Tuesday, March 16, 2010

Memo To Wall Street: Suck It!

If you watched 60 Minutes on Sunday, you probably saw the piece on author Michael Lewis and his latest book, "The Big Short."

Incredible stuff.

Makes me want to go beat the living crap out of anybody who works at either Standard and Poor or Moody's. To me, those guys were the Tim Donaghy's of this whole thing. The referees of the game, who should have at least blown the whistle many years back on what was happening, to at least slow down the runaway train that was about to jacknife into flames. But first, let's take our own medicine.

There are plenty of "villains" to go around in the sub-prime housing crisis, that turned into the AIG meltdown, that prompted the massive government bailout, that will be paid by all of us for decades and decades.

And we can start by pointing the fingers at ourselves, the average consumer.

We too, were pigs at the trough.

We (and I don't mean literally all of us, just a collective "we") were the ones who took out home equity loans on inflated house values that were too good to be true. We bought larger and larger houses with exotic mortgages that would have been considered pure voodoo back in our father's day. We were the ones who thought we could be Donald Trump in our spare time, and flip condo after condo in Miami. We were the ones who signed papers without asking good questions, or considering the consequences. We were the ones who willfully lied about our income on applications.

So I'll be the first to admit that we are hardly innocents.

That said, I am not sure I ever want to purchase another stock, mutual fund, or other Wall Street investment instrument ever again. Not after the 60 Minutes piece.

I'd rather "invest" in catfish farms or rare stamps before I throw money at anything which includes a "prospectus."

Not that it matters, but for disclosure sake, I did not lose any substantial amount of money in the stock market because of this. And while my family and I moved during the dying days of the whole funny-mortgage mania of 2007, it was a move that was made for wholly different reasons, that still resulted in a nice little bit of real estate profit from the sale of our previous (and likely overvalued) house.

I also like to fancy myself an ardent fan of capitalism, and somebody who does not begrudge any millionaires (or billionaires) who are in my midst.

But like many Americans, it is hard to be convinced that what most of Wall Street does isn't just pure bullshit. A sort of "Casino Capitalism" in which "they" can never lose. Especially when the government rushes in to make AIG and Goldman Sachs whole when they should have all been left to walk home from Manhattan in barrels held up by suspenders. Yeah I blame Bush. And I blame Obama for hiring the same asshats who built the financial doomsday machine in the first place.

Oh yeah, I know. Letting those assclowns fail would have been more painful than the expensive taxpayer cure. I've heard that one. I'm not smart enough to know if its true. Still sounds like bullshit to me. Besides, maybe letting everybody's 401k bleed out to nearly nothing would have been the kind of wake up call this country needs. At least set the precedent to Wall Street: "You want to pay one guy $100 million a year, just because he sat on a pile of cash worth $10 billion, and turned it into $20 billion with indecipherable high-finance voodoo? Ooohhhhkay.... but you are on your own, if the whole thing comes up crap-sevens."

Back to the 60 Minutes piece. In there, Steve Kroft produces a singularly spectacular moment of interview journalism. While talking to the one-eyed Asperger Syndrome doctor who made $970 million by betting against all this insanity, Kroft led him into a question that left the good doc literally speechless.

When Kroft asked how the guy knew that these mortgage backed securities were becoming toxic junk, he said, innocently, "I started reading the prospectuses." When Kroft asked why that wasn't the job of places like Moody's and Standard and Poor's, the doc said "well, there was so much stuff being issued I don't see how they could keep track of it all."

Kroft: "But, you're just one guy....."

The doc just locked up, in silence. Kroft was right. This was once of the most amazing stories in modern capitalist history.

And Lewis focuses on the 12-20 investors who dared to bet the "Don't Pass" line at the Wall Street craps table back in the 2000's when it came to mortgage backed bonds. That's right, 12-20 people TOTAL! Versus millions of others, and every major institution that was stampeding the other way, right off the financial cliff.

Meanwhile, I know how many folks will email me to say: "You know, Czabe, 'buy and hold' is the best long term strategy. History has shown, that only solid, diversified investment in the market can safely outpace inflation."

Heard that one. I'm not so impressed anymore.

I feel like telling Wall Street: "Go play with your own money. I'm gonna build that catfish farm."


  1. Czabe, having worked extensively with Wall Street banks on their mortgage-backed securities over the last ten years, I have to say unequivocally, the game was rigged to the point where the banks couldn't lose and the taxpayers were certain to be on the hook when the music stopped. Three decades of government policy recklessly encouraging more and more people to get into the joys of home ownership backfired disastrously. The banks were able to offload the mortgage risk to Fannie Mae, Freddie Mac or a Chinese or Middle Eastern sovereign wealth fund. So the banks had no stake in making good loans or finding suitable borrowers because all of the risk was being auctioned off and the banks simply made money on the origination costs of the loans and off of the securitizations. On top of that, the government was constantly pressuring banks to make loans to less and less savory borrowers (see Andrew Cuomo, Community Reinvestment Act etc.)

    There are some reforms that could take place to even the playing field so that the big banks don't have unfair advantages in the markets. Unfortunately none of these are being discussed.

    Fannie Mae and Freddie Mac were allowed to grow too big and risky. Investors stupidly relied too heavily on esoteric derivatives like the credit default swaps that AIG was offering. No one in their right mind should have signed off on AIG's financial statements from 2005-2008 without heavily scrutinizing those potential liabilities that basically brought the company down. The Fed's loose monetary policy helped fuel the boom and the subsequent bust due to the fact that money was just way too easy to come by.

    It's easy to blame the greed of the banks, but in the end, that just devolves into Marxist bullcrap that ignores the real problems I detailed above. The greed is a symptom of some horrible policies designed to artificially inflate the housing bubble and magically get people in homes that they couldn't afford.

  2. Czabe & FavaBeansNiceChianti,
    Nicely put.
    What bothers me more than the recent history is that the people in charge in Washington D.C. are still in charge and making more rules.I am one that believes we should have let the whole thing collapse and cleanse itself. However, the minds that lead us down that path are now once again in charge and it is scary.
    As for the Fish Farm, I am investing my retirement money in Charles Barkley's Golf School.

  3. Czabe -

    Can you post the link to the annual "Super Bracket" that has all the kick ass info???


  4. The really scary thing is it's not over yet. The so called improvement or saving of the financial industry is really the government and financial institutions have gotten better at hiding the problems.

    Banks are now allowed to lie about the value of what they hold. The reason is if they told the truth, the FDIC would have to take control of all the major banks and panic would ensue. Instead, the gov't loans money to the banks at 0% interest with toxic collateral and allows the banks to loan it back to the gov't at 3%. They'll do this until the banks can get back to health, which based on how long it's taken in Japan, may not occur in our lifetimes.

    The problem now extends beyond financial institutions. Municipalities all across the nation are going bankrupt. At the federal level, the federal reserve can manufacture money and loan it to the treasury, but states, counties, etc... can't do this. When they have a deficit, they have to borrow form real people. They're having trouble doing so.

    Also, sales and income tax collections have fallen off a cliff in the past year. How can we have an economic recovery without a recovery in taxes? Generally speaking, the supposedly good numbers coming from the gov't don't have any supporting evidence to back them up.

    Forgot to mention that half of Europe is also effectively bankrupt. Not just Greece.

    I made a lot of money shorting banks in 2007 and it was obvious to me they were effectively bankrupt. Now it's obvious to me that the only thing supporting the stock market is political will forcing the fED to buy futures. The fed is doing everything possible to inflate the stock market. It never really works. Markets always find their way back to their fundamental value. I don't know when exactly it will happen and the market can still go up more in the short term and I may be wrong, but I think stock market is going to collapse big time in the not too distant future. Don't say you weren't warned.

  5. Czabe - I too saw the 60 Minutes episode and I must say, it was as terrifying as it was intriguing. As a mid-twenties, not so distant college graduate I am pouring my hard earned money into the financial system with dwindling confidence it will be there for me when my golden years arrive. Great change of pace post on your part.

  6. Memo to America!!! Hold yourselves accountable and pick up you lips for everything that has gone wrong in the stock market! No on complained when the market ripped from 2000 in 1990 to 14000 in 2009! Two emotions dictate the market. Greed and Fear! Retirement funds increased exponentially during this time. Why? Same reason as they did in the 1920's. Stock prices are based on future incomes. Who new what the future incomes for RCA a radio company, would be in 1928? Who knew what the future cash flows of VA Linux would be in 1998?? Bottom line is the American people were greedy. Linux opened at 30 and closed over a hundred in the first day of trading. Everyone wanted to take advantage. The American people wanted to get a piece of the pie...no one wanted to be left out. Wall St. didn't put a gun to America's head...maybe they gave bad advice, but no one person can predict the stock market. Pick up you lips, and hold yourself accountable! Stop sueing McDonald's because your coffee is too hot! I am starting to see why the people in France brought the guillatine into existance. Now we have a president who is going to take an unpopular health care bill and deem it law. Without any constitutional merit! No sixty percent or even a majority vote is necessary for a tax hike on america. Why? Because politicians over the past 20 years have been accustomed to these revenues...this rediculous tax base brought on by the information age. No one wants to make tough decisions and make the cuts necessary. New York and California are on the verge of bankruptcy just like Europe people! Wake UP!!! Accountablility...sooner or later we have to hold ourselves to it.

  7. FavaBeansNiceChianti has it right...and it hasn't been a true Free Enterprise (certainly not laissez faire) financial system for a long time now. When the government can dictate that certain people can get loans (even though they have no business doing so) and controls much of the big lending arena, they won't allow a cleansing that a true free enterprise market should allow. We need to throw the bums out.