How America Got Herself Into This Financial Mess...

Dear Friends:

I read with total agreement the comments made by a Robert CT after watching the interview by Charlie Rose of Morgan Stanley Chairman & CEO John Mack (who happens to be Charlie's pal). It is greedy executives and the likes of John Mack who contributed to the erosion and decline of America - excessive greediness that knows no bounds.... Charlie Rose disappointed those of us who had watched his show....Nevertheless, here is the article that I have copied and pasted below....

robert_CT 02/26/2009 04:04 PM Report

“Nobody saw this coming”

Mack is an idiot! The history of markets is a history of bubbles and any CEO of a major financial firm that couldn’t see the biggest bubble in history doesn’t deserve a job.

I am a nobody with no special insight whatsoever yet I put 25% of my net worth into gold in late 2005 specifically because I thought that U.S. economic activity had reached an unsustainable frenzy and because I believed that such activity was built on a reckless and unsustainable increase in leverage.

I am not a “gold bug” and had never bought gold in my life. I feared a complete collapse of the U.S. financial system and believed and continue to believe that we may witness the insolvency of the U.S. government or a Weimar Germany style inflationary spiral which are really the same thing. Time will tell but this scenario is a possibility.

Furthermore I sold off all my financial stocks by October 2006 in anticipation that they would crash. While I wanted to short them I didn’t because being short is very challenging psychologically. I am now buying selected stocks including the financials in expectation that I will, with some luck, make at least a 500% return over the next five years. That is if the U.S. government doesn’t go insolvent, a real possibility, hence I continue to maintain by gold position.
So if someone like me had a sense of this impending disaster how couldn’t Mack see it? Has Mack ever heard of George Soros who warned of such a scenario beginning a few years ago. In addition, Soros has a view of markets that is at odds with the conventional economic dogma taught in American business schools and he has written several books outlining his ideas. Is Mack so dumb as to believe in the efficient markets theory?

I also note that Mack is one of the clowns who went to the SEC in 2005 and persuaded the SEC to change the regulations limiting the leverage for investment banks, thereby allowing MS to increase its leverage from approximately 12:1 to 31:1.

And there is no doubt that Mack is one of the fools, along with Robert Rubin, Alan Greenspan and Larry Summer who argued against regulating credit default swaps and other derivatives.
Of course Charlie Rose is Mack’s buddy so none of these inconvenient truths come up in this interview.

I worked for one of the major investment banks for about 8 years in the early 90s and by my estimate only about 30% of the business activities at these firms relates to the real or productive economy. Sure they issue bonds and stock on behalf of real companies engaged in real economic activity but about 70% percent of what they do involves promoting hair brained mergers for the sole purpose of generating fees (i.e. AOL-Time Warner which I promptly shorted post merger); financing financings to generate fees (see CDOs and CDOs squared) and running speculative leveraged interest rate arbitrage portfolios (at the peak about 2/3 of MS’s, MER’s and LEH’s balance sheets consisted of nothing more than naked speculative interest rate arb positions which collapsed under the weight of their own stupidity). Then you have all the fee generating activities geared to private equity and hedge funds which are not part of the real economy but rather “helpers” to use Warren Buffet’s euphemistic term.

In reality private equity and hedge fund firms are parasites on the economy who have learned to use the banking system and capital markets to turn the real economy into a big game of monopoly for their benefit. In short the financial services industry became corrupted by greed, arrogance, hubris and more greed. The investment banking/banking industry needs to go back to what it was at one time. A legitimate business that promotes real economic activity by making markets on behalf of real investors and that raises money for real companies.

Mack, Fuld, and Stan O’Neal should be forced to forfeit every penny they made beginning from the day they increased the leverage of their firms above approximately 12:1 Then we can debate whether they should spend any time in a federal prison for destroying the savings and livelihoods of so many ordinary Americans. Don’t get me wrong there is lots of blame to spread around but these people were at the center of this calamity and it was all driven by sheer unmitigated avarice.

As it stands Wall Street is primarily just one big “pump and dump” operation, that lurches from one scheme to the next. After the dot com bubble Wall Street needed another scam to generate fees and massive bonuses and when Alan “the ideological fool” Greenspan lowered rates to 1% he laid the ground for Mack and company to gin up the next bubble. The problem this time was much worse than the dot com bubble because it was built on leverage, hence the calamity we are now living through.

I wouldn’t be nearly so angry about this if these people had any sense of shame or contrition but Mack seems so pleased with himself because of the three of four weeks he spent huddled in his executive suites working around the clock to save MS. It would have been nice if Rose pointed out to this jackass that the firm wouldn’t have needed saving if it weren’t for Mack’s stupidity and greed. In any event Mack’s idiocy and incompetent management allowed me to take a nice position in MS on Oct-10 for $7.00 a share. I can’t wait to bail out of this stock in a few years time at or near the peak of the next bubble assuming of course that we aren’t running around with wheelbarrows of worthless money by then.

Mack, Fuld, O’Neal, et al. want us to believe that the system was swept away by some unforeseeable event but the reality is that the financial system collapsed under the weight of its own greed and stupidity. Nice work guys!


Great take on the financial crisis, huh? Many of these executives and CEO really think the American public are stupid. It tells us that capitalist Americans are MORE corrupt, mean ande brutal than any others where this is concerned, and unashamedly so... The American People should feel indignant, and have the right to demand that justice be done - and soon. President Obama should have the right to fire existing officials or anyone in government who have had a hand in contributing to this terrible mess - even those he has just appointed. There is no shame in doing that.

I'd rather see a President admit his error and take immediate corrective action, than let an existing corrupt official continue doing further damage to America's economy. and this is probably what most Americans want too.

This financial crisis further convinces me that corruption exists everywhere, no matter the form of government a country has. The differences are in the degree. After this crisis, no one can point a finger at China anymore. At least, in China, the current leadership in government is stamping corruption out steadily...

And if these CEOs are in China, their heads will really roll....and that, Ladies and Gentlemen, is what accountability is all about...

If you are one of my students reading this article, I want you to forward it to all your classmates and friends. Let them all learn from this, and not be sucked into this sort of corrosively, unethical behaviour. Let it be a reminder to "CAVEAT."

Regards,

NH