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Protecting your 401K from Wall Street

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 "Charlie, don't let anyone ever tell you that Wall Street is anything but a casino for suits."

A billionaire guest to  Charlie Rose

Markets are dominated not by the rational, but by the wealthy

Larry Summers


Wall Street is about to become the new Catholic Church--the most distrusted and vilified institution in America.

It's hard to top priestly pedophilia (and bishops covering up for them) for sheer despicability, but Bernie Madoff and his fellow hucksters are giving the men of clod a close run for their--and our--money.

Dan Gerstein, Forbes

Introduction: casino capitalism
or how Wall Street gambles with your 401K money

Investors in 401K have no choice, but to deal with Wall Street. The sad truth is, however, that most 401K investors are not well served in their dealings with Wall Street. And they would benefit from developing a greater understanding of the way Wall Street works.

The problem is that interests of Wall Street and 401K investors do not match. For Wall street firms 401K investment is just plankton to be eaten. That means that what is good for Wall Street is not necessarily good for investors, and vice versa.

Wall Street has three principal activities: trading, investment banking, and merchant banking.

401K investors deal with first two activities, and not directly but via additional intermediaries -- mutual fund companies.

History repeats, first as a tragedy and then as a farce. Wall Street of the 1930th was not known for fair play. 

On a new level the same predatory attitude re-emerged in the first decade of the 21 century. The general slogan was "f-ck the small guy." Not only Wall Street is a giant casino, but they gamble with your 401K retirement money. 

Cult of stocks instigated and promoted by Wall Street is nothing new.  This is old, dirty and very effective PR trick that helps to part 401K investors and their money.

Cult of stocks instigated and promoted by Wall Street is nothing new.  This is an old, dirty and very effective trick that helps to part 401K investors and their money.

Due to boom-bust cycle created by Wall Street with the help from Fed and government, the chances of plush retirement for Baby Boomers became an illusive goal. As USA Today noted in "For Boomers, Recession Is Redefining Retirement"

The reality is sinking in: Baby Boomers, born from 1946 to 1964, are planning to work longer, save more money and spend less, to reach any semblance of the retirement they once envisioned. According to AARP:

The pain of unemployment

It may not be so easy.

When 1,097 Americans 45 and older were surveyed last December, 9% of them said they had lost their jobs in the past 12 months, and 31% of workers that age said that it is very likely that jobs will be eliminated this year, according to AARP's 2009 report.

Baby Boomers also are out of work longer than younger Americans. Last year, they were out of work 22 weeks on average, compared with 15 weeks for the 20- to 24-year-old age group, according to the Bureau of Labor Statistics.

Selling optimism(hopium)

The bias in Wall Street controlled media such as CNN, CNMC, etc and its completly bought "media analysis" is tremedous. They have nothing to do with objective reporting. The main goal is to promote optimism. Optimism sells and business needs optimism to make money.

People without optimism for any reason (realism based or not) are shunned by those who want to make money. It is much more difficult to sell something shady (and this extremely profitable to the seller) to realist of pessimist.  It is consistent to ridicule or expose those who are not optimistic because they are bad for business. Wall Street needs optimism to succeed.  They need hopium.

Disaster is good for business, if it currently exists because crisis is good for profits. Possible or potential disaster is bad for business because it keeps the looky-loos home. Disasters are best ignored until they can’t be ignored any longer. Then they become annuities. Nobody in media ridicules the perma-bulls who are right until they’re not. For example, Bloomberg supports the bulls and castigates the bears because it is good business to do it. Without hopium, there is no reason to read Bloomberg.

Optimism is good for business. Especially if it is promoted by ‘recognized experts’ who can bring in the customers.

Until this cycle is fully played out, we won’t know if Roubini’s and other so called "perma-bears" forecasts are correct. Let’s not forget that this “recovery” is probably 100% due to unprecedented intervention by governments and central banks, and no one could have predicted the size of the (still ongoing) interventions.

Again, I suggest not counting the chickens until the market interventions cease and the current economic cycle is complete.

Hank Paulson, Bernanke, Greenspan, the entire Fed Board and a much larger army of perma-bulls who either didn’t see the crisis coming, or lied about it publicly should generally be ignored. They are paid shills of Wall Street and always were. 

Besides, if both optimism and realism were promoted equally, the end result might be an educated consumer of investment services.

An educated consumer would be able to see through the bullshit much easier than the current and historical consumer. Such an event would be terrible for many on Wall Street. Better to keep the rubes optimistic and trusting than teach them anything of value that might be used against Wall Street.

Putting the Country in Danger: the real Wall Street Specialty

Financial industry is about positive feedback loops. As such they tend to destabilize both the economy and the host country. As Minsky noted "stability is destabilizing" if financial sector is present in the economy (and it is now always present; times when bankers were killed of exiled from the country on a periodic basis are long bygone).

And 2008 is not the first time Wall Street put the country in danger. In his article Where Is Our Ferdinand Pecora? (NYT, January 5, 2009) Ron Chernow is the author of “The House of Morgan” and “Alexander Hamilton” aptly described the investigation into banksters activity by Ferdinand Pecora who was the first to reveal the really astonishing level of corruption of major players, demystifying the assorted frauds, scams and abuses that culminated in the 1929 crash.:

BARACK OBAMA has assigned a top priority to financial reform when the new Congress assembles today. If history is any guide, legislators can perform a signal service by moving beyond the myriad details of the rescue plans to provide a coherent account of the origins of the current crisis. The moment calls for nothing less than a sweeping inquest into the twin housing and stock market crashes to create both the intellectual context and the political constituency for change.

For inspiration, Congress should turn to the electrifying hearings of the Senate Banking and Currency Committee, held in the waning months of the Hoover presidency and the early days of the New Deal. In historical shorthand, these hearings have taken their name from the committee counsel, Ferdinand Pecora, a former assistant district attorney from New York who, starting in January 1933, was chief counsel for the investigation. Under Pecora’s expert and often withering questioning, the Senate committee unearthed a secret financial history of the 1920s, demystifying the assorted frauds, scams and abuses that culminated in the 1929 crash.

The riveting confrontation between Pecora and the Wall Street grandees was so theatrically apt it might have been concocted by Hollywood. The combative Pecora was the perfect foil to the posh bankers who paraded before the microphones. Born in Sicily, the son of an immigrant cobbler, Pecora had campaigned for Teddy Roosevelt and been imbued with the crusading fervor of the Progressive Era. As a prosecutor in the 1920s, he had shut down more than 100 “bucket shops” — seamy, fly-by-night brokerage houses — and this had tutored him in the shady side of Wall Street.

With crinkly black hair and flashing eyes, Pecora was an earthy populist who appealed to Depression audiences. He was fond of playing pinochle and was often portrayed with a thick cigar clamped between his teeth. When he was hired for $255 per month by the Senate committee, Pecora was earning less money than most Wall Street mandarins disbursed weekly in pocket change.

Pecora was meticulous in preparation and legendary in stamina, mastering reams of material and staying up half the night before interrogations, aided by John T. Flynn, an Irish-American journalist, and Max Lowenthal, a Jewish lawyer. As Flynn wrote, “I looked with astonishment at this man who, through the intricate mazes of banking, syndicates, market deals, chicanery of all sorts, and in a field new to him, never forgot a name, never made an error in a figure, and never lost his temper.”

As Pecora relentlessly grilled the most famous names in finance, the nation relived the 1920s boom in a collective act of national remembrance. The hearings started in a modest committee room, but as the public was swept up in the drama, they shifted to a stately caucus room, illuminated by chandeliers and flashbulbs. As it gained momentum, the inquiry expanded until it shined a searchlight into every murky corner of Wall Street. Pecora exposed a stock market manipulated by speculators to the detriment of small investors who could suddenly attach names and faces to their losses.

Bankers had been demigods in the 1920s, their doings followed avidly, their market commentary quoted with reverence. They had inhabited a clubby world of chauffeured limousines and wood-paneled rooms, insulated from ordinary Americans. Now Pecora defrocked these high priests, making them seem small and shabby.

On Black Thursday of 1929, the nation had applauded a seemingly heroic attempt by major bankers, including Albert Wiggin of Chase and Charles Mitchell of National City, to stem the market decline. Pecora showed that Wiggin had actually shorted Chase shares during the crash, profiting from falling prices. He also revealed that Mitchell and top officers at National City had helped themselves to $2.4 million in interest-free loans from the bank’s coffers to ease them through the crash. National City, it turned out, had also palmed off bad loans to Latin American countries by packing them into securities and selling them to unsuspecting investors. By the time Pecora got through with the bankers, Senator Burton Wheeler of Montana was likening them to Al Capone and the public referred to them as “banksters,” rhyming with gangsters.

With a public aching for retribution, Pecora was playing with combustible chemicals, and Wall Street complained that he was destroying confidence. President Franklin Roosevelt retorted that the bankers “should have thought of that when they did the things that are being exposed now.” It was hard for Wall Street to mount a legitimate defense as Pecora pilloried them daily.

His prosecutorial methods grew questionable when he turned to the mysterious world of private banking, exemplified by the House of Morgan. In implacable style, Pecora badgered Morgan partners into admitting that they had paid no taxes for 1931 and 1932 — an incendiary revelation when the country was undertaking huge public works projects to combat unemployment. That the Morgan men had avoided taxes because of stock market losses was lost amid the hubbub.

No less inflammatory was exposure of Morgan’s “preferred list” by which the bank’s influential friends participated in stock offerings at steeply discounted rates. The renowned names on the list, including Calvin Coolidge, the former president, and Owen J. Roberts, a Supreme Court justice, shocked the nation with its unseemly association of money and power.

One Morgan partner, George Whitney, lamely explained that the intent was to safeguard small investors by preventing them from assuming such risk. To which Pecora responded tartly in his best-selling book, “Wall Street Under Oath,” “Many there were who would gladly have helped them share that appalling peril!”

Such was the furor over the Morgan testimony that Senator Carter Glass of Virginia shook his head and sighed, “We are having a circus, and the only things lacking now are peanuts and colored lemonade.” Seizing on the comment, a press agent for the Ringling Brothers Circus took advantage of a pause in the hearings to pop Lya Graf, a midget in a blue satin dress, on the lap of the portly and surprised J. P. Morgan Jr. The committee chairman, Senator Duncan Fletcher of Florida, pleaded with newspapers not to print the pictures, which only made them rush to do so.

The photo of Morgan with a circus midget planted on his lap became the signature shot of the hearings, emblematic of Wall Street’s fallen state. An embittered J. P. Morgan Jr. said Pecora had “the manners of a prosecuting attorney who is trying to convict a horse thief.”

Whatever their failings, the Pecora hearings laid the groundwork for financial reform legislation. By the time they ended in May 1934, they had generated 12,000 printed pages of testimony, collected in several thick volumes. These documents have served generations of historians. Our national narrative of stock market mayhem in the 1920s is largely composed of characters and anecdotes gleaned from their pages.

Pecora not only documented a litany of abuses, but also paved the way for remedial legislation. The Securities Act of 1933, the Glass-Steagall Act of 1933 and the Securities Exchange Act of 1934 — all addressed abuses exposed by Pecora. It was only poetic justice when Roosevelt tapped him as a commissioner of the newborn Securities and Exchange Commission.

Our current stock market slump and housing bust can seem like natural calamities without identifiable culprits, creating free-floating anger in the land. A public deeply disenchanted with our financial leadership is desperately searching for answers. The new Congress has a chance to lead the nation, step by step, through all the machinations that led to the present debacle and to shape wise legislation to prevent a recurrence.

Unlike 1929 in2008 there was no any significant backlash from the government or public. Wall Street learned the lesson and bought the government beforehand.

Attempts to raise the question of Wall Street responsibility for 2008 crisis often are called "populist" by MSM):

Tom Daschle and the Populist Revolt, by Robert Reich: Tom Daschle's surprise withdrawal today shocked most Washington insiders... So what happened? My guess is that official Washington underestimated the public's pique at what appeared to be the old ways of Washington. Hill staffers tell me that many offices have been inundated with telephone calls, emails, letters and faxes expressing concern (to put it mildly) about Daschle -- not only his failure to pay back taxes but his relationships with major players in the health care industry and rich consulting contracts with the private sector since leaving the Senate, and even the fact that he was given a car and driver by one of them.

What's going on here? Maybe official Washington, much like most of Wall Street, is still not quite getting it.

Typical Americans are hurting very badly right now. They resent people who appear to be living high off a system dominated by insiders with the right connections. They've become increasingly suspicious of the conflicts of interest, cozy relationships, and payoffs that seem to pervade not only official Washington but our biggest banks and corporations. In short, many Americans who have worked hard, saved as much as they can, bought a home, obeyed the law, and paid every cent of taxes that were due are beginning to feel like chumps. Their jobs are disappearing, their savings are disappearing, their homes are worth far less than they thought they were, their tax bills are as high as ever if not higher -- but people at the top seem to be living far different lives in a different universe. They're the executives and traders on Wall Street who have lived like kings for years off a bubble of their own making while ripping off small investors, the financial louts who are now taking hundreds of billions of taxpayer bailout money while awarding themselves huge bonuses and throwing lavish parties, the corporate CEOs who are earning seven figures while laying off thousands of workers, the billionaire hedge-fund and private-equity managers who are paying a marginal tax rate of 15 percent on what they say are capital gains while people who earn a fraction of that are paying a higher rate, and, not the least, the Washington insiders who have served on the Hill or in an administration and then gone on to pocket millions as lobbyists for the same companies they once regulated or subsidized. To the American who's outside the power centers ... the entire system seems rotten. ...

[T]he public wants change, real change, big change. There's no tolerance any longer for the way things used to be done.

Top one percent need to pay more to the bottom ninety-nine

There will be no sustained recovery including 401K plans recovery until the real wage increases. But the outsized financial sector is strangulating the real recovery by diverting resources to itself, and taxing whatever is provided to the real economy. Economist Michel Hudson frames the current situation with the US national economy in his most recent essay, The Myth of Recovery  that the current economy is best viewed as the FIRE sector wrapped around the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs. This by and large parasitic sector ensures that 401K investors will be much poorer at the time they need to retire

When listening to the State of the Union speech, one should ask just which economy Obama means when he talks about recovery. Most wage earners and taxpayers will think of the “real” economy of production and consumption. But Obama believes that this “Economy #1” is dependent on that of Wall Street. His major campaign contributors and “wealth creators” in the FIRE sector – Economy #2, wrapped around the “real” Economy #1.

Economy #2 is the “balance sheet” economy of property and debt. The wealthiest 10 per cent lend out their savings to become debts owed by the bottom 90 per cent. A rising share of gains are made in extractive ways, by charging rent and interest, by financial speculation (“capital gains”), and by shifting taxes off itself onto the “real” Economy #1.

John Edwards talked about “the two economies,” but never explained what he meant operationally. Back in the 1960s when Michael Harrington wrote The Other America, the term meant affluent vs. poor America. For 19th-century novelists such as Charles Dickens and Benjamin Disraeli, it referred to property owners vs. renters. Today, it is finance vs. debtors. Any discussion of economic polarization between rich and poor must focus on the deepening indebtedness of most families, companies, real estate, cities and states to an emerging financial oligarchy.

Financial oligarchy is antithetical to democracy. That is what the political fight in Washington is all about today. The Corporate Democrats are trying to get democratically elected to bring about oligarchy. I hope that this is a political oxymoron, but I worry about how many people buy into the idea that “wealth creation” requires debt creation. While wealth gushes upward through the Wall Street financial siphon, trickle-down economic ideology fuels a Bubble Economy via debt-leveraged asset-price inflation.

The role of public spending – and hence budget deficits – no longer means taxing citizens to spend on improving their well-being within Economy #1. Since the 2008 financial meltdown the enormous rise in national debt has resulted from the reimbursing of Wall Street for its bad gambles on derivatives, collateralized debt obligations and credit default swaps that had little to do with the “real” economy. They could have been wiped out without bringing down the economy. That was an idle threat. A.I.G.’s swap insurance department could have collapsed (it was largely in London anyway) while keeping its normal insurance activities unscathed. But the government paid off the financial sector’s bad speculative debts by taking them onto the public balance sheet.

The economy is best viewed as the FIRE sector wrapped around the production and consumption core, extracting financial and rent charges that are not technologically or economically necessary costs.

Say’s Law of markets, taught to every economics student, states that workers and their employers use their wages and profits to buy what they produce (consumer goods and capital goods). Profits are earned by employing labor to produce goods and services to sell at a markup. (M – C – M’ to the initiated.)

The financial and property sector is wrapped around this core, siphoning off revenue from this circular flow. This FIRE sector is extractive. Its revenue takes the form of what classical economists called “economic rent,” a broad category that includes interest, monopoly super-profits (price gouging) and land rent, as well as “capital” gains. (These are mainly land-price gains and stock-market gains, not gains from industrial capital as such.) Economic rent and capital gains are income without a corresponding necessary cost of production (M – M’ to the initiated).

Banks have lent increasingly to buy up these rentier rights to extract interest, and less and less to promote industrial capital formation. Wealth creation” FIRE-style consists most easily of privatizing the public domain and erecting tollbooths to charge access fees for basic necessities such as health insurance, land sites, home ownership, the communication spectrum (cable and phone rights), patent medicine, water and electricity, and other public utilities, including the use of convenient money (credit cards), or the credit needed to get by. This kind of wealth is not what Adam Smith described in The Wealth of Nations. It is a form of overhead, not a means of production. The revenue it extracts is a zero-sum economic activity, meaning that one party’s gain (that of Wall Street usually) is another’s loss.

Debt deflation resulting from a distorted “financialized” economy

The problem that Obama faces is one that he cannot voice politically without offending his political constituency. The Bubble Economy has left families, companies, real estate and government so heavily indebted that they must use current income to pay banks and bondholders. The U.S. economy is in a debt deflation. The debt service they pay is not available for spending on goods and services. This is why sales are falling, shops are closing down and employment continues to be cut back.

Banks evidently do not believe that the debt problem can be solved. That is why they have taken the $13 trillion in bailout money and run – paying it out in bonuses, or buying other banks and foreign affiliates. They see the domestic economy as being all loaned up. The game is over. Why would they make yet more loans against real estate already in negative equity, with mortgage debt in excess of the market price that can be recovered? Banks are not writing more “equity lines of credit” against homes or making second mortgages in today’s market, so consumers cannot use rising mortgage debt to fuel their spending.

Banks also are cutting back their credit card limits. They are “earning their way out of debt,” making up for the bad gambles they have taken with depositor funds, by raising interest rates, penalties and fees, by borrowing low-interest credit from the Federal Reserve and investing it abroad – preferably in currencies rising against the dollar. This is what Japan did in the “carry trade.” It kept the yen’s exchange rate down, and it is lowering the dollar’s exchange rate today. This threatens to raise prices for imports, on which domestic consumer prices are based. So easy credit for Wall Street means a cost squeeze for consumers.

The President needs a better set of advisors. But Wall Street has obtained veto power over just who they should be. Control over the President’s ear time has been part of the financial sector’s takeover of government. Wall Street has threatened that the stock market will plunge if oligarch-friendly Fed Chairman Bernanke is not reappointed. Obama insists on keeping him on board, in the belief that what’s good for Wall Street is good for the economy at large.

But what’s good for the banks is a larger market for their credit – more debt for the families and companies that are their customers, higher fees and penalties, no truth-in-lending laws, harsher bankruptcy terms, and further deregulation and bailouts.

This is the program that Bernanke has advised Washington to follow. Wall Street hopes that he will be kept on board. Bernanke’s advice has helped bolster that of Tim Geithner at Treasury and Larry Summers as chief advisor to convince Pres. Obama that “recovery” requires more credit.

Going down this road will make the debt overhead heavier, raising the cost of living and doing business. So we must beware of the President using the term “recovery” in his State of the Union speech to mean a recovery of debt and giving more money to Wall Street Jobs cannot revive without consumers having more to spend. And consumer demand (a hateful, jargon word, because only Wall Street and the Pentagon’s military-industrial complex really make demands) cannot be revived without reducing the debt burden. Bankers are refusing to write down mortgages and other debts to reflect the ability to pay. That act of economic realism would mean taking a loss on their bad debts. So they have asked the government to lend new buyers enough credit to re-inflate housing prices. This is the aim of the housing subsidy to new homebuyers. It leaves more revenue to be capitalized into higher mortgage loans to support prices for real estate fallen into negative equity.

The pretense is that this is subsidizing the middle class, but homebuyers are only the intermediaries for government credit (debt to be paid off by taxpayers) to mortgage bankers. Nearly 90 per cent of new home mortgages are being funded or guaranteed by the FHA, Fannie Mae and Freddie Mac – all providing a concealed subsidy to Wall Street.

Obama’s most dangerous belief is in the myth that the economy needs the financial sector to lead its recovery by providing credit. Every economy needs a means of payment, which is why Wall Street has been able to threaten to wreck the economy if the government does not give in to its demands. But the monetary function should not be confused with predatory lending and casino gambling, not to mention Wall Street’s use of bailout funds on lobbying efforts to spread its gospel.

Deficit reduction

It seems absurd for politicians to worry that running a deficit from health care or Social Security can cause serious economic problems, after having given away $13 trillion to Wall Street and a blank check to the Pentagon. The “stimulus package” was only about 5 per cent of this amount. But Obama has announced that he intends on Tuesday to close the barn door by proposing a bipartisan Senate Budget Commission to recommend how to limit future deficits – now that Congress is unwilling to give away any more money to Wall Street.

Republican approval would set the stage for Wednesday’s State of the Union message promising to press for “fiscal responsibility,” as if a lower deficit will help recovery. I suspect that Republicans will have little interest in joining. They see the aim as being to co-opt their criticism of Democratic spending plans. But in view of the rising and well-subsidized efforts of Harold Ford and his fellow Corporate Democrats, the actual “bipartisan” aim seems to be to provide political cover for cutting spending on labor and on social services. Obama already has sent up trial balloons about needing to address the Social Security and Medicare deficits, as if they should not be financed out of the general budget by taxpayers including the higher brackets (presently exempted from FICA paycheck withholding).

Traditionally, running deficits is supposed to help pull economies out of recession. But today, spending money on public services is deemed “bad,” because it may be “inflationary” – that is, threatening to raise wages. Talk of cutting deficits thus is class-war talk – on behalf of the FIRE sector.

The economy needs deficit spending to avoid unemployment and poverty, to increase social spending to deal with the present economic shrinkage, and to maintain their capital infrastructure. The federal government also needs to increase revenue sharing with states forced to slash their budgets in response to falling tax revenue and rising unemployment insurance.

But the deficits that the Bush-Obama administration have run are nothing like the familiar old Keynesian-style deficits to help the economy recover. Running up public debt to pay Wall Street in the hope that much of this credit will be lent out to inflate asset prices is deemed good. This belief will form the context for Wednesday’s State of the Union speech. So we are brought back to the idea of economic recovery and just what is to be recovered.

Financial lobbyists are hoping to get the government to fill the gap in domestic demand below full-employment levels by providing bank credit. When governments spend money to help increase economic activity, this does not help the banks sell more interest bearing debt. Wall Street’s golden age occurred under Bill Clinton, whose budget surplus was more than offset by an explosion of commercial bank lending.

The pro-financial mass media reiterate that deficits are inflationary and bankrupt economies. The reality is that Keynesian-style deficits raise wage levels relative to the price of property (the cost of obtaining housing, and of buying stocks and bonds to yield a retirement income). The aim of running a “Wall Street deficit” is just the reverse: It is to re-inflate property prices relative to wages.

A generation of financial “ideological engineering” has told people to welcome asset-price inflation (the Bubble Economy). People became accustomed to imagine that they were getting richer when the price of their homes rose. The problem is that real estate is worth what banks will lend – and mortgage loans are a form of debt, which needs to be repaid.

Wall Street "business as usual"  is just criminal mischeif

As Mish noted (Janet Tavakoli on the "Myth of the Amoral Debtor"; An email from a Charlie Munger student; "Business as Usual")

Bring Out The Criminal Indictments. Pray tell, where is the action on this list?

April 29, 2010: Barofsky Threatens Criminal Charges in AIG Coverup, Goldman Sachs Abacus Deal, TARP Insider Trading; New York Fed Implicated

April 16, 2010: Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed

March 2, 2010: Geithner's Illegal Money-Laundering Scheme Exposed; Harry Markopolos Says “Don’t Trust Your Government”

January 31, 2010: 77 Fraud, Money Laundering, Insider Trading, and Tax Evasion Investigations Underway Regarding TARP

January 28, 2010: Secret Deals Involving No One; AIG Coverup Conspiracy Unravels

January 26, 2010: Questions Geithner Cannot Escape

January 07, 2010: Time To Indict Geithner For Securities Fraud

October 20, 2009: Bernanke Guilty of Coercion and Market Manipulation

July 17, 2009: Paulson Admits Coercion; Where are the Indictments?

June 26, 2009: Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America "Turd in the Punchbowl"

April 24, 2009: Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis

Don't hold your breath waiting for any of those crooks to be prosecuted.

They are all considered saviors by the president, by Wall Street executives, by the largest banks, by the likes of Warren Buffett and Charles Munger, and all the other ingrates bailed out by the Fed and Congress.

Top Three Orwellian Comments Of All Times

In contrast, I believe The Most Redeeming Feature of Capitalism is Failure.

Conversion of Investment Banks to public corporations
as an open invitation to loot the public

  The upper classes in this country raped this country. You fucked people. You built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience. Nobody ever said ‘This is wrong’.” Eisman understood Wall Street thoroughly: “What I learned from that experience was that Wall Street didn’t give a shit what it sold.”



You are probably thinking that the above quote is strange you need to read Michael Lewis's classic  about the greed wave of the 1980’s Liar’s Poker, published in 1989. He detailed the absurdity and greed of Wall Street from his firsthand experiences working at Salomon Brothers fresh out of college. He captured the destructive culture of Wall Street and immortalized the term "Big Swinging Dick" regarding Salomon (”If he could make millions of dollars come out of those phones, he became that most revered of all species: a Big Swinging Dick.”). He also described the act of "Blowing up a customer" -- successfully convincing a customer to purchase an investment product which ends up declining rapidly in value, forcing the client to withdraw from the market.

He described an old mortgage bond trader named Donnie Green who once stopped a young callow salesman on his way out the door to catch a flight from New York to Chicago. Green tossed the salesman a ten dollar bill. “Hey, take out some crash insurance for yourself in my name”, he said. “Why?” asked the salesman. “I feel lucky,” said Green. Some other memorable snippets included:

Since Lewis had written Liar’s Poker, Wall Street became greedier, nastier, more corrupt, more arrogant and more incompetent.  He traced the biggest financial disaster in history back to his old boss John Gutfreund. His decision to convert Salomon Brothers from a private partnership to a public corporation opened Pandora’s Box. The other Wall Street partnerships followed like lemmings. The risk of failure was shifted from the partners to the shareholders and the citizens of the United States. Lewis details this fateful decision (quoted from The Burning Platform, financial collapse, depression, war)

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

Deregulation as corruption of authorities

"Deregulated financial markets" are very dangerous waters for 401K investors. Markets became very corrupt:   everyone on Wall Street was greedy taking their piece of the pie forgetting about to the end game. And it is the little guy who ends up with all of these securities on their retirement accounts.

Neutering the Glass-Steagall Act in the 1990s (with generous help of Sir Alan, Subprime Maestro as he used to be called  after "subprime" mess unfolds ) contributed to the dot-com bubble and stock swindles that looted many 401K investors. It also stimulated hypertrophy of financial sector and led to the destruction of jobs and manufacturing. Sir Josiah Stamp aptly explained the situation:

"The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . Bankers own the earth. Take it away from them but leave them the power to create money, and with a flick of a pen, they will create enough money to buy it back again . Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in . But if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit."

--- Sir Josiah Stamp, president of the Bank of England and the second richest man in Britain in the 1920's, speaking at the University of Texas in 1927.

The dirty secret is that most of the investment community is preying on fear and ignorance. For instance, pension funds and endowments hire money managers, even though there is ample evidence money managers add little if any value (see a paper by Vishny, Lakonishok and Schleiffer over 20 years ago) And then these entities hire fund consultants (who of course charge fees) to help these saps pick the right fund manager.

Warren Buffett has repeatedly warned that Helpers, as he calls investment middlemen, reduce the returns of those who have capital. Stock markets are not a level playing field, never was and never will be. 401K investors served and will serve as donors for Wall Street firms. Moreover the steady stream of  money from 401K investors to S&P500 and similar funds create Ponzi scheme friendly environment and serve as a base for various, often pretty complex financial manipulations, which at the end of the day hurt those who provides foundation for them.  

Wall Street isn't a charity. 
Small investors are legitimate prey and are usually sucked dry.

Mutual funds are part of Wall Street and in no way are trying to protect your investment. They are for-profit enterprises and by definition their first task is not return to shareholders. Vanguard tried to smooth this conflict by viewing customers as shareholders and in a way is a better mutual fund family. But in reality it is controlled by advisory firms and its fees are not always the smallest:  Fidelity, which is strictly for profit enterprise, sometimes beats it for equivalent funds. So much for interests of investors.

"Free market" includes as a component well known tendency for oligopoly and free hunt on small investors including 401K investors. Very few other areas society does not criminalize such blatant conflicts of interest.

"Free market" includes as a component well known tendency for oligopoly and free hunt on small investors including 401K investors. Very few other areas society does not criminalize such blatant conflicts of interest

 Financial industry became what Paul Krugman called The Madoff Economy:

The revelation that Bernard Madoff — brilliant investor (or so almost everyone thought), philanthropist, pillar of the community — was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend.

Yet surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?

The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s ... had a corrupting effect on our society as a whole.

Let’s start with those paychecks. ... The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.

But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.

Consider the hypothetical example of a money manager who leverages up his clients’ money..., then invests the bulked-up total in high-yielding but risky assets... For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.

O.K., maybe my example wasn’t hypothetical after all.

So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. ... Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.

We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.

But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.

At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics... Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

Most of all, the vast riches ... undermined our sense of reality and degraded our judgment. Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? ... The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

After all, that’s why so many people trusted Mr. Madoff.

Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we’re looking at now are the consequences of a world gone Madoff.

How to resist brainwashing by sycophant media and dishonest research

"... anyone who has ever read Larry Kudlow wonders how he's able to manage a folding chair without assistance, much less other people's money"

Ezra Klein

You gotta give those guys credit: when it comes to dissembling, distorting, misleading, and otherwise playing games with the truth: no one else even comes close to the shady characters who ply their wares on Wall Street.

Every IT professional who got crushed back in 2000 suffered losses not only because the game was rigged but also because most people including myself were greedy and ignorant. But while decisions were our own, we were 'helped" by dishonest research, dishonest CIO of dot-com bubble, and Wall Street PR machine with CNBC as the most well-known example.

The situation is not that black and white and there are two guiding principles in using Wall Street analysts and corporate media publication and research

Don't over-generalize

Philippics directed at corrupt and sycophant media and corrupt to the nails stock analysts are easy to come during down years like 2002 or 2008. And they are by-and-large true.  But it is important not to over generalize and throw out the baby with the dirty water. Big picture published in February of 2009 pretty instructive post that address this problem:

One of the comments to last night’s mention of Societe Generale presentation by James Montier & Albert Edwards suggested that ALL big firm research is worthless. (What are they selling? How to keep your commision coming in when everyone else is going down?).

Don’t overgeneralize. One of the keys to successful investing is recognizing the talent that can make you money, or at least keep you out of trouble, and figuring out what to ignore. If the big firms’ research was all incompetent/biased/corrupt it would be easy. But its not, there is lots of great work by very smart and experienced people. The trick is figuring out what to use and what to ignore.

You must be open minded and intellectually flexible; don’t let your biases steer you away from something of value.

A perfect example: Credit Suisse has a great Macro research piece out — its a huge overview of the global markets, laden with all sorts of chart p0rn. I don’t agree with everything in it, but it has plenty of worthwhile data and commentary:

“What should we expect from equities? To answer this requires a long-term perspective. A week may be a long time in politics, but even a decade is too short to judge stock returns. Some decades are depressingly poor, while others are tantalizingly good. To understand equity returns, the long term must be long indeed. Fortunately, the Yearbook database meets this test with 109 years of data for 17 countries that together represent some 90% of world stock market value.

The last decade has been the lost decade. The 21st century began with a savage bear market. By its nadir in March 2003, US stocks had fallen 45%, UK and Japanese equities had halved, and German stocks had fallen by two-thirds. Markets then staged a remarkable recovery, only to plunge again late in 2007 into another epic bear market fuelled by the credit and banking crisis. Since 2000, the MSCI World index has lost a third of its value in real (inflation-adjusted) terms, while the major markets all gave negative real returns of an annualized –4% to –6%.

The demons of chance are meant to be more generous than this. Equity investors require a reward for risk. At the end of 1999, investors cannot have expected, let alone required, a negative risk premium from equities, otherwise they would simply have avoided them. Looking at the nine years that followed does not tell us that risk premiums have decreased, but just that investors were unlucky. Indeed, they received a savages, by definition, recur infrequently. To understand risk and age reminder that the very nature of the risk for which they sought a reward means that events can turn out badly, even over multiple years.

I don’t know if it was intended to be public, but the link to download the PDF requires no password.

Expect to see a few charts therein showing up here later . . .

Extreme caution is recommended

Still extreme caution is recommended. Recently  Times looks at an issue that is one of our longstanding complaints: Wall Streets BUY bias. Given the inherent conflict of interest between underwriting/syndicate and investing, it hardly surprising. What is surprising is the size of the bias. Here’s an excerpt:

Even now, with the recession deepening and markets on edge, Wall Street analysts say it is a good time to buy.


At the top of the market, they urged investors to buy or hold onto stocks about 95 percent of the time. When stocks stumbled, they stayed optimistic. Even in November, when credit froze, the economy stalled and financial markets tumbled to their lowest levels in a decade, analysts as a group rarely said sell.

And last month, as the Dow and Standard & Poor’s 500-stock index suffered their worst January ever, analysts put a sell rating on a mere 5.9 percent of stocks, according to Bloomberg data. Many companies have taken such a beating in the downturn, analysts argue, that their shares are bound to bounce back.

Maybe. But after so many bad calls on so many companies, why should investors believe them this time?

When Internet stocks imploded in 2000 and 2001, Wall Street analysts were widely scorned for fanning a frenzy that had inflated dot-com shares to unsustainable heights. But this time around, credit rating agencies, mortgage companies and Wall Street bankers have shouldered much of the blame for the Crash of 2008, and few have publicly questioned the analysts who urged investors to buy all the way down.

As Jacob Zamansky, investor securities lawyer, noted "Analysts completely missed the boat again with the subprime and credit crises. They should’ve given some early warning signs to investors to bail out, or at least lighten up their portfolios. That warning never came.”

As for the gullibility of 401K crowd recently John Hussman provided to the readers of his column Weekly Market Comment an nice cautionary tale attributed to Henny Youngman:

Henny Youngman used to tell a story about a guy who hears a little voice in his head singing “Go to Las Vegas .” So the guy immediately turns his car around and heads for Las Vegas . The voice says “Go to the roulette table.” The guy goes to the roulette table. The voice says “Put $10,000 down on red.” The guy puts $10,000 down on red.

He loses. The voice says, “Hey, how ‘bout that?”

Investors are hearing a thousand little voices here telling them to “ride the bull,” that stocks have a “floor” under them, and that valuations are cheap. Whatever risks investors choose to take, they would do well to recognize that if those risks go terribly wrong, most of those little voices will be passive observers with nothing to say but “Hey, how ‘bout that.”

You should evaluate every argument, bullish or bearish, based on the quality of the evidence and the credibility of the source.

But this is a small part of a larger problem  -- "brainwashing" or instilling "acquired idiotism" into 401K investors. Wall Street is an institution that redistributes financial flows and reaping huge benefits in the process. They do not produce anything and to generate nice returns they need bigger and bigger share of profits to the extent that nothing is left for regular investors. 

Here is a small sample of really disastrous recommendations for 401K investors from 1999 (15 reminders of how happy talk misled us a decade ago). None of the jerks was fired of prosecuted:

  1. October 1999: James Glassman, author “Dow 36,000.” “What is dangerous is for Americans not to be in the market. We’re going to reach a point where stocks are correctly priced, and we think that’s 36,000 … It’s not a bubble. Far from it. The stock market is undervalued.” (Fact: dot-com PE’s were astronomical, most over 40)
  2. December 1999: Joseph Battipaglia, market analyst. “Some fear a burst Internet bubble, but our analysis shows that Internet companies account for only 7% of the overall Nasdaq market cap but carry expected long-term growth rates twice those of other rapidly growing segments within tech.” (Fact: Internet Index lost two-thirds within six months.)
  3. December 1999: Larry Wachtel, Prudential. “Most of these stocks are reasonably priced. There’s no reason for them to correct violently in the year 2000.” (Fact: Nasdaq lost 50% in 2000.)
  4. December 1999: Ralph Acampora, Prudential Securities. “I’m not saying this is a straight line up. I’m not saying you can’t have pauses. I’m saying any kind of declines, buy them!” (Fact: He also predicted a 14,000 Dow by year-end 2000, and an 11-year bull.)
  5. February 2000: Larry Kudlow, CNBC host. “This correction will run its course until the middle of the year. Then things will pick up again, because not even Greenspan can stop the Internet economy.” (Fact: This faux economist is still hosting a cable show.)
  6. April 2000: Myron Kandel, CNN. “The bottom line is, before the end of the year, the Nasdaq and Dow will be at new record highs.” (Fact: In September he even predicted a rally to 12,000 by election day 2000.)
  7. September 2000: Jim Cramer, Mad Money host. “SUNW probably has the best near-term outlook of any company I know.” (Fact: Within four months Sun Microsystems dropped from $60 to $30. Down to $10 in a year. Below $3 in two years.)
  8. November 2000: Louis Rukeyser on CNN. “Over the next year or two” the stock market “will be higher, and I know over the next five to 10 years it will be higher.” (Fact: The market continued sinking, we fell into a recession, and tech lost 70% within two years.)
  9. December 2000: Jeffrey Applegate, Lehman Strategist. “The bulk of the correction is behind us, so now is the time to be offensive, not defensive.” (Fact: A sucker’s rally.)
  10. December 2000: Alan Greenspan. “The three- to five-year earnings projections of more than a thousand analysts, though exhibiting some signs of flattening in recent months, have generally held firm. Such expectations, should they persist, bode well for continued capital deepening and sustained growth.” (Fact: In 2008 he admitted he misled America.)
  11. January 2001: Suze Orman, financial guru. “In the low 60s here, I think the QQQ, they’re a buy. They may go down, but if you dollar-cost average, where you put money every single month into them, I think, in the long run, it’s the way to play the Nasdaq.” (Fact: You lose — the QQQ lost 60% more by October 2002.)
  12. March 2001: Maria Bartiromo, CNBC anchor. “The individual out there is actually not throwing money at things that they do not understand, and is actually using the news and using the information out there to make smart decisions.” (Fact: Maria sounds more like a writer for The Onion.)
  13. April 2001: Abby Joseph Cohen, Goldman Sachs. “The time to be nervous was a year ago. The S&P then was overvalued, it’s now undervalued.” (Fact: The markets continued down for another 18 months.).
  14. August 2001: Lou Dobbs, CNN. “Let me make it very clear. I’m a bull, on the market, on the economy. And let me repeat, I am a bull.” (Fact: The market was actually in bear territory for another year as the Dow and Nasdaq lost another third.).
  15. June 2002: Larry Kudlow, CNBC host. “The shock therapy of a decisive war will elevate the stock market by a couple thousand points.” (Fact: For Larry, war is just another “economic stimulus program.” He also said the Dow would hit 35,000 by 2010.)

This circus repeated in 2007: most analysts predicted that the recovery will start in the second half 2008. 

If you think the people on Wall Street are your friends, if you think CNBC is giving you good advice, if you think your all-stock 401k is a safe investment, or if you think the stock market outperforms every investment over the long run, then you really should stop reading here.

Trading as hacking

This point of was most aptly expressed Mark Cuban (What Business Is Wall Street In in his blog post in Seeking Alpha blog. He viewed traders as a special breed of hackers that try to exploit the fiat monetary system and current stock exchanges to their own advantage. Excerpted with permission from 's "Blog Maverick" weblog.

...To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.

The best analogy for traders? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing. A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it. A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.

I recognize that one is illegal, the other is not. That isn’t the important issue.

The important issue is recognizing that Wall Street is no longer what it was designed to be. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings. What percentage of the market is driven by investors these days ?

...individual stocks become pawns in a much bigger game than I feel increasingly less comfortable playing. It is a game fraught with ever increasing risk.

The PIMCO guys (who I think are the smartest guys on the Street), talk about a new normal as it applies to today’s state of the world economy. I think just as important is the new normal as it applies to Wall Street. Wall Street is now a huge mathematical game of chess where individual companies are just pawns. This is money in the bank for the big players like Goldman (GS), Morgan (MS), etc. Why ? Because the game of chess is far too complicated for 99% of the institutions out there investing money.

Prominent Stock Market Clowns

It's important to understand that for Wall Street as a whole 401K investors are a legitimate and welcomed pray.  Many 401K investors who believed dishonest research and acted accordingly hurt themselves during dot-com bubble because they focused too much on tech stocks. The bubble was also promoted by sleek, extremely well paid "Wall Street photo models",  talented "stocks circus entertainers".  This amplification of Wall Street follies is the essential function of CNBS and like.

All kidding aside, if you did not see it yet, Jon Stewart took on CNBC and the entire U.S. financial system on March  5, 2009, Jon Stewart put a little perspective on Rick Santelli's rant for me. I was somewhat in agreement with Santelli (even though I thought it was in poor taste) until Stewart made me realize that the people that were angry or yelling were market traders..........and the market has taken over 2 trillion $ in money government. They actually accept more money almost every week in bail out money and they were crying over some money going to American home owners and it suddenly made me a little sick.  Here is a Google News take on the story:

CNBC stays mum after takedown by Jon Stewart

By DAVID BAUDER – 7 hours ago

NEW YORK (AP) — If you make a date to be on a late-night talk show, it's best not to back out.

John McCain learned that lesson the hard way with David Letterman last fall, and CNBC reporter Rick Santelli just took it on the chin from Jon Stewart. Santelli and his network wouldn't comment Thursday on Stewart's brutal takedown during Comedy Central's "The Daily Show" on Wednesday.

Santelli became an instant online star when millions of people watched copies of his CNBC criticism that President Barack Obama's housing plan was "promoting bad behavior" by rewarding people who might otherwise be foreclosed. He was booked to appear on Stewart's show Wednesday.

But he backed out Friday, with CNBC spokesman Brian Steel saying that "we all made a decision it was just time to move on to the next story."

Said Stewart: "I guess the phrase would be bailed out."

During a report at the Chicago Board of Trade on Feb. 19, Santelli turned to those around him: "This is America. How many of you people want to pay for your neighbor's mortgage that has an extra bathroom and can't pay their bills?"

When the traders began booing, Santelli said, "President Obama, are you listening?"

"How many people would have liked to see Rick Santelli on this program," Stewart echoed on "The Daily Show," his audience responding with a cheer. "Are you listening? Are you listening, Rick Santelli?

"I have to say I find cheap populism oddly arousing," Stewart said.

Stewart then turned to CNBC itself, airing a selection of clips from personalities like Jim Cramer giving opinions and predictions about the economy that in retrospect looked spectacularly ill-informed.

"If I had only followed CNBC's advice, I'd have a million dollars today," Stewart said, "provided I'd started with $100 million."

CNBC's Steel said neither the network's executives nor Santelli would comment on Stewart's broadcast.

Last September, McCain canceled an appearance on Letterman's "Late Show" on CBS, saying he had to rush to Washington to help deal with the sinking economy. But the then Republican presidential candidate didn't rush back, instead going to an interview with Katie Couric the "CBS Evening News," and Letterman wouldn't let him forget it.

He was merciless in his comedic attacks, during a crucial point in the campaign, forcing McCain to return three weeks later and acknowledge that he made a mistake.

Santelli and CNBC initially sought more attention for his self-described "rant," and some saw him as a hero. After Obama spokesman Robert Gibbs fought back, Santelli said he felt threatened.

NBC colleague Matt Lauer, speaking to Santelli on the "Today" show on Feb. 26, was skeptical. "He wasn't threatening you," Lauer said.

The next day, CNBC and Santelli decided it was time to move on.

Jim Cramer

 Jim Cramer, the host of the chair-hurling, financial advice-shouting circus called Mad Money; Cramer's show is on so often, that it seems to run like a film loop).  While he pretends that he is helping individual investors he actually expose the extent to which the existing stock market is a giant Ponzi scheme with snake-oil salesmen like Cramer trying to part the fools and their money. 

Jim Cramer is probably is the most colorful of CNBC "stock circus" clowns. As Jon Friedman noted in his MarketWatch CNBC's Jim Cramer crosses a line (Jun 16, 2006) :

CNBC needed someone like Cramer to give the network some pizzazz, for sure. After all, think about it: How many days can viewers stand to see their favorite stocks falling?

After the Internet bubble burst in 2000, some viewers (illogically) blamed CNBC for their woes, saying the network contributed to the illusory run-up by endlessly broadcasting the virtues of tech-stocks investments.

So when Cramer came along and injected both a strong personality and an equities expertise, the ratings soared and CNBC had accomplished a slam-dunk victory.

Ezra Klein approach the theme of "Jim Cramer, the famous financial advice clown" from the position of effects of following his advice ( December 2008):

Via Mike Scherer, the people on the financial news shows are idiots who are trying to make you poor. The video gets good four minutes in. And of course they are. The gig is to make you feel like you can make money, so you keep watching for more awesome, money-making tips. That means they have to explain how you can do things that will make you money. And that means there have to be broad and obvious ways to make money. And more than that, it has to seem like the folks on the teevee know how to make that money. But they don't.

CXO Advisory Group tracked Jim Cramer's picks for awhile and concluded "Based on subsequent stock market performance and our judgments about his forecasts for overall stock market direction, Jim Cramer is right about 46% of the time with his stock market predictions, a little below average." Stunning performance. Meanwhile, anyone who has ever read Larry Kudlow wonders how he's able to manage a folding chair without assistance, much less other people's money. He's the sort of guy who monocausally attributes market movement to Obama's standing in the polls. Indeed, if markets are half as efficient as he believes, than his show exists in stark contradiction to the implications of efficient markets. But he has a finance show. Because like with political commentary, ratings come from entertainment, not insight and accuracy. And a broadcast that was all doom and destruction and frank admissions of ignorance wouldn't be very fun to watch.

Here is how Deep Capture blog characterized him ( Journalists Tried To Be Players But Became Pawns ):

The day our earnings press release appeared (with my letter embedded in it), Larry Kudlow & Jim Cramer of CNBC invited me to appear on their TV show. I had been on Kudlow & Cramer once or twice by then and they seemed like smart, decent fellows, so I agreed, and drove to the studio in Salt Lake City from whence one does remote interviews. This interview was different from our prior ones, however, in that they attacked me aggressively. The basis of their attack was my use of the mysterious phrase, “Gross profit,” in my discussion of Overstock’s financials. Cramer in particular berated me as if he had caught me in some heinous incantation. They gave me a brief moment to respond, then quickly signed off.

As I drove away from the studio feeling somewhat mystified, my cell phone rang. The caller was a man from deep within Wall Street “smart money” circles, someone known widely within the hedge fund community, who has been friendly to me, and even has looked out for me when he could. He speaks in charming if profane emphatics.

He said, “You know what just happened, don’t you?”

“What do you mean?” I asked.

You want to know what just happened? I’ll f—ing tell you what just happened. Here’s how it works. Those two guys are part of the short-seller community. Cramer especially is part of this ring of hard-charging short-sellers on Wall Street. I’ll bet you anything that one of his buddies is short your company. Whoever it is saw your earnings release, saw you blew your numbers away, got on the phone to Cramer and said, ‘Don’t you dare let this thing start moving. Don’t you f—ing dare let this move!’ So Cramer goes on TV and screams that nonsense at you. I bet my last f—ing dollar that’s what happened. It’s been like this all my career, but it’s never been like this.”

Later that week, a fund manager who had seen the interview told me, “That was the most unprofessional interview I have ever seen in my life.” In time, others would mention it to me, so that months and even a year later, I’d meet people who said, “I saw you on with Cramer one time. That was the craziest interview I ever saw.”

In March 2009 Cramer came under the fire from Jon Stewart.  Stewart accuses Cramer and CNBC of deliberately causing churn, panic, stock movements so that others (or them?) can take advantage of volatility. He calls for 'Good Cramer' to protect him from 'Bad Cramer'. Asks whose side are you on?

There was three episodes devoted to CNBC. In all three Jon Stewart proved that he is a really smart guy far superior in intellect to CNBC clowns like Cramer.

Actually Stewart was much funnier in the first two using the clips to skewer Cramer and the whole CNBC bunch of business sycophants. It is important to understand that real comedy is not always about laughs, its also about pointing out how completely f**ked up things are, exposing frauds and charlatans, mocking those in power, etc.

Stewart is absolutely correct in his criticisms of CNBC (aka Bubblevision) as being a corrupt to the core cheerleader for the Street.  CNBC was accused by Stewart of not only failing to foresee the credit crisis, but siding with banksters and helping to inflate the bubble. Stewart also “…pointedly questioned the hyped-up theatricality and dubious claims of CNBC shows like “Mad Money” and “Fast Money.” When Mr. Cramer explained, “There is market for it and you give it to them,” Mr. Stewart stared at him in disbelief, exclaiming. “There’s a market for cocaine and hookers!”

 Stewart noted that “If I had only followed CNBC’s advice, I’d have a million dollars today … provided that I’d started with $100 million” A de-fanged Cramer for the most part just sat and took it, blaming deceptive colleagues and sources and promising to do better in the future.

All-in- all Stewart articulated what many 401K investors feel in March 2009: that they have been taken for a ride by Wall Street and its cheerleaders. Cramer provided ruinous advice and market analysis (if you can call his clown act advice) at two major market turning points. He was, after all, so proud of coining the phrase “New Paradigm” to explain the inexplicable rise in the Nasdaq just before it crashed in 2001.

Cramer  "brand" (whatever that is) has been damaged and CNBC's brand is now under question: How can CNBC have this guy hosting when he has advocated and all-but admitted to using media such as CNBC to spread false rumors and manipulate stocks? That probably should be "GAME OVER" situation right there for Cramer. And it actually comes years too late. What Stewart was pissed about, and what many Americans (at least implicitly) are angry with, is the idea that Wall Street knew all along that they were squeezing the system for short-term gains. The theory goes that most people on the inside knew that the growth was unsustainable, but were lining their pockets every year with six figure bonuses until the collapse. Deregulation really went too far...

The chronology and links can get retrieved from New York News Blog -- New York Magazine

But the last (third) episode in which he interview the Cramer is the most important as it shows that Cramer was using "grey zone" or criminal tactics in the past and might even served in the past as a media channel working for the short sellers enrichment. Attacking a company by a popular anchor is a powerful signal for short selling that can be immensely profitable. Jon Steward brilliantly exposed the hypocrisy of Cramer and showed footage of Cramer admitting to market manipulation?

In the interview Cramer behaved like a high school student in the principal’s office caught red-handed cheating on a test. The level of corruption, the gaming of the system, and the failure of our institutions—including the press— is so infuriating that the whole interview is not even funny.  Here are some press responses:

Stewart vs. Cramer Winner Take All - Yahoo! TV Blog

After a video introduction that mocked the anticipation of the interview, Stewart began hammering Cramer on his poorly timed financial advice. It only got worse for poor Jim, who looked like a deer in headlights. Stewart repeatedly put Cramer on the spot with clips of the "Mad Money" host in a 2006 interview. In it, the excitable host spoke about manipulating futures trades as a hedge fund manager. Stewart told Cramer that the video made him very angry.

Stewart vs. Cramer We have a winner The Watcher

In the matter of Stewart vs. Cramer, I think we have a winner. (What's embedded here is the extended "Daily Show" interview with Cramer. Be aware that it contains strong language).

On Thursday's "Daily Show," Jon Stewart -- channeling Jimmy Stewart -- delivered a beatdown of CNBC's Jim Cramer, who attempted to defend himself and CNBC but, for the most part, meekly said he and his network could have done a better job in the leadup to the nation's financial meltdown.

It's hard to see how Cramer could have had any other response, given the barrage that he faced from the genuinely angry "Daily Show" host. Stewart kept his composure and never shouted, but you could tell that the games that have been played with the 401(k) savings of millions of Americans seriously ticked him off.

"I know you want to make finance entertaining, but it's not a [expletive] game," Stewart said.

Stewart's grilling of Cramer reminded me of David Letterman's confrontations with John McCain and Rod Blagojevich in the last year or so. Letterman is a master of being affable and accessible while not cutting his guests a bit of slack. On Thursday, it was as if Stewart was channeling Dave's homespun, regular-guy relentlessness. Cramer didn't know what hit him until it was much too late.

For me, the most revealing statement from Cramer came at the end of the interview, when he said this: "It's difficult to have a reporter say, 'I just came from an interview with [former Treasury Secretary] Hank Paulson and he lied his damn fool head off.' It's difficult. I think it challenges the boundaries."

"I'm under the assumption ... you don't just take their word at face value," Stewart said to Cramer.

Boom. Roasted.

But as a commenter on Phil Rosenthal's Tower Ticker site said, "Who buys advertising on these networks? Financial institutions and brokerage houses do, small investors do not." CNBC is not "about to bite the hand that feeds them," Maddog wrote.

As long as that's the case, will CNBC ever change? After all, as Time critic James Poniewozik points out, the cable network's current strategy -- which involves looking for silver linings and offering ideas on how to "Obama-proof" one's portfolio -- has actually led to higher ratings.

"As the rest of the country stews over the mismanagement of insurers and banks, there's still a small, demographically appealing niche for talking heads fulminating against the 'demonization' of business and being in favor of laissez-faire government," Poniewozik wrote.

"Hey, somebody's gotta stick up for the little guy. Even, or especially, when he's the big guy."

Selected Comments

Jon Stewart's interview of Cramer was brilliant and hard hitting. It's too bad that CNBC clowns are unable to conduct those kinds of interviews themselves. They never pose really tough questions, and follow up with even tougher questions, or show the lies of Wall St. insiders by replaying clips like Stewart did with Cramer last night. It's a sad commentary on the quality of American TV journalism that we only get a real interview on Comedy Central.

Yes, Cramer (a cheerleader for economic ideas that are more like religious beliefs, than science) lost to Jon Stewart's Everyman's view: "don't ordinary people have a right to expect reporters to seek the truth?". All the same, and as emotionally satisfying as this was, the fundamental problems remain, in that most economic language in common usage is a Big Lie. Even after Alan Greenspan confessed to Congress that he was wrong in believing that the "market" could regulate itself (a religious-like myth about economic reality), this myth lives on and still has many supporters, even inside the Obama Whitehouse. We haven't yet felt the full pain of the effects of the Big Lie about money and debt and banking. Obama's people want to keep that same Lie alive, in that they want the banking system to survive (afraid of the social anarchy that will come if the world economy actually crashes into reality). This is a War over the truth about money that was part of America's original revolution (google Richard Kotlarz). If we want to come out the otherside of this crisis whole, we have to fight another war, - this one against the Banks - READ YOUR HISTORY - as Santayanna said: "those who cannot remember the past are condemmed to repeat it."

Posted by: Joel A. Wendt | Mar 13, 2009 9:08:08 AM

Why is it that comedians are bringing us the hard-hitting interviews? Isn't that the job of "real" news people?

During the Blago drama there was no question that Letterman was the most prepared, and hardest hitting, of all the interviewers. I watched almost all the interviews, and the "real" news people were pathetic, unprepared, softball jokers. They had no clue.

Now, Jon Stewart cleans Cramer's clock and nails it better than any other talking head.

It is a real sad situation when the hardest hitting interviews on topics of intense import are by self-described comedians.

Thank you Jon and Dave for doing what the real TV media seems incapable of doing.

BTW, I am mostly referring to TV media. Print media is much better, though I am afraid they may not be around for long.

Posted by: JRPTOO | Mar 13, 2009 9:18:52 AM

I am still amazed (don't ask me how) at people who now want to "Obama proof" their money when it was the Bush administration that got us into this financial mess. CNBC is an accomplice to this shadow propaganda, just as it assisted the Bush administration in duping so much of the American public into believing Iraq was responsible for 9-11, which lead us into this neverending war. It saddens me to think so many Americans are so gullible.

Posted by: Wolfhawk | Mar 13, 2009 9:28:12 AM

While last night show was difficult to watch because of the pasting that Mr. Cramer took and I missed the biting humor of Jon Stewart, it reminded me once again cable news outlets are anything less than objective. Mr. Stewart's similar blow up with what his face Novak and Tucker Carlson are just indicitive of how those networks spoon feed people crap and call it hard news or in this case viable finance information. In case it was lost on cnbc and Mr. Cramer, Mr. Stewart's point was you should be watch dogs and work in the consumer interest and not lapdogs not daring to growl at the financial institutions. Good Show Jon and thanks again for picking up the club and beating the pundits about the heads for all their inane news manufacturing.

Posted by: Bill | Mar 13, 2009 9:33:34 AM

Jon Stewart is a National Treasure, as is Letterman. It is interesting that hiding under the guise of late night comedy, they are able to do some of the most scathing satire of our time (that actually reaches a wide audience). It is sad that our news organizations have become entertainment and our entertainment outlets have become informational, but I'm happy when they call out these fools.

Posted by: Pat C | Mar 13, 2009 10:36:15 AM

In April 2009 Nouriel Roubini called Cramer what he always was: a buffoon. Here is how Guardian reported the story (US finance pundit Cramer a 'buffoon' says leading economist):

Wall Street's favourite jester has fallen foul of the prophet of doom. A tense feud has broken out between the outspoken tele­vision stockpicker Jim Cramer and the notoriously gloomy economist Nouriel Roubini.

Roubini, a New York University professor who famously forecast a dire world recession as far back as 2006, has taken exception to remarks on a blog by Cramer that he is "intoxicated" with his own "prescience and vision" and is refusing to see green shoots of recovery in the financial markets.

"Cramer is a buffoon," said Roubini. "He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong."

The confrontation pits two of the financial world's biggest egos against each other. While Roubini has won plaudits for correctly predicting that the credit crunch would cause a domino effect around the world, Cramer has long been a cheerleader for mass participation in the stockmarket.

Cramer's CNBC show, Mad Money, has come under repeated attack in recent months for its bullish enthusiasm in a highly volatile environment. The comedian Jon Stewart recently roasted Cramer and the broader financial media for missing warning signs of a "once in a lifetime financial tsunami".

Roubini, who believes the situation is so gloomy that leading US banks may need to be nationalised, was dismissive of Cramer: "After all this mess and Jon Stewart, he should just shut up because he has no shame."

Speaking to the Associated Press ahead of a speaking engagement in Toronto, the economist continued: "He's not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull, and he got it wrong."

With his catchphrase "boo-ya" and a variety of colourful props, Cramer, 54, is a household name in the US. A former hedge fund manager, he casts himself as a self-made man who was once so impoverished that he had to sleep in his car. He took prolonged flak last year for telling viewers that Bear Stearns was "not in trouble" just a week before the 85-year-old investment bank collapsed – a remark which, he insists, was misinterpreted and taken out of context.

But Cramer has continued to attack doom-mongers, recently referring to Roubini and the Nobel prize-winning economist Paul Krugman as part of a "nationalisation jihad" for their advocacy of public intervention in the financial sector.

Last week, Cramer told his viewers that the recent 20% rally in Wall Street markets was sufficient to judge that the downturn was past its worst: "Right now, right here, on this show – I am announcing the depression [is] over!"

Maria Bartiromo

 CNBC's Maria Bartiromo (aka Money Honey; see From Disco Queen to Business News Diva and Maria Bartiromo Is No Fool ) is another prominent figure in CNBC financial clowns line. CNBC definitely favor "money honeys" and "blow dried air-heads". While this approach is personified by Cramer and his Mad Money show money honey is at least likable and that makes her more dangerous.  Here is one telling comment about her performance (Zero Hedge The Unmasking Of the CNBC Circus)

Anonymous said...
Hey, Cramer finally got some long overdue accountability...and he's very slippery at reinventing his track record.

I only wish the Daily Show would find the clip of Maria Bartarmomo defending exec pay packages in the hundreds of millions by saying they put it back into the economy by tipping waiters at restaruants, buying boats and going on vacations. What a shill!! I was so mad I had steam coming out my ears.

Ben Stein

Another interesting figure who is definitely not stupid but is incredibly dishonest is Ben Stein. Here is one apt comment about this clown: 

Ben Stein is incredible. How is it that Bush didn't make him Secretary of the Treasury? The amazing thing is that Ben is the son of the distinguished economist Herb Stein. He really makes the expression "regression to the mean" come alive.

Larry Kudlow, supply side ideologues and other "useful idiots"

  The one that really gets to me in Larry Kudlow. A standard republican thug. Him and John Taylor. I always wondered why my father hated the republicans. Now I know.

JimP in

Economist's View
 The Slow Recovery of Unemployment

Another talented CNBC economic news clown is Larry Kudlow. With his specialization in economic ignorance and professed belief in supply side economics sometimes he can be even more entertaining then Jim Cramer.

The comical effect is greatly increased due to the fact that he has  PhD  in economics (if supply side economics can be considered to be a science, which I seriously doubt) and the fact that he was former Ronald Reagan economic advisor.  I am wondering does Larry Kudlow read Larry Kudlow's columns dated a year or so ago and/or watch his past shows (preferably with the same one year lag)?  If so does he hysterically laughs ? 

But those in powers will never kick his ass from the TV -- he is just too useful. As Brendan Nyhan  noted in his article Larry Kudlow's counterfactual reasoning

Via Matthew Yglesias, here's Larry Kudlow's latest hand-waving defense of supply-side economics:

Tax revenues have been surging from personal incomes, capital gains, and dividends. Now, the Congressional Budget Office would try to argue that these revenues are lower than would have been the case if taxes had not been cut. But who’s to say? Economic growth would’ve been slower and hence revenues without tax cuts might have been lower. All we know is what we know—namely, revenues have been steadily rising in the aftermath of lower tax rates.

"[W]ho's to say?" As Yglesias writes, "Who, indeed, other than, perhaps, the staff economists at the Congressional Budget Office who are trained to make such calculations." Don't forget about all the current and former Bush administration economists and budget experts who admit that tax cuts don't increase revenue! (Ed Lazear and Greg Mankiw, among many others)

I was struck, however, that Kudlow seemed to grasp the relevant counterfactual -- the level of federal revenue we would have observed over the same time period had a tax cut not been enacted. Usually, he just touts increased revenue levels over time and (falsely) assumes that those increases prove his point (see this random example from Google, for instance).

It's hard to know if the problem is intellectual dishonesty or fundamental ignorance. As Kudlow himself might put it, who's to say?

As for this dilemma of "intellectual dishonesty or fundamental ignorance" I am inclined to see Kudlow more ignorant then intellectuallally dishonest  :-).  In truth Larry Kudlow is just a hired gun, a propagandist. He freely admits such. Listen to his tag line, "We're Right on the politics, Right on the economy."  This view is reinforced by several judgments from the Net.  Ezra Klein in  What Does Kudlow Know gives a nice example:

"Kudlow isn't a specialist in something else who's just freelancing in economic ignorance on the National Review blogs," writes Matt. "This is supposed to be his area of specialization. But he doesn't know anything about it."

I've done a fair amount of television at this point, and argued, in general, with a fair number of conservatives, and I have literally never encountered an interlocutor who seemed as utterly ignorant of his subject as when I went up against Kudlow. The guy may not be a health care specialist, but he professes to be a business economist, and anyone who's read The Wall Street Journal over the past decade should have at least a passing familiarity with the subject, and any economist should be able to quickly understand the various types of market failure bedeviling the system. But so far as I could tell, he knew, literally, nothing. That's not a condition of ideology. Plenty of conservatives can argue health care. This was a condition of truly spectacular ignorance. Spectacular not because he didn't know, but because he thought a few free market aphorisms were a sufficient substitute for actually knowing. And yet he's seen as an expert. It's bizarre.

Actually the danger of excessive power of bankers is an old sentiment. Thomas Jefferson warned of the damage that would be caused if the people assigned control of the money supply to the banking sector:

 "I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. This issuing power should be taken from the banks and restored to the people to whom it properly belongs. If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered. I hope we shall crush in its birth the aristocracy of the moneyed corporations which already dare to challenge our Government to a trial of strength and bid defiance to the laws of our country"

Thomas Jefferson, 1791

An interesting discussion of financial media recently was published in January of 2009 in Big Picture blog

  1. Barry Ritholtz Says:

    What they should really do a mea culpa on is Barron’s writer Gene Epstein

    Why on earth he is giving ANYONE economic advice, let alone the President (Spend Wisely) is laughable. He’s been utterly wrong about the recession, growth, inflation — pretty much EVERYTHING economic going on 5 years now . . .

    See this: The Economy is Just Fine . . .

  2. wally Says:

    Why should they be making recommendations or ‘picks’ at all? In good times it is pretty useless advice; in bad times it is a liability they should not have taken on.

  3. Moss Says:

    Please don’t forget Larry Kudlow. While he makes no specific picks he is the most misguided MSM voice I have ever witnessed. He refuses to face the new realities and digs in simply because that is who he is. A supply side free marketer. I guess he has no other choice since so much of his persona has been aligned with that mantra for so long. He deals in skewed opinions, not facts, and that is very irresponsible. As I have said before the incumbent economic orthodoxy has failed. The failure has been systemic and complete. It is time for many to face the facts of this and let go of many of their long held beliefs which they still perceive as truths.

  4. fflaque Says:

    Two people that get quoted and air time and I don’t know why for consistently pass="commentmetadata">January 18th, 2009 at 2:55 pm

    Amazing how the blogosphere smelled out the bear market while traditional media didn’t.

    Has anyone seen Brian Wesbury?

    And how’s Ken Heebner doing with PBR? I recall him saying it was a shoe-in to go to $250 a share. Did he sell out in time, or ride it down???

  5. larster Says:

    Agree totally on Epstein. I simply skip over his column. Maybe Obama will be the death of ideology and the return to thoughtful analysis. Hey, I can dream, can’t I?

    Why do they continue to put Abby Cohen on the roundtable. She has no insight, no feel, and no recommendations outside of the GS research staff recommendations. The value of the Roundtable is to get the opinions of guys like Faber, Zulauf, etc.; not the corporate shills.

  6. robert d Says:

    about a year ago you and i had an off-site e-mail exchange about anyone who writes a blog, runs a fund (yes, hedge funds, too), and recommends investments to report their performance. you wrote then that some investments, like those of your family, are in different accounts and would be difficult to quantify.

    but Barry, if you applaud Barron’s for their honesty, why can’t you, as an example, and all others who reach the general public, tell us how you are doing.

    Please set an example. your site is wonderful. you have a voice. do the right thing and others will follow.


  7. Scott F Says:

    Even putting aside what the over-paid lawyers say, you are a putz for responding to the comments above. Robert D doesn’t understand SEC regs regarding hedge funds (any clown does), and NormanB is an obvious hater TYPING IN ALL CAPS

    Why on earth should you be expected to reveal your results to some anonymous troll?. Why do you bother?

    I manage a modest sized fund, and your commentary has replaced what I used to pay GS good money for (I was a trader there many years ago). I know I get unvarnished opinion w/o the usual compliance dance and the firm politics that waters commentary down to worthless bullshit. Its been money to me. (And not just the FNM. LEH and AIG shorts).

    If people cannot figure out how to make money from the insights, ahead of the curve views, and sharp analysis that I find here, they should not be trading.

    PS: I’ll bet I sent you the nicest gift off of the wish list this year.

  8. robert d Says:

    To Scott F., Barry and others,

    my point was not specifically aimed at anyone in particular but at the piece you wrote, Barry, about Barron’s exposing their record….to us “trolls”, we watch TV, we read magazines, we scan the blogosphere to make informed investment decisions. I, fo one, am a very serious investor.
    I feel if you go on TV and recommend a stock, we the viewers have a right and the TV station has an obligation to show your results. Perhaps over a 3 year period would work. And audited, please tell your attorneys.

    But to listen to the ridiculous blowhards like Vince Farrell PONTIFICATE for decades without ever knowing his company his personal or corporate (hedge fund–whatever he does) results
    is just plain lack of disclosure.

    Millions of people watch and read and listen Is there no way to know , via audited past results, how they have performed.

    In other words, Barry, if you have different kinds of investors, you could tell us, your readers, how you did in 2005, 2006, 2007 and now 2008. But please understand, I write not about you specifically, but about the investment community in general.

    And Scott F., if your results were wonderful, and you were offering advice instead of criticism, perhaps you could let us all know what you like AND how your fund(s) did the last 3 audited years. So, if you had a website, we could follow you because of your record, not solely due to your eloquence on TV (if you ever do TV).

  9. Jojo99 Says:

    @robert d said “I feel if you go on TV and recommend a stock, we the viewers have a right and the TV station has an obligation to show your results. Perhaps over a 3 year period would work. And audited, please tell your attorneys.”

    While I would agree with you conceptually, the truth is that the viewer has no right to expect mea culpas from the financial media at all.

    The financial media is a business that exists exclusively as a medium for their advertisers to present their offerings. This is how the FM makes their money. The FM’s sole job is to attract viewers/readers (eyeballs) for the advertisers, who will then hopefully keep paying for advertising, which will hopefully help the advertiser make more money, which will make the owners/shareholders happy of both the advertiser and the FM outlet.

    When people realize the above, then they begin to understand that they are the “marks” in the sting engineered by Wall Street and supported by the government.

Note of predatory behavior of finance sector

More peripheral but still important is the theme of "fiat money and the banks". Here the main lesson to be drawn from the last bear market (2001-2003) is that the predatory behavior of the large part financial advisory community is a feature not a bug.  Of course there were honest hard working advisors who managed to cushion the losses and preserve most of the capital of their clients.

But most of them were of "perma-bull" variety serving the banks not people.  They were just used as sedative stimulating you to continue cost averaging strategy even in conditions where all signs were for moving to more defensive position. Naturally they failed to give any warning about  dangers connected with exorbitant P/E ratios, low earnings yields, dividend yields, and other classic valuation measures. They never mentioned about the culture of corruption with exorbitant options payments, backdates of options, 24*7 CNBC taking heads pushing stocks and other shadow deals. Some of  them were ousted after the crash but many are still around.

Earning expectations game is another funny "perma-bull" game that industry plays. As far as I can tell you can instantly discount them by 20% or more. Also they never discuss quality of earnings. Actually right now quality of earning is very low while earning itself are high because the main instrument for raising earnings is cutting job costs. In this sense stories about actual level of analysts independence that were published after 2001 are really interesting and is a very sobering read any year and at any stage of the market cycle because nothing has changed.

There are also problems with funds that are trying to play the fashion of the current moment including S&P 500. The S&P 500 and most other popular indices rank their constituent stocks by the total value of their outstanding shares. A stock that is overpriced is correspondingly overweighed, as was Cisco, Amazon Yahoo (and many other tech. high fliers) in 2000 and Google in 2005. And I known for sure that S&P added Yahoo at very high valuations and damped it after it lost most of its value. Now similar story was replayed with Goggle which was down from peak of $741 in November 2007 to $300 range in November 2008 (with minimum of $262).   

Usually specialists like programmers do not have much money in 401K accounts until mid-forties contributing at best slightly more then employers match (say 4%). Their contributions peaks around 55 and decline as soon as age-related problems with employment surface. It is not unreasonable not to contribute much before your children are out of college. For many people with children and a house significant contributions to 401K during this period are simply impossible. But this means that real total investment horizon for 401K investments is essentially 20 years or less (45-65) with only 5-10 years of peak contributions. The latter are separated from retirement by approximately 10 years of declining wages. As I mentioned before for those in their 50s calculating how much they will need at retirement involves predicting the inflation rate for the next three decades, not a small feat...

The economic dynamics of the past ten years suggests that stock market fails standard economic tests of efficiency, and is behaving in a different way then most popular economic abstractions like "efficient market hypothesis".  The key issue here is be slightly skeptical about any economic guru and avoid experimentation with your portfolio or putting all eggs into one basket be it shocks, or bonds or gold based on some new fashionable investment trend. Please remember that as for financial gurus there is definite oversupply problem here even if we count only the most successful, having several books printed: many of those books smell Lysenkoism. Blatant disregard and/or ignorance of even elementary statistical principles (within the topics covered by basic statistical course for financial specialties) is one common feature of most works in this area.

In August 2005, in comment to Business Week article Real estate and Recession  reader using userid Wes noted a specific dander that educated, middle class professionals encounter as investors because paradoxically they represent the major prey for financial industry:  

"Where are the big-money folks? Sitting on South Beach drinking mai-tais and laughing about the entire process, thanking a higher power they cashed out of the market when they did. The same thing happened back in 2000.

It wasn't the big money that got slammed; they pulled out early. The small timers and day traders pushed the market to the breaking point. Many of them lost their life savings and retirement accounts while the big money were losing amounts that looked like rounding errors.

The real issue here is that the same people who are creating the mania will be the ones that pay most for it. People in my demographic (educated, middle-class professionals) have the most to lose. Some of my peers who know nothing about financial markets and even less about repairing a sink faucet are buying rental properties, mainly responding to the market hype they overheard at Starbucks while buying a morning latte. This same group has been known to "weathervane", throwing money into the markets that seem to be hot without having a diversified, sustainable strategy to maximize long term wealth."

If so, the defensive strategy is the key for preventing huge losses (401K tax) that financial industry is trying to impose on you (similar like lotteries impose an implicit tax on workers).  Paul B. Farrell, in his Nov 13, 2006 column noted:

Wall Street operates like a Vegas convention of competing magicians, all trying to discover the other guy's secret. Hoping to get richer in this magical world of deception, they make your money disappear and magically reappear. Every day, billions of magic acts on Wall Street, vanishing here, reappearing there, often into their pockets.

We're warned at the opening of the new film, "The Prestige:" "Are you watching closely?" You're in London a century ago, watching two magicians in a deadly battle of one-upmanship. Obsessed about secrecy they send spies into the enemy camp. Constantly upping the ante, taking ever-greater risks, undeterred, even inspired by deaths in the wake of their battle. Their obsession's worthy of Wall Street's magicians.

What is magic? "Every great magic trick consists of three acts," says actor Michael Caine: "The first act is called 'The Pledge.' The magician shows you something ordinary, but of course, it probably isn't. The second act is called 'The Turn.' The magician makes his ordinary something do something extraordinary. Now if you're looking for the secret, you won't find it. That's why there's a third act called 'The Prestige.' This is the part with the twists and turns, where lives hang in the balance, and you see something shocking you've never seen before."

Act One: 'The Pledge' of a new bull market

Wall Street's cheering a new bull market: Something ordinary "that probably isn't." Oh really? Why? Suppose you put $11,722 in the market back in January 2000. A few weeks ago the Dow finally hit a new high for the first time in almost seven years, and you're back to even. Big deal? Hardly

Today, you have slightly over $12,000. So let's say you've gained roughly $75 a year on your initial $11,722 investment, less than 1% annually since 2000. The truth is, Wall Street hasn't done much for the little guy the past seven years.

Actually, it's even worse. For almost seven years, inflation's been eating away at the value of your $11,722, making it worth less. You've lost money. Lots. Even with that meager $75 annual gain, your $11,722 is actually worth maybe $10,500 today.

And while you're losing, Wall Street's making megabucks in fees and commissions, stockpiling billions for 2006 bonuses. It's also been a great year for hedge managers and CEOs pocketing record salaries. Welcome to America's new "trickle-up" market.

Any financial con artist worth his warm smile is aware that "donors" as a rule are  victims of their own greed. Moreover -- by means of our complicity in allowing our identities to be molded by a culture dominated by marketing, empty promises and predictions, and our own self-deceptions -- the fate of a hapless "donor", bamboozled by self-inflicted selfishness is not an exception. It is a rule.  Wall Street is not a charity. It wants a fat cut. As Robert Kiyosaki  recently wrote in his  Mutual Funds Get Greedy  Yahoo column:

To quote Bogle, "Simply put, fund managers have arrogated to themselves an excessive share of the financial markets' returns, and left fund investors with too small a share." Elaborating on that point, Bogle writes, "With today's dividend yields on stocks at about 1.8 percent, a typical equity funds expense ratio consumes fully 80 percent of a fund's income."

In any simulations it is clear that holding large percentage of stocks during the last five years of your major contributions is dangerous as you can run into the same situation as people, who retired in 2002 and early 2003.  In such situation fear rules and most people simply sold their stock holdings converting paper losses into real. To avoid such behavior requires "steel nerves" and a very good understanding of finance -- two qualities that are extremely rare.

Let's repeat it again: Wall Street isn't a charity.  Small investors are legitimate prey. Fund managers get used to allocating to themselves an excessive share of the financial markets' returns

Actually simulation of different periods instantly reveals the real danger of excessive percentages of stocks in your portfolio.  But please note that zero percent of stocks is also a bad option as bond funds impose their own significant risks and many stable value funds now provide return less then 5% which means less then 2% after inflation.

Historical data for most common in 401K plans funds are available from Yahoo free of charge. Still unfortunately very few professionals ever perform even a primitive Excel modeling of the their 401K portfolio based on past data for a representative period of time (let's say ten years). And that despite the fact that it is their own money. It really pays to understand stocks and bonds asset allocation strategies even it cannot predict the future.

Like Monsieur Jourdain's discovery that he has "been speaking prose all my life, and didn't even know it!" in famous Moliere  play you might not suspect that you have one, but that does not matter. Absence of strategy is a strategy too. Here is a very apt question: Money Magazine, Ask the Expert The right return - Aug. 22, 2006:

QUESTION: I always hear financial advisers say, "If you assume an 8 percent to 10 percent annual return in your 401(k)..." before they go on to tell you how much you'll have when you retire. All the 401(k)s I've ever participated in have hovered around the 1 percent to 2 percent range if not negative territory. As far as I can tell, the numbers are fantasy. Am I missing something? - Jordan P., Cincinnati, Ohio

You can appreciate a very fuzzy answer if you read the columns: the so called "expert" provided no solid statistics about average performance of 401K accounts, just hand wavering. When Vanguard looked at the performance of retirement plan participants in June 2004, the portfolio of the mean participant had gained only 2.7 percent annually over the previous five years, just barely keeping pace with inflation (see 401(k) performance raises concern on Soc. Sec. accounts - MarketWatch). That means that you actually can beat 40% of 401K participants using stable value fund. It also shows clearly the extent of the rape of 401K participants by financial industry.

I would argue that independent of whether you take my advice for granted or not (you better not: skepticism is a virtue) your 401K strategy should be defensive, as this casino is definitely stacked against little guys. Not gaining exorbitant returns (double digits returns that are often advertised in "make money fast" books and publications) but protecting your money from losses should be the major goal. Please remember this figure --  2.7%. That's what you should expect if you are not very careful, taking into account your own mistakes and predatory nature of mainstream financial advice. In this sense getting 4.5% as a typical stable fund provides is a 66% improvement over typical returns. 

The stock market casino, precisely like the casinos in Las Vegas, is a very simple machine. The odds are with the house – always and forever. Customers bring in tons of money and they leave a large portion of it to operators, thinking that they had a really good time. There are too many things that are stacked against owners of  401k accounts. First of all mutual fund industry instead of being a part of the solution is a part of the problem (in a sense that access to Treasury Direct in 401K accounts might actually improve returns).  After all, any mutual fund needs to provide a decent living for owners and staff. There are some incentives too and meeting them like in any business means bonuses and that screw behavior in major way and at your expense.  As Justin Fox wrote, long ago in the paper Is The Market Rational? No, say the experts. But neither are you--so don't go thinking you can outsmart it. - December 9, 2002:

[T]he argument of modern behavioralists includes a crucial observation that wasn't in Keynes -- that professional investors are now under so much pressure from their customers that they cannot make the kind of long-term bets that might beat the market. If they do, as was the case with a lot of value-oriented mutual funds in the late 1990s, they can soon find themselves without any customers' money to invest. That gets us to a world in which an investor with enough staying power and contrarian gumption can beat the market, but the vast majority of mutual funds and hedge funds don't.

What happens after bonus is granted does not matter that much. Once characterized as long-term investors, most fund managers can now be fairly described as short-term speculators. Generally there is a distinct tendency to emulate the corporate world: to provide very plush living for those at the helm at investors expense. You would be hard-pressed to find any large financial services company which has not been implicated in the fleecing of investors one way or another. 

Like in gambling among typical mistakes that 401K investors make are over-diversification (spreading your money all over the table, between superficially different mutual funds) and over-betting (on stocks, especially during the bubbles). In the first case you suffer from high transaction costs (each fund has maintenance fees) in the second you rely on pure luck.

Like in gambling among typical mistakes that 401K investors make are over-diversification (spreading your money all over the table, between superficially different mutual funds) and over-betting (on stocks, especially during the bubbles)

There is also tremendous implicit power of mutual fund industry that gives them the ability to block any reforms. That's why 401K investors are really swimming in shark infested waters. Being slightly parasitic institution the stock market casino produces nothing, no actual value. Employees make a living, executives purchase bigger and bigger mansions and more expensive cars, but the net result is that it acts like an "oligarchy tax": at the end a sizable chunk of investors money are confiscated and redistributed feeding the rapid growth of US oligarchy.

In his book Unconventional Success the manager of the Yale University endowment fund David Swensen gave an interesting assessment of the industry which in his opinion "lead to behaviors that line the pockets of mutual fund managers at the expense of the individual investor;"  He thinks that "colossal failure of the fund industry carries serious implications for society, particularly regarding retirement security for America's workers;". Moreover industry is "seriously impairing the level of resources available to support future generations."  This book is an interesting read if you want to know details how "Full Service" brokers and the majority of mutual funds pillage the small investor's accounts, but most information is available free on  the Internet in "after dot-com bust" articles.  There are also many similar books (like Wall Street Versus America).

Hedge funds is another and  very interesting recent phenomenon. Some of them got at the center of sobering NYT assessment. BTW hedge funds stock market now account for approximately half of all trading on the New York and London exchanges. Taking companies private is another recent fad and there are huge amount of money involved in leveraged buyoffs. Amount of money that was  put in LBOs are many times bigger that the amount of money that was invested by venture capital during dot-com bubble.

After reading all this it is easy to slip into negative mode. Still the key point made above is not frighten and depress anybody, but to stress that IT professionals in general and programmers in particular should pay more attention to 401K funds allocation decisions. It is not that difficult to read a couple of good investment books and learn to use Excel. And it definitely helps to avoid repetition of sad story of the last boom-bust cycle when a lot of professionals lost substantial portion of their 401K due to overinvestment in risky internet-related stocks and funds.  It was the running joke at the time that 401K had turned into 101K.

In Bear Market Etiquette the problems with Wall Street  systematic distortion of information were summarized  in the following way:

After a spectacular year-long rally in the stock market, investors are exuberant. Stock market bears have become an endangered species, but reports of their extinction are greatly exaggerated. Indeed, there are many reasons to believe that a return to bear market conditions may be imminent. If the markets turn down again, it won't be pretty but bearish investors may be able to harvest impressive profits by betting on lower prices.

Regardless of market conditions, most investors are overwhelmingly bullish. They have been trained to hold stocks through thick and thin. The bear market of 2000-2003 proved that the average investor will hold stocks through devastating declines, much like a deer in the headlights. Few investors are even aware of techniques such as short selling, put options, or inverse funds that allow profiting within bear markets. For savvy traders, a fast moving bear market can provide stellar profits using these techniques. But a bear market implies that most investors are losing. Severe losses can lead to extreme resentment against those traders who profit from these environments. If you are a profitable bear trader, you should be sensitive to those who are losing while you are winning. In a very real sense, the money that you are making is the money they are losing.

Cocktail conversations about stocks are typically brag sessions about being long a stock that went to the moon. When was the last time you heard someone brag about a spectacular short sale? The next time you are at a party, try telling your best short-sale story and see what kind of reaction you get. Hopefully, your friends will be polite.

The most popular form of bear market investing is short selling, a practice where the investor sells borrowed stock from a broker with the obligation to purchase it back later, presumably at lower price, with the profit being the difference between the sale price and the repurchase price. Even though there is nothing illegal or unethical about short selling, it is still regarded in popular culture as a rogue practice. Many people consider it unpatriotic to sell short the country's finest firms and profit from their troubles. Short sellers have always created resentment, particularly during bear markets when the majority of investors have lost large sums of money.

Stock investing is fundamentally an optimistic pursuit. Most people (particularly Americans) have a natural tendency to be optimistic. Short selling goes contrary to that natural tendency. This may be why short sellers are mistrusted. Short sellers are not necessarily pessimistic, they are just identifying a trend and profiting from it.

One of the most famous short sellers on Wall Street was Jesse Livermore who emerged from the 1929 crash with almost $100 million. Jesse certainly caused a lot of resentment among all of the ordinary people who had lost fortunes in the crash. Some even blamed Jesse and other short sellers for the crash. In response to investor outrage, the stock exchanges enacted rules to limit short selling that remain to this day. After the crash, Livermore often received personal threats and was forced to hire bodyguards. Sadly, Jesse lost his entire fortune in a mistimed investment strategy a few years later and eventually committed suicide. The tragic story of Jesse Livermore has become a parable for the "evils" of short selling.

Other well-known bears have been teased and ridiculed during bull markets, then shunned and reviled when their bearish predictions came true. Bearish analyst Jim Grant endured years of ribbing by Louis Ruckeyser on the Wall $treet Week television show during the long bull market. The same Mr. Ruckeyser fired "permabear" analyst Gail Dudack just months before the stock market peak in April 2000. The unfortunate Ms. Dudack disappeared into obscurity just as her bearish forecasts proved correct. Professional stock analysts know that a bearish outlook may permanently ruin a promising career. This may be why bullish analysts vastly outnumber bearish ones. There is little room on Wall Street for a bear.

Stock market bears are always in a battle with a perpetually bullish "Wall Street Industrial Complex". These institutions are designed to sell securities to the public so they are always promoting stocks as safe and sound places to invest capital. Trading commissions by short sellers generate little revenue for the brokerage industry. In fact trading commissions in general are only a small part of investment industry profits. Management fees, investment banking, research, media, and a plethora of related activities make up the big money the investment industry. These institutions need a constant inflow of new capital to survive. Only a continuously bullish marketing message can lure investors to buy these products and services.

This bullish message is reinforced by the financial media who receive the bulk of their advertising revenue from the same industry that is after your investment dollars. They have created 24-hour "news" channels that are really nothing more than non-stop infomercials for stock investing. Most people get their financial information exclusively from these tainted sources. Financial media influence is powerful and pervasive. Most common investors simply reflect the bullish perspective of the information they receive from the media.

It is not the purpose of this article to discourage purchasing stocks. Quite the contrary. Stock investing is an essential part of a healthy economy. But there is a time to buy and a time to sell. The media will tell you that anytime is the right time to buy but will never tell you when to sell. Successful investors listen to the message of the markets, not the talking heads on the cable news network.

Conflict of interest

There is not need to demonize Wall Street. Those guys are trying to do what they are supposed to do. The problem is the conflict of interests. There are many of them. One interesting and not so obvious example was described by Barry Ritholtz  in his blog entry Big Firm Conflict of Interest: The Penalty Box (March 3, 2009)

Its fairly well known in the traditional retail investment world that the client and the advisor often have opposing, and sometimes contradictory, interests.

I sometimes forget just how much so in my little world of boutique asset management (We charge about ~1%). A conversation with a couple of brokers from a large firm that I can’t name (hint: Rhymes with Schmerrill) reminded my just how misaligned the incentive system is, and how screwed up it must be to work at a huge, publicly traded, mega asset management firm.

To wit: These two gents guys run a few $100 million dollars in managed accounts. They are mostly stock jockeys, but they have a smattering of bonds as well. Their assets are spread out amongst stocks they selected, in house managers, and other mangers on their firm’s platform. Typically, the clients are charged 1.0-1.25% on their assets. Various products (I hate that word) will pay the broker more or less depending upon the fund manager’s arrangements with the house.

As is typical of brokers with this size asset base and seniority, their payout was about ~43%.

Let’s do some quick math before we get to the heart of the conflict: On $300 million in assets, let’s call it $3.3 million dollars in gross revenue to the firm. That’s about $1.4 million to them, from which they pay a few sales assistants, T&E, etc. Thus, they each should be making about half million dollars annually before Uncle Sam takes his.

Here’s where things get interesting: Early in 2008, they moved aggressively into cash. (Obviously they are TBP readers). For most of the year, they run about 20% bonds, plus 5% percent stocks (some client would not sell). All told, about 75% of their asset base is in money market funds, which pays out essentially nothing to the broker — but preserves the clients investments. Late in the year, they put a toe back in the water.

Overall, the clients do very well. In a year where the markets are practically cut in half, their clients lose about 10%. The investors are ecstatic, and while the two brokers annual compensation was shmeissed — they went from over $3 million gross to under $1 million — they have happy, referral making clients to rebuild their business upon. Its a short term income hit that should generate gains over the long term. And, they got there by doing the right thing.

Now, that drop in income alone raises conflict issues. I tell clients who ask why they are paying 1% to sit in Cash that they are not — they are paying 1% to not be losing 45% in equities, and to have us tell them when to go back into stocks. We think that’s worth 1%, and if you disagree, well talk to your friends who have seen their investments destroyed.

Here’s where things get completely misaligned. When 2009 rolls around, their manager calls them into his office, and says: “Bad news, boys. Your revenues dropped so much last year you are in the Penalty Box. As per your contract, your payout for this year is 30%.”

Let me make sure I understand this: We did the right thing by our clients, and although we took a big short term revenue hit, we hope it pays off over the long run. And the firm response is to drop our payout even further? So the entire system is set up to discourage doing the right thing by the client?

(Hence, why they are talking with us).

We’ve previously discussed the misaligned compensation system of bankers and the short term incentives that led to the entire credit crisis. But did you have any idea that the entire industry was so utterly conflicted?

I find this utterly ridiculous. No wonder we get so many inquiries from (soon-to-be-former) clients of the big houses:They have been cut in half, but at least the firm got its 1% and the broker’s payout remains at 43%.

And that’s all that matters in the end, right?

Hidden fees and fudged numbers in mutual fund industry

We should also should be skeptical about information from mutual funds. They are part of Wall Street and that shows. As one discussion participants noted in 'Lazy Portfolios' sparkle in '07, but new year brings adjustments - MarketWatch discussion board:

Folks the numbers seldom match.  I have actively managed my mutual fund portfolio for over 14 years.  Every year...I do the numbers and calculate my returns.  The fund companies...all of them fluff the figures.  Some are worse than others and one needs to be careful in which companies they invest in.  I prefer the Fidelity and Vanguard series with a little T.Rowe Price...but they all fudge the actual returns.  A NY Times Business article 2006 exposed this fact two years ago.

So basing your decisions on information about past returns is dangerous as numbers are often fudged.

As one reviewer of  Gotcha Capitalism How Hidden Fees Rip You Off Every Day-and What You Can Do About It  aptly noted:

The driving force behind this explosion of unfair business practices is computer technology and the shift to an online/database economy: economic transactions are essentially invisible now, and it is much easier for profit-driven companies to simply make up a bunch of fees or "service charges" when no actual services are being provided.

... companies have scientifically researched the most effective methods for hiding bogus fees, and what the tipping point are, so that they steal tiny amounts from millions of customers, but in ways that these customers either won't detect, or understand. And it doesn't matter if you catch one company ripping you off: they all do it, so there's really nowhere for consumers to turn.

As I noted in the introduction 401K investors by-and-large are feeding financial intermediaries. In a typical bond fund with average return 4.5% and fees 0.5% the mutual fund share is approximately 10% of returns, the share equal to what landlords used to demand from serfs during middle ages -- 10% of harvest was the usual rent for farming land during this time.  Here they provide us with nothing but a web portal, on the contrary we provide them the money and they still are getting the same 10% cut.  The value of the whole 401K circus for Wall Street is in fees they get from 401K donors.  This is a powerful fee extracting machine.

If you use a broker with flat $10 fees and your average transaction size is $1000 you are paying 2% ($10 to sell and $10 to buy a security).  This situation is typical for eTrade and other online brokerages.



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