Review and Outlook
June 30, 2009
Wanted: A Man For All Seasons
Any illusions of respectability that used to attach to a suit and a tie, to
a title with responsibilities, to a huge salary and the accoutrements of
wealth and power, have pretty much evaporated. It is profoundly sad to see
principle and morality so casually displaced by mendacity and greed. For
too many, riches are preferable to reality, and it's such an easy preference
to make. For too many the truth is a damned nuisance, but in the end it's
all there is. I used to advise stockbroker trainees against churning client
accounts to generate commissions: "You have to be affluent enough to be
ethical." How rich does one have to be before honesty is affordable?
Ken Lewis, CEO of Bank of America, has testified in a deposition to the New
York attorney general that he was forced to accept a merger with Merrill
Lynch on the orders of Treasury Secretary Hank Paulson, who reportedly
threatened to fire Lewis and his board of directors, and Ben Bernanke, the
Chairman of the Federal Reserve. So rather than resign his $12
million-a-year post and stand up for his shareholders to whom he has a
fiduciary obligation, Lewis did the easier, more pragmatic thing: go along
and get along. He accepted the merger with Merrill's toxic losses, thus
paying off Merrill's shareholders and principals with the equity of his Bank
of America shareholders. How pathetic and sad to see someone so big reduced
so small. Bounced from Chairman by the shareholders, including me and my
proxies, he has no future as the CEO either. Hold your sympathy, his
retirement plan is well endowed.
If Lewis's statements are true, they cast a devastating light on the
credibility of the offices of the Treasury and the Fed. The problem
continues to plague the markets: who can you trust? In the specific case of
Merrill and Bank of America you have to believe they have a serious
marketing problem with depositors, investors and shareholders who may have
fundamental confidence and anger issues with B of A's red, white and blue,
and Merrill's bull.
Too Big To Fail
What an absurd solution it is to take one institution that is "too big to
fail" and merge it with another, thus creating an even bigger Leviathan. Too
many institutions too big to fail have proven themselves too big to succeed.
Yet we hear it so often that it becomes axiomatic. It is a gross canard.
There are legal mechanisms for preventing corporations from getting "too
big" in the first place. Gathering dust are the Clayton Act and the
Robinson-Patman Act. These amendments to the original Sherman Antitrust Act
forbid mergers or acquisitions that substantially reduce commercial
How much additional oil has been produced by the mergers of Chevron with
Texaco or Exxon with Mobil? And the answer is "none." And how much price
competition was eliminated by the consolidated oligopoly that is the oil
industry? Or the paper industry? How much cheaper or better is satellite
radio now that the only two participants in the industry have been allowed
In the financial industry these consolidations are revealing deeper problems
for which there can be no effective solutions fairly provided by the same
politicians who created them. In the April 28th Wall Street Journal, Dennis
K. Berman sagely concludes that the Lewis deposition reveals a perhaps
irreconcilable difference in the regulation of banks and securities markets.
"Securities laws are relentless in their demands for disclosure. Banking
regulation relentlessly keeps it secret." How can anyone be confident in the
sitting congressmen who are restructuring financial regulations? The
concentration of power is troublesome.
Many of the people who have permitted and in many cases encouraged the
financial fiasco possess sterling pedigrees. They are among the best and
brightest from the finest academic institutions. Was it all just a "big
mistake?" Was it truly a problem with "the system" or the fault of
Shortly after the collapse of Communism the first democratically-elected
president of Czechoslovakia, Vaclav Havel said, "We live in a morally
contaminated environment. We fell morally ill because we became used to
saying something different than what we thought. We learned not to believe
in anything, to ignore each other, to care only about ourselves.If we
realize this hope will return to our hearts." And as then Joseph Ratzinger
wrote in 1985, "The market rules function only when a moral consensus exists
and sustains them." (Quotes from Carl Anderson writing in The Wanderer, June
The problem is a failure of personal moral responsibility. "The problem with
socialism," said Bill Buckley, "is socialism. The problem with capitalism is
The record of Paul Volker's character and intelligence is beyond reproach.
One hopes his influence remains. The changes he seeks are to: 1) limit the
size of banks; 2) separate deposit-taking from trading at financial
institutions; and 3) force all derivatives trading onto public exchanges.
(Bloomberg.com, 6/28/09) Sounds like a return to sanity: restrain bigness
and create competition and diversification in the banking community; keep
intermediation and disintermediation, deposits and equities, lending and
owning, apart from each other; and enforce full transparency of derivatives
by publicly trading them in the light of day.
Sooner or later problems get solved. After all, when there's no solution,
there's no problem and humanity has been investing and trading since before
Harvard President Drew Faust on Bloomberg television 6/10/09: "The Harvard
endowment will recognize a 30% drop over the last twelve months." It is
going to be a long, slow slog to recovery. There is a generational change in
psychology to which we must be sympathetic. Investment decisions are based
as much on the attractiveness to the larger market as ourselves. It's not
much good to like stocks that nobody else does. The result is a portfolio of
Stock screens are revealing significant growth in the number of companies
priced below book value, a condition I've rarely seen since the 1980's. In
fact valuations are much improved across the board. Whereas the largest cap
companies have yielded the greatest disappointments we are screening far
more small and mid caps.
Money market funds cannot yield much when the Fed has a target rate of 0 to
.25% for Fed Funds. We improve portfolio yields by staggering very short
term, high quality, corporate paper in periods of 4, 6, 9, 12 and 18 month
Like ice that was delivered in big blocks by men in trucks, or coal that was
dumped down a chute into the cellar, time and technology have changed and
stock brokerage is dying. The function of a stockbroker has been reduced to
bringing assets into the firm, to "manage" the relationship. It's expensive,
redundant, and obsolete. The system offends fiduciary responsibility and the
prudent man rule. The existing generation of "stockbrokers" is being
squeezed out of business, replaced by financial advisors and financial
planners whose market is much more specific, which is to say, smaller than
the general public served by stockbrokers in the past.
There is a consensus building of inflation fear and higher interest rates in
the near future, resulting from the unprecedented liquidity pumped into the
system by the Fed. The Monetary Base, which is currency in circulation, has
risen from $830 billion to $1.720 trillion in the last year through June 24.
I don't doubt that the value of the dollar and our standard of living will
be diminished, but I am not so sure about radically higher interest rates in
the near future. In any case, there is absolutely nothing to be gained by
the speculation. The system will respond to changes in rates.
The need for systematic money management has perhaps never been greater.