Greed and Deception on Wall Street

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The Daily Reckoning | Saturday, January 14, 2012 Wall Street: pound for pound the most psychopathy in America, Readers weigh in on corporate greed and crony-capitalism, Plus, all the week’s reckonings for your fashion-conscious consumption... --------------------------------------------------------------- Urgent Stem Cell News — The Story You Haven’t Heard... A miracle stem cell “cure” could allow 10 million blind to see again. The truly amazing part of this story is the stem cells involved in this “cure” are a special kind that have no ethical controversy! To see how this untapped $64 billion market could make you richer than you ever dreamed, click here. Joel Bowman Checking in today from Punte del Este, Uruguay... You know what’s great about Punte del Este in the Summer? The beach...and everything on it. Know what’s not great about Punte del Este in the Summer? Not being on the beach and, therefore, not surrounded by everything on it. That in mind, we’ll keep this introduction brief. Earlier this week, we reprised two Daily Reckoning “classiques,” vintage columns penned by Mr. Eric Fry back in 2005 and 2009. It’s funny how time changes moods. When we first published the pieces, which focus on crony-capitalism and unsavory greed, they received little in the way of reader feedback. The subjects were out of fashion, it seemed...even though they were critical components of the crash that would, and did, come to be. Fast-forward to the world as we (think we) know it in 2012 and all of a sudden the topics are a little more fashionable. They’re not “hanging out on the beach in Punta del Este” fashionable, of course...but they might end up being so if given a bit more airplay. To that end, Eric’s ’09 column serves as today’s feature column. Please enjoy it...and feel free to check out a few of the responses we received in the mailbox section, below... The Daily Reckoning Presents Greed and Deception on Wall Street [Originally published on February 6, 2009] Eric Fry For the last several months, the sordid tales of greed and deception issuing from Wall Street have read like the story line from a riveting suspense thriller. But the most recent tales are so unbelievably gruesome that they resemble the story line from a documentary about Jeffrey Dahmer or John Wayne Gacy...or some other serial killer. Each subsequent act is more grisly and disturbing than the one before it. Your editors are now afraid to open their Wall Street Journals at night, even with the doors locked and all the lights on. The horrifying truth, dear investor, is that very few prison cells in America contain more psychopathy — pound for pound — than Wall Street’s corner offices and board rooms. Late last week, for example, we learned that AIG, Citigroup and several other struggling financial institutions duped the US government out of billions of dollars, even as the government was in the process of tossing out lifelines to them. Yes, this story is revolting, but true. The US Treasury overpaid by about $78 billion for toxic assets from American banks, according to a report from the Congressional Oversight Panel. “The report showed,” a Reuters news story reveals, “that the Treasury got the worst [of its many bad deals] on second- round investments in American International Group for $40 billion and Citigroup for $20 billion under special aid programs tailored for the two institutions. “For each $100 spent on these two companies,” says Reuters, “the Treasury received securities worth $41.” In other words, for those readers who do not have an abacus handy, taxpayers lost $35.4 billion dollars the second they drove their toxic securities off the lot at AIG and Citigroup. This is a very odd expression of gratitude — kind of like a drowning swimmer who, after being rescued from certain death, thanks the lifeguard by stealing his car. Who do you suppose would have known best about the true value of the securities the government purchased from AIG? The government employees who purchased them or the sellers at AIG? We’ll go out on a limb here and guess that the folks at AIG knew better. So if the sellers had an inkling that the assets were worth far less than the government was paying paid, didn’t the sellers also have an obligation to divulge that information to the government — the party that was saving them from their own recklessness and stupidity? This is not a trick question. Yes, is the answer. But since the sellers at AIG did not divulge accurate values to the buyers at the government, didn’t the sellers commit a kind of fraud? And if they did, don’t they deserve a kind of prison sentence? But let’s not rush to judgment. If AIG executives legitimately had no idea that the prices the government paid for their securities was light-years away from real-world prices, then they are not guilty of fraud. But if they are not guilty of fraud, they are nevertheless guilty of extreme incompetence...again. Criminal or moron. It’s one or the other. Either way, they deserve dismissal. The chilling storyline that is unfolding from Wall Street’s corner offices prompts an obvious question that never seems to produce the obvious answer? Why do the corrupt and/or inept individuals who were the architects of the current financial crisis remain in positions of well-compensated power? Why, in other words, do we taxpayers continue to throw good money after bad? And why does the government conduct bailouts from the top of America’s financial pyramid, where the perpetrators of the crisis reside, rather than from the bottom of the pyramid, where the victims reside? Seems like that would have been a better way to squander taxpayer dollars. Your editors understand the rationale for dispensing trillions of dollars to failing financial institutions rather than, say, failing individual homeowners. But we emphatically reject it. The government has managed to dispense trillions of dollars of bailouts and guarantees without producing any palpable benefit for the economy at large. Despite the deluge of bailouts and guarantees that has rained down upon American financial institutions, the economy continues to atrophy and the finance sector remains comatose. So why continue the ruse? Why not squander taxpayer money to help families stay in their homes, rather than help psychopaths stay in their Armani suits? An alarming report by Mark Pittman and Bob Ivry of Bloomberg News emphasizes the point. “The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed,” the Bloomberg duo reveal... These enormous pledges, Pittman and Ivry point out, would almost be enough to “pay off every home mortgage loan in the US, calculated at $10.5 trillion by the Federal Reserve.” But lest you think we are kicking America’s corporate chieftains while they are down — or as close to down as we have seen them in a long time, which is actually not very down at all — we would remind you that your editors also kicked the corporate chieftains (often) while they were riding high. Nearly four years ago, we remarked: “A corporate culture of well-mannered avarice restrains the mighty American economy. Many public companies labor under a Soviet-style central planning — the sort of planning that arranges things very nicely for the planners themselves, but much less well for the proletariat... “‘In 2003, the ratio between CEO Pay and worker pay reached 301 to 1, up from 282 to 1 in 2002’ according to a report from United for a Fair Economy. ‘If the minimum wage had increased as quickly as CEO pay has since 1990, it would today be $15.76 per hour, rather than the current $5.15 per hour.’ [Editor’s update: United for a Fair Economy now reports that CEO pay has soared to 343 times that of hourly workers.] “‘By any standard, many of today’s executive compensation packages are excessive,’ BusinessWeek asserts. ‘Too often, directors have awarded compensation packages that go well beyond what is required to attract and retain executives and have rewarded even poorly performing CEOs... Moreover, a poorly designed executive compensation package can reward decisions that are not in the long- term interests of a company, its shareholders and employees.’” Shortly after airing these remarks, we followed up with a column entitled “Pinstriped Psychopaths.” Regrettably, the observations within that column proved to be much more prescient and relevant than we could have ever imagined. In short, it pays to learn a little bit about the guys who are overseeing your capital...and to avoid the bad ones. Regards, Eric Fry, for The Daily Reckoning Look out for this GOLD SCAM in 2012... With many analyst predicting big gains for gold stocks in 2012, you can bet unscrupulous operators will try to take advantage of the precious metals popularity and rip off innocent investors! Don’t be a victim! Watch market analyst Greg Guenthner’s newest presentation now and discover simple ways you can avoid popular and costly stock scams... Click here to learn more. ALSO THIS WEEK in The Daily Reckoning... Crude Oil: The Best Bet for 2012 By Steve Belmont Chicago, Illinois Crude oil may not only be the best commodity play for 2012, it could prove to be the best commodity play of the next three to four years, soundly beating both gold and silver. I’m not talking about oil producers, refiners or drillers...or any individual stock — but the real thing: crude oil itself. The Nearest Thing to a Permanent Thing By Jeffrey Tucker You can find a coin shop in nearly every town in the United States. The proprietor is unlike any you will find in any other store. He is unusually steeped in history, intensely aware of the larger context of the passing economic and political scene. This is because if it is a good shop, you will find the whole history of modern life on exhibit, and learn more from looking than you find in a multivolume history. My Crystal Ball for 2012 By Chris Mayer Rancho Santana, Nicaragua There are great reasons to visit Nicaragua: pristine beaches that you will have almost to yourself, the charming architecture of its old colonial cities such as Granada, the inexpensive food and lodging and much more. But it’s still a frontier market with bad roads, unreliable power and a large poor population. There are great opportunities, but also the potential for painful setbacks. The sentiment, of course, applies to all markets — and life in general. Welcome to 2012. What opportunities and surprises can we look for in the year ahead? Some thoughts... Wrong-Way Friedman An Interview with Doug Casey My friend Bill Bonner of The Daily Reckoning and I tend to agree on most everything. We have a laugh riot whenever we talk about a Friedman editorial, although it’s a black kind of comedy. As a professional busybody, Friedman has the answer for how to improve everything - how we can all make our lives better, if we’d only do as he says... which almost always involves giving the government more power to enforce his prescriptions. URGENT NEWS... Breakthrough: New “Magic Bullet” Technology Could Zap Deadly Cancer Cells at Will In the latest clinical trial, over 85% of cancer patients achieved complete or partial remissions of their symptoms using the “magic bullet” technology. This is a rare opportunity to get in early on a little-known Biotech Company that’s making medical history... Click here for full details. The Weekly Endnote... And now, it’s over to a few readers for some thoughts, ideas and rumors... First up, this one from Reckoner Combs... Pinstriped Psychopaths: Great article. There is another dimension that has intrigued me about corporate compensation. Many of these CEOs sit on each others’ boards and tell each other how deserving they are of their huge compensation packages. One of my investment services tracked the averages over the past 100 years. In the hayday of the robber barons, the ratio of the CEO to the lowest paid employee was approximately 50 to 1. By 1970, it eclipsed 100 to 1. It now stands at 850 to 1. While I have no desire to see the federal government try to regulate corporate compensation, this behavior is totally egregious. It is a fraud on employees, most shareholders, and the consumer. Are there any strategies to combat this perverse trend and bring CEO compensation in line with traditional norms? And this, from Reckoner Myron... Thank you, Eric Fry, for saying things that need to be said. Certainly no individual’s labour (contribution to society as a whole) is worth 300 times someone else’s, INCLUDING all athletes, (not just baseball players alluded too, or rap or any other singers/entertainers, movie stars etc.) but least of all corporate executives, and particularly in the financial field who often get obscene bonuses even when their companies/banks under-perform and cheat the shareholders. I am also 100% opposed to taxpayer bailouts of bankers who over leverage, there should be personally responsible for malfeasance. Being of a somewhat libertarian persuasion I am not generally in favour of more laws and regulations, or excessive government meddling in private enterprise, but since corporations do exist and are a reality of life that is not likely to go away, and there are laws that govern corporations, maybe one more simple stipulation would right a lot of wrongs. I would propose that any Corp. over a certain capitalization not be allowed to pay out more in salary and bonuses to the management team than what they pay to shareholders in dividends. Collectively this would still, on the basis of a few dozen people in management, compared to hundreds or thousands of investors, allow for a disparity in earnings, just putting a damper on the excesses that are getting out of hand. And finally this, from Reckoner G.L.... Another ingredient in the escalation of CEO salaries was the meddling of government in the issue. When certain jealous ‘liberal’ politicians became envious of real CEO compensation, they started a movement to publish CEO salaries of public corporations. Their flawed thinking was that they would shame CEOs into being more reasonable. It was a very zombie kind of logic. I was part of an employer group at the time who told the government their thinking was flawed and would have the exact opposite. I am not surprised since the psychopaths are indeed leading the field of “I deserve more” honestly or not. It also helped the salaries of bureaucrats and politicians by the way. As soon as CEO A saw the salary of CEO B, he wanted the same (whether he deserved it or not) or he was going to resign. Boards of public companies being what they are caved in and pretty soon they all got into the act with C and D and so on all wanting more than the next guy. The same thing happened in professional sports where a guy like Scott Gomez in ice hockey makes $7.6 million for 3 goals a year in 82 games when the Rocket was scoring 50 goals in a 50 games season for an undisclosed amount...turned out the undisclosed amount was $25,000 a year, five times the average salary of the ’60s. And now the top politician of the country wants to be Robin Hood but not without screwing the good old folks out of $10 million for his Hawaiian vacation. Oh well if they don’t have bread, they can always eat cake. --- As always, we welcome your thoughts. Email them to the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Money Printing: The Ugly Truth Behind the “Good News” Has Capitalism Failed Us? Careful Steps to Avoid a “Dystopian Future” The Basic Problem With the Fed Euro Reverses Slide in Short Squeeze Eurozone Data Continues to Print Weak The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. 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