Setting Main Street vs. Wall Street, from Jim Sogi

September 23, 2008 |

The vilification of Wall Street is taking full force. It is the worst form of scapegoating, denial, and mistakes were made (but not by me). It is similar to the criticisms of the legal profession where the intransigence, unreasonableness, and greed of the litigants is blamed on the representatives who are doing the job set out for them in the system. The current crisis originated in the greed and failure to save by homeowners, their use of real estate borrowing for consumptive lifestyles. Their failure to save, their spendthrift ways are all being loaded on to the investment community who were doing their function within the system. Now emails are floating around fighting the bailout of billionaires on Wall Street. You are an easy scapegoat. No matter that the speculator helped provide the liquidity to create trillions in new wealth. No matter that the long held family home is valued at many multiples of it's purchase price. It is the most culpable real estate speculator and overextended consumer that now point the finger in the attempt to avoid their own errors, lack of judgment. With an election coming up, the politicians, the worst of all, are jumping on the BANDWAGON. The cycle is ending. The funny thing is that equities are barely down a 1/5 and they are throwing out the baby along with the bathwater. But it's good. We really don't need the big firms anymore with universal access and electronic execution. Truth is we really don't need big government either, but its turn comes next.

For the speculator, many new niches and many opportunity will arise. The government will be the ultimate slow mover. As they try to enter the market, as we have seen this last week, there are big waves kicked up. The least qualified populate government functions. Small and fast moving adaptors can thrive in such an environment. Seems that many big hedge funds are going down or weakening. The white shoe brokers are weak. The change will be good. It's just like evolution and climatic change. New species will arise. Many will perish unless they adapt. Even the data itself is reinventing itself with data over a year old being almost irrelevant. As Lack says, regulation will be a joke. Every rule will create a dozen loopholes to exploit that the slow moving professors never thought about. THEY can't control the markets. The big illusion is that government can cure the problems when in fact, THEY are the problem.

Kim Zussman replies:

K Zuss "Greed and failure to save by homeowners" is also what caused the markets to recover from the tech-bubble / 9-11 bear market. The FOMC could have chosen not to increase liquidity / ease rates in that environment — in which case there might have been a deeper/longer "my father's" recession.

Remember the wealth effect: as people's homes increased in value, they felt richer, borrowed more, spent more, and drove earnings up. And felt a lot of pressure to do so. How do you say no to the Mrs. when she complains about the many vacations the neighbors take, or their new boat?

One of my favorite symbols of this period was the web-ads showing ethnic-minority couples dancing on rooftops when their loan was approved. Hey, it's a free country.

Bruno Ombreux sees a silver lining:

Am I the only one thinking that this mess is actually very good news for small speculators?

Fewer investment banks, fewer hedge funds, higher cost of capital and more regulations mean less efficient markets, that is more edges. And at the same time less competition for those edges.

The golden age of speculation is coming.

Janice Dorn adds:

Power of You / Dr Dorn Some days ago, I sent a copy of my first book to Alan Millhone. The title of the book is: Personal Responsibility: The Power Of You.

We are living through an epidemic of failure/unwillingness to accept personal responsibility for our actions. The blame game is just that. No personal responsibility. Mistakes were made ( but not by me). When the locus of control shifts from inward to outward, there is nothing but whining, blaming, gnashing of teeth, bullying, etc.

The worst lies are the lies we tell ourselves.

Tim Melvin argues:

Slicer Don't confuse speculators with the banks and Wall Street. There is an enormous gulf between the two. The fact is the banks did create loans and loan structures that encouraged excessive borrowing. Merrill used to encourage homeowners to take out home equity loans and put the money in stocks. Homeowners did not create option ARMs or understand them. Banks created then and sold them. The public did not slice, dice and engineer toxic securities from their mortgages. Wall Street did that.

Does the public have culpability for their stupidity and greed? Of course they do and they are paying for it. Look at foreclosures. That can't be a pleasant experience. However, the Street has to take its share of blame for creating the speculative fires and then pouring gas on them.

Most "speculators" had nothing to do with the creation of this mess. They do not lend money or create securities. They trade. And most of us do it with our own money.

Jim Sogi replies:

While you are entirely correct, the public doesn't know or care of the difference, and blames you as much as Gold Man. Anything to deny personal responsibility.

Comments

15 Comments so far

Adam on September 23, 2008 9:36 pm
From Steven Colbert interviewing Maria Bartiromo,

“I believe that these guys should be able to speculate and do anything they want, to make as much money as they want, in any way that they want and I want…in the good times, and then when things go bad, we should bail them out so they can do it again later. You know because I believe in the free market…I believe in the free market, except when it might hurt a corporation. Now we are about to give an eighty five million dollar loan to someone who couldn’t run a business now isn’t that a risky loan for the United States of America?…”

and

“The rule here…the lesson here is don’t just…like…screw up, screw up royally. Like really, really, endanger the entire world with your management.”

As the saying goes it’s funny because it’s true…
Matt Johnson on September 23, 2008 9:57 pm
Jim, I don’t think it’s the homeowners at all, I think it’s the BROKERS (and loose credit), companies like Goldman, Lehman, M.Stanley - would probably like to think their tough stuff in the speculation world but the truth is they’re just brokers, the bulk of their money over the years comes from FEES. Now yes, they do sometimes take these fees and speculate with them, but that’s a different story. These firms are brokers - nothing else, they get paid to get in the way. It’s in their best interest to create products to sell, thus earn commissions (spreads, too). They created new products, convinced people to buy them, the layman didn’t do his homework and boom.
This happens all the time.
We’re already seeing the IB world get smaller, and thank goodness - most of those folks aren’t capitalists. They get paid way too much money for taking little to no risk.
Matt Johnson on September 23, 2008 10:16 pm
PS Gordon Gekko was a p-ssy.
Bill Cook on September 24, 2008 4:23 am
Jim, I am all for people taking responsibility for their actions, but that is a two-way street. How much is spent on advertising encouraging those to consume? No one twisted the arms of investors to buy these securitized products for a greater return. It was one huge Ponzi scheme by all of them, except it has ended.Where was their judgment when they issued those mortgages without proper documentation? There is enough culprits to lay the blame for this mess!
Dan Sturzenbecker on September 24, 2008 7:26 am
The deleveraging process is certainly hurting those who are leveraged while creating opportunities for cash hoarders. My guess is that many of these opportunites are going to be taken advantage of by foreigners who are holding huge rafts of U.S. Treasury paper and overvalued currencies.
Bill Cook on September 24, 2008 8:18 am
The blame game doesn't solve the problem. You can say individuals were irresponsible for taking a larger mortgage or home equity loans, greater than their ability to pay. You can blame the rating agencies for their duplicity with the investment banks, then changing their ratings. Like previous times there will be winners and losers, but will we learn the necessary lessons from these errors of judgment?
George Parkanyi on September 24, 2008 9:08 am
Jim,

Now you're blaming the government. What about the people that voted-in the governments? Or the people who don't pay enough attention to what their representatives are doing and ask the right questions? And that leverage themselves and their families to the hilt?

Forget blame. It's just an environment that we're in. People act in their self-interest, and sometimes that conflicts with the common good. We just don't seem to be collectively clever enough as a society to keep certain things in reasonable balance/moderation. The way debt has spiraled out of control and made us more vulnerable vis a vis some other societies is a good example.

No one is at fault here, or we all are to greater or lesser degree. It is what it is, and as a speculator you have to assess that and just do the best you can.

What needs to be looked at here is that our environment could be changing dramatically. There is actual risk now to the tools of our trade - money itself, bank accounts, brokerage accounts, credit, and market mechanisms. What happens if these no longer become available, or are severely impaired? Are we prepared for that extreme sort of a shift?
karl on September 24, 2008 1:12 pm
It wasn't the public that created CDOs, packaged and offloaded MBS, and leveraged large financial services firms to 30:1 or greater. It wasn't the public that gave AAA ratings to garbage paper based on models that forecasted housing prices would never go down. Nor was it the public that believed those ratings and leveraged itself to buy that soon to be worthless paper - for a few basis points of additional yield.

Everybody in the financial world who wasn't brain dead saw the housing bubble and all but the most obtuse must have known what the eventual outcome would be. Securitization and derivatives desks aren't stupid. There must have been a few good dark humor laughs along the lines of "This is eventually going to blow up and we had better be the heck out of here when it does." There was no desire to check the paperwork to ensure the validity of incoming loans (and there was even pressure against doing so). Instead, just take them in, wrap 'em up, chop 'em up, and ship 'em out. Collect bonus at end of year. The desire for loans on Wall Street was insatiable and the housing market was more than willing to feed Wall Street what it was craving. Had an executive at a firm in 2005 stood-up and said "Hey, this stuff is garbage, we've got to stop", he would've been not-so-politely shown the door. Stopping the securitization gravy train would've cost his co-workers a substantial amount of income. Had Wall Street said to mortgage aggregators, "You're sending us crap! Raise your standards or we stop buying" - the bubble may have very well been averted. Instead Wall Street clamored for anything it could package and sell.

"the investment community who were doing their function within the system"

If their function is to maximize the current year's profits, without any regards to their firm's future, or that of the larger economy, then yes, they were certainly doing their function. Had there been holdback provisions on the bonuses paid that were dependent on how well the paper performed years down the line, one can be sure that the volume of garbage passed on would've been reduced significantly. (Of course that would never happen). At the end of the day, this /is/ a Wall Street induced problem. Sacrificing the future ("What do I care? I won't be around!") for immediate gain. The greed and failure to save by homeowners was clearly surpassed by the greed and failure to plan by the investment community.
Charles Longfellow on September 25, 2008 2:11 am
“The current crisis originated in the greed and failure to save by homeowners, their use of real estate borrowing for consumptive lifestyles. Their failure to save, their spendthrift ways are all being loaded on to the investment community who were doing their function within the system.”

If the above statement was true, it would hold that less greedy homeowners, and especially those who had large savings accounts, were less contributing to the current crisis. Ok. Sell me a bridge. Of course the “proper functioning” investment community also owned homes, so the measure of their greed and size of their savings accounts were also contributory. Of course, if they were bundling up mortgages, grabbing commissions and leveraging them to the moon, while offloading to international buyers, well let’s not forget those irresponsible home owners. Consumptive lifestyles? Yeh, but more likely assembly line duties before squash practice.
Dan Costin on September 25, 2008 7:36 am
The simple truth is that if everyone paid back the loans he took out, there would be no crisis. The taxpayers are going to have to pay up for those taxpayers that didn't. The houses were built — someone has to pay for them.
Mr T on September 25, 2008 8:04 am
The simple truth is if the loans were never extended to people who couldn’t pay them back there would be no crisis. The houses would never have been built.
Charles Longfellow on September 25, 2008 9:35 am
The homeowners are accountable for their homes, not the unwinding of leveraged mortgage instruments. Not unless Enron happened because citizens used too much electricity, and Refco failed because Grandma was tinkering with forex.
Anonymous on September 25, 2008 9:52 am
We cavalierly use words like crisis, meltdown destruction, etc. so regularly that they lose their effectiveness and impact. In this instance, there are no words in the english language to adequately express the spot that the U.S. economy is in right now.

I was listening to Jack Welch this morning on CNBC whose view I respect greatly. Of course, it would be disingenuous to boil down his comments to a few words. Other than it is safe to say that there is nothing “simple” to any of this maelstrom of a calamity we are experiencing today. And as such, There is not a quick fix or a simple solution either to the massive problems that the financial world is facing today . We have gone through similar events like this, such as 1987,1989-1992,1998, 2002, and now 2008. If the others were tropical storms, this is a Tsunami. He did state that very brilliant people such as Paulson and Bernanke et. al. are working feverishly to right the listing ship we know as the American Ecomonic system.

But people do want simple solutions to complex problems and it is not going to happen. It took years to get us here and it is going to take years to get us out of here. But we have to start somewhere and the $700B program appears to be a good start.

But to play the blame game is to be like old generals who fight previous wars rather than the current one. Buffett has been chastised here for his prior sanctimonious. However his $5B investment in Goldman Sachs, his only previous investment in an invstement bank was in 1987 in Salomon Bros, would not have been undertaken if a) he did not believe that Congress will approve the Treasury package and b) Goldman Sachs is still king of the Investment Banking world. Long live the King.
Steve on September 25, 2008 1:11 pm
Will the bailout solution(s) end up establishing a framework where it incubates a catalyst that creates another impending financial crisis at some future point?

It appears that as a government intervenes in the market the more government is required, or expected, in the future to act on behalf of certain industries. Are efficiencies within various aspects of the financial industry increased as a result of government intervention, or regulation? Can or are government bailouts considered as part of a risk quotient in certain businesses?
Greg Vinately on September 25, 2008 5:54 pm
"Will the bailout solution(s) end up establishing a framework where it incubates a catalyst that creates another impending financial crisis at some future point?"

You can bet on that.

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