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Jim Rogers: What Recovery? America’s Problems Getting Worse, Not Better

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By Barry Ritholtz - December 11th, 2009, 12:15PM

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12 Responses to “Jim Rogers: What Recovery? America’s Problems Getting Worse, Not Better”

  1. Floyd Gondoli Says:
    December 11th, 2009 at 1:13 pm

    On target until he starts bemoaning excess regulation as a factor; does anyone seriously think the repeal of Glass-Steagall isn’t a major factor?

  2. davossherman@gmail.com Says:
    December 11th, 2009 at 1:20 pm

    There are good eggs and there are GREAT eggs! Rogers is super people!!!

  3. nyet Says:
    December 12th, 2009 at 1:56 am

    Rogers is a nauseating bore.

  4. Eido Cohen Says:
    December 12th, 2009 at 3:30 pm

    @Floyd Gondoli

    Of course the repeal of Glass-Steagall is NOT a major factor. As discussed in this article,
    http://meganmcardle.theatlantic.com/archives/2008/09/hindsight_regulation.php

    “Repealing Gramm-Leach-Bliley, or at least the provisions that repealed Glass-Steagall’s ban on commercial banks entering other lines of financial business. If this were part of the problem, it would be the commercial banks, not the investment banks, that were in trouble.”

  5. Barry Ritholtz Says:
    December 12th, 2009 at 3:45 pm

    The Megan McArdle article you reference (September 2008) is half right, half wrong.

    McArdle correctly points to CFMA and the repeal of Glass-Steagall under Clinton as factors to the collapse.

    But she ignores all of Bush’ actions and in actions. Under W, the policy of Federal Prem-emption was put into place — this eliminated all of the state Anti-Predatory Lending laws, which were acting to reduce sub-prime lending. There was an opportunity to reinstate traditional lending standards, which Bush decided against doing.

    Under 43, the SEC allowed leverage to go from 12-to-1 to 40-to-1 via an SEC waiver for GS, BSC, LEH. MER and MWD.

    And, Bush’s SEC appointments were all horrific, and the agency itself became yet further neglected.

  6. Eido Cohen Says:
    December 12th, 2009 at 4:17 pm

    Jim Rogers is right on the money when he discusses excess regulation. Would more regulation have stopped Bernie Madoff? Of course not. Direct, incontrovertible, evidence was brought to the SEC *on one more than one occasion* about Madoff’s dealings (years before he turned himself in), yet no serious actions were taken. The laws to enforce were already there; more regulation would have made no difference. We need to *enforce* the regulations we have rather than create EVEN MORE unenforceable regulations as if, by magic, this will solve everything.

    SNIP

  7. Barry Ritholtz Says:
    December 13th, 2009 at 7:29 am

    Grossly oversimplified nonsense.

    Here are some facts for you:

    The SEC had been gutted for well over 10 years — much beyond benign neglect — first under Clinton, than under Bush. As accounting scandals, corporate fraud, and white collar crimes were exploding, the SEC budget was starved, staff slashed. Quality lawyers left in droves. Their IT systems dramatically lagged the private sector.

    Overall, the SEC as in shambles.

    Everything about what amounts to the nation’s largest prosecutors office had been systemically starved, all but dismantled — all in the name of deregulation. You could have brought a signed Madoff confession, and they would have missed it

    Some strategy: Gut the prosecutors office, and then when they become helpless saps, use the mess you created to “prove” regulation doe not work. That’s not just a transparently weak argument, its bullshit

    Go peddle your ideological nonsense elsewhere.

  8. dsawy Says:
    December 14th, 2009 at 4:41 am

    1. The SEC’s budget was increased as a result of SarbOx in 2002, and has been going up throughout both the Clinton and Bush years, markedly so after the passage of SarbOx:

    http://www.sec.gov/foia/docs/budgetact.htm

    2. If it was being “starved, all but dismantled — all in the name of deregulation,” then how did the number of regulations as well as the budget go up after SarbOx?

    3. The SEC has admitted that they had information that should have led to an investigation of Madoff in 1992, before Clinton was elected. I quote: “The SEC had sufficient information to inquire further and investigate Madofffor a Ponzi scheme back in 1992.” (SEC Office of Inspector General Report of Investigation, Case OIG-509, Executive Summary).

    Said investigation makes it quite clear why the SEC failed to pursue Madoff time and again: Madoff was a big name in the securities industry, rather chummy with high level people in the SEC as well as in Washington DC. It was not a matter of budget or lack of personnel why the SEC failed to pursue Madoff, but rather his ability to bluster and name-drop as ways of intimidating the SEC investigators into failing to pursue him to a point where they would develop hard evidence.

    What the SEC needed to pursue Madoff wasn’t more money or more people. What the SEC needed was a balls, brains and a spine to stand up to Madoff, use the evidence they gained from the Avellino & Bienes investigation (where they could have used more spine in levying harder charges, including fraud for promising “100% safe” investments) to investigate Madoff. They didn’t. In 2000, when Markopolos brought information to the SEC on a silver platter, the problem wasn’t lack of resources, it was lack of brains; the SEC personnel didn’t understand the information that Markopolos had given them. Future investigations of Madoff were aborted due to internal “stovepiping” in the agency, incompetence due to a lack of understanding of the mathematical impossibility of Madoff’s returns as well as inexperienced investigators being blustered by Madoff.

    In looking at the SEC’s budget and the number of cases they’ve brought from 1992 forward, I don’t see an agency that was “systemically starved” but I do see one that did not grow anywhere nearly as fast as the industry they were charged with regulating. There appears to be no mechanism in budget appropriations for the SEC (or any of the other financial regulatory bodies) to grow at the rate of the securities industry (or sectors thereof) that they regulate, much less recruit, hire and train people in the increasing complexity of the products they regulate. There is little chance a lawyer leading a SEC investigation is going to understand some of the heavily mathematical derivative products being used today, yet the SEC appears to have no recruiting effort to go after the same skills that Wall Street is using to create these products (physicists, pure math jocks, etc). They’re still recruiting accountants, finance people, etc – which are all necessary, but insufficient to regulate the market as it is today.

  9. Barry Ritholtz Says:
    December 14th, 2009 at 5:15 am

    Do you want to make the argument that the SEC was a priority under either Clinton or Bush? That they were adequately staffed and funded? That their IT systems were remotely close to modern? That their budgeting kept up with overall govt spending?

    Yes, after Enron, their budget went up. But not nearly enough to deal with their responsibilities.

    And Bush’s FY2003 budget cuts SEC enforcement by $209 million. (Boston Globe 12.29.02)

    The number of rules, administrative laws, and regulations have increased every year since the republic was founded — this proves nothing.

    Lastly, the URL you used (the first Google hit for SEC budget history) shows the SEC overall budget was essentially flat over large periods of time. From 1995 to 2002 it was essentially flat — rising over 7 years from $300m to $423m — during a huge run up in stocks, fraud, scandals, and bust.

    Look after that first Google hit and you will see lots more info on the state of the SEC.

    This is a more accurate description of the realities at the SEC than the picture you painted:

    SEC Enforcement Cases Decline 9%
    Staff Reduced Because of Budget Crunch
    November 2006
    http://www.washingtonpost.com/wp-dyn/content/article/2006/11/02/AR2006110201701.html

    The number of new enforcement cases brought by the Securities and Exchange Commission fell by 9 percent last year as the agency grappled with staffing cuts brought on by a recent budget crunch, according to figures released yesterday. . . . The agency’s reduced tally of 574 enforcement actions included 91 cases against shell companies that failed to file regular financial reports. That issue has become an SEC priority of late, but pursuing those cases takes less time and fewer resources than most other actions. Former agency lawyers said such cases amount to going after low-hanging fruit.

  10. Barry Ritholtz Says:
    December 14th, 2009 at 5:25 am

    Here’s another:

    Today’s disaster is a result of lessons not learned during the Enron mess
    By Robert Bryce
    September 24, 2008
    http://www.usnews.com/articles/opinion/2008/09/24/from-enron-to-the-financial-crisis-with-alan-greenspan-in-between.html

    “In 2001, the SEC’s budget was $437.9 million. In March 2002, the General Accountability Office issued a report that said that the shortage of money and manpower at the SEC had forced the agency to “be selective in its enforcement activities and…lengthened the time required to complete certain enforcement investigations.” So what has happened since then? Precious little. Yes, the agency has a substantially larger budget today than it did during the Enron era. For this year, its spending authority is $906 million. And for 2009, the agency’s budget is projected to increase slightly, to $913 million.

    But here’s the howler: The number of enforcement personnel, the people who go after the financial engineers, is expected to decline. That’s right. Despite the trillion-dollar meltdown now underway, the number of SEC enforcement personnel will decline from 1,209 this year to 1,177 in 2009. In all, the SEC expects to have 3,771 employees next year. For comparison, the Smithsonian Institution budget for 2009 includes funding for 4,324 employees.

    That’s not meant as a slap at the Smithsonian. It houses a myriad of the nation’s most treasured objects. But the SEC actually guards the nation’s treasure. And yet, Congress treats it like a bastard stepchild. Indeed, Congress doles out more than five times as much money for corn subsidies ($4.9 billion in 2006, the most recent year for which data are available) as it does for the SEC.

    Those pitiful numbers lead us to the innumerable problems posed by derivatives, the same financial instruments that led to the chaos at Enron, which before it failed operated a huge—and almost completely unregulated—derivatives exchange business. According to the Bank for International Settlements, the global derivatives market is now worth some $676.5 trillion. That’s $676,500,000,000,000. That’s a fivefold increase over the value of derivatives that were traded in 2003. Further, that $676.5 trillion is 51 times America’s current gross domestic product.

  11. Barry Ritholtz Says:
    December 14th, 2009 at 5:41 am

    The S.E.C. Should Hire Journalists
    http://dealbook.blogs.nytimes.com/2009/01/28/another-view-the-sec-should-hire-journalists/

    1. The S.E.C. is underfunded and understaffed.
    2. S.E.C. examiners are often recent law school graduates.
    3. Many of these law school graduates are using the S.E.C. as a career steppingstone.
    4. A good number of these examiners do not stay at the S.E.C. for very long (because of, among other things, the pay differential between what they make here and what they’d earn elsewhere), and most don’t know a lot about hedge funds when they start.

    And these:

    Forbes: The Tiny SEC Grows 02.04.03
    http://www.forbes.com/2003/02/04/cx_da_0204topnews.html

  12. dsawy Says:
    December 14th, 2009 at 12:51 pm

    I didn’t make the argument that they were adequately funded, or that they were a priority. I made the argument that, contrary to your assertion that they were “all but dismantled… in the name of deregulation” that their budget went up, consistently. That’s not “dismantled,” “starved” or anything of the nature. They were consistently funded, but at levels that are completely inadequate for what they have to do now.

    To your points in response:

    1. The SEC is underfunded and understaffed for the size and complexity of the markets. If we simply abolished a great deal of the “innovation” on Wall Street since 1990 (to pick a date), then the SEC’s budget becomes viable. As Paul Volcker noted recently, the only “innovation” by the financial sector in the last 25 years of any social utility has been the cash ATM. I’d agree with Volcker’s assessment, with the proviso that trading platforms and increased openness available to the public via the Internet have been a good development, on balance.
    2. That the SEC turns first to law graduates for their investigative team(s) is a symptom of the problem. You, BR, are a statistical oddity in law – most lawyers I’ve met wouldn’t know a gaussian distribution if you dropped it on them. They’re almost completely innumerate. They’re not going to go very far in securities, whether by regulation or promulgation. It takes a great deal of self control on my part to not simply roll my eyes when talking with most lawyers on the subject of investments, trading and financial schemes. They’re simply out of their league, but they’re filled with hubris and confidence by virtue of having passed the bar. They’re lambs to the slaughter when they go up against Wall Street’s thimbleriggers.
    3. The revolving door between the SEC and Wall Street is *the* central problem in the Madoff investigation, IMO, because when the target is a big wheel like Madoff, there are human consequences of some wet-behind-the-ears newbie taking on “the kings of Wall Street.”
    4. What the SEC should be hiring are people who are grizzled veterans of Wall Street – in much the same way that when FDR formed the SEC, who did he hire? Joe Kennedy, a notorious plunger of his day. To catch thieves and swindlers, FDR hired one of the best, who knew the games from the other side of the law.

    To re-iterate my point: in neither the Bush nor Clinton administration was the SEC’s budget slashed, nor their personnel sacked, or anything of such drastic nature. The SEC’s budget kept growing. The SEC did lose personnel, but this was because Wall Street was busy hiring them away – and there’s no way that the SEC can offer salaries that compete with the Midas-like salaries of Wall Street.

    Wall Street’s schemers and wet dreamers simply out-grew the SEC, and (as I noted above) there is no budgetary process within the SEC to grow the agency in proportion to the number of funds, products, money managers, schemes, new CUSIP’s listed, derivatives created… whatever metric of growth you might care to use on Wall Street. The SEC’s budget and hiring grows in relation to the number of cases they bring and the size of the body of regulation they have to enforce. That’s it. That’s why they got a funding bump after SarbOx, and not before. If we grew the SEC in proportion to Wall Street, it would have seen a huge funding increase in 1997 to 2001, during the dot-bomb bubble.

    But let’s assume, for debate, that we installed such a budgetary and hiring process at the SEC – ie, that the bigger and more complex that Wall Street becomes, the SEC grows automatically at some linear factor (eg, SEC budget and staffing = (multiplier * Wall Street total traded value/year + multiplier * securities issued) * overall market complexity factor). To accomplish this would take a big change in enabling legislation by the Congress, (ie, not mere rule-making changes) and we know a priori that Wall Street would howl like a ruptured duck, shower Congress with money and greasy hand-shakers and nothing would happen.

    ie, Just about what is happening right now.

    Absent leadership of the style of Teddy Roosevelt during his “trust busting” phase, no modern POTUS (either D or R) is going to take on Wall Street in such a bold manner. What is needed is a POTUS who is a) already rich and b) doesn’t give a fat rat’s ass what Wall Street thinks of him. TR was such a man, FDR was such a man, Harry Truman wasn’t rich, but he certainly didn’t give a fat rat’s ass what people thought. This was easier in TR’s day, when a very small percentage of the US was dabbling in stocks; today, with over half the country being invested in something on Wall Street, Wall Street can mount their silly PR campaigns that such a TR-like POTUS is out to “screw your 401(k)!” And today, most any POTUS will fold like a cheap tent in a windstorm.

    Lastly, let’s call a spade a spade: Many of these regulators, politicians are of the same milieu as the people they’re supposed to regulate: Ivy-league graduates. Look everywhere in American business and finance today and you see the spawn of Harvard Business School and other Ivy League schools – and disasters in their wake. (eg, GM and Wagoner is a great example, or Chris Cox and the SEC as another). These people are infused with a sense of hubris and ego far beyond their actual capabilities, but they’re thicker than thieves when it comes to sticking together. If you and I were in the SEC and charged with regulation, I’m sure we’d rather enjoy taking down Harvard MBA’s in these various schemes. Putting other Harvard grads in charge of busting fellow Harvard grads? I don’t see any enthusiasm when this is the case. We’ve now had four presidential administrations filled with Ivy League graduates… and each successive administration makes their disdain for the US public more blatant than the last in how they work to benefit their cohort.