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

The New York Times has a terrible habit of putting the book publishing industry upon a pedestal. Book writing has always been an essential—even a crucial—career milestone at the Times that it must warp the paper’s perceptions of the book business. Today’s story about the flawlessly orchestrated sale of Amanda Knox’s memoir is a perfect case in point.

Knox’s book project reminds us what Big-Six New York publishing can do so well and what no one else can come close to doing, that is, coordinate a media launch with a book lay-down that blankets every airport, Costco, Wal-mart, Target, supermarket, newsstand and Kindle with a copy of the young woman’s memoir on the same day to generate a super-Nova of media saturation.

The cascading effect of seeing the book’s cover image over and over each day for a two-week period combined with the continual reinforcement of daily “exclusive” media interviews on magazine and morning shows creates an indelible impression like no other form of publicity. It can also generate massive sales in brief period.

That kind of publishing requires an infrastructure that only the big publishers possess. They’re also the only ones who can take the financial risk of advancing the author millions of dollars.

And yet, the NYTimes wants to believe last year’s 1.2m-copy selling Jaycee Dugard book was a surprise to publishers. Worse, the newspaper is deluding itself wit this analysis:

Booksellers, who have a finely tuned sense of what will take off with their customers, said the success of the book will rest on how it is written and whether Ms. Knox comes across honestly to readers. “I think if it has an authenticity and reflective quality, it could be huge,” said Roxanne J. Coady, the owner of the R.J. Julia bookstore in Madison, Conn. “If it is a variation of a P.R. campaign to clean up her reputation, I think it will flop badly.”

If independent booksellers had such “a finely tuned sense of what will take off with their customers” the stores would not be the endangered species they are today. Their economic value as weathervanes would have allowed them to retain customers instead of losing them to discount chains.

The bigger fallacy is that the writing is what will matter to the success of the book. Don’t get me wrong. The tack Ms. Knox takes in how she explains her story will determine its success. And a better written book will have a much bigger impact, especially if Knox can do what good writers really do, edit and frame her story to make an emotional connection with readers.

Nonetheless, publicity is what will make or break the book. Buyers will make their purchasing decision based upon their encounter with Ms. Knox through various media outlets. How Amanda Knox comes off on 60 Minutes and the Today Show, in newspaper features and radio interviews will signal to readers whether they want to buy the book or not. No one will come upon her through her prose.

Buyers on this scale are not readers so much as participants. If her story resonates, you join Team Amanda. The price of admission is buying her book. The book is a talisman, not a vehicle.

So far the Knox team has shown they get this in every way. The family has been disciplined. They’ve kept Knox from the press while still satisfying and teasing the interest of the public. They’ve chose Bob Barnett, a lawyer who plays the publishers like a harpsichord, to represent them. They’re selling the book at the perfect time to set the whole process in motion: February publishers auction; manuscript submitted by July; August for rest and media training; September to coordinate the October or November launch.

Whichever publishing house buys the book will wrestle with how to deal with the Presidential election. Though 2012 is likely to end with a whimper politically leaving Knox to fill the news vacuum for a few weeks before the Christmas book selling season really takes off.

Source:
In Amanda Knox Tale, a Delicate Bet for Publishers
By Julie Bosman; February 13, 2012
www.nytimes.com/2012/02/13/business/media/in-amanda-knox-tale-a-delicate-bet-for-publishers.html

There were two announcements this weekend that may freak people out over the future of books. The first was a prominent and innovative independent bookseller announcing that she had put her store up for sale with a broker who might look for someone to take over. As with the sale of the popular store in Washington, DC, Politics and Prose, there’s a good chance this move will be seen as a bellwether for independent bookstores.

After all, Roxanne Coady of Madison, Connecticut’s R.J. Julia is a financially sophisticated owner capable of making a going concern work. If she’s getting out of the business—arguably a few years too late—then there cannot be much hope for physical bookselling.

And, yet, there’s news today that Amazon is planning physical bookstores or, at least, a pilot store to sell Kindles and the physical books that they publish themselves. This comes from Good E Reader:

Amazon sources close to the situation have told us that the company is planning on rolling out a retail store in Seattle within the next few months. This project is a test to gauge the market and see if a chain of stores would be profitable. They intend on going with the small boutique route with the main emphasis on books from their growing line of Amazon Exclusives and selling their e-readers and tablets.

Seattle is where Amazon’s main headquarters is based and is known as a fairly tech savvy market. It is a perfect launch location to get some hands on experience in the retail sphere. A source has told us that they are not looking to launch a huge store with thousands of square feet. Instead they are going the boutique route and stocking the shelves with only high margin and high-end items. Their intention is to mainly hustle their entire line of Kindle e-Readers and the Kindle Fire. They also will be stocking a ton of accessories such as cases, screen protectors, and USB adapters.

The company has already contracted the design through a shell company, which is not unusual for Amazon.

Not even contemplated here is an even bigger opportunity whereby Amazon could open small to medium size bookshops that capitalize on the desire for a third-space complete with coffee bar. In that retail environment, Amazon could easily sell the high-volume, high-margin items taking advantage of its superior logistics and distribution skills. (And, if it wanted, could also install a print-on-demand capacity that would make it easy to walk in and purchase any one of millions of titles.

Source:

Amazon in the Process of Launching a Retail Store
By Michael Kozlowski
Good E Reader; February 4, 2012

http://goodereader.com/blog/electronic-readers/amazon-in-the-process-of-launching-a-retail-store/

I always find it interesting to see which books TBP readers are buying.

In addition to throwing off minor referral revenue, the Amazon embed code lets me track every click from these links — how many people look at the page, how many books get collectively purchased.

Its anonymous — I don’t know who bought what — but there’s lots of data on the various books generated.

The 10 Most Popular Books Bought By Big Picture Readers in 2011

Click to enlarge:

These were the most popular TBP books for the year of 2011:

Bailout Nation (Barry Ritholtz)

Trend Commandments: Trading for Exceptional Returns (Michael W. Covel)

A Gift to My Children: A Father’s Lessons for Life and Investing (Jim Rogers)

Traders, Guns and Money: Knowns and unknowns in the dazzling world of derivatives (Satyajit Das)

How We Know What Isn’t So: The Fallibility of Human Reason in Everyday Life (Thomas Gilovich)

Boomerang: Travels in the New Third World (Michael Lewis)

The Other Side of Wall Street: In Business It Pays to Be an Animal, In Life It Pays to Be Yourself (Todd A. Harrison)

Endgame: The End of the Debt Supercycle and How It Changes Everything (John Mauldin)

How I Trade and Invest in Stocks and Bonds (Richard D. Wyckoff)

Fiscal Hangover: How to Profit From The New Global Economy (Keith Fitz-Gerald)

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The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money by Carl Richards

Carl Richards accessible new book discusses the errors we all make when it comes to money. Carl uses personal stories and simple ideas — literally sketched on the back of a napkin — to explain why we keep making bad choices. We’re often making decisions with our emotions rather than our intellect, and it costs us. Richards isn’t saying that investors try to eradicate their emotions; rather, they should aim for an investment strategy that balances managing fear and greed in a way that “truly reflects your own emotional strengths and weaknesses.” Once readers recognize what influences their decisions, they’ll be much better able to act rationally.

Reviews:

“Though 2012 has only just begun, I suspect Carl Richards’ new book, The Behavior Gap, will be the best financial book of the year. And it will be because it’s not another step by step guide on dealing with money and investments. Rather, it is a brilliantly simple book about the relationship between people and their money.”
-Alan Roth, CBS Moneywatch

“Carl Richards is the anti-Jim Cramer. He doesn’t pick stocks, and he doesn’t shout. In wise, calm style, The Behavior Gap teaches us how to rein in the emotional saboteur within us-the voice that leads us to double-down when the market is peaking and to make a panicky exit when stocks are a bargain. Richards shows us that, when it comes to our financial security, slow and steady wins the race.”
-Dan Heath, coauthor of Made to Stick and Switch

“The Behavior Gap is the best combination of practical advice and emotional encouragement that I’ve seen in a personal finance book in quite some time.”
-Manisha Thankor, Forbes.com

“Who says common sense is common? Smart, tactical, practical advice for anyone who has done dumb things with their money.”
-Seth Godin, author of We Are All Weird

“Carl Richards’s deceptively simple sketches in The Behavior Gap will make you laugh, change your relationship with money, and leave you the wealthier for it. This one is bound to be a classic!”
-William Bernstein, author of A Splendid Exchange and The Investor’s Manifesto

“Carl has a knack for showing-gently and with charts!-that when it comes to money, most of us are idiots. Carl prods us to master money, rather than letting it master us.”
-Laura Vanderkam, author of All the Money in the World

“A brilliant guide to the ways we often trick ourselves into staying poor. Read this before you make your next financial decision.”
-Zac Bissonnette, author of Debt-Free U

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Jim Picerno is a veteran financial journalist and has been writing about portfolio strategies, investment products, and macroeconomics since the early 1990s at Bloomberg and Dow Jones. Picerno is the author of Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor (Bloomberg Press, 2010). His articles on finance and economics have appeared in a variety of publications and news outlets, including The Atlantic, Financial Advisor, and BankRate.com.  He blogs at CapitalSpectator.com

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Best of Book Bits 2011

The year behind us delivered one of the better runs in publishing for finance and economic books. What follows are some of the more memorable names from my weekly Book Bits column over the past 12 months. Next week I’ll follow up with Part II. Meanwhile, here’s the first installment of a somewhat arbitrary listing of worthy titles from 2011:

● Expected Returns: An Investor’s Guide to Harvesting Market Rewards
By Antti Ilmanen
Excerpt via publisher, Wiley
We should humbly recognize the limits of our understanding. Realized returns are dominated by randomness, structural uncertainty, and rare events. Expected returns are unobservable, at best estimated with noise. We should resist hindsight biases wired in us—the outcomes that materialized seem more inevitable or predictable than they truly were. It is worth recalling that experts can only explain a fraction of realized return variation afterwards, and this is an inherently easier task than predicting. Any observed return predictability is mild, possibly spurious, and rarely robust. Therefore I stress humility in interpreting empirical results and even more in making predictions and in trading based on them.

● The Quest: Energy, Security, and the Remaking of the Modern World
By Daniel Yergin
Review via The Economist
Providing sufficient energy to seven billion increasingly affluent humans without burning up the planet may be humanity’s greatest challenge. “What is at stake”, writes Daniel Yergin, “is the future itself.”
Mr Yergin’s previous book, “The Prize”, a history of the global oil industry, had the advantage of an epic tale and wondrous timing. Years in the making, it was published, to critical and popular acclaim in 1990, two months after Saddam Hussein invaded Kuwait, thereby putting Saudi Arabia’s oilfields in peril. “The Quest”, as its more open-ended title suggests, is a broader and more ambitious endeavour. It is, first, an account of the many ways in which people have sought to produce energy—by burning fossil fuels, harvesting the wind, brewing biodiesel and trapping the sun’s heat. It is also an analysis of the increasingly fraught political context in which this business is conducted, especially with regard to three big and longstanding fears: energy scarcity, energy security and, more and more, the environmental ruin that energy can cause.

● Red-Blooded Risk: The Secret History of Wall Street
By Aaron Brown
Summary via publisher, Wiley
From 1987 to 1992, a small group of Wall Street quants invented an entirely new way of managing risk to maximize success: risk management for risk-takers. This is the secret that lets tiny quantitative edges create hedge fund billionaires, and defines the powerful modern global derivatives economy. The same practical techniques are still used today by risk-takers in finance as well as many other fields. Red-Blooded Risk examines this approach and offers valuable advice for the calculated risk-takers who need precise quantitative guidance that will help separate them from the rest of the pack. While most commentators say that the last financial crisis proved it’s time to follow risk-minimizing techniques, they’re wrong. The only way to succeed at anything is to manage true risk, which includes the chance of loss. Red-Blooded Risk presents specific, actionable strategies that will allow you to be a practical risk-taker in even the most dynamic markets.

● Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers
By Ellen E. Schultz
Review via Publishers Weekly
The retirement crisis is no accident, claims Wall Street Journal investigative reporter Schultz; large companies have played a significant role in its creation to protect the wealth of its top executives. When GE, IBM, Verizon, and others slashed pensions and medical benefits for millions of American retirees, they pointed fingers everywhere but at themselves–but who was really at fault? Pension funds were not bleeding the companies of cash. GE hadn’t contributed a cent to the workers’ pension plans since 1987, but still had enough money to cover all current and future retirees. Executive pensions at GE, with a $6 billion obligation, are a drag on earnings. These are largely hidden, however, lumped in with the figures for regular pensions. Schultz’s methodical cataloguing of these abuses paints a highly unflattering picture of companies that cut benefits to boost earnings, lay off older workers who are entering the years in which their pensions will spike, inflate retiree health benefits to boost profits, lobby for laws that keep the system inequitable, hoard death benefits, and fire whistle-blowers.

● Thinking, Fast and Slow
By Daniel Kahneman
Excerpt via The New York Times
Although professionals are able to extract a considerable amount of wealth from amateurs, few stock pickers, if any, have the skill needed to beat the market consistently, year after year. The diagnostic for the existence of any skill is the consistency of individual differences in achievement. The logic is simple: if individual differences in any one year are due entirely to luck, the ranking of investors and funds will vary erratically and the year-to-year correlation will be zero. Where there is skill, however, the rankings will be more stable. The persistence of individual differences is the measure by which we confirm the existence of skill among golfers, orthodontists or speedy toll collectors on the turnpike.

Here’s the second installment of my bids for the best economic and finance books for 2011 (you can find Part I here). Yes, it’s subjective and there are other worthy titles that go unmentioned. Space may be unlimited on the web, but time is still finite. On that note, here’s one that got away: Pandora’s Risk: Uncertainty at the Core of Finance, by Kent Osband. This one should have been tapped for Book Bits when it was published this past summer. Better late than never. In any case, Osband takes the market bull by the horns and brings us on an enlightening quantitative journey through the crucial business of thinking about and managing risk in the money game. An instant classic that’s at once provocative, thought-provoking, and practical (pay special attention to his innovative take on measuring price volatility in chapter 11). Meanwhile, here are some of the more memorable names that actually made it to these digital pages during the past 12 months of Book Bits:

Dylan Ratigan, MSNBC’s financial expert, has written a book about how markets have become perverse.  It is an interesting example of how strange “competition” has become.  One oddity presented itself on the cover of the package in which the book arrived.  The cover proclaimed “Simon & Schuster: A CBS Company.”  The author works for NBC.  Only in America!

I was concerned by the title (“Greedy Bastards”).  I think that greed is unlikely to have changed greatly over the last quarter century in which the U.S. has suffered three recurrent, intensifying financial crises.  I don’t call people bastards, even the self-made ones, because my mother reacted poorly to Speaker Wright referring to me as the “red-headed SOB.”

Ratigan’s view on these points turns out to be similar to mine.  He argues that the issue is not greed, but perverse incentives.  When CEOs have incentives adverse to the public and their customers they tend to act on those incentives and harm the public and their customers.  This observation is one of those obvious but essential points so often overlooked.  A CEOs’ principal function is creating, monitoring, and adjusting the corporation’s incentive structures.  There is a massive business literature on this function and CEOs uniformly believe that incentive structures for officers and employees are critical in shaping their behavior.

There is only one (disingenuous) exception to this rule – when officers and employees act criminally because the CEO has created perverse incentive structures.  Suddenly, the CEO is shocked that his officers and employees acted criminally in response to the CEO’s incentive structures that encourage criminal conduct.  Ratigan focuses on precisely this exception.  Anyone that has had the misfortune to listen to compulsory business ethics training by his or her employer will have learned that the key is the “tone at the top” set by the CEO.  True, but that always ends the discussion.  No employee is going to be trained by his employer as to what to do when the tone at the top set by the CEO is pro-fraud.
As Ratigan demonstrates, our most elite financial CEOs typically created and maintained grotesquely perverse incentive structures that encouraged their officers and employees as well as “independent” professionals to act criminally in a manner that harmed customers, the public, and shareholders – but made the controlling officers wealthy.  Is there any CEO of a lender incapable of understanding that the loan officers and brokers’ compensation depends on volume and yield – not quality – the result will be catastrophic?  Is there any CEO of a lender incapable of understanding that if the loan brokers’ fees depend as well on the reported debt-to-income and loan-to-value ratios and the broker is permitted to make liar’s loans the result will be that the brokers will engage in endemic, severe inflation of the borrowers’ incomes and their homes’ appraised values?  Is there any reader that doubts that the CEOs intended to produce precisely what their perverse incentives were certain to produce?  A CEO cannot send a memo to 50,000 loan brokers instructing them to inflate appraisals and use liar’s loans to inflate the borrowers incomes’ but he can, and does, send the same message through his compensation system.  None of these perverse incentives produces an unexpected result.

Ratigan gets right two of the three essentials to understand why we suffer recurrent, intensifying financial crises.  First, cheating has become the dominant strategy in finance.  Second, cheating is dominant because finance CEOs create such intensely perverse incentives that fraud becomes endemic.  The Business Roundtable (the largest100 U.S. corporations), had to react to the Enron era frauds.  It chose as its spokesperson a CEO who embodied the best of American big business.  This was the response he gave to Business Week when their reporter asked why so many top corporations engaged in accounting control fraud:
“Don’t just say: “If you hit this revenue number, your bonus is going to be this.” It sets up an incentive that’s overwhelming. You wave enough money in front of people, and good people will do bad things.”
How did the CEO know about the “overwhelming” effect of creating incentives so perverse that they would routinely cause “good people [to] do bad things”?  He knew because he directed and administered such a perverse compensation system.  An SEC complaint would soon identify that compensation system as driving accounting control fraud at his firm.  His name was Franklin Raines, CEO of Fannie Mae.
Ratigan can add to the effectiveness of his explanation by adding a description of the third essential driving our perverse incentives.  Accounting control fraud, as criminologists, economists, and (competent) financial regulators recognize is a “sure thing”.  See George Akerlof and Paul Romer, “Looting: the Economic Underworld of Bankruptcy for Profit” (1993).  It produces guaranteed, record (albeit fictional) short-term reported profits if one follows the fraud “recipe” for a lender, which produces guaranteed, extreme compensation for the controlling officers, and causes catastrophic losses.  It is trifecta of guaranteed results that causes CEOs to adopt the perverse incentives they know will cause their officers and employees to follow the fraud recipe.  It is the three “de’s” – deregulation, desupervision, and de facto decriminalization that allow the CEOs to put these perverse incentives in place with impunity and produce the criminogenic environments that drive our recurrent, intensifying financial crises.

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Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.


Follow him on Twitter: @WilliamKBlack

REVIEW: Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy by Yalman Onaran.

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Do We Love Zombie Banks?

The new book by Yalman Onaran of Bloomberg News, Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy, is a well-organized and clearly written discussion of the use of leverage to provide growth in many different economies. The vehicle for funding this ersatz growth is the “zombie bank,” a metaphor which, the author notes, Boston University’s Ed Kame helped to popularize with respect to money center banks.

Onaran has carefully researched the zombie phenomenon and makes some important points in this concise volume about both public policy and the concerns of investors. One of the more interesting early threads in the book is the juxtaposition of the experience of the US in the S&L crisis and Japan in the 1980s and 1990s with the US today. Onaran notes that when the Japanese finally did get around to cleaning up their real estate mess, banks were closed and portfolios restructured at deep discounts, but the world did not end.

“Even though the [Japanese] government spent about $495 billion for these efforts initially,” he writes, “it managed to recoup about half of its investment when selling the bad assets in the next three years.” Similar could be said about the US cleanup of the S&L crisis, but that may have only been the case because real estate prices continued to rise from the 1980s through the mid-2000s.

But the more important point made by the author in his skillful reflection of the work of my friend Ed Kane and other scholars with respect to the S&L mess is that is takes a long time for political systems to address the asset quality and solvency problems that qualify banks for zombie status. Onaran notes that Kane believes that it may take another “four or five years for the full resolution. As we’ve seen from the thrift and Japanese crises, that delay will only increase the costs to society and hold back economic recovery.”

This book is not Shakespeare, but instead a series of bite-sized observations on the zombie in the global economy phenomenon written in that tight style familiar to readers of Bloomberg News. Both politically and in terms of the actual financial cost, Onaran documents some of the more interesting aspects of why governments seem to tolerate the too-big-to-fail banks, but like another friend and author Mike Mayo, he never quite comes to the obvious conclusion, namely that we really love zombies.

The author kindly quotes this reviewer as saying that zombies eat money rather than people, a statement which is obviously true but misses the real point — namely that zombies also spend money and are the drivers of employment, financial booms and busts. Banks such as Citigroup, Countrywide and Lehman Brothers failed because they took too much risk, but in doing so created a lot of nominal growth which is mother’s milk for politicians. No member of Congress really wants to kill zombies.

Onaran notes that along with the problem of zombie banks the issue of cleaning up the real estate market remains unaddressed, a situation which stems from the same political reality that makes us love zombies. After WWII, it was considered scandalous and shocking when politicians suggested that national banks be permitted to make 70 LTV mortgage loans. Today the reform proposals to liquidate zombies like Fannie Mae and Freddie Mac put forward by Republicans suggest 95 LTV loans as the standard template for “qualified” residential mortgage loans.

Zombies are vehicles for an economic cycle built upon debt and bad money, and driven by the post WWII demographic reality known as the baby boom. During the peak of the housing boom in 2005, when zombie moneycenter banks and GSEs were competing with one another to buy residential mortgages from smaller banks and non-bank originators, the fact of the zombies made credit far more available for consumers.

The “democratization of credit” described by authors like Jim Grant and now further detailed by Onaran in Zombie Banks inevitably involves losses as credit expands. The losses on these giant creators and aggregators of leverage are then socialized despite the best efforts to prevent this despicable but very popular evil. But the inefficiency of the zombies makes that growth very expensive, a fact that Fed officials ignore even as they use the large banks as convenient conduits for monetary policy.

“Ironically, the political debate over how to restart the global economy is devoid of any acknowledgement of the role a bloated financial services industry plays in impeding growth,” writes former FDIC Chairman Sheila Bair in the introduction to Zombie Banks. “Until government policymakers come to grips with the basic economic truths reflected in this book, our road to recovery will be a very slow and costly one.”

Zombie Banks is a good review of the latest thinking about the ebb and flow of the political economy.

Click to enlarge:

I always find it interesting to see which books TBP readers are buying.

In addition to throwing off minor referral revenue, the Amazon embed code lets me track every click from these links — how many people look at the page, how many books gt collectively purchased.

Its anonymous — I don’t know who bought what — but there’s lots of data on the various books generated.

These were the most popular TBP books for December:

Bull: A History of the Boom and Bust, 1982-2004 (Maggie Mahar)

Currency Wars: The Making of the Next Global Crisis (James Rickards)

A Gift to My Children: A Father’s Lessons for Life and Investing (Jim Rogers)

Bailout Nation (Barry Ritholtz)

Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance (Robert Stowe England)

Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves (Mike Mayo)

Extraordinary Popular Delusions & the Madness of Crowds (Charles Mackay)

Extreme Money: Masters of the Universe and the Cult of Risk (Satyajit Das)

Florilegium Imperiale: Botanical Illustrations for Francis I of Austria (Walter H. Lack)

How I Trade and Invest in Stocks and Bonds (Richard D. Wyckoff)

How We Know What Isn’t So: The Fallibility of Human Reason in Everyday Life (Thomas Gilovich)

How to Lie with Statistics (Darrell Huff)

Money and Power: How Goldman Sachs Came to Rule the World (William D. Cohan)

Seven Pillars of Wisdom: A Triumph (T.E. Lawrence)

The Investor’s Anthology: Original Ideas from the Industry’s Greatest Minds (Charles D. Ellis, James R. Vertin)

The Philip K. Dick Collection (Philip K. Dick)

What Works on Wall Street (James O’Shaughnessy)

When to Sell: Inside Strategies for Stock-Market Profits (Justin Mamis)

Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the Life-Changing Science of Behavioral Economics (Gary Belsky)

Goldman Sachs has been around for 142-years. It has maintained an image of being better than its competitors — smarter, more collegial, more ethical, and far more profitable. Its “14 Principles” starts with “Our clients’ interests always come first.” (Cue laughter; cut to SEC settlement)

William D. Cohan’s Money and Power: How Goldman Sachs Came to Rule the World reveals what utter nonsense that story is. The faux narrative is the result of the most aggressive and sophisticated PR machine in the financial industry. Goldman is a secretive money-making machine, rife with conflict of interests, exerting undue influence over government.

When the firm is not busy doing “God’s work,” it is assiduously cultivating people in power. Its been that way since 1913, when Henry Goldman advised the government on how the new Federal Reserve, designed to oversee Wall Street, should be constituted. Sidney Weinberg, who ran the firm for four decades, advised presidents from Roosevelt to Kennedy and was nicknamed “The Politician” for his behind-the-scenes friendships with government officials. Goldman executives ran fundraising efforts for Nixon, Reagan, Clinton and George W. Bush. Famously, and fatefully, two Goldman leaders — Robert Rubin and Henry Paulson — became Secretaries of the Treasury, where their actions both before and during the financial crisis of 2008 became the stuff of controversy and conspiracy theories.

Reviews:

“[A] definitve account of the most profitable and influential investment bank of the modern era….recounts these events capably…..[and explains] Goldman’s cultivation of a reputation for brilliance unique even in the rarefied precincts of Wall Street…..gives readers the information they need to ponder whether investment banking has moved in a constructive direction.”
-New York Times Book Review

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“Destined to be a runaway bestseller…There’s no shortage of Goldman clients, rivals, and former employees willing to explain how greed and recklessness led Goldman to become too big, too powerful, and even too conflicted to fail. As one Goldman alum puts it, ‘I saw what they did to their customers…They’d steal from them, rape them, anything they could do.’ It worked like a charm…[Cohan] has produced the frankest, most detailed, most human assessment of the bank to date. Cohan portrays a firm that has grown so large and hungry that it’s no longer long-term greedy but short-term vicious. And that’s the wonder — and horror — of Goldman Sachs.”
-Businessweek

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“A well-researched history and analysis of the world’s most powerful investment bank. Written with the co-operation of the top people at Goldman, Cohan’s book is neither a hatchet-job nor a whitewash – and all the better for that.”
-Financial Times

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“[Money and Power] offers the best analysis yet of Goldman’s increasingly tangled web of conflicts…The writing is crisp and the research meticulous, drawing on reams of documents made publicly available by congressional committees and the Financial Crisis Inquiry Commission.”
-The Economist

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“[E]xhaustive, revelatory account of the rise and rise of Goldman Sachs….engrossing….penetrating….Cohan revels in a good bust-up and lingers over anecdotes involving intrigue….All the senior partners still living spoke to him, often very candidly, and only a few from the next ranks seem to have refuse….a vast trove of material”
-Financial Times

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“A former Lazard Freres & Co. banker and newspaper reporter, Cohan brings the bank’s sometimes ‘schizophrenic’ behavior to vivid life…Drawing on more than 100 interviews with clients, competitors and Goldman leaders including Chief Executive Officer Lloyd C. Blankfein, Cohan evinces an eye for telling images and an ear for deadpan quotations.”
-Bloomberg

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“In MONEY & POWER, journalist and former investment banker William D. Cohan launches a quixotic quest to show that Mr. Blankfein and his peers are money-sucking evil-doers that came to their riches mostly by nefarious means…Mr. Cohan’s complaints against Goldman seem to be that it is ‘ruthless’ in pursuit of profit; doesn’t do enough to protect its instutitional clients from making bad decisions; works too closely with government; too often advises clients on both sides of a deal; and skirts close to the line of ‘insider trading’.”
-The Wall Street Journal

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Full chapter after the jump

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Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves by Mike Mayo is one of the more important books to be published since the start of the financial crisis. Part memoir, part revelatory narrative of Mike’s career, this highly personal but informative book provides some very important information about how Wall Street works – or doesn’t – and confirms the view of many people than most deals are bad deals, done only to enrich the parties but not investors.

By way of disclosure, I need to say that Mike and I both worked at Prudential Securities in the early 2000s, he as an analyst and myself as a tech banker, so we never really got to know each other.  It may interest readers of The Big Picture to know that I have just joined Tangent Capital Partners in New York.  I will be focusing on financial advisory and asset management opportunities, but remain Vice Chairman of Lord, Whalen LLC, parent of Institutional Risk Analytics.  Maybe I’ll get to serve as receiver for Bank of America when they go belly up, but I digress.

A decade before Prudential, Mike and I almost crossed paths at the Fed, but he worked at the Board of Governors in Washington while I was at the Fed of New York.  The former is supposedly in charge of the central bank’s operations, but the latter is the older and more important part of the Fed system.  When Treasury Secretary Timothy Geithner was President of the New York Fed, he dispensed gifts and subsidies to Goldman Sachs and other banks without the prior knowledge or objection of Chairman Ben Bernanke and the other members of the Fed Board of Governors.  Suffice to say that there are no tennis courts at the New York Fed.

Mayo provides a lot of important detail about how the major Wall Street firms operate and, in particular, why the larger banks and their clients are more concerned about making money than creating value.  Mike learned as did I that truth is not beauty on Wall Street, except in those few, generally smaller firms that have been able to preserve a culture of client service and quality.  As Mike points out several times in Exile, many large cap mergers are done simply to cash out the managers.

“Two things are worth noting about these super-size banks,” Mayo writes.  “First, much of their growth has come from mergers and acquisitions.  They are not growing like Google, by creating a product and doing it better than anyone else.  Instead they are just buying out their competitors… Secondly, many of these banks would likely not have grown to their current size without federal assistance in the past.  In all the bank crises of previous decades, bank failures were thought to be too economically disruptive.  But government bailouts – including the most recent round – didn’t resolve that problem. They merely delayed it, allowing banks to keep growing in size and scope, making the potential cataclysm next time that much bigger.”

This quote hints at one of my criticisms of Exile on Wall Street, namely that Mike does not yet appreciate that nobody in Washington or on Wall Street wants banks, especially the largest banks, to behave.  There are many places in the book where I expected Mike to turn that corner of epiphany and state this case, but let me do it for him.

Whether you talk of the National Bank Act of 1865, the creation of the Fed in 1913 or the subsequent birthing of the housing GSEs in the 1930s, both the business community and their lackeys in Washington were more concerned about stoking employment and sales today than in safety and soundness of money or banks.  I touched on this point in my 2010 book, Inflated: How Money and Debt Built the American Dream, which begins with this quote from Hayek’s “Denationalization of Money” essay:

“I do not think it is an exaggeration to say that it is wholly impossible for a central bank subject to political control, or even exposed to serious political pressure, to regulate the quantity of money in a way conducive to a smoothly functioning market order. A good money, like good law, must operate without regard to the effect that decisions of the issuer will have on known groups or individuals. A benevolent dictator might conceivably disregard these effects; no democratic government dependent on a number of special interests can possibly do so.”

If you look at the decision to allow national banks to make real estate loans three quarters of a century ago or the S&L crisis in the 1980s, the point was jobs, jobs, jobs.  This is why the socialists in the neo-Keynesian economic camp led by Paul Krugman chatter constantly about printing more money to grow nominal employment, even if these “workers” cannot afford to buy food at the grocery story due to galloping inflation.

The other, related point to make about Mayo’s memoir is his somewhat embarrassing paean to Paul Volcker.  Like Mike, I have great personal regard for Chairman Volcker as a public citizen,  but we cannot allow the author of a book about the bad behavior of large banks to get away with this omission.  Simply stated, Paul Volcker is the father of “too big to fail.”  A former Chase banker, Paul Volcker has always been an advocate of bailouts going back to the Penn Square Bank failure.  As I wrote in Inflated:

“In his 2010 book Senseless Panic: How Washington Failed America, former FDIC Chairman William Issac confirms that Mike Bradfield, then general counsel of the Fed and now in the same position at the FDIC, demanded that the FDIC bail out Penn Square Bank, no doubt with the knowledge of Volker and other Fed governors.  Issac responded that he would if the central bank shared the cost, but the Fed balked.”

Overall, Mike Mayo deserves great kudos for writing this readable and very personal narrative of his years on Wall Street.  Like Mike, I have spent a lot of my career fighting the tendency of big banks and politicians alike to paper over the truth in the name of expediency.  Exile on Main Street is a valuable, firsthand account of why in our democracy big banks and the people who run then tend to be less concerned about creating value for investors than in extracting value for themselves.  And as long as America remains a messy, ill-managed free market system, it is likely to remain so.