Gloating with Wall Street's goodfellas
By Julian Delasantellis
Let's say that living on your block is a friendly, easygoing, always ready to
lend a hand to a guy in trouble fellow we'll call Mr Tarp. In September of last
year, another neighbor, we'll call him Mr Bank, came to him with a tale of woe.
Ah, it had been hard times for Mr Bank. Speculating in wild, hare-brained
financial schemes had left him destitute and on the brink of eviction and
ruination. A little assistance, a few bucks, would help a lot.
Mr Tarp is such a soft touch that nobody was surprised when he opened his
wallet. Mr Tarp, however, was more than surprised to find out that Mr Bank had
not used said largesse to pull himself
up by his bootstraps, rather he had used it for the acquisition of champagne
and prophylactics to be used in the bedding of Mr Tarp's wife.
Mr Tarp feels that there has been a failure in communication, but Mr Bank is
nonplussed. "I see the way you treat me," Mr Bank defends himself, "you think
I'm too big to fail."
More than a year past the emergency financial reforms necessitated by the
collapse of Lehman Brothers in mid-September, 2008, and it's obvious that, as
Dorothy observed in The Wizard of Oz, "We're not in Kansas, anymore."
The more important query now is, "We're not in Kansas, we're not in pre-2008
finance, so where the hell are we?"
Once again, the laws of unintended consequences have smote the markets with
their heavy, irony laden fists; where we are is certainly not in a world we
wanted or expected to be in, but it's pretty certain that we'll be going to
more unpleasant places, to suffer even more indignant calumnies, before it can
be said that markets have settled down into a new, semi-permanent stasis.
It all seems so long ago now - but it was just a little over a year ago - when
Lehman fell, and it almost seemed that the chain tying it to the rest of the
financial system was going to go taut and take it down with it as well. Away,
it all went, a blinding miasma of Lamborghinis and Lear jets, all sucked
straight down into a dark vortex of destruction suddenly unleashed onto the
financial system.
Watching the spectacle of former US Treasury secretary Henry Paulson fall on
one knee to request the fair maiden, speaker of the US House of Representatives
Nancy Pelosi, to grant him $800 billion of the public purse, one might be
forgiven in not remembering just how much else was going on at that time -
specifically, the fate of US investment banks.
Once, they ruled the Street like mighty tyrannosauri, and the roar of their
banquets and bacchanals drowned out the sound of all other life on the Long
Island Sound every weekend. Then, mostly through mergers that turned their
fiery red blood into skimmed milk, their numbers faltered. By the beginning of
2008, there were only five - Bear Stearns, Merrill Lynch, Lehman Brothers,
Goldman Sachs and JP Morgan/Chase. By the end of September, there were only
two, Goldman Sachs and JP Morgan/Chase.
The other three had been victims of the times. In March 2008, Bear Stearns
stumbled and faltered; its only salvation and future was as a digestive of JP
Morgan Chase in a US-government-brokered and financed deal. Wall Street's king
of the thundering herd, Merrill Lynch, got eaten on the cheap by the boys from
Charlotte, North Carolina - Bank of America. Lehman fell, and took the world
with it.
What was bringing the great giants down was a seemingly new strategy, but, in
reality, it was as old as creation itself - the elephants being felled by
insects. These institutions depended on billions of overnight "hot" lending to
fund their loan and asset portfolios, any disruptions of that continuous
inbound conduit would, in essence, put the institution out of business. All
over the world, nameless and faceless speculators were learning that bad news
about these companies, whether real or manufactured. It spread and penetrated
the investment banks' defenses with effortless ease, starting electronic "runs"
on the banks that crippled their ability to keep their daily fill of loan
funding. The speculators were handsomely rewarded in this perfidy, with shorts
of bank stock and credit default swaps against the banks put on before the
assaults started becoming massively profitable.
Soon after Lehman, the US economic mandarins of Paulson and Federal Reserve
chairman Ben Bernanke realized that they had to protect the last two of the
breed, Goldman and JP Morgan/Chase before they went extinct - an event that
hardly would have inspired more confidence in a system then desperately needing
all it could get.
On September 22 came the new regime, as it was then announced that no longer
would investment banks such as Goldman and Morgan be regulated - most said
poorly regulated - under George W Bush-appointed chairman Christopher Cox by
the US Securities and Exchange Commission (SEC). From heretofore, they would be
turned into much more tightly regulated commercial banks, able to access
emergency Federal Reserve reserves in case of another run on the bank.
But with all rights come responsibilities - at least that's the way it's
supposed to work. Press reports at the time stated that a key factor in the
change was that it put the investment banks under the more stringent Federal
Reserve's rule and rules. No longer would there be any of the nonsense 40-1
cash leverage rules that the SEC allowed for the investment banks in 2004, thus
sparking the craziest chapter of the great bubble. Almost like a reactionary
television show that gleefully showed young ghetto hooligans learning
discipline and responsibility through harsh and painful induction training at a
US Marine Corps boot camp, observers clucked for the banks' once previously
bold and buccaneering ways, now, supposedly, long gone.
Now, a year later, things have turned out exactly as expected - except that the
roles are reversed. The rulemakers have not disciplined the corrupted; it's
more accurate to say that the corrupted have abased the rulemakers. If the
intention was that the big investment banks would settle down into a sort of
quiet, reserved suburban lifestyle, the reality has been that they've acted
more like former gangsters placed into the US government's witness protection
program, taking over the numbers racket on the Saturday pee-wee soccer fields.
We're just coming out of the latest corporate earnings reporting season, and,
although generalization is always problematical, a few broad themes were
evident. Construction and related companies such as Caterpillar did very well,
as the market continues to look for an economic rebound centered on the
resumption of economic demand from Asian economies.
Things were not as rosy in regards to the profit picture for many stocks of the
financial sector, such as banks and insurance companies. There, the continuing
questions about the credit quality of many institutions holding mortgage and
mortgage-related securities, as well as the ongoing difficulties of the US
consumer struggling under the rapidly deteriorating employment situation, led
to generally weaker than expected corporate results. For instance, Citigroup,
struggling to adapt and prosper as an essentially public/private partnership,
struggled by with a profit margin of only 0.87%.
But it was clear and sunny skies for the then investment now commercial banks.
Goldman's profit margin came in at 25.77%, JP Morgan/Chase at 19.38%.
Obviously, the two took all the fancy tricks they learned in Wall Street, and,
when bringing them home, swept American Main Street with them.
On the Huffington Post, Dylan Ratigan noted that about 90% of Goldman's recent
$11 billion in profits came from gains originating out of equity and bond
trading in the company's principle investments. This is a skill that becomes
infinitely easier once a company becomes so big as to be able to control much
of the market through its sheer girth alone. Add to that over $70 billion in
Treasury/TARP (Troubled Asset Relief Program) and Federal Reserve low-cost
emergency loans along with the fact that, as an institution the market has
judged to be "too big to fail" - Goldman essentially borrows at US government
rates - and you can see why, no matter what foulness the investment banks like
Goldman and Morgan seem to land in next, they always seem to be popping up like
roses from out of it.
In no way can Goldman or Morgan be considered consumer banks, not unless you
consider the couple of bucks their bosses give to the shoeshine boys a valid
consumer line of business. For the banks that are actually exposed to the
vicissitudes of the American consumer, their existence has become, to
paraphrase Thomas Hobbes in Leviathan, "nasty, brutish" and, if they
weren't operating under the government's implied too big to fail guarantee,
probably very "short" indeed.
The most important current operating fact regarding the US economy is that it
continues to be progressively more and more starved for fresh credit. According
to an October 9 report by Rex Nutting from Dow Jones/Marketwatch:
US
banks are reducing their lending at the fastest rate on record, tightening the
credit squeeze and threatening to leave many otherwise viable businesses unable
to borrow money to expand their businesses, meet their payroll or refinance
their maturing debts. According to weekly figures provided by the Federal
Reserve, total loans at commercial banks have fallen at a 19% annual rate over
the past three months, while loans to businesses have dropped at a 28%
annualized pace.
Should you be one of the multitudes who
believes that US government borrowing to fund the huge President Barack Obama
fiscal deficit will soon stoke inflation, you might be interested to learn
that:
The big drop in credit also shows up as slower money growth. In
the past 13 weeks, the money supply has fallen 0.3%. Most new money is created
by borrowing, as banks credit the borrower's account with the proceeds of a
loan. Conversely, the money supply is reduced when debts are paid off or
written off. Deflation is not a threat - it's already here.
Obviously,
there can't be any inflation, or any real long-term earnings growth for
consumer and business-oriented banks for that matter, as long as the economic
crisis continues to destroy capital faster than Obama can ask Bernanke to print
it.
These issues are of little concern to operations such as Goldman and Morgan,
with their trading strategies and profit profiles essentially divorced from the
real economy. But down here on planetary level, as the little league baseball
fields don't get maintained because the businesses who funded the work go out
of business after having their loans called, after elderly people with chest
pains have to wait longer for one of the few ambulances on station after rescue
service cutbacks, life is changing, changing for the long term, and it sure
isn't pretty.
Neither is the northern snakehead. This small fish, about 10 centimeters long
and originating in China, was illegally dumped into the streams and marshes of
rural Maryland in the 1990s. Their skill as predators (along with the fact,
when it's finishing ravishing the ecosystem of one pond, it can, while
breathing air, get out of the water and walk on dry land a short distance to
another) meant that it was soon just about the only aquatic creature still
thriving in Maryland's inland waterways.
Where the snakehead can walk and breathe, the former investment banks have
strategies like high frequency trading. With all due respect to Rolling Stone
writer Matt Taibbi, "great vampire squids wrapped around the face of humanity",
is where it is going. Voracious, predatory snakeheads is what the future may
belong to, and, man, when you Google it, you'll see that it is one ugly fish.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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