Interesting Perspective on Derivatives

I think I've found the next two books I'd like to read in this story: Janine R. Wedel: Shadow Elite: Derivatives, A Horror Story: "...elites .... invariably try to hang onto power--not so much by controlling the physical means of production, but by also dominating the cognitive map, or social discourse. What really matters ...is not what is publicly discussed, but what is not discussed. Social silences, in other words, are crucial."

Perhaps the two books, Shadow Elite, by Janine Wedel and Fool's Gold: How the Bold Dream of a Small Tribe at J. P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe, by Gillian Tett will explain what would happen if there are NO derivatives at all. The phrases always heard publicly discussed about derivatives are, "they're necessary tools... bankers must have access to these tools... banks must distribute RISK by using derivatives." That's the mantra, over and over again.

What derivatives really do is cover the banker's asses when they make really, REALLY risky loans to people, businesses AND COUNTRIES that have piss poor credit. With derivatives, the bankers are assured a profit even when the loans default. That, it seems to me, is motivation to loan money to those who WILL default. Meanwhile, you and I, either as a customer or as an investor, or both, lose out at one end or the other and, as Goldman Sachs says, "that's our problem."

And, of course, there are those physics equations that are the backbone of the derivative that only a physicist can interpret; just another layer of darkness to hide the truth from all outside of the tribe.

The books should be interesting; bankers gathering in tribes to manipulate the financial system. It sounds like a good ole boy's club to me and they always seem to operate in the Dark Side.

Dave

Elena Kagan and The Case that Opened the Door: Citizens United v. Federal Election Commission, U.S. Supreme Court Case Summary & Oral Argument

Yesterday I watched Rachel Maddow play an audio clip of Elena Kagan, President Obama's Supreme Court pick, arguing for the Government in the Citizens United v. Federal Election Commission, U.S. Supreme Court Case Summary & Oral Argument case. The point Rachel tried to make was that Kagan stood her ground well, with considerable strength, in the face of Chief Justice Roberts' questions and the questions of Justices Scalia, Breyer and Alito, all right-leaning justices. Clarence Thomas didn't ask any questions. But, what I heard Kagan do was essentially stutter, hem and haw and not give a very good response at all. In fact, she sounded tremendously weak in the face of their questions. My impression was that maybe President Obama made a wrong choice; she didn't sound like a legal scholar or advocate for the common person at all. Rachel didn't do very well supporting Kagan, in my opinion.

So, I listened to the "Reargument," the last summary arguments made by the attorneys before the court made their final deliberations and decision, myself. My head is spinning. For Citizens United (appellant) was Theodore B. Olson, an astonishingly brilliant attorney, as lead attorney with Floyd Abrams as second there on behalf of Senator Mitch McConnel. Elena Kagan was lead attorney for the Government (appellee) with second Seth P. Waxman on behalf of Senators John McCain et al.

I don't claim to know enough about the law to follow the details of the arguments, although I found the entire thing, approximately 1-1/2 hours, spell binding. And, Solicitor General Kagan did much better, in my opinion, in the whole rather than that small audio bite Rachel used. But, I can get a sense of which way the wind blows. Olsen came to court with one claim, that the law was unconstitutional, a very broad claim that Congress was limiting free speech in the Bipartisan Campaign Reform Act. Kagan, however, came to court with five specific claims, two of which were that corporate funding could be traced directly to Quid Pro Quo, the corporate buying of favors from Congress, and shareholder protection, a new claim for the governing law.

It was the two claims that the court majority jumped on for its final decision and more emphasis was placed, it seemed to me, was to thwart the shareholder protection claim. Chief Justice Roberts said, "so it IS shareholder protection that is your claim," to Kagan. "You're taking the side of a Paternalistic Government, a Big Brother watching over us." From that point on, he, Scalia, Alito and Breyer directly and indirectly referred to that claim in their questions. The wind was clearly blowing toward a decision for Citizens United and against Big Brother Government.

I can't help but think the point Kagan should have made is that a corporation or organization spending tons of money for or against a particular candidate is actually saying that all of its members, employees, customers, shareholders are speaking with one voice and I can't believe that's true. At least a member of a union has a choice not to contribute his or her money to any political ad the union leadership may choose. But, corporations or organizations with corporate membership speaks for the board of directors and CEOs only. No choices are given to employees, customers or shareholders. She should have challenged Chief Justice Roberts' claim when he said that all investors in a corporation DO agree with the corporate leadership. That's a mind-boggling statement for a Chief Justice of the Supreme Court to make. Where is and how could he know the proof for that kind of claim? Where is the data to support that claim?

The idea that a handful of people, CEOs and board members, can speak with their own passion and beliefs for all others was repulsive to James Madison. He devoted an entire Federalist Paper explaining how to cure "the mischiefs of faction," such as is created when a small number of people band together to speak for many adversely to the rights of others.

Madison said, "There are two methods of curing the mischiefs of faction: the one, by removing its causes; the other, by controlling its effects.


There are again two methods of removing the causes of faction: the one, by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests."


He went on to suggest that controlling its effects was key to curing factions, such as what Congress attempted to do with the Bipartisan Campaign Reform Act. But, the Supreme Court appears to have gotten hung up on the "Big Brother" problem, the typical conservative "big government" stand. Who says the court isn't political? In effect, the Supreme Court ruling in favor of Citizens United gave corporate employees, customers and shareholders "...the same opinions, the same passions, and the same interests" as the corporate board and leadership. It's funny that today I received an email from Arkansas' Bill Halter for U. S. Senate campaign claiming that the U. S. Chamber Of Commerce and other Republican organizations are funding deceitful ads against him and for Senator Blanche Lincoln, a pro-corporate Democrat voting against most of Obama's reforms. The U.S. Chamber of Commerce is decidedly against Obama in all things. Many corporations have left it, which speaks volumes about it not speaking in one voice. It's the kind of faction that Madison spoke about. And, then there is Pacific Gas & Electric Company that is spending $35 million for the deceitful Proposition 16 campaign in California. It, too, does not speak for its customers and shareholders, many of whom are supporting a law suit against it for its deceitful claims but, because of the Supreme Court ruling in favor of Citizens United, it can spend its money, paid by its customers, on deceitful political ads.

So, we need a law to control the effects of corporate political spending. It's too bad that Kagan couldn't have framed her arguments differently. But, alas, it may not have mattered with a conservative court anyway. Contrary to the conservative claim that liberal judges are activists, it is their own judges that are activist judges.

Rachel, pick a better audio to make your case.

Dave

Republicans agree to Financial Reform Deal - Screwed Again

Now is this a good deal? Ezra Klein
- Wonkbook: FinReg deal; Obey tired of explaining the Senate; Republicans take on Fannie and Freddie: "Republicans and Democrats reach deal on too-big-to-fail".

I had to read this at least four times, so let me recap. The $50 billion fund (that to-big-to-fail companies paid into) to dissolve a wayward company has been dropped, the FDIC will liquidate "faltering" to-big-to-fail companies "by borrowing money from Treasury," i.e., tax payers, and "Congress would have to approve the use of federal debt guarantees."

It sounds like to me that the Republicans are laying the expense of liquidating these to-big-to-fail companies squarely on the backs of you and me, the taxpayers. How is that not being screwed again?

Dave

Are We Learning Anything Yet?

The market is down today, primarily because of Greece's debt and its effect on the Euro, which is also down on the Foreign Currency Exchange market. And, profit-takers are taking profits. It was only a few years ago that everyone was flocking to buy Euros, as opposed to dollars, because it was the "thing" to do. The other day Paul Krugman pointed out that the nay-sayers about the Euro were probably right; countries that joined the union fell into the Euro trap. Once they accepted using the Euro for their currency, they were forever trapped from using their own country's currency in managing debt. The only way out of bankruptcy from that point forward is to cut wages and try, I say "try," to manage inflation or deflation. They can't print money anymore to do that; that's for sure. So, there is Greece whose greedy politicians got in way over their heads in debt, with the help of Goldman Sachs and other global banks, and fraudulently hid their debt to join the European Union. And today there are riots in Greece - because of the trap. I think the lesson is that there is no easy money and no easy way and no short cuts and no short term gains without eventually paying the price of negligence.

Another story today comes from the U. S. Department of Interior, specifically the Minerals Management Service who gave British Petroleum (BP), and all other oil companies drilling in the Gulf of Mexico, huge exemptions to standard safety and spill precautions so their company expense would be minimized. Countdown's Keith Olbermann pointed out the negligence of BP Oil and that a single safety valve costing only $500 thousand was not used on that TransOcean Deepsea Horizon platform because it was "too expensive." He also pointed out that the executives of those companies made twenty times the cost of that valve. Watch the video. The point here is, as is true of all companies, that the bottom line is profit and compensation and short term gains. It is not about the "right thing to do" for corporations. Huge risks are taken that bite us in the ass eventually. Contrary to what we've been fed for 40 to 50 years, companies are not more efficient than the government.

And then there is the movement, including the Tea Partiers, that suggests that President Bush II wasn't the worst president we've ever had. Laura Bush was on Oprah Winfrey yesterday and Oprah ask her about how she felt about the criticism of President Bush. "It hurt," she said, "because people don't know him." One of his daughters said essentially the same thing; that people would think better of him if they knew him. They have a uniquely personal perspective and it's probably true. If I were to have a beer with him, I would probably like him personally. I may find him funny and personable. But, I don't want to have a beer with my president. I want him to be a good, the best he can be, for this country. Bush was a terrible president. He neglected his country, hedged on infrastructure, underfunded our schools, promoted self-regulating policies for industry and in fact created a "culture" in his administration of "hands off" regulating and, of course, we went to war in two countries primarily because of his "gut feelings" and his extra-large ego. He implemented President Reagan's laissez faire economy, international belligerence and "debt doesn't matter" policies like no other president has done. Every where we turn, we find destruction, negligence and decay.

In fact, all of us accepted the laissez faire libertarian philosophy, small, hands-off government philosophy and the Republicans continue to spout it. Ideology, the great and deep rut that trapped all of us and is now biting us in the ass. Diligence and clear thinking could have saved us much of our heartache today. Good government that pays attention is what we want, not necessarily small government just because that's a cute thing to say.

Diligence means more than listening to "cutesy" phrases a politician or pundit says, like Sarah Palin's "how's that changy thing goin' for ya'." It means paying attention. It means learning about who you're voting for and what they really stand for. If all you can do is be star-struck and just want more of what we've done the past 50 years, then please don't vote. I've had enough of that.

Dave

Big Executive Payday Ripoff

The thing that caught my eye in this article, Big Paydays for Chiefs of Top Media Companies - NYTimes.com, is that CBS Corporation made $227 million in 2009 and nearly 20% of it went to its top executive, Leslie Moonves, who was paid $43 million. Does anyone else think that's a bit much?

I can't bring myself to buy CBS's stock for that reason. Hell, I don't even like Katie Couric let alone anything else on CBS. Come to think of it, what else IS on CBS? I don't think I know.

Dave

We are a mean, vengeful society: 12-Year-Old To Be Tried As Adult For Dad's Fiancee's Death - Pittsburgh News Story - WTAE Pittsburgh

In this story, 12-Year-Old To Be Tried As Adult For Dad's Fiancee's Death - Pittsburgh News Story - WTAE Pittsburgh, a young boy killed his stepmother-to-be while she slept when he was eleven years old. He killed her with a child-shotgun his father bought for him. The prosecutor has charged the boy as an adult, with first-degree murder, and Lawrence County Judge Dominick Motto cited the "execution-style" as one reason to try the boy as an adult. According to KGO talk-show host, Pat Thurston, the boy has been held in the state prison, which became too expensive because of the specific "protection" the boy needed while there, and then transferred back to the adult county jail and then to the county juvenile facility.

Judge Motto said, as additional justification for the adult charge, that the woman "was totally defenseless at the time her life and the life of her unborn fetus was taken by a shotgun blast to the back of her head. There was no indication of any provocation by the victim that led to her killing. A more horrific crime is difficult to imagine." A psychiatrist for the prosecution said the boy is evasive, resentful and refuses to accept responsibility, and that, apparently, is more reason to charge the boy as an adult.

Do you see the same problem I see, here? It seems to me that the judge and prosecutor want the boy to see the crime the same way they do, a horrific crime. But, that there was "no provocation," and he is evasive, resentful and refuses to accept responsibility appears to be the very reasons that he should NOT be charged as an adult. The boy doesn't have a clue as to the seriousness of what he's done. And, so far, he's been treated like crap and he's angry about it. The prosecutor and judge are taking the easy way out. They don't want to go to the trouble of figuring out how this happened. They don't want to spend the time and the money for child psychologist and counselors and whatever else to figure this boy out.

And, there is that "child shotgun." Where did that come from? I had no idea this country sold child shotguns until I saw one. Was it only last October while I was visiting my niece and nephew in Johnson, Indiana? Or was it the year before? On that Saturday we were sitting outside talking when a man, perhaps in his late thirties or early forties, parked his pickup in the driveway. He and his son, no older than ten years old, were Deer hunting. The season had just opened, a month early, for "child" season. They were both dressed to the camouflage "t," except for the orange vest each wore. The boy carried a shorter shotgun - a child shotgun. It was nearly as long as he was tall.

They stopped to talk. The man said something along the lines of, "we had to do this today because we have to go to church tomorrow," as explanation of hunting on Saturday. He asked where a good spot was to wait for Deer. As I sat watching and hearing what the man said, I couldn't help thinking how bizarre the whole thing was. I remember thinking that I needed to SAY something to the man. I wanted to ask the man, "ARE YOU STUPID?" I remember the urge to ask that question was so strong that I was barely able to keep my mouth shut. I wanted to ask, "YOU ARE TEACHING YOUR SON TO USE A GUN AND YOU'RE GOING TO CHURCH TOMORROW?" "ARE YOU AN IDIOT?" "DO YOU NOT SEE ANY HYPOCRISY IN THAT?" I didn't. I should have.

So, here we are with young Jordan Brown killing his stepmother-to-be with a child shotgun his father bought for him, perhaps with the same bizarre ideas and thoughts in mind that were behind the hunter-father's reasons for buying his son a child shotgun. And, somehow, the judge and prosecutor turn reasoning on its head to charge the boy as an adult when, in fact, the father is the real idiot in the whole, sorry story. If I were the judge, I would be looking at the illogical logic behind buying the goddamned gun and what illogical logic the father planted in the boy's brain about using the gun (or did the father expect the boy to figure it out himself?) instead of thinking that the boy should be able to reason along the same lines as he, presumably an adult, does. It appears to be the boy's terrible fate that a lethal combination of idiots, his father, the prosecutor and judge, have aligned against him. In addition to the boy's defense attorney, where is the community that should be angry over the injustice in their court?

Dave

My Individual Retirement Account (IRA) My Ass..ets

Like most people, I have an IRA that is managed by someone else, such as TD Amreitrade or JP Morgan. Actually, I have one at both. Both have played catch-up the past two years or so and are pretty much back where they were in 2007. I have some, very limited, control over the TD Ameritrade account, but zilch control over the JP Morgan account. I've just finished a review of those accounts and compared them to another brokerage account I own that I control completely. My IRAs have failed miserably to keep up with the one I control for two reasons: 1) those damn management fees, and 2) the typically accepted so-called investment advice you hear on CNBC and everyplace else that sells mutual and exchange traded fund (ETF) and stock market advice, such as Suzie Orman.

Let's take number two, first, that so-called investment advice, which, again, comes in two parts. The first advice you typically hear is that "old" people should not be in the stock market, which is, of course, a bunch of hogwash. The second thing you hear is to buy stock and hold it forever, which is also hogwash. In October 2008 when the stock market took that scary dive of 700 points or more, Suzie Orman told everyone over the age of 50 who was watching Oprah Winfrey that they shouldn't be in the stock market. So, everyone 50 and older sold their stocks and millions lost billions of dollars that day. All that sell-off also drove the market down another 700 points or so over the next few days, causing yet more to sell and lose billions. The spiral-down. My dentist did too. Suzie scared him so bad that he lost nearly $500,000 in a single day..., by selling out. I didn't sell.

That's not to say, however, that I wasn't afraid. I was scared. My accounts were down big time. And, I was ready to push that "sell" button. But, that red ink next to those stocks I owned scared me more. I'm a tightwad and can't stand to lose money. Why, I ask myself, do I want to sell GE and lose $40,000? About that time I heard Warren Buffet say, "the market is NOT going to go away. It will come back. Now's the time to buy, not sell." So, I thought about that and told myself "he's right." GE is a good company that makes the best turbines, locomotives, builds the best hydro-electric dams and sells the best toasters and, to top it off, it still has a good balance sheet even if down a bit. Why in hell would GE disappear? The answer is, it wouldn't. It will adjust to the recession and come back. So, I took Warren's advice, as scared as I was, and moved a chunk of money from savings to my brokerage account and bought GE at $6.00 a share. Damn, that was cheap! I wish now that I had moved ALL my savings and bought more GE, and others. But, I was chicken. There was, after all, that so-called advice that "old" people shouldn't be in the stock market by safe Suzie and CNBC that stuck in my mind after years and years of drilling it in my brain. And, since I'm old, I hedged my bet a little by playing it TOO safe.

I also ask myself why I had held onto the stocks so long? I had held them so long that the long-term gain was actually less than a savings account, around 2% per year. I could have sold them at their peaks, or close to it, and made a lot of money and used that money to buy them back when they were down, and stocks always go up and down, even in bull and bear markets. All this thinking finally lead me to a final question: "Whose money is this, anyway?" Theirs? Or mine? The answer, of course, is "mine." And, the answer to the next inevitable question is that I need to manage my own money and my own portfolio because "they" don't know a damn thing about those things. And, in order to do that, I need to learn as much as I can about companies... not stock markets. Stock markets are for buying and selling company stocks, and that's it - period. The price you pay and the amount you make, however, is related to the company, so that's what you need to know about.

And that brings me to point number one, those damn management fees. You get dinged on a managed account at two levels, the first (highest) is the management fee on the mutual or exchange traded fund level, those fund managers. The second (lowest) is the management fee the brokerage charges you for "managing" your account. A double whammy. After the management fees are taken, you get the rest. ETFs are the latest fad in managed funds, "exchange traded funds." These are nothing more than mutual funds that can be bought and sold anytime during the trading day on the stock market, just like a stock. That's supposed to be a big deal, the selling point of ETFs. But, it's not a big deal. It's just more hoopla to make you think you're a big investor.

Take, for example, ETF iShares Barcleys 1-3 Year Credit Bond Fund (Symbol: HYG). Like mutual funds, all of these ETFs give you a chart for investing $10,000 and show you how much you would have in 10 years. That's supposed to be a big deal, too. HYG shows a chart over three years and it says I earned $1,185 on that $10,000 investment from February 2007 to February 2010. That's $395 per year, and that's 3.95% interest per year, about like a Certificate of Deposit (CD). But, if you read the "Management's Discussion of Fund Performance," it says the "total fund return" was 10.84%. Wow. What happened to the 6.89% that I didn't get? The answer is "management fees." This specific fund has $5.5 billion in assets. That means the management fee is around $378 million a year, most of which could be going into your account.

Listen, folks, there is no goddamned way that management of buying and selling bonds needs that much money to manage it. Buying and selling bonds is easy, no matter if your buying $100 worth or a billion dollars worth, and at Barcleys' level is probably done by a computer. I would be surprised if managing the fund takes more than three or four accountants who constantly audit the transactions, and only a "sample" of transactions at that. And, for that, they need hundreds of millions? No way. Nope. Most of it is going for that corporate jet they take to the Bahamas.

So, what to do? Well, the money is "your" money, not theirs'. So, my advice is to learn how to invest yourselves. You may not be able to get full control of your IRA or 401k, but you can start a small "learning" account, of a few thousand dollars with a discount brokerage, like TD Ameritrade. If you want to invest in bonds, get a copy of the iShares Bond Funds 2010 Report to Shareholders, scan through it for one that gives a good "total" return, and look at the individual bonds it invests in, say the top ten bonds it buys. Go buy them and then see how much each bond earns. As you accumulate cash, buy some more. Also, contribute a little of your paycheck (or social security check) each month to your investment account so you can buy more. Also, keep a percentage of your investment account in cash, say 15 to 20% in case you need it. You can then get that 10+% interest (or dividends) per year instead of giving most of it to a fund manager.

After you learn, then see if there's a way to take more control of your IRA. You may not be able to avoid that low-level management fee, but you may be able to replace all of those mutual funds and ETFs with a selection of stocks and bonds that make up your own fund. After all, if you know how to buy and sell stocks and bonds, you're doing the same thing those managers are doing.

Bonds are fixed income investments and they are good for getting better returns than your bank gives you. (A note about "munis," Suzie Orman's favorite bonds. They may be tax-free, as she likes to point out, in some cases, but they are also the debt that cities and municipalities have. And, at the moment, those cities and municipalities are not doing so hot in paying off that debt. So, make sure you know how the municipality is doing financially.) After you get a handle on bonds, learn how to find "good" companies, so you can buy and sell stocks. Give me a call or send me an email. My advice is free. I'll tell you the truth about what I think about any public company out there.

Dave