The Party that cried "Socialism"

Republicans are crying "Socialism!" again. This time, it's because of limited oversight of executive pay in financial companies that would fail were it not for the support of the federal government. As I write this, Fox news is telling me the government wants to "tell companies how much money they can make". The TCOT Report is...wait! they took it down?...WAS running the misleading headline "Socialism Anyone? Pay Restrictions for All", which actually linked through to this Stephen Labaton piece in the NYTimes Politics section, on how the Obama administration is trying to deal with issues of executive pay in regulating an industry driven to insolvency by a culture of executive privilege and greed.

The reason the TCOT headline and the Fox News claim are misleading is that there just isn't any evidence the Obama administration is a proponent of socialism, in favor of dictating "how much money" businesses can make or how much executives should be paid. The administration does seem to be a proponent of responsibly managing the hundreds of billions of dollars that are flowing to private institutions from taxpayer coffers and, at the same time, fixing the regulatory system, whose function it is to help prevent the type of crisis we find ourselves in today.

The American People are now the largest shareholders in AIG, Citigroup, and others. We have assumed a great deal of risk associated with the bailout of these institutions and, as such, have not just a right, but a duty to influence the structure of the turnaround, which is essentially what we're buying.

Let's look at the New York Times article and see if the Socialist Wolf is hiding in there:

"One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company."

This is capitalism, folks. Capitalism works best when compensation is tied to the success of the company. America's best companies operate this way. Does anyone want to argue that we should reward executives who fail? Isn't THAT Socialism?

The article goes on to discuss the need to overhaul regulation of "the shadow banking system that Wall Street firms use to package and trade mortgage-backed securities, the so-called toxic assets held by many banks and blamed for the credit crisis."

The aim of better regulation is reducing risk across the financial system. Clearly, the "shadow banking system" did not do a good job of self-regulation. And now these institutions are on the receiving end of a huge and ongoing public bailout.

Here's another passage from the Times article:

"During the presidential campaign, Mr. Obama repeatedly urged regulators to adopt new rules to give shareholders a greater voice in setting executive pay for all public companies."

If there is one term squarely associated with capitalism it is "shareholder value". Obama is urging support for shareholder rights, not the government's right to specifically dictate pay.

Instead of grappling with the hard details of the financial crisis left to President Obama, some Republicans are grappling to find fault in the other party's plan, sometimes fabricating mountains out of mice and painting administration policies with broad labels like "Socialist" and "liberal tax and spend", largely ignoring the facts on the ground.

So, once again, there is a lot of crying, but no wolf. Instead, Obama sounds like the kind of responsible capitalist that we need right now. The Socialism charge just doesn't hold water.

When the markets collapsed they turned desperately to the US government because the US government is central to both US and global capitalism - the biggest player in the world. So, to say that the government's involvement in a reasonable solution is "Socialism" is just ridiculous. Every good corporation reviews failure in risk management and modifies systems to prevent a reccurrence. The current financial crisis is due to a failure in risk management across the entire system, therefore new controls are necessary.

I, for one, will be on the lookout for the Socialist Wolf, but until he shows up let's focus on how "Americans" are going to work together to fix a broken system.

In Ponzi We Trust

Right after the Madoff scandal I wondered aloud, via Twitter, to Paul Kedrosky if all of Wall Street was a Ponzi scheme. He replied that the Madoff scandal would severly damage trust in US markets.

Today, a Citywire article quoting Bill Gross, famed bond-fund manager at Pimco, says he finds Ponzi-like schemes across the entire US economy.

It reminds me of a quote I heard on CNBC (I can't remember who said it) late last year when a guest analyst said "C'mon. The entire US economy is based on lending people money they can't afford to buy things they don't need".

The Way the Cookie Crumbles

Mike Shedlock's piece on the Madoff madness underlines the fundamental reason why faith in the "powers that be" is crumbling like a dry cookie.  

It's a house of lies.

Let's consider a few items, shall we?

The CIA never imagined that terrorists would fly jetliners into buildings.

Alan Greenspan never saw the looming credit crisis in 2007, even though a newbie mortgage broker saw it coming in 2005, the minute he joined the industry, and blogged about it.

"If BS were poetry we would all be millionaires. That’s what my aunt would say."

No one could see Enron coming.

And no one on Wall Street could see the Madoff debacle coming...except the "smart money".

Barron's wrote about the mystery of Madoff's returns in 2001.  Sophisticated investors reverse engineered the strategy and said the returns just didn't add up.

But the insiders kept investing with him.  Why?    

Because, as Shedlock points out, they got the lie wrong.  They thought insider trading, made possible by Madoff's huge market making business, was facilitating the fraud, not a simple Ponzi scheme.  Had it been insider trading that would have been just fine with them because the money would have been there and they could cash in on the lie too. 

And so it goes.

But truly, we owe these liars a debt of gratitude for finally imploding the old and broken system so we can replace it with something new.  It's been a long time coming.

I leave you with lyrics to a collaborative poem, "That's the Way", by Tom Waits and William Burroughs:

That's the way the stomach rumbles
That's the way the bee bumbles
That's the way the needle pricks
That's the way the glue sticks
That's the way the potato mashes
That's the way the pan flashes
That's the way the market crashes
That's the way the whip lashes
That's the way the teeth knashes
That's the way the gravy stains
That's the way the moon wanes

Mad Mad Mad Madoff World (Update)

Wall Street Manna reports on a Barron's story back in 2001 that was onto Madoff's "don't ask, don't tell policy". The Barron's piece elucidates so nicely how Madoff plucked the social strings of the wealthy elite to lull them to sleep as he robbed Peter to rob Paul (See It's a Mad Mad Mad Madoff World). And after the story came out everyone looked the other way for another 7 years. Well, almost everyone.

This quote from one investor whose eyes began to itch says it all:

"What Madoff told us was, 'If you invest with me, you must never tell anyone that you're invested with me. It's no one's business what goes on here,'" says an investment manager who took over a pool of assets that included an investment in a Madoff fund. "When he couldn't explain \ how they were up or down in a particular month," he added, "I pulled the money out."


As for Ponzi schemes, I wondered aloud after this story broke if all of Wall Street is a Ponzi scheme. It may be a stretch but, in a way, doesn't the current situation prove this? If the money was there then there would be no problem. But the money isn't there. Lots of it isn't there.

But don't listen to me. I am not an economist or a hedge fund manager. I'm just a lucky dummy who got scared of the market last summer and put all my savings into cash.

It's a Mad Mad Mad Madoff World

A Paul Kedrosky tweet informed me of today's arrest of Bernard Madoff for perpetrating perhaps the largest Ponzi scheme...ever.

What's so not funny is Madoff's central role on Wall Street over nearly five decades. He was Vice Governor of the NASD (among numerous high profile regulatory roles), which is supposed to keep an eye on wrongdoers, though anyone who knows a little bit about the ins and outs of Wall Street knows that this dog never had any teeth.

It's so not funny because everyone knows that trust is central to healthy markets. And when trust goes away so do investors. But my guess is that if not everyone, most people had a little voice in the back of their heads that told them to look the other way whenever little things, like the non-disclosure around hedge funds, CDSs and myriad other "instruments" of high-finance , threatened to turn market believers into skeptics.

And why not let a few items slip past the collective ethical gatekeeper? After all, nearly all of us has a good portion, if not all, of our nest eggs invested somewhere around "The Street", right?

And who wouldn't place their money with Bernard Madoff? Turns out the rich and powerful, those most likely to know more about those sniggling little items slipping past the ethical gatekeeper, trusted their millions to Bernard. Of all people, Mr. Madoff was likely tuned to the gatekeeper's little secret more than most, so he placed his own little devil above his door to whisper sweet nothings into the ears of the unconsciously suspecting millionaires and billionaires he fleeced over the years:


“In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner’s name is on the door...Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark.”


But Mr. Madoff is surely the exception to the rule. Don't you think?