In Search of the Perfect Investment

The banking industry spent more than 600 million lobbying to gut finance reform. It basically succeeded. The bill that passed will not prevent the banks gambling with your money. You insure their gambling money and bail them out when they screw up.  They will make pots of money for awhile.  They’ll pay themselves huge bonuses. Then there’ll be a financial crisis, with asset values crashing all over the place. And you and I will get hurt — if we’re not careful. How to be careful:

1. Recognize the certainty of the upcoming stratospheric boom in asset values — though I don’t know which ones at present. But there will be one.

2. Participate with only a small percentage of your assets.

3. Keep your gambles (called “bets” in Wall Street parlance) to liquid vehicles — ones you can sell from one day to the next.

4. Keep your stops tight. The more risky, the tighter the stops.

5. Above, all keep away from Wall Street creations — whether they be called structured or alternative investments, or private equity funds or leveraged buyout funds, or whatever the new names are.

You need to be aware that, increasingly, even highly liquid investments like publicly-traded  stocks are stacked against you — first by the high frequency trading shops and second by proprietary trading by Wall Street houses — which sadly, was not outlawed by the Dodd-Frank finance reform bill recently passed into law. See below.

You can see the beginnings of the upcoming boom. Once again, Washington is encouraging us all to gamble by keeping interest rates unbelievably low for far too long and lending the chief gamblers — the big banks — unlimited money (your money) to gamble with.

What got me thinking about all this was Matt Taibbi’s latest piece in Rolling Stone, “Wall Street’s Big Win. Finance reform won’t stop the high-risk gambling that wrecked the economy.” Selective quotes from the Taibbi’s excellent piece:

The first of the two final battles coalesced around an effort by Sens. Carl Levin of Michigan and Jeff Merkley of Oregon to implement the so-called “Volcker rule,” a proposal designed to restore the firewall between investment houses and commercial banks. At the heart of Merkley-Levin was one key section: a ban on proprietary trading.

“Prop trading” is just a fancy term for banks gambling in the market for their own profit. Thanks to the Clinton-era deregulation, giant commercial banks like JP Morgan Chase were not only allowed to serve as investment banks, accumulating mountains of privileged insider information, they were allowed to play the markets themselves. That meant that the prop-trading desk at Goldman Sachs could bet heavily against Greek debt not long after the bank had saddled Greece with toxic interest-rate swaps. It also meant that if any of these “too big to fail” banks went bust, American taxpayers would be expected to bail them out. The Volcker rule – pushed by Paul Volcker, the former Fed chief and current Obama adviser – aimed to lay down a simple law for big banks: If you want to gamble like a drunken sailor, fine. Just don’t expect us to mop up the mess after you puke your guts out.

Here are Taibbi’s words on derivatives. Remember Warren Buffett had famously called them “financial weapons of mass destruction.”

If that was the plan, it worked. In early June, only a week after she defeated Halter in the runoff, Lincoln set about gutting her own rule. First she offered a broad exemption for community banks. Then a group of conservative House Democrats led by Rep. Collin Peterson of ­Minnesota ­proposed an even bigger compromise – one that would exempt virtually every type of derivative from federal oversight. “I was told that Peterson offered this compromise and Lincoln quickly accepted it,” says Greenberger.

That was the beginning of the end. The new deal allowed banks to keep their derivatives desks by moving them into subsidiary units and exempted whole classes of derivatives from regulation: interest-rate swaps (the culprits in disasters like Greece and Orange County), foreign-exchange swaps (which helped trigger a global crash after Long Term Capital Management imploded in 1998), cleared credit-default swaps (a big contributor to the AIG collapse) and currency swaps (also involved in the Greece mess). “About 90 percent of the derivatives market was exempted,” says Greenberger.

In the end, this would be the ­entire list of derivatives that are subject to the new law: credit-­default swaps that have not been cleared by regulators and swaps involving commodities other than silver and gold.

Hilariously, even the few new regulations on derivatives that remained in the bill don’t seem to worry Wall Street. Just a few weeks after Lincoln agreed to gut the measure, famed JP Morgan executive Blythe Masters, often credited as one of the inventors of the credit-default swap – one insider calls her “the Darth Vader of the swaps market” – actually sounded psyched about the bill. The new law, she declared publicly, won’t even hurt energy commodities, one of the few classes of derivatives that Lincoln didn’t exempt.

“It’s not a big change for commodities,” Masters said. “It’s fine-tuning more than a material impact.” The so-called reforms, she concluded, “are actually going to be very beneficial for the industry.”

And that, ladies and gentlemen, is what the Obama administration is touting as the toughest financial reform since the Great Depression.

And the article’s conclusion:

Worst of all, some analysts warn that the failure to rein in Wall Street makes another meltdown a near-certainty. “Oh, sure, within a decade,” said Johnson, the MIT economist. “The question: Is it three years or seven years?”

Johnson was part of a panel sponsored by the nonpartisan Roosevelt Institute – including Nobel Prize-winning economist Joseph Stiglitz and bailout watchdog Elizabeth Warren – that concluded back in March that the reform bill wouldn’t do anything to stop a “doomsday cycle.” Too-big-to-fail banks, they said, would continue to borrow money to take massive risks, pay shareholders and management bonuses with the proceeds, then stick taxpayers with the bill when it all goes wrong. “Risk-taking at banks will soon be larger than ever,” the panel warned.

Without the Volcker rule and the ­Lincoln rule, the final version of finance reform is like treating the opportunistic symptoms of AIDS without taking on the virus itself. In a sense, the failure of Congress to treat the disease is a tacit admission that it has no strategy for our economy going forward that doesn’t involve continually inflating and reinflating speculative bubbles. Which sucks, because what happened to our economy over the past three years, and is still happening to it now, was not an accident or an oversight, but a sweeping crime wave unleashed by a financial industry gone completely over to the dark side. The bill Congress just passed doesn’t go after the criminals where they live, or even make what they’re doing a crime; all it does is put a baseball bat under the bed and add an extra lock or two on the doors. It’s a hack job, a C-minus effort. See you at the next financial crisis.

You can and should read his entire piece. Click here.

Jodie Fisher’s Peculiar Relationship With Hewlett-Packard

By JONATHAN BERR from AOL Finance

Jodie Fisher has used up about 10 of her 15 minutes of fame for her role in the downfall of Hewlett-Packard Co. (HPQ) CEO Mark Hurd. Many questions in this sordid tale remain unanswered that should disturb investors.

First, why was the 50-year-old actress, whose “body” of work features films that were light on plot and heavy on nudity, hired by the number one PC maker? Fisher’s statement, released through her attorney, Gloria Allred, says “At HP, I was under contract to work at high-level customer and executive summit events held around the country and abroad.”

That’s vague. The explanation published by Bloomberg News was even more perplexing saying her job “was to organize forums for CEOs and chief information officers that gave customers access to Hurd and other HP executives. She would gather background information on invitees and introduce executives to one another.”

Jodie Fisher

Huh? Aren’t there scores of people on the H-P sales staff whose job it is to know the technological needs and wants of the CEO and senior management? Maybe there are tech savvy consultants who can help H-P land big tech deals, but Fisher is not one of them. Her resume — at least what has been disclosed by Allred — is fuzzy speaking of her recent job as a “vice president of a commercial real estate firm” and her work as a “successful salesperson for a Fortune 500 company.”

Wall Street loved Hurd as much as it hated his predecessor Carly Fiorina, who is now running for the U.S. Senate from California. At least for a while. H-P’s shares are up more than 70% over the past five years but have dropped almost 17% this year. Yesterday, H-P announced preliminary third quarter revenue of $30.7 billion up 11% compared with the prior-year period. GAAP diluted earnings per share were approximately 75 cents and $1.08 on a non-GAAP basis. How much Hurd deserves credit for is hard to say.

But employees may not have liked him as much. In H-P’s case, when corporate cultures revolve around cost cutting, resentment among lower-level employees quickly builds, especially at a Chief Executive such as Hurd who earned a whopping $30 million last year. Back in 2005, Hurd announced a plan to cut more than 14,000 workers, or about 10% of H-P’s work force at the time. Then, last year during the recession, the company announced plans to cut another 6,000 jobs and instituted company-wide pay cuts.

On top of that, Hurd reportedly submitted inaccurate expense reports related to Fisher totaling about $20,000. Now, with an exit package worth a reported $35 million, he can afford to pay it back. Fisher can use the undisclosed settlement she received from Hurd to jumpstart her acting career or pay her attorney, Allred.

Sometimes companies take years to recover from scandals. Harry Stonecipher was ousted as the CEO of Boeing Co. (BA) in 2005 after it was revealed that he had an affair with a female subordinate. The plane maker has been in a tailspin ever since because of numerous delays with the 787 Dreamliner. That’s why H-P will need to pick a new CEO very carefully.

There, I fixed it

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Favorite recent New Yorker cartoon.

KILLER BISCUITS WANTED FOR ATTEMPTED MURDER

Linda Burnett, 23, a resident of San Diego, was visiting her in-laws and while she was there she went out to a nearby supermarket to pick up some groceries. Several people noticed her sitting in her car with the windows rolled up and with her eyes closed, with both hands behind the back of her head.

One customer who had been at the store for a while became concerned and walked over to the car. He noticed that Linda’s eyes were now open, and she looked very strange. He asked her if she was okay, and Linda replied that she’d been shot in the back of the head, and had been holding her brains in for over an hour. The man called the paramedics, who broke into the car because the doors were locked and Linda refused to remove her hands from her head. When they finally got in, they found that Linda had a wad of bread dough on the back of her head. A Pillsbury biscuit canister had exploded from the heat, making a loud noise that sounded like a gunshot, and the wad of dough hit her in the back of her head.

When she reached back to find out what it was, she felt the dough and thought it was her brains. She initially passed out, but quickly recovered and tried to hold her brains in for over an hour until someone noticed and came to her aid. Linda is a blonde, but I’m certain that’s not relevant.

Harry Newton,who is saying “NO” far more often these days. There are huge benefits: His phone doesn’t ring so often. He gets more time to himself. He’s able to mull. Mulling is good. More time for the family. More time for tennis.