure at HUD was average, but Mr. Cuomo has turned out to be a reasonably effective AG.  His father, you may remember, was the governor of New York and was reasonably popular; Andrew Cuomo certainly has name recognition all out of proportion to his actual, though real, accomplishments.  Hence, Mr. Cuomo could be a tough opponent for Gov. Patterson to deal with.  What better way to sidetrack Mr. Cuomo than to kick him upstairs to the Senate, where he would be out of New York until 2012?  Who would want to step back from the Senate to the Governorship of New York, anyway?  If Mr. Cuomo is as effective in the Senate as he has been as AG, he could be good for New Yorkand the nation.

Enter Mayor Mike, Michael Blomberg.  Mr. Blomberg recently ignored the law on term limits and is running for a third term.  Everyone seems to believe that Mayor Mike is indispensable, which we’re sure is good for his ego, but bad for the city.  We used to think that Mayor Mike was at worst neutral, and probably good, but this term limit thing has turned us off him.  It’s clearly just a play to keep his name in lights until 2012, when he can run for President on some ticket.

Maybe, just maybe, someone has whispered in Gov. Patterson’s ear that it would be a neat deal to name Mayor Mike to the Senate.  Someone as in Hillary!, looking toward an Obama implosion.

Enter Caroline Kennedy, the Obama of the New York race.  Someone forgot to tell her that Gov. Patterson had enough problems to deal with without her butting in.  The same people who savaged Sarah Palin for lack of experience are falling all over themselves to laud Sweet Caroline as the best person for the Senate.  We say to Caroline, go back and build your bonafides, do some real political base building like Obama did.  Work some get out the vote campaigns.  Work as your uncle’s aide and learn what does on in the Senate and how politics really works.  Run for state legislature; city council; school board; something, anything, just show us a capacity for the nitty-gritty of politics and a desire to do the work. 

Here’s our take on the deal.  Gov. Patterson figures he has to get rid of a rival, so he puts Mr. Cuomo in the Senate.  Ms. Kennedy goes back to her own life, having made a good effort.  Her friends will all commiserate with her and tell her that the gov is not a nice man.  If she finds she really wants a political life, she should work on it.  Mayor Mike will not have to turn his back on the Senate and will be free to stick around as the most visible pol outside Washington until he forms his presidential exploratory committee in 2010.  However, Mayor Mike will have to support the Gov for his reelection.  How’s that — a payback for NOT naming you to the Senate?

One further thought.  Since Hillary! will be the Secretary of State, her official residence will be Washington, DC.  What if Obama implodes?  Would Hillary! front a ticket with Mayor Mike as her veep choice?  With the understanding that she would serve one term and then turn things over to him?  She would be 65 in 2012, so she could serve two terms, but maybe to get someone like Mayor Mike to work with her she would need to promise to give it up after one.  Interesting, since that gets around the prohibition on having President and Vice President from the same state.  Of course, given the Clinton’s history, Mayor Mike would have to have the one-term promise carved in something other than Starbucks Latte foam.

And then there’s the Republican mess.

Ain’t politics grand?

We’re heartened that the federal government has seen fit to bail out GMAC, the auto finance company that GM sold part of a while back.  The ostensible reason is to provide money so the company can once again lend money to people so they can buy cars.

However, we’re heartened for a perverse reason, because this incredibly stupid deal is the latest proof, as if any more were needed, that the Treasury, led by “Just Plain” Hank Paulson, still, even at this late date, has no plan in place to do anything.  He’s winging it, just trying to get to January 20, 2009, when he can slink out of Washington to a retirement which will be considerably eased by the $500,000,000 he took out of Goldman Sachs, without paying taxes on it.

In essence, the government is giving GMAC and J Ezra Merkin, the King of Due Diligence, a very lucrative lifeline, not even requesting that senior manglement (not a misspelling) be thrown out.  The government is leaving the same bozos in charge who got GMAC into this mess!  You may remember that J Ezra Merkin is the lout who promised his investors all sorts of prudence and oversight and then gave all his investors’ money to Bernie Maroff.  We’ll bet that J Ezra will shortly need the money to defend himself against a whole passle of lawsuits over his investment activities.  Maybe not bet, but certainly hope. 

Oh.  Sorry.  We forgot that The Club protects its own. 

Once again, there has been no penalty for bad management, no link between actions and outcome.  We continue to privatize gain and socialize loss.  Maybe we should just bag the whole pretense of capitalism and socialize the whole thing.  Ya think?

We have been following the Madoff Saga with considerable interest, for there appear to our untrained eyes to be some similarities between what Bernie Madoff is supposed to have done and the activities that may have gone on in the executive suites of Wall Street.

Mr. Madoff is charged with running a Ponzi scheme.  He declared that the assets under his management had earned a modest, but consistent, return, and has recently admitted that the whole thing was a fraud, that he used the money from new investors to pay the “return” to the older investors.  This is a classic Ponzi scheme, named after the Boston fraudster who ran a scheme in the early 1900s.  Some legal people believe that the investors who were paid these returns may have to surrender the money so that all investors may receive an equitable treatment as the wheels of justice grind away. 

What intrigues us is the possiblity of a parallel line of thought.

What if someone were to assert that the bonuses and outrageous termination agreements paid to the leading lights of Wall Street were similarly the result of fraud?  Would the recipients of these funds have to make restitution so that all parties to the debacle could be treated fairly?

Clearly, there were at least some serious mistakes and misjudgements in volved in the ratings, the loan papers, the derivatives, the lack of oversight, the credit default swaps, etc. 

Was there fraud?  That’s an open question.  Certainly there are enough discrepancies between what went on and normal business practices, between reasonable, prudent, ethical conduct and what went on in mortgage lending practices, that some razor-sharp legal mind should be able to make a strong case that the leaders of Lehman, for example, should be forced to return their bonuses.  All bankrupt financial companies should actively pursue the return of all salaries and bonuses over some reasonable figure, say $50,000 a year.  Oh, all right, $100,000 a year.  Ooops!  There goes the Hampton’s real estate market, not to mention the market in used Ferraris and 150-foot yachts. 

Any financial company whose leaders so mismanaged its affairs that it has been forced to seek government bailouts should be forced to seek the return of the bonuses the executives earned while they ran the company into the ground.  The leaders of Merrill, AIG, Citi, and others come to mind.  We see no reason to excoriate the leaders of the auto companies for stupidity and poor planning while letting the Wall Street Wonders stroll off into the sunset with zillions of dollars.

Just possibly fraud could be construed in that these geniuses posed as capable financial executives.  Clearly, there was some serious misrepresentation of ability, prudence, judgement and, yes, honesty.  We wonder if next Halloween we will see masks portraying all these people — since their ability was make-believe, maybe a Halloween mask of them is appropriate.  Then the neighborhood kids could trade them like baseball cards – “I’ll trade you a Dick Fuld and a Stan O’Neil for your Alan Greenspan.”  (Sorry.  Off track again.)  (Better now.)

We’re amused that now that the fat is well and truly in the fire, all sorts of tycoons and nabobs are falling all over themselves to eschew their bonuses for 2008’s fine work.  Next we’ll be reading about $1 a year men making a comeback.  Since we are dealing with intelligent men and women, they may well see the benefit of going one step further and paying for the privilege of working for the government.  Certainly, given that Alan ”Two Bubbles” Greenspan, the now disgraced former head of the Federal Reserve System, stepped down from his position and gave a speech shortly thereafter for a gathering of the Gullible Guests of Lehman in return for $250,000, that the impeached ex-president W.J. “It depends on what the meaning of is is” Clinton has parlayed his eight years of fun and games in the White House into a fortune estimated at $100,000,000 (that we know about) and routinely receives $500,000 for a single speech and that the former “Master of the Universe” and ex-Secretary of the Treasury Robert “I Love Gramm-Leach-Bliley” Rubin has received over $100,000,000 from Citi while helping run it into the ground, who’s to say that paying a bit up front as a franchise fee to get an “Ex-Government Official Influence Peddler” Franchise isn’t a smart career move.  It’s a better investment than a Secret Decoder Ring and it certainly beats buying a Mickey D’s burger franchise.  (Got a bit off the track there, but we just have to go where the argument takes us.)  (Love that stream of consciousness.)

See?  Fraud knows no rational or irrational bounds.  It’s everywhere you want to look.

The news from Ascot Partners hasn’t been good recently. 

The fund, led by J. Ezra Merkin, used to have $1,800,000,000.  He reportedly received 1.5% of the assets under management for being the investment advisor to the fund, for directing its investments, for buying and selling securities in accord with his stated investment strategies.  As reported by the New York times, his program is described as “consisting of capital appreciation and income by investing in a diverse portfolio of securities.”  He intended “to the extent circumstances permit, to adopt a selective approach in evaluating potential investment situations generally concentrating on relatively fewer transactions that can be followed more easily.”  Sounds good to us, in theory.  In practice…?

In practice, Ezra appears to have bagged all the investment boilerplate and given the money to his good buddy, Bernie Madoff to manage.  Or mangle.   This is definitely “relatively fewer transactions.”  Score one for Ezra.

So much for all the intellectual palaver you can read above.  And he got 1.5% of $1,800,000,000, or $27,000,000, a year for wiring the money to Bernie.   Once.  Talk about residuals!  If this is true, then Ezra struck the Mother of All Deals.  $27,000,000 a year for writing a few pages of blah blah blah boilerplate about the economy, business and investment conditions and the phases of the moon and then reformatting the investment summary he got from Bernie.  A quick trip to Kinko’s to have the thing printed up, a couple of bucks to mail each one out, and bingo!  Instant $26,999,000 profit each and every year.  Start at 8 in the morning, finish by noon and go to lunch

We wonder how this seems to a guy who does honest work and is now facing unemployment and foreclosure on his home.

Looks like another middleman caught with his hand in the till when the till slammed shut.  Maybe the silver lining in this mess is that the cold light of discovery will finally shine on all the insects living in the netherworld of consulting, advising, introducing, contacting and convention-going middlemen and put them out of business. 

Bottom line:  Investors should talk directly to their investment managers and not allow anyone to get between them.  Anyone caught using an unapproved sub-advisor gets fired and sued for fraud.  If Ezra had known of these penalties, we bet he’d have thought long and hard about subbing the money to Bernie and collecting his fee.  Might not have stopped him, but it certainly would have slowed him down and given the investors clear recourse when his scheme came a cropper.  Or wound up in the crapper.

N.B.  We are reading “The Superorganism,” by Bert Holldobler and E.O. Wilson, a magnificent book about “The Beauty, Elegance and Strangeness of Insect Societies.”  Turns out that the higher social insect orders are amazingly altruistic and well organized.  We apologize to all these orders of insects for insulting them by calling the middlemen “insects.”

If, as reported in all the media, Bernard Madoff was the operator of a massive investment Ponzi scheme, he will surely go down as the most capable in a long line of Ponzi operators.  But there is a bright side to this story, even as we read about massive losses to small charities, large, “sophisticated” investors and investment consultants and their clients.

A small editorial comment may be in order.  As we read the reports about the improbability of an investment fund making 10% a year each and every year, we remember when we were doing research into corporate earnings and happened upon the quaint notion of “managed earnings,” the practice whereby certain corporate managements made sure that their earnings were up a reasonable amount each year, even if they had to accelerate or postpone payments and expenditures.  No one got too exercised over managed earnings; maybe that kind of fraud is good.  Ya think?

For starters, this drama may well lead to a shake out and a shrinking of the number of “Hedge Fund Advisory” groups.  These are the people who act as the gate keepers for the hedge fund industry.  If you are an investment manager, these people will send you clients.  Or not.  Depending on how much you are willing to prostrate yourself before their altar.  Many of these middle men now stand exposed for what they always were: just another bunch of guys looking for a payday without doing any productive work.  They can’t manage money, so they make it difficult for those who can.  These guys run seminars and conferences that investment managers must attend; you don’t dance the jig, you don’t make their approved list.  We’ll be interested to see how many of these useless dolts fall by the wayside in the coming months.  Clearly, at least a few of these guys missed the boat big-time.

Second, we are reading between the lines, perhaps, but it seems that the legal powers and perspicacity of the SEC are being questioned, to say the least.  Initial reports indicate that quite a few people had reasonable questions about Mr. Madoff, his method of operating and the reported results he showed over a long period.  These questions were were mentioned to the SEC and other regulators, but were not followed up on.  What is clear is that the SEC either didn’t have sufficient oversight authority, was asleep at the switch or both.  While we view the SEC as necessary, their powers have been eroded or ignored in recent years, so much so that they have become almost irrelevant, especially under the most recent head, Chris Cox; this must change.

Third, we wonder how many more hedge funds and private investment partnerships are out there who have engaged in similar shenanigans.  We have read of many hedge fund managers who have declined to allow clients to remove money from their funds, some since last January.  Clearly, the markets will suffer inordinately when these restrictions are lifted.  It appears to us that there is a massive shake-out underway in the investment industry, not only of the brokerage houses — pardon us, Investment Banks — but in the ranks of hedge funds.  This is probably a good thing, but a lot of investors are going to get hurt as this mania winds down.  There are too many funds and there are too many former retail brokers who converted their client book into a fund.  A shake out is long overdue.

Lastly, unless the government steps in, we may have one more instance of real risk in the markets.  Admittedly, it’s the risk of fraud, but it should not be covered up by the government, any more than the losses of any other group should be covered up.  Mr. Madoff’s client list looks like a “who’s who” of hedge fund investing, and the amount of money that people with massive influence have lost is staggering, but the government must not bail out these investors.  Some time, some how, we must put risk back into at least some small corner of the business world; we made a start with Lehman, we should continue here.

If Mr. Madoff is guilty as charged, and reports are that he admitted the whole scheme to the arresting officers, he should be debriefed very carefully before being shipped off to the slammer; we, for our part, would love to know how he held the thing together for so long without any help.  Could one guy have done this all alone?  Inquiring minds want to know.

At the end of the day, this sad event may turn out to be yet another monument to hubris and greed, made possible by a wild-west regulatory environment.