Financial Crisis Ends America's Second Gilded Age?
Politics / US Politics Feb 10, 2009 - 07:53 AM GMTBy: Oxbury_Research
Mark Twain called the late nineteenth century the “Gilded Age”. In fact, Mark Twain wrote a novel called “The Gilded Age” ridiculing Washington D.C. and many of the leading figures of the day. Mark Twain thought that the period was glittering on the surface but corrupt underneath. Many people believe that there are many similarities between that era and our current era. It seems to me to be another instance of history “rhyming”.
The Gilded Age was an era of intense political partisanship. Sound familiar? This era also saw the rise of the Populist party. Burdened by heavy debts, many farmers joined the Populist party. The Populist party, among other things, called for an increase of the amount of money in circulation and government assistance to help farmers repay loans. Similar populist policies are definitely alive and well today.
The Gilded Age has been caricatured as an era of corruption, conspicuous consumption, vulgar displays and unfettered capitalism. This late nineteenth century era was seen as a period of the “robber barons”, unscrupulous speculators and extravagant displays of wealth by America's upper class. Many people would describe our current era in a similar fashion.
I do look forward to some writer stepping up and becoming this era's Mark Twain because human nature being what it is, not much has really changed either on Wall Street or in Washington.
“Robber Bankers”
I am often asked by folks not familiar with the financial world - “Why are the banks in such bad shape?” It's simple - because their executives looted them and their board of directors let them. Will future historians talk about this era as an age where “robber bankers” ran rampant?
This age of the “robber bankers” began years ago. During the dotcom bubble, investment bankers and the like took public hundreds of companies which were valued on nothing more than hot air. Much of the hot air was supplied by the enablers on CNBC and other media outlets.
During that boom, for every dollar that was raised via an IPO, banks made 57 cents in fees and about half of that was dished out directly to the bankers. This was their reward for the ludicrous valuations they put on basically worthless companies.
This is where the perverted system of rewarding bankers for short-term profits really got rolling. Bankers were rewarded regardless of what happened to the IPOs in the years that followed. There was no “punishment” for bringing companies public which failed shortly thereafter.
Bankers thus became fearless about risk. There was no stick in a traditional carrot and stick approach, only a juicy carrot – their compensation pool. Compensation for bankers became so skewed that they were encouraged to take more and more risks in order to generate larger and larger profits for themselves.
Fast forward to today. Investment banks and hedge funds turned risk into a form of leveraged financial crack cocaine. Much of the risky, overrated (thanks to the corrupt rating agencies) debt issued by Wall Street had little upside potential, only massive downside potential.
The “robber bankers” knew this and yet had their “snake oil salesmen” (see my Bourbon & Bayonets article on Wall Street snake oil) selling this garbage all over the world. What we needed was for the financial regulators to step in and rein in the lying snake oil salesmen.
Trust Washington D.C.?
Instead, the Bush administration closed their eyes and chose to ignore the happenings on Wall Street. They did their best imitation of an ostrich and kept their heads buried in the sand. They kept their heads firmly buried in the sand even when Wall Street had brought the global financial system to the edge of financial oblivion and US-style capitalism had fallen into disrepute.
Which brings us to today. The Obama administration has been passed a horrendous hand by the Bush administration. So far, they have not played it well.
Think about it. Whatever solution is agreed upon by the political class in Washington will mean that the United States will have to go many more trillions of dollars deeper into debt. This means that the US Treasury will have to issue many trillions of dollars worth of Treasury bills, notes and bonds.
This also means that the United States desperately needs foreign investors to hold on to the US debt they already own and to keep buying new US debt. Yet, it seems that the Obama administration is deliberately trying to antagonize foreign investors with their Buy American policy. Add to that, their stirring the currency pot with the largest overseas holder of US treasuries – China.
Americans have greatly underestimated the degree of anger around the world toward Wall Street and America. What the Obama administration has to realize is that global investors, particularly in Asia, are already fuming.
Many countries are already fuming over all of those triple-A rated “suitcase bombs” that went off in their financial markets, left there by Wall Street's “snake oil salesmen”. People overseas have come to realize that many of the securitized bonds issued and sold to them by Wall Street banks were nothing more than a conduit for shifting losses to “suckers” - unsuspecting overseas investors. In effect, they were swindled by Wall Street with Washington's tacit approval.
This has led to widespread global distrust of major US institutions – both Wall Street and Washington, which allowed Wall Street to sack and pillage everywhere across the globe. America is going to have to do a lot to regain the trust that had been built up for generations and has now been lost due to the greed of a relatively few people.
Meanwhile, there is another important fact that has not escaped the notice of overseas investors. This fact is that none of the Wall Street bank executives, who were largely responsible for nearly blowing up the global financial system, have been brought to justice. In fact, many of them are still in place and have been handed responsibility for the multi-billion dollar clean-up. This is absolute insanity and will not re-kindle trust in US institutions by overseas investors any time soon.
I believe this will be the next major shock to the US financial system in 2009. There is a palpable fear among overseas investors, such as the sovereign wealth funds, that the Americans will swindle them again. Due to this lack of trust in America, foreign investors are very gun-shy and will likely keep lots of dry powder, invest in their own markets and stay away as much as possible from upcoming Treasury auctions.
I believe they will continue to do so until the Obama administration brings about real Changes on Wall Street. The Obama administration has to clearly tell Wall Street, “Your Gilded Age Is History!” I won't hold my breath for that sort of Change any time soon.
Cheers,
By Tony D'Altorio
Analyst, Oxbury Research
Tony worked for more than 20 years in the investment business. Most of those years were spent with Charles Schwab & Co., both as a broker and as a trading supervisor. As a supervisor, he oversaw, at times, dozens of employees. Tony was trading supervisor during the great crash of 1987 and was responsible for millions of dollars of customers' orders.
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
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Comments
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laurie
05 Oct 09, 11:38 |
wall streets gilded age-
Todd, This is why, Obama has to start working on regulation. People are not going to trust are system until he gets mean with Wall Street. love Mom |
