It matters whether the investment is good or bad

Regarding Paul Krugman's editorial "Bits and Barbarism" I'll leave it others to comment on Gold and Bit-coins and dwell on the Keynesian idea that it doesn't matter how the money is spent for the economy to grow. While World War Two did pull us out of the depression and war is pure consumption, this economic notion of Keynes needs testing in other settings. The recent global mal-investment in real estate is a drag that would not be reversed by additional spending in housing. Japan's inability to pull out of it's lost decades comes in spite of huge infrastructure expenditures tried in the 90's. Nor should we expect the forthcoming clean up spend on nuclear waste and plant dismantling will help out, especially if every nuclear facility lays dormant as another of the country's mal-investments.

 

An example of what an investment Bank could do

Europeanutilities have on occasion had to pay a penalty for excess power put on the grid. This penalty phase comes about when wind and solar power is filling the grid and the less desirable nuclear and carbon based power can not be shut off.  Hydrogen powered automobiles that are about two years away from commercial deployment and where the problem is distribution of hydrogen gas to filling stations. What could an investment bank do with sort of information?

First, secure a long position in depressed European utilities, then sell the idea of making the electric grid the means of conveying hydrogen gas to the various filling stations for automobile use. Filling stations would convert electricity into hydrogen thru electrolysis on the spot. The electrolysis would happen when sensors on the grid inform the various stations that excess capacity needs to be sopped up. Usually post midnight to 6 am and of course anytime high wind and good solar collecting is filling the grid. Such a system would tolerate waste in electric transmission and conversion to hydrogen as it would be preferable to paying a fine. Since the utility wires are already in place, infrastructure costs are minimized. Safety is enhanced because of the small volumes of hydrogen gas of this scheme versus any other.

The scheme solves the utility battery problem as well as promoting a clean energy solution that is safe and distributed for auto and truck transport. Utilities will price their power more optimally and improve their valuations in stock and bond portfolios. This is an example of a long term win win type of proposition that investment banks were made for, versus Goldman Sach's scandalous rent seeking intrusion in the aluminum trade exposed early in 2013.

Volcker rule is irrelevant

The Volcker rule of the Dodd Frank Act, named after former Federal Reserve Chairman Paul Volcker, is an attempt to re-instate in some form or another the Glass Steagall act of 1933 where commercial banks and investment banks were separated. The separation allowed government regulation of commercial banks using a self funded FDIC insurance program to guarantee deposits. Investment banks on the other hand were allowed to act freely and practice unprotected capitalism. The Volcker Rule is a modern yet muddled attempt to micro manage between commercial and investment banking. Well paid lobbyist are eviscerating it, but the market's current aversion to dicey financial instruments will keep abuse to a minimum in the near term. The why of this observation requires a short history.

Investment banks used to raise capital for factories, transport and the public infrastructure required to promote and maintain useful activities to generate an economic good. As more debt was sold, these banks developed trading desks to keep a liquid market for the bonds that were issued. This market activity was a low level low pay operation that was understood to be operating in a zero sum environment. Traders began to assert their importance when the crumbs falling their way were millions of dollars. Harvey Golub's rise at Lehman Brothers in the late 70's is a well documented example of this change in banking.

As systems improved among competitors and customers the trading desks developed artificial products, derivatives, to hedge various positions. These instruments were hard to figure out and price so that firms issuing them found extra profit. An egregious example of bad faith with these derivatives was in 1993 when Bankers Trust sold their customer, Proctor and Gamble, a particularly one sided deal. Years later in a hard fought suit it was revealed in audio tapes that the traders were high fiving themselves for having made a huge windfall by duping their customer. Bankers' reputation did not long survive that revelation, but the casino mentality of milking the customer completely took over Wall Street in that decade so that the raising of capital became secondary. A current sickening example of a worthless manipulation is Goldman Sach's aluminum trading operation exposed recently. The scheme moved inventory from warehouse to warehouse to justify price increases. To reap the fullest price the stock of aluminum ingots had to be inventoried and moved around for eighteen months, solely for the purpose of taking advantage of customers such as Boeing, a large user of aluminum in the manufacture of aircraft.

The investment community has taken notice of Wall Street shenanigans by pricing the stocks of too big to fail banks with low valuations, low price earnings ratios in finance parlance. The lowest PE ratios are with those with the most opaque business model. Bernie Madoff, for example, had an opaque business model. Ironically some firms are spending big money for legal talent in Washington for the right to write opaque money losing contracts. That banks are currently minting money hand over fist is in spite of their trading desks, not because of it. With the current Federal Reserve Bank policy of lending at practically zero and banks lending back to the government at a few points higher does not require exceptional bonus generating talent.

That Goldman Sachs just was added to the Dow Jones Industrial Index is an indication of how far it has coasted on it's reputation for excellence. The aluminum scheme described previously not only shows that Goldman currently is an impediment to industry but it also shows a business model bereft of purpose. For it to be honored as an “Industrial” is an Orwellian use of language that real investors see through. Currently GS is valued with a PE of 10, a C-. Imagine that, GS is the dummy in the room,

 The Volcker Rule will not be abused in the near term because no financial officer wants to over pay for a tax fiddle that will blow up on them. Considering the legal and structured investment fees required, many companies select more transparent schemes, such as not repatriating foreign income. It will take generations for the financial idiocy perpetrated by too big to fail banks in the first decade of the millennium to be forgotten. When it is, then the rule will be trampled over by a herd of credulous bulls which will bring forth another financial crisis.

More Cities Consider Eminent Domain to Holt Foreclosures

TheCity of Richmond California is threatening to use the power ofeminent domain to condemn and buy the foreclosed properties of it's town people as a way to clean up the blight that the financial melt down left them. Other hard hit cities are considering similar strategies. Some, such as San Bernardino and North las Vegas, have considered it and then backed away due to threats from financiers claiming breach of rights with investors not receiving fair market value and from the Federal Housing Authority Agency overseeing the likes of Fannie Mae and Freddie Mac claiming that this sort of action is a threat to their safe and sound operation.

Richmond should go ahead and use it's power of eminent domain to buy these foreclosures. It is a local solution to a scattered problem which federal entities are actively hindering rather than solving. The threat that a mindless too big to fail bank will ever issue a mortgage in the city again is a godsend. That no mortgage broker will ever darken their fair city again is a blessing. And that the opportunity for homes in their community to be part of the world's greatest financial fraud again is not.

The facetious claims for individual investor's rights by the investor class is laughable considering the fraud they perpetrated on investors they claim to be protecting. The fair market value of an investor's position in a bundled instrument combined with many others in the country is difficult to determine on its face. At this level of complexity a judicial remedy has weak legal underpinnings. That these bundles were incorrectly priced by rating agencies paid to look the other way by the very same institutions claiming to be protecting investors is the beginning of the fraud. These mis-priced bundles were then combined again to be sliced and diced into various synthesized tranches thereby cubing the ownership complexity. There was no real thought to protect owners rights when these complex instruments were created so that now the only solution to this Gordian knot is to hack it apart.

That Government Sponsored Enterprises are part of the fraud makes the Housing Authority's representation to vouchsafe safe and sound operation preposterous. Government should be helping rather than hindering by correctly analyzing that this fraud was perpetrated by excessive concentration and abuse of financial power rather than sell to the public the need for complexity and opaqueness. The City of Richmond is much better served by small locally owned banks that are a part of it's fabric. Yes, fewer mortgages would be issued, but only to those correctly identified as credit worthy by local bankers and not outsourced to self serving ratings agency. If a default occurs, then there is much precedence in law to adjudicate these simple instruments. Simplicity in market transactions is a friend of justice while complexity is a friend of fraud. Why should government promote fraud?

The Pecora Commission of 1932 did much to expose the excesses of the previous decade creating the ground work for the Glass Steagall Banking Act of act of 1934. The Dodd Frank Bill, on the other hand, was written before a similar commission ever got to discovering the excesses of the 2008 financial calamity. The result is a two thousand page document at risk of further influence by lobbyist of the banking industry. That morass of legislation would be effective and beneficial to our economy if it were reduced to just one article with two sentences. No financial institution can have claim to assets greater than one tenth of one percent of Gross Domestic Product. If they do, then they are to spin off into as many unrelated companies as necessary to reach the correct level. The spirits of Andrew Jackson and Teddy Roosevelt would consider it worthy of consideration as an Amendment to the Constitution.

Twitter, Facebook and Google IPO's

Googles's IPO auction was clearly superior to Facebook's overpriced disaster and todays underpriced Twitter shut out to it's customer's and fan base.

How The Economic Machine Works

Ray Dalio's economics lesson on YouTube is a must see for everyone, individuals as well as policymakers.  His take is that increasing productivity is the only pathway toward progress and prosperity. And for me it's a different view of the Keynes versus Friedman debate.

J P Morgan's $13 Billion Settlement

Bill Moyer's interview with Gretchen Morgenson "Why J P Morgan may be getting off easy"  doesn't get to the heart of the matter until late in the interview where she observes that until Wall Street does real banking for the real purpose of investing and growing the economy, instead of playing games with each other, that they are drag on our society that should be disemboweled rather than protected. Where is Andrew Jackson when we need him?

You could almost feel sorry for Jamie Dimon

The next time the Fed's call in a favor by asking you to buy a toxic waste hole such as Bear Stearns, beware of the tail of litigation and bad mouthing from the very people who asked for your help!  I am not giving J P Morgan a free pass here because they apparently did not understand that a fortress balance sheet in a world of financial crisis is to buy the good stuff at distressed pricing and not the bag full of odorous excrement as the Jeremy Irons character in the movie "Margin Call" so colorfully described the firm's portfolio.

The Bernanke Market

Jeff Sommers "Strategies" article in today's New York Times business section rates Ben Bernanke by how well the market did during his tenure which is a rather mindless measure of competence.  I have blogged previously that despite being an Ayn Rand Libertarian, Alan Greenspan failed catastrophically as Chairman of the Federal Reserve because he promoted concentration of the banking system with the systematic elimination of fear, the great economic regulator, among the big players.  Big banks could borrow at lower at rates and leverage higher than smaller competitors so that business drifted their way exacerbating the trend toward bigger and riskier behavior.  As a libertarian I agree there should be less regulation, even banking regulation, but I consider Greenspan a traitor to my ideals by not forcing one small easy to understand regulation. That being whenever a financial institution reaches an asset level of x, let's say one tenth of a percent of GDP, that it is required to break up into independent pieces, spin offs in Wall Street parlance. After all Adam Smith's Wealth of Nations describes free markets as having many players on both sides, which apparently is something the former Chairman forgot.

Wall Street Exploits Ethanol Credits

I hate the ethanol subsidy.  If you are a true small government tea party activist then this should be the number issue you should be all over your congressman to sequester out of existence. It is a truly ridiculous incentive to feed our cars and not our bellies.  That Wall Street is taking advantage is no surprise.

I believe Wall Street is over funded with a surfeit of true economic growth inducing ideas.  It is particularly disconcerting that the Dow will shortly include Goldman Sachs as part of the thirty stocks in the Dow Jones average because I can't for the life of me see their long term business model.  Publicly funded gunslingers do not make a worthy benchmark of American industry.  For example today's article in the New York Times business section on the proudly private brokerage firm of Sandler Oniel describes the business in hunting terms.  "We eat what we kill." And you know what?  I find that to be exemplary.  Compensation is high but so is the risk to the partners.  Goldman on the other hand is a rent seeker diddling the system pretty much as Gretchen Morgensen describes regularly in her Fair Game column in the same paper.

The Perils when Megabanks Lose their Focus

This New York Times business section article leaves a out critical point, which is that gaming behavior is not a long term profit growing strategy.  As an individual investor I have lost interest in Megabanks.  If they keep up their idiotic loser course then others will as well.    

Goldman IT not so intelligent

Today's report of "2 Accused of Stealing a Trading Firm's Code" reminded me of Michael Lewis's article in Vanity Fair about the very same issue and where after all the mindless prosecuting and jailing it is Cyrus Vance, Manhattan District attorney, and Goldman Sachs who come out looking like they don't know what they are doing.
I bring it up solely for the fact that Goldman's vaunted high speed trading prowess apparently is not. Those managing the program do not understand that, while proximity gives a slight edge in the speed of light transaction, if your logic is a patched together piece of convoluted gobbledy gook, then you arrive late and out of luck.  I think high speed trading is a waste. But to participate in a waste and not be good at it is like being declared second runner up in the nit wit club.

September 1 Postscrpt

Reading Code Blue in the Economist and I smell Goldman's IT rat as the culprit for the three hour crash at the NASDAQ last week. Not only are they incompetent, but now it appears they are dangerous.

Antitrust and creative destruction

The Government is great at putting on an antitrust suit just when the forces of creative destruction are sweeping away the status quo.  I disagree with Paul Krugman's assessment in "The Decline of E Empires" that  monopolists, especially in the very fluid IT business, are affected by government action in any manner.  The Justice department and the European anti monopoly agency is laughably out of it fighting calvary assaults as if the browser wars has anything to do with current fifth generations apps.

Say it ain't so, Joe

Joe Nocera just went off the deep end in his editorial of today where he actually broaches the idea of keeping  Fannie and Freddie.  Joe, didn't you read Gretchen Morgensen's book,  Reckless Endangerment?  Mixing public and private commerce can only lead to the eventual "heads" banker win "tails" taxpayer loses fiasco we suffered in 2008.  Please, keep the system clean of stupid exceptions that a congressman can drive an aircraft carrier through and don't let Fannie and Freddie live.  That goes for the other GSE's, such as Sallie Mae and Farmer Mac,  as well,

What a Waste

Goldman and others diddle of the commodity markets makes a lie of their claims of investing.  The transfer of aluminum ingots from one warehouse to another described in the New York Times article "A Shuffle of Aluminum" simply to extract a rent describes an bank bereft of real money making ideas.

Desperately Seeking Scepticism

The Economist 22 of June article describing Deloitte's bruising from the Standard Chartered money laundering scandal is another instance of reliance on the fee payer to self report to the regulator.  It is clear that it doesn't work.  It's so bad that the paying client, Standard Chartered,  was advised by the auditor, Deloitte, of possible avenues of avoidance using Deloitte clients as examples.

I am the Lawsky

Harvey Pitt's Cato Presentation

The Death of Corporate Reputation: How Integrity Has Been Destroyed on Wall Street

Harvey Pitts observation that the rules have to be written by economist and not lawyers is not clear enough to reduce the pages and pages of a Dodd Frank, for example. Listening to an NPR presentation years ago where everyone from a low level mortgage broker up to Morgan Stanley, the final receiver and issuer of the mortgage backed security knew that it was all crap.  But since they had convinced Moody's to issue a high rating for the package of vile excrement it got sold at a big profit and Morgan  looked for more.

It appeared that Wall Street was purposefully pissing into their own soup and then slurping it up themselves convinced that since it was profitable it must be good. The trouble was that everyone booked the profit immediately without a clawback from the market if it went wrong.  Regulations's that require just a check list without the participant's skin in the game are sure to be gamed. On the other hand a simply constructed regulation that requires the bank issuing the mortgage to to retain 10% of the asset and 100% of the first loss and the Wall Street Bank issuing the mortgage backed security to retain a further 10% per cent and again 100% of the instrument's first loss during it's thirty year term will have more effect than ten thousand pages of regulation written by lawyers because the incentive would be to keep the crap out and not to look for more to book.

A Flawed System That Suits the Shareholders Just Fine

Jesse Eisinger's Pro Publica article on J P Morgan Chase, where stockholders reaffirmed Jamie Dimon's dual role as CEO and Chairman of the Board, makes as if stockholders are delighted. Since I voted with my feet years ago, I really don't care.

My perspective regarding Jamie Dimon's tenure is that he was lucky to have the remnants of the J P Morgan Fool's Gold team that held him back from underwriting mortgages that did not make sense. When the 2008 crash came he had the fortress balance sheet that made him the darling of Wall Street and Washington, but last year's London Whale incident now leads me to believe the bright lights of old  are completely gone and the stupid people have been put in charge of risk.  TBTF banks look like utilities subsidized by the Federal Reserve. There is no current bank business model that can rake in extraordinary profits and therefore not of interest as an investment whether Jamie is chief cook and bottle washer or not.    

Shareholders Denied Access to Chase Vote Results

There is no one who has dropped further and faster in my esteem than Jamie Dimon.

Big Banks get Break in Rules Limiting Risks

Today's front page article in the New York Times shows the power house bank lobby doing it's work at keeping instruments as opaque and profitable as possible. Well go ahead and let the bad boys play with themselves since the only believers that they offer a viable product are Wall Street banks.

The cat in the tree

“The cat is up the tree these last five years and we still haven't gotten it down yet” is a sentiment expressed at an economic forum recently regarding the status of the global economy. Some argue for increased spending to generate demand, increase growth and thereby reduce debt with greater tax receipts. I am not convinced this would work without careful expenditure since mal-investment is a waste that exacerbates the economic malaise with more debt and little compensating economic growth.

Japan's infrastructure spend of twenty years ago did nothing to turn around their current economic malaise now entering it's third decade. It's malinvestment in nuclear utilities caused by ineptitude in preparing for the inevitable tsunami has doomed Japan for more decades of decline as they have to mothball some facilities and dismantle and detox others. In both cases the return on investment is negative but the later is extremely so.

With American real estate clearing up and the war expense in Afghanistan and Iraq winding down the economy is getting a gentle breeze behind it. A good case could be made for the stalemate in Congress being a good thing.

Scandinavia is an example of governments actually seeking value for expenditures. Sweden was in bad shape in the nineties and today it is doing great. They may be socialists but they are extremely practical. No hand wringing on their part when it came to not saving Saab, a car company which I am sure many Swedes were proud of and in a country such as France would have been saved by the government in charge in a heartbeat. Didn't I blog earlier about the Sweden taking on Milton Friedman's school voucher system?

My final point is that global banks are the great cake eaters in the system. The greater the percentage of global GDP from assets badly allocated by whales gone wild the longer it will take for the cat to back down to the ground.  

Urge to Purge

Paul Krugman is hitting on Andrew Mellon  and Joseph Schumpeter's liquidation bias; "Liquidate Labor, Liquidate Stocks, Liquidate the Farmers" in his editorial in the New York Times referring to David Stockman's The Great Deformation. I Think Paul ought to revisit his March 2009 editorial where he pretty much agrees with the point of this blog which is that financial activity as a percent of our economy should go down and I believe it has. Mortgage brokers selling toxic loans and living large is a rot that has been purged out. TBTF Banks are finding it difficult to sell financial engineered products to others so that the likes of Bank of America in banking and G E in industry are out of it.

Not being an economist with data on hand I can't prove it but it feels like finance is a smaller part of our economy and that's a good thing.


The Market Mystique

Uncovering the Human Factor in Risk Management Models

Jesse Eisinger of ProPublica interiew ith John Breit formerly of Merrill Lynch reminds me of Gillian Tett's Fools Gold, where the really bright quants make up the higher powered financial structures and then get shunted aside by the operators who play with the tools without a clue about the caveats understood by the instrument's creators.

Bank of America`

I watched Brian Moynihan, CEO of Bank of America, on Charlie Rose the other night.  I figure he was dealt such a bad hand from previous management that there has not been any opportunity to make London Whale size bets in stupid non economic transactions.  He appears to understand his advantage of scale so as not to get distracted by traders playing with themselves.  Curiously from my reading of Fools Gold I thought that J P Morgan Chase had the brainpower and discipline to play with complex financial instruments, but it appears the Morgan group was over powered by the Chase side and the dummies were left in charge.

Once More Through the revolving Door for Justice's Breuer

In today's New York Times I see that Lanny Breuer will rejoin his old law firm as vice chairman at $4 million a year, which from my perspective is a reward for his lack of prosecutorial vigor toward his former clients.  See the PBS Frontline show "The Untouchables" for an example of how pathetic Lanny was as a public servant.

Masked by Gibberish, The Risk Run Amok

Floyd Norris's piece in the business section of the New York Times commented "on the sheer incompetence and stupidity documented in the report" by Senator Levin's subcommittee.  J P Morgan Chase pays lobbyist to get their way and then believes the fantasy they propose.  What a loser feed back loop.

Nothing Much Has Changed

Jesse Eisinger's article today in the New York Times DealBook section asks “what would happen if this report does what the senator hopes and puts pressure on the regulators to finish a simplified and loophole-free Volcker Rule, which would prohibit banks from making bets for their own profit using taxpayer-backed money. Why should we have the slightest confidence that big banks could be persuaded to follow it? And why should we feel reassured that, if they didn’t, regulators could or would enforce it?

We shouldn’t. And we don’t.”  Exactly what I say.  No regulation replaces fear of bankruptcy among all the actors, debtors and creditors, so that risky transactions are not a game, but a life or death existential reality.  TBTF banks will always look at Dodd Frank as something to be gamed.

From my Libertarian perspective I find Dodd Frank irrelevant.  TBTF banks are utilities to me.  Certainly nothing to invest in or to leave savings with.  The fortress balance sheet mentality espoused by J P Morgan Chase appears to have been a PR thing around the time of the Bear Stearns rescue.  As I understand it, it was Hank Paulson who had to insist on the low ball offer of two dollars a share since it appears Jamie Dimon actually thought there was enough positive value to offer ten dollars ! 

Nothing Much Has Changed

Boeing's Vietnam

Financial engineering is an apt description of derivatives and other financial instruments that require a thorough understanding to minimize risk. Boeing, in the realm of physical engineering, is betting heavily on Lithium Ion battery technology that it appears not to thoroughly understand. It is at risk of making incorrect decisions to salvage sunken costs. From a cursory amateur point of view it is understood that a battery that can take such a quick charge and deliver high energy is a very volatile cocktail. Reassurances that software and containment can manage the problem are not. Today's headline in the New York Times business section “Setback to Boeing's Hopes for Longer Range for 787” indicates a lack of understanding of the risks from which they appear to have been blind to since the inception of the Dreamliner project.

A change to a nickle based battery system that is less volatile will require a lengthy period to redesign and certify which will costs billions because the intricate production line will have to stop. It is a gutsy decision that has to be made. The alternative stay the course non decision jeopardizes the plane's 180 minute safe flying distance from an emergency landing airport, much less the 300 minute range it was designed for.  The FAA is a creature of industry so Boeing could push to get the Dreamliner flying again, but the agency will dither on the 180 minutes over unassisted flight zones until millions of hours of restricted use are completed. The plane is unsalable under such a ruling because the competing Airbus 350x is just a few short years away and is learning from Boeing's mistakes by designing out the Lithium Ion Battery.

My favorite movie about the financial crisis is “Margin Call.” The Jeremy Irons character was brilliant when asking the rocket scientist to speak to him as if he were a child. From that elementary description of the problem the boss understood that a big gutsy decision had to be made to save the company from certain disaster. Boeing's CEO has to do the same and quickly.

Time to draw Blood

Further in Alan Blinder's When the Music Stopped I am at the Fed's balance sheet where it occurs to me how the administration can finally shoot the weak stragglers heading off into the sunset. So okay Tim Geithner was right in not upsetting the system in the middle of the crisis, but now the kid gloves can be taken off to rein in the moral hazard that the crisis engendered. The weaklings are Citigroup and Bank of America and the Fed could act in a manner similar to the FDIC where it arbitrarily determines it does not like the collateral it is holding from these two banks and tells them to sell themselves off in whole or parts with the threat that the Fed is demanding it's cash back.

Why do this? First and foremost it will do much to reverse the moral hazard of the bailouts where financial institutions realize that eventually bad decisions can put a bank out of business. I resent Citi Group's recent “we were there through out American History” advertisements. Both Citi and BofA do not deserve to be part of our history after their sloppy inattention to good banking and determined empire building, especially Ken Lewis's disastrous rescue of Angelo Mozzillo's Countrywide. I think the TBTF problem would be ameliorated if the Fed could make this move in the name of good banking and thereby leave Congress and lobbyist completely out of it. It would be something for Bank Director's to consider when they go off on a bender, such as Robert Rubin when calculating the existential odds of actions of the bank he is nominally overseeing. 

To Understand is to Forgive

I believe it's a French saying and so Alan Blinder and his When the Music Stopped must be French. It's as if Tim Geithner wrote the book explaining why we had to tread lightly here and give support there as if no bad acts had been committed. The reason behind the Santulli rant that created the Tea Party was that the unforgivable was forgiven! Obama should have made Citibank into the poster child of the stupid calamitous favor seeking institution that it was in the first three months of his term! That he did not got him the derision of Wall Street and revolt on Main Street. A crisis like the Great Recession requires a little blood letting and needs a FDR (of all presidents for a libertarian to cite!) style lynching to set things right.

George Osborne to the Rescue

England's Chancellor of the Exchequer is making some strong noises about separating consumer banking from investment banking with a Glass Steagal light using chinese walls to separate the two sides within the same firm. He will experience the insignificance of his grand well qualified pronouncement as it is steam roller-ed into insignificance before he gets his first gray hair.

Lanny had to resign

After the Frontline "Untouchable" program last week I don't think Lanny Breuer had any other choice.

The Untouchables

PBS Frontline has done a good job of reporting on the financial crisis. Their latest, The Untouchables, gives a very clear view of how regulation does not replace fear of failure in the marketplace.  The Justice Department showed a prosecutorial cowardice and diffidence to make a case necessary to enforce rules and regulations against those who can afford even stronger defense teams.  When there is no money in the bank it's tough to hire a such a team.  Citigroup management got plenty of internal warnings that something that could jeopardize the bank's very existence was in effect.  Without a bail out Citi would have gone under and justice done.  In this case persuasive influence gave the taxpayer the bullet and management title to their ill gotten bonuses.
Thankfully the private sector has civil recourse where the legal teams opposing the banks are more capable than the quintessential government bureaucrat,  Lanny Breuer.    

After the Music Stopped

I am looking forward to Alan Blinder's new book which I believe will have parts of right on agreement and vehement disagreement for me.

High Speed Trading

Again back to Warren Buffet who considers his share holders as partners in a business.  He does not split the shares of his company because he values long term investors who do not trade in or out of their shares in Berkshire Hathaway.  If it was just individual stocks being traded then I doubt the need, but in a world of artificial instruments (ETFS) and mutual funds the high speed trades arbitrage the differences away quickly and the expense of it all is a testament to the friction costs by which Wall Street lives by. In Warren's world a round lot investment of ten shares is worth 1.3 million dollars. A brokerage firm may make a thousand dollars on that transaction which is in the order of one tenth of one percent commission.  Not much to fund the hardware and quants necessary for a high speed stock trading operation.

Friction Costs

I have been a long time follower of Warren Buffet and Berkshire Hathaway and a quick read of Tap Dancing to Work shows me how I developed the concept of investment banker's playing with themselves and frittering away investor capital.