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Tuesday, April 20, 2010

 

Goldman Stinks

We have been critical of Goldman Sachs in the past, pointing out that it had long ago abandoned its customer centric culture in favor of a ruthless traders' mentality where profit maximization seemed to trump all other considerations. Those who deal with G-S do so (hopefully) with their eyes open and with due caution. Fortunately, virtually all of these customers are institutional and/or professional investors, something the SEC seems to have forgotten in its ill conceived lawsuit announced Friday. Whether G-S is guilty of unfair dealing, or fraudulent behavior is highly debatable and in any event, will be nearly impossible to prove to a jury. The fact that the decision to sue was made on the basis of a 3-2 party line vote is itself indicative of the hardball, flagrantly political tactics of the current administration in all venues.

Neither this lawsuit, nor the financial regulatory reform bill making its way through the Senate amounts to any more than an oblique foray against the behavior that brought about the financial crisis in 2007-2009. We are already hearing that Dems are ready to abandon the goofy pre-funded account to be used to bail out systemically risky banks (perpetuating too big to fail even as Dems claim the opposite). This makes sense since banks would have passed along that cost, meaning that taxpayers would still have paid for the bailouts. So now we are simply left with a system where Federal regulators could take over and bail out banks without due process to be paid for ... how? In short, more power to the federal government, less free enterprise, with no compensating good.

We have posted previously about how the financial crisis came to occur and who was at fault, and you can find that in the archives. But keep in mind that the banks have paid back most of the TARP money. To the extent taxpayers have paid for bailouts, it is basically all Fannie, Freddie, and AIG. Even GM is starting to pay back - and that is one I would not have predicted. Now that's a big part of the deficit, but the reason the deficit is exploding is not TARP. It's the lousy economy, totally mismanaged by this administration, and the stimulus which is mostly wasted.

And it's going to get worse. Much worse.

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When I was in school, some of my more enlightened social studies teachers would familiarize us with current events by having us review the New York Times on occasion, then the country's best newspaper, very objective on its news pages and fair and balanced in the op ed section. Alas the Times editorial standards deteriorated decades ago, and today, the best paper by far is the Wall Street Journal, which maintains objectivity in its reporting and an avowed rightward slant in the op ed section ("free people, free markets") but at a standard of quality unmatched anywhere else. If we could somehow get people, young and old, to read those op eds every day, people would not be so easily snowed by this gang of thieves in charge right now. Thankfully, we do have talk radio that has done a good job of alerting Americans to the danger.

But if you read the Journal every day as I do, you might have seen these brilliant pieces:

Last Thursday, "A Message from Henry" contributed by Mike Donahue, a financial adviser from California. "Henry" is an acronym for "High Earner, Not Rich Yet." Here are excerpts: I'm in the 23% federal and 10% state income tax brackets. I pay a 1.2% property tax on very expensive California real estate. I am subject to the Alternative Minimum Tax. I am self-employed and subject to a 15% payroll tax on the first $100,000 in income and an 8.75% sales tax. If I have a gain from investing, I pay a minimum of 15% federal and 10% state tax but can only write off $3,000 per year if I lose. And now the government wants me to pay more?...Since I graduated in 1983 I have been in straight commission sales and have had many 60-70 hour work weeks. No secure salary, no pension - just me profiting through helping others...The first 20 years were tough, but it's finally starting to pay off. I have more than most only because I've worked harder than most and because I am a saver. It was not easy...Why then does the government feel entitled to take my money and give it to others? Call me cruel. I don't care. I give to whom I choose - but since so much is confiscated (and wasted in the process) I have little left to give...Life is hard. You learn when you fail and you make changes when things hurt. Why then is the liberal agenda trying to make sure nobody feels any pain?..What has happened to personal responsibility and accountability?..I am not for equal outcomes regardless of effort. If Congress continues to buy votes at the expense of social mobility we will no longer be a great nation. The truly rich will stay that way but many "Henrys" like me will quit... If you take the incentives away you will lose Henrys."

In Friday's Editorial "Too Big to not Get Right, the Journal (most likely Paul Gigot) gave a pretty balanced assessment of the Dodd bill, as follows:
"The main author of the Senate bill, Chris Dodd of Connecticut, says the latest draft of his bill to reform financial regulation 'will end bailouts.' We wish that were true. This evolving legislation still allows regulators to deploy unlimited sums to rescue financial giants and with too much discretion. Still there's reason for optimism, because as flawed as Mr. Dodd's bill remains, it has been improving in each draft... Mr. Dodd is moving slowly toward restoration of the freedom to fail in American financial markets. The hardest work is still to be done. To force Mr. Dodd's rough draft on to the Senate floor would constitute behavior as reckless as anything we've seen on Wall Street."

The weekend edition brought an enlightening interview with New Jersey Governor Christie concerning his attempts to reign in state spending and hold the line on taxes in an already overburdened state. Editorials educated on the Start Treaty's implications for missile defense and the nomination of the very liberal Goodwin Liu to the already radical 9th Circuit Court. The message was that this could be a preview of the Obama nominee to replace Justice Stevens. Along that line was a review by Professor John Yoo of Stevens' opinions on terrorist trials and the implications for national security.

Yesterday's section was perhaps best of all. Mary Anastasia O'Grady chronicled the shocking and embarrassing behavior of our Ambassador to Honduras, Hugo Llorens and of Fulton Armstrong, staffer to Senator John Kerry (Dem MA) and the Senate Foreign Relations Committee. Their insistence that the legal deposition of President Zelaya (ordered by Honduran Courts) be labeled a coup, and Mr. Armstrong's longstanding ties to Cuba, including his relationship with Cuban spy Ana Belen Montes, are the stuff that has made those of us on the right suspicious of the motives of those on the other side of the aisle. Professor T. H. Breen contributed a history of the battles at Lexington and Concord in honor of the 235th anniversary. Editorials focused on the Goldman Sachs case and Israel's disillusionment with the Obama administration (get in line). "As for Iran, yesterday brought reports of a secret memo from Defense Secretary Robert Gates to the White House arguing that the Administration lacks a strategy for coping with Iran's drive to gain a nuclear weapon...For all the current talk about Israel costing American lives and treasure, the striking fact is that the U.S. has NEVER had to go to war to defend the Jewish state. That's because for 62 years Israelis have [provided for their own defense, in an alliance with the U.S. that has reflected American values and - in both the Cold War and the war on terror - advanced American interests. The Obama administration seems not to grasp this point; which is why these are anxious days for Israel and its American friends."

There was also a letter from Virginia's attorney general explaining the constitutional grounds for challenging the health reform bill and another letter explaining Eric Holder's role in taking heat for Obama on the use of civilian courts for terrorist trials.

Today brought more info on the arming of Hezbollah by Syria, and an editorial and a column on the SEC's culpability in failing to uncover the Stanford ponzi scheme, where it had a real consumer protection responsibility. Also, a scientist's explanation for the ash storm that has resulted from volcanic molten material meeting icy glaciers.

If an informed citizenry is our best defense against authoritarian government, the Journal is certainly doing its part.

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In other happy news, the Musings portfolio has now surpassed its previous high point, having retraced the entire plunge resulting from the financial meltdown. We have the formula to thank. And the formula keeps demanding that we sell. Last Wednesday, we did buy 50 shares of AES preferred (AES.PR.C) at 44.55. Then Friday, we sold 200 shares of FNFG from the IRA, since our holding was swollen by the merger with HNBC. We got 14.63 for shares purchased on 4/12/04 for 13.38. Yesterday, we sold 500 shares of FSI International (FSII) at 4.12 (purchased 10/3/07 for 2.05).

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