Banking Sector Practices, Sure It’s Legal… But Is It RIGHT?
Stock-Markets / Credit Crisis 2009 Sep 03, 2009 - 03:48 PM GMTBy: Graham_Summers
Folks, I’d like to ask your indulgence today. Typically we reserve these pages for in-depth analysis of the stock market and economy. But I’ve grown FED UP with the complete lack of coverage that one area of the current crisis has received.
Ever since the Financial system started imploding in July 2007, I’ve heard countless folks talk about liquidity, bull markets, bear markets, the dollar, bailouts, etc. But there’s one thing I’ve heard virtually NO ONE talk about. That is:
MORALITY or ETHICS.
Everyone’s analysis of this financial crisis is far too complicated. The simple facts are that it was created by complete and utter greed on the part of various regulators and financiers.
In simple terms, the banks (investment and otherwise) lobbied Congress, the SEC, and other regulators to let them engage in business practices that were neither sensible nor responsible (excess leverage, financial wizardry that turned junk subprime assets into “AAA” rated entities, and more). They did this under the pretence that these practices would be good for the market and US economy as a whole.
The reality is that these practices allowed the banks to make ENORMOUS profits: between 1970 and 2003, financial stocks’ earnings as a percentage of the S&P 500’s total earnings rose from less than 10% to 31%. Put another way, by 2003, financials accounted for nearly 1/3 of ALL profits made by publicly traded companies.
Now, THE largest expense for any financial company is SALARIES. So when banks and financial companies lobbied to have their leverage limits increased (or any number of other changes that were made in the ‘90s and ‘00s), they did it for one reason: to collect HUGE payouts.
These folks were driven by greed and nothing more. They didn’t want more people to own homes. They didn’t care if folks lost money buying the AAA rated garbage they pawned off on pension funds and the like. They didn’t care if their OWN balance sheets were cesspools of crap loans no one would ever pay back. Heck, they weren’t even looking after their shareholders (leverage of 50-to-1 makes it extremely likely you’ll end up wiping out ALL equity sooner rather than later).
No, they wanted one thing and one thing only: to make as much money as they possible could.
And boy did they.
In 2007, the average Goldman Sachs pay was $661,000. For Morgan Stanley it was $340,000. Again, these guys were after one thing: BIG PAYOUTS.
So now we fast forward to the financial crisis.
Ever since this Crisis began, the guys behind the bailouts and other “solutions” have used the law or legal precedent to justify their actions. Bernanke, for example, has cited all kinds of laws that give him the right to throw tax-payer money around, monetize debt, and all the other financial hocus pocus he’s engaged in. Same goes for Hank Paulson (who somehow managed to convince the government that he was an impartial figure despite making $500 million+ at Goldman Sachs).
But no one has EVER used the phrases “this was the right thing to do” or “this was a good, moral action.”
Perhaps I’m a naïve fool who belongs in a Disney movie or a Charles Dickens novel (where good and bad distinctions are always clear), but I don’t see the ethics or “moral right” of any of the stuff going on in our financial system today.
I don’t see how it’s “right” for the US central bank to destroy our currency so that Goldman Sachs can pay itself 2007 level bonuses again.
I don’t see how the same folks who created this mess (Hank Paulson, Bernanke, etc) should be allowed to try and fix it.
I don’t see how it’s “morally correct” to funnel tax-payer money to Wall Street BUT not to small businesses and the like (if we’re going to bail people out or help them, why not focus on the 17 million small businesses instead of the 10 biggest banks?)
I don’t see how it’s “ethical” to allow Goldman Sachs and other High Frequency Trading Program operators to “front-run” me and everyone else who participates in the financial markets (Goldman’s traders only lost money two days last quarter… that is statistically impossible unless you’re cheating).
Bottomline: I don’t see ANY actions that are truly aimed at helping MOST of us (the RIGHT thing to do). All I see are huge sums of money (my, yours, our children’s and our grandchildrens’) being thrown at guys who:
- Made a ton of money pursuing reckless business practices, screwed up, and should go broke or be fired
- Have shown ZERO responsibility for the actions they pursued that caused this Crisis
- Have yet to offer any real solutions (or changes to their business practices) to help SOLVE the Crisis
Basically, we have a very small minority of Americans who believe they deserve a FREE LUNCH. These folks are Wall Street and the banks (the alleged pillars of capitalism).
The irony here is that the basic tenant of capitalism (and MORALITY) is responsibility for one’s actions. If you pursue reckless business practices in the name of greed and those practices turn against you, you SHOULD GO BROKE. You don’t get to keep everything, keep calling the shots, AND get other peoples’ money as a reward for your mistakes.
Never-mind the legality of this issue… it’s simply NOT RIGHT. End of story.
Let’s put this whole issue into perspective. Imagine two salesmen working at the same firm: Bob and Frank. Bob lies to his clients, embezzles money, and generally engages in business practices that could damage his firm. Frank, on the other hand, never lies, doesn’t cheat his clients, and always watches out for the firm’s best interests.
Now, what sane business owner would give Franks’ salary and commissions to Bob?
NO ONE.
And yet, this is exactly the “solution” Ben Bernanke and others have been pursuing in dealing with this Crisis. They are giving OUR money to people who created a MESS. Again, forget about whether or not this is legal. It’s not right. Never has been. Never will be.
And I don’t think I’m totally misguided here.
The ENTIRE financial system runs on trust (credit and debt are issued based on your trust you will be paid back). If you want to fix the financial system, you need to restore trust.
Ben Bernanke is working overtime to make the banks trust each other again… but he’s sacrificing an even more important “trust” relationship to do this. That is the trust Americans have for Wall Street/ the banks/ regulators/ etc.
It may get Ben Bernanke re-elected… but it’s going to destroy Americans’ retirement, incomes, and prosperity.
And that simply is not right.
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Good Investing!
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.
© 2009 Copyright Graham Summers - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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