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