Posts filed under “Really, really bad calls”
“For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different.
The past decade was the worst for the U.S. economy in modern times, a sharp reversal from a long period of prosperity that is leading economists and policymakers to fundamentally rethink the underpinnings of the nation’s growth.
It was, according to a wide range of data, a lost decade for American workers. The decade began in a moment of triumphalism — there was a current of thought among economists in 1999 that recessions were a thing of the past. By the end, there were two, bookends to a debt-driven expansion that was neither robust nor sustainable.”
Just in case you forgot: By nearly any conceivable measure, the George W. Bush administration (2000-08) economic performance was the worst of any President since Hoover.
Aughts were a lost decade for U.S. economy, workers
Washington Post, January 2, 2010
There is a BusinessWeek article that notes “Shares of companies whose CEOs dine with Obama outdo the S&P.” I have a quote in that I would like to clarify: “Just a coincidence? Only partly, says Barry Ritholtz, CEO of equity research firm Fusion IQ. Losers don’t get asked to hang out with the President, he…Read More
Dan Gross calls out America’s CEOs, noting “the government’s giving them everything they want, yet still they whine.” Excerpt:. “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,…Read More
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
“…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.
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 . . .
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
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
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 FT.com
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
“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