The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

After spending several years writing money-losing columns that were lacking in any insight into Wall Street for the New York Times, Ben Stein has returned.

After his NYT dismissal for becoming the pitchman for scam site FreeCreditReport.com, enough time has elapsed that Stein seems to have landed a gig with Bloomberg owned BusinessWeek.

We will see which direction of wrong Stein heads in this time. His former free market absolutism out of favor, he seems to be tacking in the direction of populist outrage.

This is another column not worthy of much dissection, but one sentence leapt out: “Goldman can make money by creating a scam synthetic security, as the SEC’s complaint alleges…”

No, that is not what the SEC complaint alleges — the legal charge is GS and Tourre engaged in fraud, made material misrepresentations about the security for sale, and had omissions of material facts.

Once this faux outrage passes, I expect to see the same old money losing lack of insight we’ve come to know and love about Ben Stein . . .

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UPDATE: April 21, 2010 9:14pm
“Bloomberg informs me that Ben Stein is not a BusinessWeek or Bloomberg employee. This was a one-time editorial contribution.”

I am thrilled to be wrong!

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Previously:
Farewell To Ben Stein (January 29th, 2008)
http://www.ritholtz.com/blog/2008/01/farewell-to-ben-stein/

Good Riddance, Ben Stein (August 7th, 2009)
http://www.ritholtz.com/blog/2009/08/good-riddance-ben-stein/

Source:
Goldman Sachs SEC Fraud Lawsuit Makes My Eyes Burn
Ben Stein
Business Week, April 20, 2010
http://www.businessweek.com/news/2010-04-20/goldman-sachs-sec-fraud-lawsuit-makes-my-eyes-burn-ben-stein.html

Paul Farrell gets his rant on, raging at the $400 million lobbyist effort Wall Street has put forth to kill financial reforms.

He writes that this “signals a resurgence of unregulated free market Reaganomics capitalism, the conservative ideology that killed Glass-Steagall in 1999 creating too-big-to-fail banks, setting the stage for the 2008 meltdown.”

But its much worse than that. What Wall Street wants is to water down reform so it can, according to Farrell, pursue these 8 goals:

(1) evade securities laws
(2) avoid taxes
(3) minimize capital requirements
(4) increase leverage
(5) hide speculative risks
(6) maximize short-term profits
(7) avoid stockholder disclosures, and
(8) manipulate regulators.

I wish I could say I disagree — but I don’t. Unless we get substantial reform, nothing will change. Why?

“Wall Street needs to continue running the same scam on taxpayers in order to get their mega-bonuses. They have lost their moral compass, sold their soul to the devil, lack a conscience, have no interest in the public.”

Well said . .  .

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Source:
Clash of the Titans: Obama vs. Goldman’s Reaganomics
PAUL B. FARRELL
Marketwatch, April 20, 2010
http://www.marketwatch.com/story/president-obama-vs-goldmans-reaganomics-2010-04-20

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Transcript & Video: Bill Black Testimony on Lehman Bankruptcy
Jane Hamsher Tuesday April 20, 2010 2:28 pm

FDL Contributor Bill Black scorched everyone with his testimony on the failure of Lehman Brothers when he testified before the House Financial Services Committee today. His prepared remarks can be found here (PDF).

CHAIRMAN KANJORSKI: And now we’ll hear from Mr. William K. Black, Associate Professor of Economics and Law, the University of Missouri, Kansas City School of Law. Mr. Black.

BILL BLACK: Members of the Committee, thank you.

You asked earlier for a stern regulator, you have one now in front of you. And we need to be blunt. You haven’t heard much bluntness in hours of testimony.

We stopped a nonprime crisis before it became a crisis in 1991 by supervisory actions.

We did it so effectively that people forgot that it even existed, even though it caused several hundred million dollars of losses — but none to the taxpayer. We did it by preemptive litigation, and by supervision. We broke a raging epidemic of accounting control fraud without new legislation in the period of 1984 through 1986.

Legislation would’ve been helpful, we sought legislation, but we didn’t get it. And we were able to stop that because we didn’t simply consider business as usual.

Lehman’s failure is a story in large part of fraud. And it is fraud that begins at the absolute latest in 2001, and that is with their subprime and liars’ loan operations.

Lehman was the leading purveyor of liars’ loans in the world. For most of this decade, studies of liars’ loans show incidence of fraud of 90%. Lehmans sold this to the world, with reps and warranties that there were no such frauds. If you want to know why we have a global crisis, in large part it is before you. But it hasn’t been discussed today, amazingly.

Financial institution leaders are not engaged in risk when they engage in liars’ loans — liars’ loans will cause a failure. They lose money. The only way to make money is to deceive others by selling bad paper, and that will eventually lead to liability and failure as well.

When people cheat you cannot as a regulator continue business as usual. They go into a different category and you must act completely differently as a regulator. What we’ve gotten instead are sad excuses.

The SEC: we’re told they’re only 24 people in their comprehensive program. Who decided how many people there would be in their comprehensive program? Who decided the staffing? The SEC did. To say that we only had 24 people is not to create an excuse — it’s to give an admission of criminal negligence. Except it’s not criminal, because you’re a federal employee.

In the context of the FDIC, Secretary Geithner testified today that this pushed the financial system to the brink of collapse But Chariman Bernanke testified we sent two people to be on site at Lehman. We sent fifty credit people to the largest savings and loan in America. It had 30 billion in assets. We had a whole lot less staff than the Fed does.

We forced out the CEO. We replaced the CEO. We did that not through regulation but because of our leverage as creditors. Now I ask you, who had more leverage as creditors in 2008? The Fed, as compared to the Federal Home Loan Bank of San Francisco, 19 years earlier? Incomprehensible greater leverage in the Fed, and it simply was not used.

Let’s start with the repos. We have known since the Enron in 2001 that this is a common scam, in which every major bank that was approached by Enron agreed to help them deceive creditors and investors by doing these kind of transactions.

And so what happened? There was a proposal in 2004 to stop it. And the regulatory heads — there was an interagency effort — killed it. They came out with something pathetic in 2006, and stalled its implication until 2007, but it ’s meaningless.

We have known for decades that these are frauds. We have known for a decade how to stop them. All of the major regulatory agencies were complicit in that statement, in destroying it. We have a self-fulfilling policy of regulatory failure
because of the leadership in this era.

We have the Fed, the Federal Reserve Bank of New York, finding that this is three card monty. Well what would you do, as a regulator, if you knew that one of the largest enterprises in the world, when the nation is on the brink of economic collapse, is engaged in fraud, three card monty? Would you continue business as usual?

That’s what was done. Oh they met a lot — they say “we only had a nuclear stick.” Sounds like a pretty good stick to use, if you’re on the brink of collapse of the system. But that’s not what the Fed has to do. The Fed is a central bank. Central banks for centuries have gotten rid of the heads of financial institutions. The Bank of England does it with a luncheon. The board of directors are invited. They don’t say “no.” They are sat down.

The head of the Bank of England says “we have lost confidence in the head of your enterprise. We believe Mr. Jones would be an effective replacement. And by 4 o’clock that day, Mr. Jones is running the place. And he has a mandate to clean up all the problems.

Instead, every day that Lehman remained under its leadership, the exposure of the American people to loss grew by hundreds of millions of dollars on average. Auroroa was pumping out up to 300 billion dollars a month in liars’ loans. Losses on those are running roughly 50% to 85 cents on the dollar. It is critical not to do business as usual, to change.

We’ve also heard from Secretary Geithner and Chairman Bernanke — we couldn’t deal with these lenders because we had no authority over them. The Fed had unique authority since 1994 under HOEPA to regulate all mortgage lenders. It finally used it in 2008.

They could’ve stopped Aurora. They could’ve stopped the subprime unit of Lehman that was really a liar’s loan place as well as time went by.

(Kanjorski bangs the gavel)

Thank you very much.

Tom Toles vias Washington Post

There is nothing like free money and maybe a softening of lending standards to get people to buy things again. Edmunds.com is reporting that March 2010 saw a record number of automobiles purchased with zero financing. The total of 22% of transactions exceeded the previous high of 21% in July 2006. The stark difference though of course is the total number of vehicle sales between the two periods. In March 2010 the SAAR was 11.77mm (highest since Sept ’08 ex clunkers) and in July 2006 it was 17.07mm.

Legislation currently under consideration in the Senate would not have prevented the crisis we just had. As such, it is unlikely to prevent a future crisis.

Sign the letter below and join leading financiers, market experts, and former regulators from both political parties in demanding that Senators restore the integrity of our financial markets and lay the foundation for our economic recovery.

You can sign the letter by clicking anywhere below:

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The over-lawyered former Lehman CEO Richard Fuld, in prepared testimony to the House Financial Services Committee:

“Let me start by saying that I have absolutely no recollection whatsoever of hearing anything about Repo 105 transactions while I was CEO of Lehman. Nor do I have any recollection of seeing documents that related to Repo 105 transactions.”

The Sergeant Schultz defense is among my very favorites.

April 16, 2010
By John Mauldin

First, Let’s Kill the Angels
Equal Choice, Equal Access, Equal Opportunity
Some Quick Thoughts on Goldman
La Jolla and Dallas

When you draft a 1,300-page “financial reform” bill, various special interests get language tucked into the bill to help their agendas. However, the unintended consequences can be devastating. And the financial reform bill has more than a few such items. Today, we look briefly at a few innocent paragraphs that could simply kill the job-creation engine of the US. I know that a few Congressmen and even more staffers read my letter, so I hope that someone can fix this. The Wall Street Journal today noted that the bill, while flawed, keeps getting better with each revision. Let’s hope that’s the case here.

Then I’ll comment on the Goldman Sachs indictment. As we all know, there is never just one cockroach. This could be a much bigger story, and understanding some of the details may help you. As an aside, I was writing in late 2006 about the very Collateralized Debt Obligations that are now front and center. There is both more and less to the story than has come out so far. And I’ll speculate about how all this could have happened. Let’s jump right in.

First, Let’s Kill the Angels

I wrote about the Dodd bill and its problems last week. But a new problem has surfaced that has major implications for the US economy and our ability to grow it. For all intents and purposes, the bill will utterly devastate angel investing in the US. And as we will see, that is not hyperbole. For a Congress and administration that purports to be all about jobs, this section of the bill makes less than no sense. It is a job and innovation killer of the first order.

First, let’s look at a very important part of the US economic machine, the angel investing network. An angel investor, or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business startup, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.

Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally managed fund. Although it typically reflects the investment judgment of an individual, the actual entity that provides the funding may be a trust, business, limited liability company, investment fund, etc.

Angel capital fills the gap in startup financing between “friends and family” (sometimes humorously given the acronym FFF, which stands for “friends, family and fools”) who provide seed funding, and venture capital. Although it is usually difficult to raise more than a few hundred thousand dollars from friends and family, most traditional venture capital funds are usually not able to consider investments under $1-2 million.

Thus, angel investment is a common second round of financing for high-growth startups, and accounts in total for almost as much money invested annually as all venture capital funds combined, but invested into more than ten times as many companies (US$26 billion vs. $30.69 billion in the US in 2007, into 57,000 companies vs. 3,918 companies). (Wikipedia)

(Incidentally, angel investing got its name from people who invested in Broadway plays, and the term began to be used for investors in similarly risky startups.)

This has become a very big deal in the US. Angel investors put as much money to work as all the mainstream venture capital funds. And the internet has greatly expanded the network of angel investors. In 1996 there were about ten organized angel networks, most quite small. Now there are many hundreds, and some of them are quite large and organized, with some serious money amongst the members.

“Angel investors committed fewer dollars but increased the number of investments during the first half of 2009,” according to “The Angel Investor Market in Q1Q2 2009: A Halt in the Market Contraction” by the Center for Venture Research at the University of New Hampshire. Total investments in the first half of 2009 were $9.1 billion, a decrease of 27% over the first half of 2008, the study reports. However, 24,500 entrepreneurial ventures received angel funding during the period, a 6% increase from the first half of 2008. The number of active investors in the first half of 2009 was 140,200 individuals, virtually unchanged from the same period in 2008. (Tech Transfer Blog)

And according to a conversation I had with the very enthusiastic David Rose of Angelsoft this week in New York, the numbers are growing as the economy improves. If you assume that as many new ventures were funded in the latter half of 2009, then we are looking at 50,000 new businesses last year. At an average of (my guess) 10 employees a firm, plus all the business they contract for, that is at least 500,000 jobs, with the promise of many more for the firms that become viable.

Angel investors do more than just provide money. Many are successful businessmen, and they give guidance and often bring their networks of contacts and potential business partners to the new venture. While I can’t find the statistics, I will bet you that companies that are started with angel money are more successful than those that aren’t.

And remember, that is 50,000 new businesses or more every year, as 2009 was not exactly a banner economic year. This is the very heart of the job-creation machine in the US. It is what keeps this country competitive. And the Dodd bill places this at severe risk. Let’s look at how it would handcuff potential investors.

Here are a few quotes from Venture Beat, a publication of the venture industry. (http://venturebeat.com/2010/03/26/angel-investing-chris-dodd/)

“There are three changes that should have a particular effect on angel investors, a catch-all category which includes everyone from friends and family members who invest in a startup, to unaffiliated wealthy individuals, to side investments made by venture capitalists acting on their own.

“First, Dodd’s bill would require startups raising funding to register with the Securities and Exchange Commission, and then wait 120 days for the SEC to review their filing. A second provision raises the wealth requirements for an “accredited investor” who can invest in startups – if the bill passes, investors would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000). The third restriction removes the federal pre-emption allowing angel and venture financing in the United States to follow federal regulations, rather than face different rules between states.”

Read the rest of this entry »

This guy Robert Khuzami looks like the real deal:

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The chart below from the American Association of Individual Investors (AAII) shows the deviation from the mean by individual investor in regards to their historical stock allocation percentages.

Investor allocations to stocks is just back to the zero line, suggesting investors are only now back at their mean allocation to stocks. The 23 year mean by individual investors to stocks is 60%.

The fact that individual investors are not grossly over allocated to stocks at this point suggests they still have a fair amount of liquidity to invest. As long as liquidity remains favorable stocks should not experience any deep setbacks.

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Equity Asset Allocation Deviation from Historical Mean

Chart courtesy of Fusion Investments