After twenty years as a participant in the financial services "game", for some reason I began to feel unease with my profession in 2006. The feeling grew through 2008 as the entire world nearly melted down. It became a queasiness in 2009 as I watched Wall Street attempt to spin and deceive it's way back to credibility. It coalesced on 3/14/10 as I watched the following interview. If you have some time today, and if you can endure the Lipitor commercials that precede them, please take time to watch both parts. If you're near a bookstore, pick up a copy of "The Big Short", too. It's a great read.
For me, all the dots finally connected and the mental image I'd created of an "industry" that was, in the end, honest and beneficial came crashing down. The examples of corruption are nearly endless and I'll examine more in the days to come but, for now, let's just choose one, in ten simple steps.
1) Major TBTF bank insolvent due to overwhelming amount of underperforming and/or worthless debt.
2) Congress pressures FASB to change accounting standards thereby allowing said bank to reclassify worthless securities and loans as having some notional value.
3) Bank allowed to borrow unlimited/infinite amount of money at Fed discount window at 0.0025%.
4) Bank takes borrowed dollars and buys US Treasury bonds paying 3.0%.
5) Bank keeps spread from risk-less transaction and books this as profit.
6) Bank employees pay themselves huge bonuses commensurate with their brilliant minds.
7) CNBS begins non-stop parade of sell-side analysts who exclaim that the bank common shares are "undervalued" based upon cash flow and earnings.
8) Unwitting investors bid up shares of the still insolvent bank, perpetuating the illusion of financial health.
9) Bank "insiders" unload millions of personal shares and options to duped public.
10) Responsibility and wealth transferred. Bank executives, management and traders wealth is preserved at the expense (and loss) of the average, regular, hard-working investor.
Oh, and along the way, the Fed/Treasury benefited, too. The insolvent bank participated in a stealth form of quantitative easing. By using borrowed money from the Fed to buy treasuries, the TBTF banks create a synthetic demand for those bonds and notes, thereby keeping rates artificially low, consistent with stated Fed policy. Pretty slick, huh?