The US Today: What Happens When You Let Investment Bankers Run a Country
Politics / Credit Crisis 2009 May 24, 2009 - 08:15 AM GMTBy: Graham_Summers
If you’re like me, you’ve probably looked at the US recently and wondered what has happened to your country. I’m not talking about the GOP/ Obama situation nor am I referring to capitalism vs. socialism…
I’m simply talking about basic common sense items like: stay out of debt, don’t do anything if it doesn’t make sense, do you homework before signing a contract, etc.
Indeed, the American government (I’m including the Federal Reserve in this category) began charting a strange course as a country when the Financial Crisis first accelerated with Bear Stearns’ collapse in February ‘08.
Granted we’d flirted with government intervention several times before (Chrysler in the ‘70s, Long-Term Capital Management, etc.). But we’ve since taken it to a whole new level. The basic risk of capitalism (failure) has been removed from the equation for most major US businesses. However, this risk was removed at the expense of increasing the US’s debt load and putting the dollar at risk.
Pushing to remove risks so you can pursue insane business practices? Crazy deals that offer little benefit to the parties? Doing things quickly without actually considering the consequences?
Sounds a lot like investment banking doesn’t it?
Investment banking as an industry runs almost completely contrary to wealth creation since it thrives on fees rather that capital appreciation. Investment banking is about making DEALS (any deals) regardless of whether the deals make sense or benefit both parties (after all, the advisors to the deals, the investment bankers, get paid based on commission and free stock).
Indeed, investment banking is one of the few industries on the planet in which you can get rich by creating debt for others to pay off. Goldman Sachs, as you know, is an investment bank. And this financial crisis is riddled with former Goldman Sachs execs.
Hank Paulson is the most famous. In the private sector you’ve got John Thain of Merrill Lynch, Robert Steel of Wachovia, Ed Liddy of AIG. On the government side of things, you’ve got Hank Paulson as Treasury Secretary, World Bank President Robert Zoellick, Neel Kashkar who’s in charge of running the Troubled Asset Relief Fund (TALF), and others.
You can see the “investment banking” stamp everywhere. Consider the deals the Feds have created and consider the actual benefit they offer to the parties involved:
- Bear Stearns/ JP Morgan
- The US taxpayer/ Fannie Mae and Freddie Mac
- The US taxpayer/ AIG (and all of its counterparties)
- Merrill Lynch/ Bank of America
All of these deals were terrible. All of them were rushed through. And all of them were allowed because of lax regulation/ poor analysis. To this day no one in the mainstream media seems to have adequately analyzed these deals in a way that includes actual numbers. Instead we get dopey adages like “it’s about stemming the tide,” it’s important to “stop the bleeding,” “it’s about saving the system.”
You can also see the “investment banking” stamp on the Federal Reserve. Two years ago, the Fed owned $800 billion worth of Treasuries. Today, its balance sheet contains $2.1 trillion worth of assets, only $543 billion of which are Treasuries. And with only $51 billion in capital, the Fed is leveraged at 42 to 1!
Tons of junk assets that aren’t properly valued? Refusal to reveal the real worth of your balance sheet? Leveraged to the hilt?
Sounds like investment banking!
To me this financial crisis is nowhere near over for one simple reason: we continue to perpetuate the VERY same business practices that created it in the first place. It’s like a junkie getting clean by continuing to use dope. In the US government’s case, it’s just that the junkie has super clever explanations and jargon to explain why this is a good idea. The reality is that it’s not. And it’s going to end very, very badly.
Covering all of these items in detail (as well as how to prepare your portfolio to deal with them) would take too long for one little essay. So we at Gains, Pains, &Capital have put together a FREE special report on how to prepare for the Second Round of this financial crisis. You can download it FREE at www.gainspainscapital.com.
Swing by today to pick up your copy.
Be Safe,
By Graham Summers
Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets.
Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
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