Leverage blessed leverage for certain banks' prop trades and hedge funds

When regulators look to address the fix they need look no further than what HAD always been observable - leverage. Mr Benanke, Mr Paulson, Mr Geithner were each aware of same during the hockey stick era 2003 to 2007 and did what? NOTHING. Mr Geithner protected his NY Fed turf by creating LFIG (The Large Financial Institutions Group), Mr Bernanke gave several prescient speeches as early as 2006, Mr Paulson did what he knew how best to do - a deal for the Street.

When it comes to leverage, for the uninitiated leverage equals borrowed money and when Wall St and certain banks lever they do so for whose benefit? The house, I repeat the house. Not you, not me; but their own traders and executive CASH compensation, last shareholders then somewhere somehow the bond holders of these institutions forgot how to perform due diligence and general creditors and got what they deserved. Mr Buffett in only his sage way, stated a few months back when it comes to leverage, "If you don't owe anyone money guess what ? ( I added that piece) you can't go broke." True then, true today and true tomorrow.

But back to the headline, this writer has maintained that the very increase in leveraged holdings in particular in mortgage backed (and related derivative) securities (for that matter it could have been any asset), gave the rest of the participants IN THAT MARKET signals that they too could and/or should hold even more of the SAME.

After all there must have been more sameness, just like milk right? More homogeneity so relying upon similar data, crunched through similar internal models measuring volatility and correlation to warn when danger (less liquidity) was approaching. However, just as few could react in time to avoid the deadly Indian Ocean tsunami which struck the day after Christmas 2004 the same could be said for certain banks' proprietary trading desks. The question to have been asked was NOT whether a potential tsunami required measurement it was the when not if occurrence of a large earthquake that caused the waves that required measurement. Such that the same underlying mortgage collateral is AND was undeniably in a when not if state.

Leverage, Darkness, Derivatives, Internal Models, CASH Compensation
It's more than a fascination; fascinatin' stuff in certain parts of the country; how could certain
banks and brokers churn out record after record "profit" and pay terrific sums in CASH compensation if they truly competed in transparent markets? Drum beat please...answer? Leverage. And darkness. And derivatives. These securities were largely created, traded, valued over the counter (dealer darkness, indicative levels based upon cherry picked, disclosed trades) and trader CASH compensation upon same; not to you, not to me. I'd be more fascinated to learn how these traders invested these CASH bonuses (and more recent bonus replacement salary increases) - especially the amounts funded by taxpayers - writ you and me.

Another principal agent conflict of interest on the taxpayers (unleveraged) dime; I only wish it was a dramatization.

Bailout: The creators of crisis not capable of the cure

Financial theater is one way to describe today's line - up of no less than 8 bankers (including the newest two, Mr Blankfein and Mr Mack).

I'll be very brief; if any taxpayers, senators, congressman believe the pablum spewed that these SAME CEO's who CREATED the crisis by piling on debt and leverage onto their own balance sheets - upwards in some cases of over 30 times equity. (Note: this is reported leverage - not the same as actual given the impairments and asset write downs which should have been booked long ago; therefore "actual leverage" is estimated to be well over 50 time equity.) If anyone actually believes that the foxes will fix and restore the economy - you have to be pretty gullible.
I'll tell you a story - I'm from New Jersey, whose nickname is the "Garden" state; however in business I tell my clients that I want to be like I'm from the state of Missouri, whose nickname is? The "Show me" state. By the way, "gullible" is not found, anywhere in the definition of prudence.

These SAME CEO's are the very ones even today who 2:
1)have not told us how they used / spent TARP money
2) have not told the markets what assets they hold on their books
* Let me be even more BLUNT - TODAY - no one, I repeat, no one (not Mr Bernanke, not Mr Geithner, not Mr Paulsen); knows the total extent and nature of the assets held by these banks. Stunning - today the 8 CEO's testified "safety and soundness" was the MOST important factor in decisions concerning their bank; fascinating - really; what did they know and when did they come to this conclusion? It surely could not have been in 2004 to 2007, of course; that's when the bonuses were somewhat higher. Pity the poor CEO's bonus haircuts in 2008.

Again, let's call a spade a shovel because that's what it is - the sooner the US Taxpayers see the last show of financial theater the country will be better off.

Bloomberg had Mr Sorrentino, president of the nations' community banks on today; how refreshing he was; 98% of the banks are healthy (as this blogger pointed out last October) - the "too big to fail" doctrine is total hogwash - likely invented by someone at the big banks who was getting a "too big" paycheck they were looking to protect.

Mr Reid, praised the three Republican Senators who voted in favor of today's economic stimulus as true patriots. True patriots, if they are in fact true, would recognize that any programs which backwash thru DC are in fact a clear demonstration of waste of taxpayer funds. Leave the stimulating in the hearts, minds, and more importantly, the wallets of each taxpayer - the best economic decision is almost always the "local" decision - keep Washington out the economy; they can't even tell who the bank robbers (er incapable,inept CEO's) are AFTER they return to the scene of the crime!

Another and the last way to put this is the mantra - if you want different outcomes you need to change your inputs; I cannot imagine a more dire financial and economic circumstance; not with standing Mr Obama's campaign promise "Change we can believe in" - I say "show me".

Is a prudent fiduciary result at all possible? US Treasury - Crossing the LINE into partnership with TARP banks?

As a result do TARP recipients, the Big 5 banks, receiving good US taxpayer dollars for toxic assets owe a fiduciary duty to the US Treasury / taxpayer?

What is the US Treasury thinking, contemplating?
What is, if any, the training in fiduciary responsibility of civil servants at the US Treasury, Federal Reserve and TARP banks management?
What is the fiduciary capacity of all of our elected officials - federal, state, county and local?

If parties are not trained, educated and informed what result is likely to befall the taxpayer.

For example.
Upon receipt of US Taxpayer monies, is the Treasury requiring acknowledgement of a duty of undivided loyalty or is it arms-length, perhaps even an adverse relationship?

Now what? before & after - parsing the interests of bailout

Who has money at risk? The US taxpayer.


Since this is an EXTRAordinary event a more balanced set of risks can be fashioned if:


SOME SKIN IN THE GAME if ANY commitment of US taxpayer funds

As previously suggested, in "RECYCLING OLD Wall St compensation" Wall St and the other financial services institutions managements, boards and employees should contribute some personal funds to a set of solutions. AND take a second place interest BEHIND the return OF and the return ON US taxpayer money.


The taxpayer rightly or wrongly feels that:

• They get to keep their jobs, get a paycheck (at taxpayer expense!), in cleaning up their own problems - things could be a lot worse; just ask an auto worker, flight attendant or pilot.


• The US treasury proposal fails to pin money responsibility on those most in the position to have known better;


• Same proposal will, as previous extraordinary rescues (at taxpayer expense), fail to deliver a cure as promised;


• Liquidity band aids the fracture - it can act as a temporary solution only;


• Liquidity DOES not, as stated on http://www.fiduciaryexpert.com/ in JULY 2007, address the REAL immediate problem - that is credit default, due to asset values continued decline;


• The REAL cure is to allow all markets to proceed on their own - let private market players balance it all out - no matter how painful.


• The taxpayer understands that markets need to self - correct; not all goes up (or down) in a linear fashion.

ONE FINAL Q-U-E-S-T-I-O-N FOR THE TV Business media

Today is Monday, September 29, 2008

TV Business media (the usual cast) is in such a questioning frenzy TODAY - stirring up debate, looking for answers, one even chest thumping "WE own this story" really?

Where were they in the 16 quarters spanning 2004, 2005, 2006 and 2007?

Watching the PARADE of analysts-estimate-beating, RECORD Wall St EPS announcements get what? A Cheer! When scrutiny was the more appropriate news angle, not to mention the primary job descriptor and RESPONSIBILITY of a journalist.