L - E - V - E - R - A - G - E = root of Wall St. Financial Services crisis

In testimony today before the Senate banking committee, Secretary of the Treasury Paulson fails to state the word LEVERAGE; the crisis IS CAUSED by Wall St's extensive leverage of complex, illiquid mortgage backed securities, derivatives and insurance thereon. It's not just that these firms invested in mortgage securities - no matter how complex - it's the fact that they DECIDED to leverage investments in same! Why? To make even more money.


In the past 5 years NO ONE, I REPEAT NO ONE ON WALL ST, UPON RECEIVING A PAYCHECK OR A BONUS CHECK OR STOCK OPTION GRANT - raised their hand or voice to state; "Something's not right - my compensation is too high!!!" DID THEY?


Many Wall St firms aka the Financial services (FS) industry learned what hedge funds were doing; outperforming a benchmark by juicing performance with leverage, they imitated that behavior and added even more leverage, especially to securities related to an asset class that was black & white overvalued by ANY measure; real estate.


Wall St (FS) borrowed, also leveraged heavily against other asset backed securities including credit cards, auto loans, boat loans, aircraft loans, student loans and other exotic assets and cash flows - these assets were then securitized (another source of revenue) in various classes, traunches and to many different investors.

Further, credit enhancements on these "securities" so called default insurance, (in a further incarnation, credit default swaps) was underpriced; perhaps due to one particular player's (lacking true capacity) actions, market share gobbling, anti competitive behavior; often sanctioned / blessed by the "independent" credit ratings agencies. Can you spell AIG?


In the past Mr Paulson promised Congress that Bear Stearns rescue bail out was EXTRA ordinary, really?


Since then we've Fannie Mae, Freddie Mac, AIG, now it's just cash - now "we need the (tax payers) cash" to preserve the management of FS companies; to even consider that company management be allowed to continue to run these companies is imprudent and revolting.

• Why should or would the US taxpayer let the decision makers of the past continue at the helm?



• Where is the US Treasury's prudence - in selecting / allowing agents of better decision making on behalf of the US Taxpayer?



• How does the judgment or process of the US Treasury lend example / teach the FS industry, or demonstrate a prudent fulfillment of its fiduciary duty to the US taxpayer?

Keeping it REAL


Markets ultimately exist to serve the people - it needs to be a real market - let the chips fall where they may - yes some companies will fail and restructure but the clearing price will signal to ALL that markets work - for better or worse. That's the risk / price / value of an asset or collection of assets or set of investment behaviors.


With a FS industry as concentrated as Paulson suggests we need to let that industry rise and fall ON ITS OWN - as the players (they all wear BIG BOY pants) have clamored for, pounded the table, kicked their heels, indeed demanded and lobbied for the past 25 years! To state that the industry is too interconnected and requires a bailout fails to appreciate that diversification, as in all other businesses and more importantly credit markets- is one thing; PRUDENT. Look it up!

US Treasury Bailout for MBS - NO!

Chris McConnell & Associates
Independent Qualified Fiduciary
Audits Training Expert Witness
http://www.fiduciaryexpert.com/


US TREASURY MBS BAILOUT - NOT
Rather a better solution requires the Financial Services Industry; FSI to propose, implement and accept the risks of a multi-year solution; but not the US taxpayer; however cloaked.
1) VOTE No to government bailout, US Treasury plan.
2) The financial services industry, FSI inclusive of commercial & investment banks, broker dealers, insurance companies, credit ratings agencies created the problem; an artificial “market” for Mortgage backed securities, MBS.
3) FSI accepted the fruit from leveraged gains of the past - not the US taxpayer.
4) Therefore the US taxpayer should not bail out these entities.
5) The US Treasury plan simply does not address an inescapable issue; real estate values have been and remain dislocated from personal incomes.  Further, regrettably the US’ jobs picture is negative and getting worse; overcapacity exists in most industries, notably the Financial and real estate related industries.

An FSI – based solution has the best chance of success, in keeping with a self policing / self regulatory regime / market – based approach
There is no perfect solution, however, a better use and alignment of interests / resources, free market approach, best chance of success is an industry (Financial Services Industry) solution including the credit ratings agencies (S&P, Moodys, Fitch, et al) and hedge funds.
Temporary, extraordinary waiver of anti-trust regulation may be required.
ALL of those parties need to band together now – as they ALL did in the past in creating this “artificial” market for toxic MBS securities, derivatives and insurance thereon.

The FSI collectively is in the best, most advantaged position to model, price & evaluate risks of RMBS & CMBS and derivative securities.

The Cause - No one in FSI raised their hand in the past did they?
The outsize FSI profits were earned in the full light of day of boards, officers, auditors, regulators, shareholders and debt holders.
The FSI didn’t complain in the past when the models were showing huge "paper" profits; paying out vast sums to officers and employees.
Same profits INCLUDED a CEO’s personal certification of internal controls.

Closing comment – greed and or failure to admit mistakes, take losses
Many have criticized Wall St. CEOs, like Richard "Dick" Fuld that he or LEH board could have, in the recent past, raised capital and increased the chance of his firms’ continued survival.
Similarly, AIG, by way of example, but not in isolation, could have, in the past 12 to 24 months sold off or at least reduced some of its concentrated holdings in its non-Life, Property / Casualty FPG (Financial Products Group) correct? Rather they decided to hold these contracts; the epitome of self interest, hubris and ultimate greed!

Lastly where is the voice, the voices of self - regulation?
Those loud voices of SIFMA (the creation of the SIA and BMA), ICI and US Chamber of Commerce NOW?
Let them:
Stand up
Raise their voices
Take responsibility now
accept fiduciary responsibility to the US taxpayer
i. A more impressive, peerless collection of intellectual capital does not exist.
ii. Let’s see if they have, when times are tough, collectively the character to propose and implement a prudent plan of action;
iii. In the sole interests of the US taxpayer, as fiduciaries should.

The VERY LAST WORD - Leverage & Margin
Drastically reduce it – come on, 2 to 3% margin on MBS and related is like an Indy race car, trying to maintain speeds of over 200 mph on city streets; endangers innocent bystanders, indeed plainly perilous and reckless.

Stocks require initial margin of 50%; some have more; but when it comes to MBS and related securities, derivatives margins could and SHOULD BE raised to levels that approach prudence.

With over 25 years combined securities and expert experience Chris McConnell & Associates provides independent, conflict-free fiduciary training, audits, expert witness and litigation support in FINRA (NASD), ERISA and 401k plans, Non-profits, Foundations and Endowments; Trust, Estate & Probate and Marital Dissolutions regarding issues of fiduciary duty, suitability, diversification, employment benefits and compensation for the financial services industry.

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If you would like more information about this topic, request a CV Brochure or to schedule an interview kindly contact Chris McConnell, AIFA at (310) 943 – 6509 or visit http://www.fiduciaryexpert.com/