Alan Greenspan, in his testimony to Congress yesterday, professed to be in "a state of shocked disbelief" that putting the foxes in charge of the henhouse resulted in fewer chickens and fewer eggs, golden or otherwise. Greenspan actually said he still believes that the "self-interest" of banks and other financial firms is the best protection against malfeasance!
SEC Chairman Christopher Cox said – with a straight face -- "We have learned that voluntary regulation does not work." Whoever “we” is, “we” is slow learners. The “fox in the hen-house” fable was written over 2500 years ago. Guess they didn’t teach folk wisdom at Harvard.
While these are the only two who were flailing before Congress yesterday, they shouldn’t be. The former CEO of Goldman Sachs (GS) should be there, too. Oh, wait, he can’t be. He’s now the Treasury Secretary responsible for selecting the foxes! Well, then, let’s drag the other Wall Street CEOs and the big regional and multi-national bank CEOs in. Tell ‘em to bring their dark pool and algorithm-loving heads of their trading desks as well. (For more on dark pools and algorithm trading and their destructive influence on the investing of our life savings by actual human beings, see my article, Program Trading, Dark Pools and Gold.)
John Kenneth Galbraith, writing on the Great Depression, pointed out the foibles or trusting Wall Street to regulate themselves:
This took a variety of forms, of which by far the most common was the organization of corporations to hold stock in yet other corporations, which in turn held stock in yet other corporations. During 1929 one investment house, Goldman, Sachs & Company, organized and sold nearly a billion dollars’ worth of securities in three interconnected investment trusts—Goldman Sachs Trading Corporation; Shenandoah Corporation; and Blue Ridge Corporation. All eventually depreciated virtually to nothing.
The Glass-Stegall Act was a well-conceived response to shenanigans like those from Goldman Sachs, above. It created a Chinese Wall between stock brokerage (dressed up with the fancy phrase “investment banking” to give it a better cachet) and commercial banking. As a US Supreme Court opinion held in 1971, it did its job well:
Congress was concerned that commercial banks ...had both aggravated and been damaged by stock market decline partly because of their direct and indirect involvement in the trading and ownership of speculative securities. Congress also...repeatedly focused on the...hazards that arise when a commercial bank goes beyond the business of acting as fiduciary... and enters the investment banking business either directly or by establishing an affiliate to hold and sell particular investments.
So who did away with the Chinese Wall of safety that Glass-Stegall provided for two-thirds of a century? Republican Phil Gramm was the primary sponsor of the bill but almost every legislator voted in favor and then-President Clinton was only too happy to sign it. Within a month of the abolition of Glass-Stegall, then-Treasury Secretary Robert Rubin, the former co-chairman of Goldman Sachs, became Sandy Weill’s top lieutenant at Citigroup (C), the bank that led the charge into using depositors’ money to speculate on sub-prime mortgages, algorithmic trading, and six-sigma derivatives.
Weill spent $100 million of Citigroup’s earnings in just one year to lobby for the destruction of Glass-Stegall. One company. One year. He still proudly displays the pen President Clinton used on his wall. Some people collect animal heads. Weill has trophy pens. And recently, Goldman’s current boss noted, “We’ve come full circle, because this is exactly what the Rothschilds or J. P. Morgan, the banker were doing in their heyday. What caused an aberration was the Glass Stegall Act.”
The head of the biggest stockbrokerage – now a commercial bank, so they can accept depositors’ funds and get government protection against losses – describes Glass-Stegall as “an aberration.”
It was not an aberration. It was an essential safeguard protecting America’s hard-working people. So was the uptick rule, also tossed away just last year. So were trading collars, most of which were tossed aside last year.
Then came the advent of naked short selling. Not for you and me, you understand. Mere mortals would find themselves in felony court for doing this. But big-spending campaign contributors prove yet again that we have the best politicians money can buy as they were given carte blanche to sell short more shares of a given company than there are shares of that company. Then there is program trading which I would allow only on days when the market moved less than 250 points, but today run unopposed to take a market up 300 points in a day, and down 500 in less than two minutes.
What can you do to protect yourself? Demand reinstatement of Glass-Stegall or vote out the legislator who won’t reinstate it. Demand the reinstatement of the uptick rule. Demand the abolition of naked shorting. Demand the resumption of effective trading collars. Demand that limits be placed on computer-to-computer program trading. Revel in the flailing of those who did this to you. Revenge may be a dish best eaten cold but, what the heck, it’s cold.
Finally, buy yourself some of the fallen angels that this lunacy has created. Even with Wall Street’s greed and stupidity, a well-run company selling a desirable product is still a going business, no matter what the current stock price shows. Value will out over the intermediate term. Buy some gold, too. It’s the only money governments can’t print more of.
- Anglo American (AAUK), the big platinum, diamond, coal, iron, steel and gold firm, at less than $10.
- Keppel Corp (KPELY) the Singaporean giant that is the world’s leading builder of jackup drilling rigs for deep-water exploration, one of the biggest infrastructure firms in Asia, and a leading developer of residential townships in China. It sells for less than $6.
- Penn Virginia Resources (PVR) and Natural Resource Partners (NRP), two coal-royalty firms now yielding more than 10% and providing solid cash flow. (Less than $15 and $22, respectively.) And, for gold,
- Goldcorp (GG), one of the best-managed, lowest-cost gold miners in the world. Less than $16.
- Anglogold Ashanti (AU), which has a large forward hedge in gold but, with the current pullback, ample opportunity to reduce that hedge. Less than $15.
Disclosure: Long AAUK, KPELY, PVR, NRP, GG and AU – and buying more...
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This article has 4 comments:
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iThinkBig
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Oct 24 09:50 AM-
Kevin Lamson
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johnboy
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iThinkBig
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