Posts filed under “Really, really bad calls”

Whining CEOs

Dan Gross calls out America’s CEOs, noting “the government’s giving them everything they want, yet still they whine.


“After an eight-year slumber, the Environmental Protection Agency is again issuing regulations. Two years after an appalling financial debacle, Congress has finally moved to regulate Wall Street. But to hear our nation’s corporate chieftains tell it, it’s enough to plunge us back into recession . . .

On July 12, the U.S. Chamber of Commerce, the Business Roundtable, and the National Federation of Independent Business held a “Jobs for America” summit. While President Obama met with CEOs at the White House, the summiteers called for—wait for it!—cutting taxes for companies, extending tax cuts for the wealthy, and opening up federal areas for resource exploration.

The notion of these guys holding a jobs summit is a little like BP holding a deepwater-drilling safety summit. Between 2001 and 2009, corporate America designed the playing field to its specifications—easy money from the Federal Reserve; lower taxes on capital gains, dividends, and income; an administration that let industry essentially write its own regulations. But the players proceeded to put up goose eggs. In January 2001, there were 111.6 million private-sector payroll jobs in the United States. In January 2009, when Bush left office, there were 110.9 million. The stock market is basically where it was a decade ago. The lost decade ended with the deepest recession since the Great Depression.”

Great stuff. . .


Poor Little CEOs
The government’s giving them everything they want, yet still they whine.
By Daniel Gross
Posted Saturday, July 17, 2010

Category: Corporate Management, Politics, Really, really bad calls

Global Housing Boom

I have been adding some additional charts to my powerpoint for this afternoon.I am choosing amongst the areas I want to discuss, when an email came in regarding my presentation. One of the conference participants made the following challenge to me: “Can you support your position, in a fast, easy way, why the US housing…Read More

Category: Bailout Nation, Real Estate, Really, really bad calls

Its the Law, Bitches!

“…it is impossible for us, with our limited means, to attempt to educate the body of the people. We must at present do our best to form a class who may be interpreters between us and the millions whom we govern.”

-Thomas Babington Macaulay, member of the Governor General`s Council, in Calcutta, in 1834. Quoted in The New Yorker, May 31, 2010.


FT’s Alphaville says I am cranky. Jeff Matthews says I am wrong. Michelle Leder points out the settlement is a pittance relative to GS’ cash.

Here’s a news flash: All of that is irrelevant. We are a nation of laws, and that is what guides SEC prosecutions, negotiations, and settlements. Sure, I may be cranky (only fellow curmudgeon Alan Abelson agrees with me), but what I truly am is astonished at some of the uninformed commentary pinging about inter-tubes about this subject.

Spin isn’t fact, opinions aren’t laws, and having an opinion is not the same as being informed.

One might hope that various folks discussing these issues have a passing familiarity with Securities law, but apparently not. Let’s see if we can edumacate some folks who are unfamiliar with the 1933 and 1934 Security acts.

1) Its the Law, Bitches!: First and foremost, this is a legal issue: It is not a philosophical debate, a political question, or a case of ethical transgressions; It is not even an investing question.

I am not going to get all Kartik Athreya on everyone, or claim that only lawyers should discuss this. But too many people seem to be forgetting that this is a legal case. It turns on what the law is, how regulatory agencies enforce that law. Discussing this out of that context is fun and intellectually stimulating, but it also provides zero insight into the legal case, or its prosecution, or its resolution.

Here is the classic legal syllogism: Understand the relevant law, apply the facts to that law, draw your conclusion. And the relevant law?

2) Securities Exchange Act of 1934:

Since this is a legal case, what say we actually look at the law?

“It shall be unlawful for any person, directly or indirectly to make any untrue statement of a material fact or to omit to state a material fact . . . [or to] engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”

-Rule 10b-5, Securities Exchange Act of 1934 *

Based upon the evidentiary information the SEC had — emails, phone calls, sworn statements, etc. — the “Fabulous Fab” told Abacus buyers that John Paulson was long the Abacus CDO when he was in fact short it; Further, Fab omitted to mention that a short seller helped to construct the synthetic CDO that he was betting against.

That factual description is a clear violation of Rule 10b-5.

There are some folks who have argued that yes, Fab made untrue statements and omitted others — but they were not material. That is a very good, very lawyerly argument — but it is one that would be a stone cold loser in front of any jury.

Bottom line: IMO, this was a no brainer case based on these facts and the law. Unless you can show Fab never said those things, it is case closed.

THAT is why Goldman settled.

3)  Its a pittance! This is only a) 14 days of profits; b) 7X the CEOs salary c) 5% of Cash on hand:

Pay attention, this is important: I have been laboring under the impression that fines and penalties are relative to the legal transgression — you know, the law that was violated, and the damages that violation caused.

Fines are not based upon your bank account or annual income.

But that seems to be precisely what some people are arguing for. Does anyone here really want to see  the law structured so that fines and penalties are dependent upon your assets and income — and not based on the actual infraction?

Imagine getting pulled over for a speeding ticket, and in addition to license and insurance and registration, you give the cop (or the judge) your IRS 1040, bank account and IRA/401k statements. Fines are then assessed based on your income and wealth — rather than the actual seriousness of the infraction?

Pretty ugly and absurd thought! Yet that is exactly what I keep hearing people claim — that apparently, we should use a company’s finances and income to assess a far greater penalty.  Therefor, the fine should have been much greater — regardless of the transgression, because GS is so profitable and has so much cash.

Is that the road any of you seriously want to go down?

4) Penalties should be proportionate to infractions: Consider the transgression at hand: Fab lied in the sale of structured products, and his firm Goldman Sachs failed to adequately supervise him in these transactions. In the grand scheme of things, this was actually a minor transgression. Sure, it was sleazy, but it was not a billion dollar violation; It sure as hell was not an Arthur Anderson type massive firm-wide fraud deserving of the death penalty — as some of the angrier posts have demanded.

As much as many people want to blame the entire economic meltdown on the vampire squid, they deserve only a modest amount of blame. Worse still, this was not their most egregious offense.

In a nation of laws, we punish people for the crimes/transgressions they caught doing — not the ones we suspect they are guilty of (although OJ might beg to differ).

5) Securities Act of 1933: Civil Recovery by Defrauded Investors

As to the issue of Civil recovery by Goldman’s client’s, again, the 1933 Act is clear:

“In general,any person who offers or sells a security by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact, shall be liable to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon . . . ”

–Section 12 — Civil Liabilities Arising in Connection with Prospectuses and Communications, Section 12 A

As noted Friday, this now opens Goldman to all manner of civil litigation by clients. I have no idea what the final cost of this will be; but a multiple of the $550 million in SEC settlements is likely, and a 10-20X final dollar amount is certainly in the range of possibilities.

6) Goldman’s Stock Rallied, therefore, its a victory:  I’ve always hated that analysis, but since you brought it up: Pre-indictment, GS was north of $180. It closed Friday at $146. Its still some 20% below where it was.

On a related noted, since the indictment, Goldman Sachs has lost about $15 Billion if market capitalization. Isn’t that part a consequence of the SEC indictment? Isn’t that, in effect, part of the penalty?


Life is not a black & white, bull/bear debate. There is nuance and subtlety to complex issues. But there are also law, facts, and actually a functioning legal system with specific rules and procedures.

Some people seem keen to ignore that . . .

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Category: Legal, Really, really bad calls


July 14, 2010, 3:16PM The good news in America today is that many of lies from our leaders and media no longer seem to be working.  Four out of five people view the current proposed financial reform as ineffectual.  Many in Congress who voted for socialism for the rich now look like they will be…Read More

Category: Bailouts, Really, really bad calls

Deficit Chicken Hawks vs Ronald Reagan

Once upon a time, there was a President. He was elected in the middle of a recession, following an economic crisis and a decade long bear market. He came into office on high flying oratory, but was regarded by many as a lightweight. Once in office, he passed a variety of legislation over the objections…Read More

Category: Economy, Politics, Really, really bad calls

Corporate Cash Has Been Piling Up Since 1982

I want to add to Invictus’ commentary taking Newsweek’s International editor, Fareed Zakaria, to task. There are three facts that I believe put the issue into much better context than Zakaria’s opinions do.

1) The average cash-to-assets ratio for corporations more than doubled from 1980 to 2004. The increase was from 10.5% to 24% over that 24 year period. That was the findings of a 2006 study by professors Thomas W. Bates and Kathleen M. Kahle (University of Arizona) and René M. Stulz (Ohio State). When looking for an explanation, the professors found that the biggest was an increase in risk.

Indeed, the phenomena of corporate cash piling up has been going on for a long long time. You can date it back to the beginning of the great bull market in 1982 to 86, went sideways til the end of the 1990 recession. It has been straight up since then, peaking with the Real Estate market in 2006. The financial crisis caused a major drop in the amount of accumulated cash, but it has since resumed its upwards climb.

This FT chart makes it readily apparent that this is not a new trend:


chart courtesy of


2) The total cash numbers numbers are somewhat skewed by a handful of companies with a massive cash hoard. Exxon Mobil, GE, Microsoft, Apple, Google, Cisco, Johnson & Johnson, Verizon, Altria, EMC, Disney, Oracle, etc.

3) Not only is this not new, but the media has been covering it for years. See for example, this 2006 USA Today about the same phenomena: Many companies stashing their cash. Or this 2008 Businessweek article: Stocks: The Kings of Cash.  Or this 2009 WSJ article: Corporate-Cash Umbrellas: Too Big for This Storm?.

So why all the sturm und drung?  Well, it makes for a good narrative — facts be damned. Zakaria, whose international reporting is usually excellent, does not let his apparent unfamiliarity with corporate balance sheets or history prevent him from opining on the subject. Perhaps Kartik Athreya should have been more focused on the mainstream media, instead of bloggers . . .


Update: July 12th, 2010, 2:30PM:
Be sure to see our spreadsheet analysis of the Cash and Equivalents: Corporate Cash: Top 20 Firms = $635 Billion


UPDATE 2: December 22, 2010 3:49pm

Jim Bianco reports corporate cash is 7.3% — exactly what the historical median has been.


Why Do U.S. Firms Hold So Much More Cash Than They Used To?
Thomas W. Bates and Kathleen M. Kahle
National Bureau of Economic Research, March 2007
(PDF here

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Category: Financial Press, Really, really bad calls, Valuation

Paul Volcker on FinReg, Subprime & Deregulation

“There is a certain circularity in all this business. You have a crisis, followed by some kind of reform, for better or worse, and things go well for a while, and then you have another crisis . . . People are nervous about the long-term outlook, and they should be.” -Paul A. Volcker, senior White…Read More

Category: Bailouts, Credit, Really, really bad calls, Regulation

Why Ruin A Perfectly Good Economic Theory?

Someone sent me this Wiley Miller Non Sequitur comic from November 2008. The full comic is after the jump, but I think it works better — for our purposes — just as a single panel.



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Category: Humor, Really, really bad calls

George W. Bush: Expanding Minority Home Ownership

Apparently, Barney Frank somehow hypnotized George W. Bush:

click for video


If video does not play, click here, look for video link in box on right hand side of page

Click here for Audio


President Calls for Expanding Minority Opportunities to Home Ownership
Remarks by the President on Homeownership, St. Paul AME Church, Atlanta, Georgia
White House, Office of the Press Secretary, June 17, 2002

Category: Real Estate, Really, really bad calls, Video

Ack! The Alan Greenspan Chair at NYU !

John Paulson’s $20MM gift to New York University is to endow a chair in Economics named after Alan Greenspan. This might have slipped by our notice over the holiday weekend, but for the intrepid eye of Dan B: “The Stern School will apply $5 million of John Paulson’s gift to support two endowed faculty chairs. …Read More

Category: Federal Reserve, Really, really bad calls