Monday, December 14, 2009

Free Speech in France and the U.K./Goldman Sachs/

This is what RB calls a test. Can everyone identify who is the RB in these pictures? The LB said that no one has ever flunked one of RB's tests, and you either get a A or an F, no in between. This particular test is not exactly a mind bender either, LB muttered.

Both of my parents are still alive. The picture of my father was taken in 1939, near the time that he met his future business partner in the final round of the southern Golden Gloves boxing championship, a story told in an earlier post. Left Brain & Right Brain Decision Making By the mid 1960s, those two young men had built the largest home building business in Middle Tennessee from scratch. The picture of my mother was taken in the spring of 1941, displaying her happiness about having a dress to wear at her high school graduation. The dress was given to her by her Uncle, who had found the fortitude to invest in stocks soon after FDR was elected President in 1932. RB was telling that story as its justification for buying stocks back in March: RB Wants to Tell a Story/ That particular story, and RB only thinks in stories, actually made some sense to the LB when it started to plug more information into its research on historical cycles. It is the kind of stories that led the Old Geezer to fund RB's stock market frolic starting on 3/3 with the purchase of Medtronic.

For this entire week, the RB will be Head Trader as payment for winning the Head Trader of the Year here at HQ. If Headknocker loses any money during this upcoming week, RB will not be held responsible. Instead, the Old Geezer, the appointed guardian for the RB, will be held accountable by the HK. And, HK apologizes in advance for anyone offended by ITEM # 2 below, as the LB woke up this morning thinking unpleasant thoughts about the Masters of Disaster. As readers of this blog know, RB does not explain anything so it is up to the LB to write the minutes explaining the rationale for trades, and that explains why that part of the blog is so boring. After all, the LB is not exactly Mr. Excitement, and all long time readers already know that it is one boring Nerd.

Headknocker did inquire before the start of the trading day whether he owned XTO Energy. He does not remember. He does remember that one of the HTs just bought Exxon. BOUGHT XOM at 71.5/Added 50 SIVBO at $19.15 And if XTO is not owned, why not the HK inquired, hasn't the HK made it clear to all the HTs that they are supposed to buy stocks that go up in order to advance the HK's capital position. And the RB added, yes, the HTs need to do better if the HK is ever going to buy Canada.

LB noted that the world markets have responded positively to Abu Dubai's 10 billion dollar bailout of Dubai. Apparently, it pays all over the world to be an irresponsible borrower.

While this point does not need to be mentioned, the purchase of a stock, say METPRA at $7, $8 and $12.5, does not mean that it would be bought now at $22.5. As I have mentioned, with the increases in prices for these floating rate securities, I have lost interest. Occasionally, I have recently ventured into buying 50 share lots of some, like HBAPRD or ORHPB, primarily to earn something on some of the excess cash, and I have bought others like SCEDN that fell in price to a level that was interesting to me. And I have done some trading, like exchanging GJS for more of PYT. On balance, however, I am no longer interested in the floaters due to their tremendous price appreciation, with some of my positions tripling, or doubling, in price. I know from a few emails that some readers bought some of these floaters soon after I discussed them, like 1000 shares of AEB at less than $5 bought by a reader in California, after reading my comments, notifying me well after the fact. Only a couple of readers send me those type of emails. So, the opportunities were discussed in this blog when they existed, and for the most part those opportunities have long since gone away. It is important to realize for the future that those opportunities existed to varying degrees for about 6 months. So, someone could have passed on them in October, and was given a second chance on many of them in February and early March, and some lasted into the summer months.

1. Three Stories Over the Weekend About Freedom Speech: Unlike most other nations in the world, the U.S. has free flow of ideas occurring constantly in the mainstream media and in non-traditional outlets available on the internet. I have been aware of Great Britain's efforts to stymie free discourse with its libel laws, used primarily to financially beat anyone into submission who dares to criticize someone of influence, and consequently discourages free and open discourse about matters of public concern. The U.S. needs to prevent the enforceability of U.K. libel judgments, a step than many in Congress are advocating and some states are also trying to implement. The British approach is fundamentally inconsistent with the conservative values embodied in our First Amendment, as interpreted and applied by the Supreme Court for generations.

France is no better than the U.K. A story in the NYT reveals how powerful politicians in France have citizens arrested for exposing their lies with videos posted on YouTube. The particular law in question, allows for a fine of up to $18,000 for making a "public insult" to one of France's ministers. The video in question showed the French minister at a conference that she denied attending, and another showed her in an inebriated state bogeying, bumping and grinding with much younger men. Another video showed a French minister making a racial slur. While France and the U.K. certainly have more press freedom than China, they are in no position to criticize China for arresting one of its citizens for publishing a paper favoring democracy in China. China Indicts Liu Xiaobo

Those responsible for these free speech restraints in the U.K. and France will of course assert many lofty and noble goals for their existence. In reality, there is one goal-to protect the rich and/or powerful from criticism.

2. Goldman Sachs (own bonds only): I am in the process of reading Andrew Sorkin's book "Too Big To Fail" which is both interesting and easy to read. Sorkin points out those working in financial industry earned 57 billion dollars in compensation in 2007, and Goldman Sachs accounted for 20 billion of that number.(see page 4) Within a year after the close of 2007, many of those firms had failed or would have failed but for the massive government intervention. So, how much compensation did those wizards actually deserve? Arguably some of those making compensation with a lot of zeros earned more money than they lost during the 2002 to 2007. However, as a group, I would roughly estimate that they lost around 10 trillion, maybe as much as 12 or 13 trillion. In a recent post, I stated that never before in the history of mankind has a group of people been paid so much to perform so poorly. Can there be any reasonable disagreement with that observation from anyone who is not a Master of Disaster, for they apparently lack the ability to see much of anything clearly?

The financial wizards kept their compensation, every dime of it, for taking reckless and irresponsible risks for the sole purpose of personal self-aggrandizement, which risks destroyed some firms and crippled others, while placing the entire world's financial system in danger of total collapse. This is not an argument but a statement of simple facts. Sorkin makes clear early in his book that Jamie Dimon realized that many of the Wall Street firms might collapse in mid September, and he rattled off a list of names in a conference call to his senior staff shortly before Lehman's bankruptcy filing (at p.3).

I read an article in this issue Vanity Fair , one of dozen or so magazines that I receive at HQ, about Goldman Sachs in those critical days back in September 2008, when the world was on the brink of financial Armageddon caused by the wizards of American finance. The C.E.O. of Goldman, Lloyd Blankfein, was interviewed for that article. He is reported to have said that he doesn't know whether Goldman would have survived without the assistance of the federal government. If there had been no intervention at all by the government, I do not believe the matter is even open for conjecture. GS would have collapsed soon after Morgan Stanley before the end of 2008.

The story in the WSJ over the weekend is just one of many that points to the role GS played in the growth of the subprime market. I would recommend reading that article. Then as a refresher on the subject of AIG and Goldman Sachs, I would read this excellent article from NYT from September 2008. It is an eye opener about Goldman's interest in the government bailing out AIG.

As I have discussed in this blog, I am not a GS hater, and in fact own some floating rate securities tied to Goldman Sachs bonds (currently own PYT and GYB). I have previously bought and sold the common stock. I do try to keep an open mind about what is actually happening in our society however. Firms like GS exist to advance the self-interest of a small group of their employees to realize substantial wealth without any concern about what may happen to the billions of people trying to get by in this world when their financial schemes blow up, as they inevitably will do. (Those who worked at Lehman prior to the bankruptcy received handsome rewards, but was there any there there when the music stopped?) Any interference with the Constitutional right of our financial wizards to blow up the world's financial system is viewed as an unnecessary regulation, paperwork, and needless meddling by government bureaucrats. While they try to dress the pig up and make it look nice and appealing for the average working stiff voter, it ultimately comes down to preserving their ability to realize astronomical sums regardless of the consequences to others, even billions of others. I mentioned in an earlier post that it only took three years for the investment banks to blow themselves up after the SEC rule change in 2004 allowing them to increase their leverage: Continuation of Prior Post from Last Night: 2004 SEC Rule Change

And, those firms will do everything possible to prevent any financial reform that will interfere with their ability to do it again. I do believe that an earlier generation learned a great deal from the Great Depression and how to make it more difficult for the greedy and selfish egomaniacs to destroy the world's financial system. I do not believe the current generation has learned much of anything. So when I invest in long term bonds issued by an investment bank, I will try to monitor the situation closely. GS is probably okay over the short and intermediate term. Longer term, it is always up in the air, a serious question that will require careful monitoring. I avoided any losses in Fannie, Freddie, Bear Stearns, Lehman, Washington Mutual, and the other poster children of failure from the last financial crisis. But the mind may be more mush during the next Wall Street generated crisis, and I may not be so fortunate.

It might seem strange to use the phrase "constitutional right" to describe the freedom of financial wizards to further their personal wealth irrespective of the consequences of their actions, and without meaningful regulation trying the balance the risks and rewards of their activities. This is a frequent theme in this blog. It must be a constitutional right since such activities have been so prevalent and long-standing, as much a freedom in reality as freedom of speech embodied in the First Amendment. So, it must be a Constitutional Right to take irresponsible risks for personal wealth aggrandizement even though the consequence will be disastrous for billions of people, and it goes without saying that the rewards for colossal failure are allowed to be kept. Just deny that you have any responsibility for what happened, even say that you are a victim, and move on to your next hundred million. Another Constitutional Right, the Right to be Free From Responsibility, has been a frequent topic in this blog. And, besides those who had nothing to do with the financial meltdown, and have had to pay for it nonetheless, who has actually been held accountable, other than the in your face fraudsters like the Bernie Madoffs of the world, who do seem to have multiplied into a cockroach epidemic? While some piece of news could easily escape my attention in the SUV Capital, not exactly part of the financial capitals where the financial wizards ply their wares, I am not aware of any of the Masters of Disaster going to jail, or even being charged with anything, or losing a single dollar in their ill-begotten compensation. It is interesting though to hear some of their mouthpieces blame poor minorities for what happened.

There is a surging populists anger in America about all of the financial bailouts, and that anger is justified but misdirected. Without the infusion of massive capital by the government, the Masters of Disaster would have succeeded in causing a collapse of the financial system last year, and a deep and long-lasting depression. Fannie and Freddie had to be seized by the government with their debt guaranteed, hundreds of billions had to be infused into the system to shore up the balance sheets of financial institutions destroyed by greed and reckless behavior, and to replace some of the trillions that had gone up in smoke in ill-advised schemes, otherwise credit would have done more than just contracted some. So the anger is directed at what saved the system, recognizing that those efforts still had many flaws, rather than what caused it and what will cause it to happen again and again. The GOP without a doubt has learned nothing, and the Democrats are unlikely to do anything significant either. And, it is important to remember that the seminal event of the current financial crisis was the 2004 SEC rule change, adopted in a 5 to 0 vote, with 3 Clinton Democrats voting with the republicans, an extremely important event in the soon to develop financial crisis.

LB concluded that fortunately for HK, all members of the staff here at HQ will be busy with other matters this week, so there will not be much time for the RB to perform its usual mischief.

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