Posts filed under “Really, really bad calls”
Over the years, I have described myself politically as a “Jacob Javits* Republican.” For those of you unfamiliar with the Senator from NY, Javits was a social progressive, a fiscal conservative, “a political descendant of Theodore Roosevelt’s Progressive Republicanism.”
After he “retired” in 1980, the GOP took a very different turn: The emphasis on Fiscal conservatism was lost. Balanced budgets were no longer a priority. In terms of electoral politics, the embrace with the Religious Right was a deal with the devil. It married the party to a backwards combination of social regressiveness and magical thinking. Ideology trumped facts, and conflicting data and science was ignored.
In short, the party became more focused on Politics than Policy.
I bring this up as an intro to David Stockman’s brutal critique of Republican fiscal policy. Stockman was the director of the Office of Management and Budget under President Ronald Reagan. His NYT OpEd — subhed: How the GOP Destroyed the US economy — perfectly summarizes the most legitimate critiques of decades of GOP economic policy.
I can sum it up thusly: Whereas the Democrats have no economic policy, the Republicans have a very bad one.
The details are what makes Stockman’s take so astonishing. Here are his most important observations, of which I find little to disagree with:
• The total US debt, including states and municipalities, will soon reach $18 trillion dollars. That is a Greece-like 120% of GDP.
• Supply Side tax cuts for the wealthy are based on “money printing and deficit finance — vulgar Keynesiansism robed in the ideological vestments of the prosperous classes.”
• Republicans abandoned the belief that prosperity depended upon the regular balancing of accounts — government, trade, central banks private households and businesses.
• Once fiscal conservatism was abandoned, it led to the serial financial bubbles and Wall Street depredations that have crippled our economy.
• The Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement.
• Who is to blame? Milton Friedman. In 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold.
• According to Friedman, “The free market set currency exchange rates, he said, and trade deficits will self-correct.” What actually occurred was “impossible.” Stockman calls it “Friedman’s $8 trillion error.”
• Ideological tax-cutters are what killed the Republicans’ fiscal religion.
• America’s debt explosion has resulted from the Republican Party’s embrace, three decades ago, of the insidious Supply Side doctrine that deficits don’t matter if they result from tax cuts.
• The GOP controlled Congress from 1994 to 2006: Combine neocon warfare spending with entitlements, farm subsidies, education, water projects and you end up with a GOP welfare/warfare state driving the federal spending machine.
• It was Paul Volcker who crushed inflation and enabled a solid economic rebound — not the Reagan Supply Side Tax cuts.• Republicans believed the “delusion that the economy will outgrow the deficit if plied with enough tax cuts.”
• Over George W. Bush 8 years in office, non-defense appropriations gained 65%.• Fiscal year 2009 (GWB last budget): Tax-cutters reduced federal revenues to 15% of GDP — lower than they had been since the 1940s.
• The expansion of our financial sector has been vast and unproductive. Stockman blames (tho but not by name): 1) Greenspan, for flooding financial markets with freely printed money; and 2) Phil Gramm, for removing traditional restrictions on leverage and speculation.
• The shadow banking system grew from a mere $500 billion in 1970 to $30 trillion by September 2008 (see Gramm, above).
• Trillion-dollar financial conglomerates are not free enterprises — they are wards of the state, living on virtually free money from the Fed’s discount window to cover their bad bets.
• From 2002 to 2006, the top 1% of Americans received two-thirds of the gain in national income.
I find it fascinating that the most incisive criticism of the irresponsible GOP policies has comes from two of its former stars: Bruce Barlett and now David Stockman. Sure, Krugman, Stiglitz, DeLong and others have railed against Bush policies for years. But it seems to take an insider’s critique to really give the debate some punch.
Its funny, but when I criticize Bush, I get accused of being a liberal Democrat (I am not). I am simply giving my honest perspective of an utterly ruinous set of irresponsible policies that did lasting damage to America. The critiques of Obama does not generate the same sort of reaction. I suspect brain damaged partisans of the left suffer from somewhat different cognitive deficits than brain damaged partisans of the right.
Here’s to hoping that reality-based economic policies are somewhere in our future.
Note: Brain damaged partisan comments will be unceremoniously deleted
Four Deformations of the Apocalypse
NYT, July 31, 2010
Today’s must read MSM piece is a brutal takedown on irresponsible tax and spending by Larry Kudlow’s former boss in the Reagan admin, David Stockman. Four Deformations of the Apocalypse DAVID STOCKMAN I’ll have more on this later, but go read what he wrote . . .
(Invictus here, kids. Don’t go bashing BR.) I learned two interesting things last week: Erick Erickson told me the following (bold font is mine, bold claim is Erickson’s): Likewise, after the 2003 tax cuts, the unemployment rate fell to the lowest level since World War II. Let me repeat that: the Bush economic program created…Read More
Yet another economist who dines at the restaurant of the free lunch: David Greenlaw of the US Economics Team at Morgan introduces what he calls a “Slam Dunk Stimulus” of sorts: “If it were possible to inject a significant amount of stimulus into the US household sector, and this stimulus had zero impact on the…Read More
We interrupt the George Bush reputation rehabilitation tour for this brief reminder: “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…Read More
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