Changing the Culture of NY Investment/Commercial Bankers
Far too often we quickly forget history – even recent events of just a few years ago. It was on April 27, 2010 during the Senate’s permanent subcommittee on investigating Wall Street’s latest crisis, that the most memorable moment burst onto the scene. Democratic Senator Carl Levin of Michigan held up an e-mail that had been written almost 3-years before by two of Goldman Sachs’s most senior traders. The dramatic event emerged as the e-mail described a Goldman CDO (collateralized-debt obligation) as “one shitty deal.” Loyd Blankfein was testifying. Levin interrogated him demanding to know if it was ethical for Goldman to sell a security that its traders thought was crap in the face of the fact that Goldman, as a principal, was betting against the success of that security.
Blankfein was noticeably uncomfortable, yet defended Goldman’s conduct replying “In the context of market-making, that is not a conflict. What the clients are buying, or customers are buying, is—they are buying an exposure. The thing that we are selling to them is supposed to give them the risk they want.” Blankfein was stating that it did not matter what Goldman thought of a deal. Clients “are not coming to us to represent what our views are.” On the one hand, Blankfein was correct. If a clients say buy gold when it is falling it is not their job to ask are you covering shorts or going long. However, when Goldman is designing the instrument, a different perspective emerges – they know what is inside and the transaction has a whole other connotation.
Levin indeed had dug through the 900 pages of additional Goldman documents that were released that same day. Another 3-year-old e-mail popped-out. This was written by Craig Broderick, who was Goldman’s chief risk officer and a top player in the firm relied upon by Blankfein. The Broderick Memo of May 11, 2007, as it became know, revealed that Goldman planned to keep the firm in the black while many other banks went down the tubes by marking down the prices on its portfolio of CDOs and synthetic CDOs. The Broderick Memo stated that marking down the valuation of the products they sold “will potentially have a big [profit and loss] impact on us, but also to our clients. … We need to survey our clients and take a shot at determining the most vulnerable clients, knock on implications, etc. This is getting lots of 30th floor attention right now.”
Goldman was net-short the mortgage market by May 2007 and such a mark-down would be profitable to the firm and devastating to the marketplace. Goldman’s decision to mark-down the CDOs aggressively, indeed set off a chain reaction of events that led to the failure of Lehman and Bear. Goldman’s most profitable year to date was 2007 posting earnings of $17.6 billion pretax.
The crisis that will erupt once again is going to emerge from this grey area. If you are a hedge fund you are paid to trade with other people’s money and the bulk of the profits and losses flow to them. Then you have Investment Bankers who were supposed to bring companies to market and provide facilities to trade. This does present a great area for you create products and facilitate trading. This gives you inside knowledge as to people’s positions and when you then engage in proprietary trading, the ethical line become blurred.
The real crisis emerges when the scheme of Investment Banking and proprietary trading then moves into the Commercial Banking realm. Blending the proprietary trading and Investment Banking with Commercial Banking opens the door for catastrophic meltdowns because the Commercial Banking is the cornerstone of the economy providing loans to business and they facilitate the velocity of money. When proprietary trading is merged with Commercial Banking then the entire system is placed at risk. This was the importance of Glass-Steagall. We cannot allow the Investment Banking culture to dominate the Commercial Banking field. This MUST be severed or the next crisis will be twice as bad and the last one.
Poland Protesting Unemployment
The unemployment among the youth is a major issue as to how the system is collapsing. Politicians do not grasp that taxes reduce spending that reduces economic expansion and that reduces growth and employment. They do not understand that small government is necessary – not huge government wasting people’s money and reducing the standard of living. Nor 10,000s of protesters marched through the Polish capital on Saturday in one of the largest demonstrations in years to demand more jobs and higher pay, blaming Prime Minister Donald Tusk’s government for failing to tackle unemployment. This is all part of the collapse in socialism. The older generation do not want to hear that because it is now time for them to collect. Unfortunately, the system was never designed from a practical long-term view. There was never any consideration of cyclical movements – just expectations that a straight line could be created with laws.
California – Tax Man Cometh – As Always Their Mistake You Still Pay
California small business owners and investors are facing $120 million in back taxes after a 20-year-old tax exemption was struck down by an appeals court last year. That’s right. Government always wins. They make a mistake, and you still pay. We would be better off with the Mafia in charge – at least you can negotiate with reason.
Since 1993, California provided that you paid only half of the capital-gains taxes due on sales of stock in businesses with less than $50 million in gross assets. The hitch was that the business must keep at least 80 percent of payroll costs and assets in the state. In August 2012 the tax exemption was ruled unconstitutional ob the basis it interfered with interstate commerce. That was about as rational as a metal patient on drugs. If the court ruled it denied equal protection in the sense of “justice for all” I would agree with the decision. But to claim it interfered with interstate commerce by trying to keep people in the state with incentives is nonsense. New Jersey has an EXIT tax. You leave, and they want more taxes. That will never be ruled unconstitutional because the Supreme Court has held taxing powers are unlimited in a fundamental sense – nobody in government ever met a tax they did not like to suppress others with.
As always, in comes the bureaucrat looking to get even with those in the private sector for having talent they lack and money they get only by taking bribes. These are typically the people who were stuffed in gym-lockers in high school and it is pay-back time for them. They hate people who make money – look at one in the eyes. You see hatred paired with stupidity.
Faster than a speeding bullet, the state’s Franchise Tax Board was signaling plans to collect retroactive taxes dating back to 2008 from more than 2,000 small businesses licking their chops for an expected take of $120 million. The small business owners screamed and turned to seek a legislative solution. In February state tax collectors offered to hold-off on issuing tax summons that would not down include interest and penalties provided they signed waivers extending the statute of limitations so they could go after them later. The state Senate passed a bill that reduced the total amount of retroactive tax due by only 76%. So you see, the bastards just cannot keep their hands out of other people’s pockets.
Education A Complete Failure?
Education in the United States and elsewhere has been designed by academics with no real practical work experience. I was in Australia, and Macquarie Bank had funded an education program at Macquarie University. I was given a tour since they were so proud. They took over a hotel and set up rooms to be dealing desks with academics making up news and sending it out on screens. The problem was if the students did not respond as the professor assumed the markets should, then they failed. This was completely without practical merit.
In the USA 60% of college graduates cannot find a full-time job in their chosen profession as reported by Forbes. With unemployment over 50% among the youth in Europe, the failure of formal education to train people for the future is at a monumental catastrophic crisis. The economic future looks really bleak. This is how the pension funds are failing because there are not enough working youth to keep the Ponzi scheme going.
The American Manufacturing Renaissance & Energy
Detroit Abandoned Manufacturing
QUESTION: Is there a “manufacturing renaissance in the USA.”
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ANSWER: Yes. This is developing for two primary reasons. First: the 2011 law that has blocked Americans from starting businesses overseas. Second: many companies including auto manufacturers who rushed to Mexico to manufacture cars are coming back. Ford no longer employs anyone at its Hofu Plant in Japan and the Cuautitian Plant in Mexico both opened in 1981.
Clearly, there is plenty of proof to indicate that there is rising factory output, strong manufacturing production gains, and lower labor costs for the first time in a long-time given the less militant unions that chased jibs away. American workers are more attractive than ever before. For a major Japanese auto manufacturer in the 90s, I was asked to explain how the American plant had higher productivity numbers the a similar plant in Japan. I visited the plant and discovered they employed people who had been in Detroit and lost their jobs thanks to the unions. They moved to California and worked non-union. Productivity rose, they were more happy, less confrontational, and had outperformed the Japanese. The whole thing was the union created confrontation out of everything so the perception that American workers were lazy was actually wrong.
Add to this the natural gas boom underway in the U.S., which many believe will lower energy costs for U.S. manufacturers dramatically, and what you have is a resurgence of the manufacturing sector that has been shrinking as a percentage of the economy for several decades thanks to unions. The USA is probably the most competitive in the world on a global basis. This is also caused by much higher taxes in Europe the will not get any better. The downside, USA needs taxes and we will see rising taxes that will destroy thus new manufacturing renaissance.
Nonetheless, as in all things, the U.S. “manufacturing renaissance” is also cyclical in addition to these structural changes. Therefore, the sector is doing as well as would have been predicted under any circumstances at this point in an economic recovery, however, that provides the incentive to return. Without the cyclical boom in the economy, the manufacturing would not return home. Those who try to downplay this trend as purely cyclical, are clearly speaking from their ivory towers and lack the hands-on contacts that I have had over the years. When the Euro was forming, we developed the strategies for Japanese companies needing to open in Europe. We looked at labor costs, taxes, and currencies. We put those who did not need skilled labor in Ireland and manufacturers in Britain. We were called in to Mercedes and met with the board of director at Daimler Bends. So we participated directly in this decision making process. This is not what I “think” foes on – it is what goes on.
U.S. Manufacturing Renaissance is Fact not Fiction. The question is when will taxation kill it? What destroyed American manufacture is perspective. A woman was very demanding and confrontational. Her husband split and eventually met a girl 20 years younger. The wife then says he left her for the “young girl” he met after the broke up. That is the explanation she prefers because there is no responsibility on her part. This is the same problem. It is better to say it was the greed of manufacturers seeking low costs rather than to say unions became too confrontational with no sense of competitiveness and politicians kept raising taxes that made the products too expensive and uncompetitive. It is a two-way street.