The headlines and the story lines and the snappy quotes and the overall gist of the stories and drumbeats of stories that we are reading and hearing and seeing these days have a running (and very disturbing) theme: The leaders don’t get it! They…just don’t…get…it! Scary. Scary times we live in.
You see, certain of the elites and the privileged and the Masters of the Capital Markets have had it all their way for so long. It’s hard to give that life up. Just ask Bernie Madoff, sleeping tonight on his government-provided bed. Even though throughout this country the villagers are gathering, and their torches are being lit…too many in power still don’t get it. That life? It’s over. Hard to accept. So is the carnage left behind by the Masters of Wall Street for the rest of us.
Some developments can be seen in clear light but the effects kick in much later.
“This” started a long time ago. This is what we wrote in winter 1993 in our newsletter, advice to clients and colleagues:
“Recent events in the board room and the resulting dramatic headlines have sent a wake up call to senior executives and boards of directors throughout America’s corporations. If you company has not yet been involved in internal or external corporate governance issues, it’s time to analyze the current public debate and prepare for your involvement in the latest movement to sweep the corporate world. This is not a short-term phenomenon.
“Sooner or later, virtually every publicly-owned corporation in the United States will be involved in the broadening corporate governance debate now underway in earnest; corporate governance issues could eventually affect the careers of countless numbers of senior corporate officers.
“Broad-based shareholder activism is a relatively new movement – embryonic, according to a prominent activist – beginning to seriously affect the way that CEOs run their companies and the way boards and CEOs get along. The times are changing.”
The signs of change? We wrote about runaway executive pay, the board’s proper role in oversight, growing pension fund activism, the public’s attention being engaged in a variety of corporate issues, an often angry business press zeroing in, the personal attacks on CEOs mounting, the activists shareholder movement going global, and environmental organizations moving into synch with shareholder activists to target companies. All very evident, no crystal ball needed.
But the good times rolled on, didn’t they!
But the good times were rolling on, as the 1992-93 economic recovery kicked in. Fed Chairman Alan Greenspan wasn’t going to take the punch bowl away from the joyous parties going on. Cheap credit was the key to making everyone happy. Hands-off the brakes. Sometimes that’s the price of being re-nominated for what can be the best job in town…sometimes. Oh, he did bury the “irrational exuberance” warning in a speech to a group of nodding economists in 1996…but who of us really heard that obscure warning?
So we rolled on, merrily along…we briefly skirted disaster with the meltdown of the hedge fund Long Term Capital Management, for which the Fed Maestro (as he was lovingly called by Wall Street) rescued in 1999 (a measly $4 or $5 billion was needed from the Fed friends), sending the signal – “it’s still party time!” – throughout the canyons of Lower Manhattan. Total losses were $4.6 billion. Warnings were ignored then…and later.
The other watchdogs looking out for our interests? Leaders in the Senate and House – who were supposed to be protecting our interests – conspired with Wall Street Wizards to disassemble the 7-decades long protective barriers between Wall Street brokers and investment bankers and traditional bankers (the Glass-Steagall Act), allowing the thundering herd to crash into the bank vaults to steal away your money.
Oh, the language they used – creating powerful, diversified financial services giants to compete with the world’s best…giving the consumer more choice… modernizing the banking system (take that old fogeys!). Well, take a look at the poster child of all this — Citigroup – does it meet those definitions today? That’s what repeal of Glass-Steagall by Gramm-Leach-Bliley did for us back in 1999.
Count your blessings: we did dodge a big bullet. The Wizards and Elites and some of their Capital Hill cronies – and that fellow in the White House — wanted your Social Security accounts “privatized” so that you could use “your own money” to buy the junk being peddled by Wall Street for your retirement future! More choice for the consumer!
There goes Enron – but not the lessons of bad behaviors
At the beginning of this decade Fortune magazine’s 7th ranked American corporation imploded just about overnight. Poof! There went Enron. And with it, Arthur Anderson, one of the world’s largest accounting firms. This was eight years after my observations…that things were changing for Corporate America and Wall Street…and this was not short-term. Some pretty awful lessons came out of Enron and WorldCom and Global Crossing and other failed firms. That were applied by the Wizards and Elites and Masters of Finance.
The heart of Enron’s collapse was the practice of moving the company’s mounting debts and obligations off the balance sheet and into “SPE’s” – arcane accounting devices that, as “special purpose entities,” could hide the bad news so the company could trumpet the good news…all good all the time. Until the music stopped – this was a kind of Corporate Ponzi scheme, and it collapsed. (Enron lenders had strict covenants that were triggered as the share price slid downward.)
In the wake of Enron and WorldCom came outrage, fulminating, posturing and then the Sarbanes-Oxley legislation. For the record, this was a very good thing that President George W. Bush got behind – give him some credit.
Some good things came out of SOX reforms and renewed White Collar crime enforcement, but as we have seen, SOX didn’t go far enough. And once the walls came down between the bank finances and the Wall Street Wizard’s schemes, all hell was bound to break loose.
You see, the Wizards and Elites and Masters saw a big opportunity: move bad stuff on a massive scale out of the balance sheets of large corporations (the bank holding companies and diversified financial firms) and into “packages” of mortgages — and sell them everywhere to everyone.
Once, banks held mortgages in their portfolios and earned profits in the process. Risk was a paramount concern – would the loan be repaid? Could the borrower afford the monthly payment? Was their credit good? After Enron – again, the bad lessons learned – the new diversified financial giants (with everything under one roof) began to move billions of dollars in mortgages in their portfolios into securitized (love that word) packages and then sold them to institutional investors – probably your pension fund holds much of this junk.
And the game moved into high gear
Enablers such as the big credit risk agencies happily slapped Grade A ratings on the packages – for a fat fee, thank you – how soon do you need the Triple A label? And then the Wizards marketed these to foreign central banks, US pension funds, university endowments, foundations, mutual funds, hedge funds, and more of the eager buyers.
This is the junk that has gummed up the world’s financial system. The “securitized” and “collateralized” packages of mortgages, and credit card debt, and student loans, and car loans, now sit gathering dust on the shelves in far too many institutional investor offices… there is no market for same. The auction markets for trading this stuff like baseball cards locked up a year ago. No one can sell the CDOs and CMO sets.
See the lessons? Move the bad stuff off your books at the bank or the mortgage company or the car loan company and transfer the risk to someone else. (The problem at Enron was that the company guaranteed and was directly responsible for the debt of their shadowy SPE units – the bad stuff came back) Move enough of this stuff so the whole capital market gets gummed up. Make sure the problems to come are huge – so that we are too big to fail. If we do flirt with failure run to the Protects in Washington to get bailed out (remember that “Get Out of Jail Free” card in Monopoly?). Hey, we have shoveled enough money into their campaigns to ask for the favors needed.
I guess it took 15 or even 20 years for the mess that was seeded in the 1990s to blow up on all of us. We are all paying the price for the Wizards’ and the Elites’ and Masters’ arrogance, their disregard for the rest of us (ignoring their fiduciary duties as they did), and their outright stupidity in too many cases.
The AIG debacle – the shame of the Wizards who brought us the mess
Well, not all of us are paying the price. As we write this, incredibly, unbelievably, American Insurance Group (AIG), the company in many ways right at the center of the scams of the past decades or so, is paying out obscene bonuses to the people in the very unit (at least half of the money, anyway) that brought us, well, what looks very much like some kinds of fraud executed on the most massive scale possible.
Things weren’t as advertised. Things that were promised were not possible to deliver. “Securitized” didn’t mean secure. “Collateralized” weren’t backed by real collateral. Things were not as rosy as promised – sounds to me like some kinds of fraud.
The federal government – you, me – now own 80% of this failed company. Oops, I mean AIG, this company deemed “too big to fail”. (See the lessons of Enron?) We have invested some $400 billions of taxpayer dollars and Federal Reserve dollars into AIG. To “retain” the Wizards who created and marketed the toxic junk that clogs and paralyzes our domestic and the global financial systems, barrels of cash had to be doled out. (Huh? Yes, to retain the leaders of the failed unit, we must lavish cash on them now. It’s contractual, you know!)
So, the first of a total of $450 million in checks were doled recently to AIG managers. New York State Attorney General Andrew Cuomo is demanding answers, including the list of those people receiving checks. Several dozens got millions in payouts. US Senator Charles Schumer is threatening to tax all of the money to claw buck from the 73 employees who got $1 million or more – “if you don’t return it on your own, we will do it for you…”
One of the games played in all of this was for insurance firms to issue “insurance” on “credit default swaps,” transactions that really weren’t insurance and weren’t really good for assuring safety…in case the packages of junk failed. Which they did. At least until now. Insurance? Well, we didn’t actually sell insurance (which would come under state insurance regulation)…that’s the kind of game played. Who pays – you and me, pals of mine!
There’s more, much more to come. Today’s New York Post full page headline screams it out: “NOT SO FAST YOU GREEDY BASTARDS …Feds plan 100% tax on AIG bonuses…”
So how about those lessons out of Enron and WorldCom et al: Much of what went on in leading to the market meltdown sounds like fraud. In so many ways. What forecasts of future profits enticed even sophisticated investors to invest in exotic instruments by the Wizards? Calling state and federal prosecutors: The People are angry and demanding action. The torches are being lit. You have some of the tools, thanks for Sarbanes-Oxley. You have the US Justice Department’s expert White Collar crime unit (formed after Enron, with 700 convictions under their belt now).
Solutions – get tough, prosecutors
We have a soon-to-be-vacant Caribbean island hideaway on the shores of the azure blue Caribbean waters which the Wizards and Elites and Masters have often flown over in their private jets (usually at shareholder expense) en route to posh hideaways and resorts. It’s a very safe place – guarded by US Marines. It’s US territory. Guantanoma Bay. Wonderful healthcare available, according to “Sicko” filmmaker Michael Moore – better than many of the laid off Americans receive. Great place for white crime fraudsters, right? When we run out of room at Gitmo we can use some of the stimulus money to expand other federal lockups in various states, right? (Put people back to work building these facilities, and later for watching over the Wizards.)
Be assured of this: What we have known as “Wall Street” and much of the financial services sector will not be the same as in the party years of the last decade or two. As our president said we are not going back to business as usual and the same old same old on Wall Street in some parts of the corporate sector.
And to show you the magninmous response of the Street’s poster boy, AIG: The CEO of AIG has asked the top employees in the troubled division to “give back the bonuses.” Anyone getting $100,000 or more should return “at least half” – some have already returned all. And then this warning to us from AIG: There is at least still $1.6 trillion – that’s “T” – on the AIG books that could blow up the American economy, the world economy, the 2009 stimulus package, and more. Too big to fail – it works!
That’s it for now. Gotta calm down after watching the cable news, hearing about the AIG issues, learning more about the Madoff scam, and pondering the thumb-in-the-eye given by Wall Street Wizards to our new president…leave it with this.