Wall Street

I will not spend a single penny for the purpose of rewarding a single Wall Street executive, but I will do whatever it takes to help the small business that can’t pay its workers or the family that has saved and still can’t get a mortgage.

President Obama, addressing a joint session of Congress on Tuesday night.

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NPR’s Planet Money series recently did an interesting story. The piece sought to answer what at first glance might seem like a seemingly simple question: where are all the U.S. dollars out there?

According to the Federal Reserve, the total amount of U.S. currency in circulation is about $900 billion. That figure isn’t referring to dollar denominated deposits in banks or investment accounts around the world. We’re talking about “cold hard cash” changing hands every day. Actual dollar bills in the wallet – $5’s, $10’s and $20’s or, if you’re lucky, a “Franklin” in the Christmas card from Grandma.

That works out to about $3,000 per American – including babies, teenagers and the elderly. But if you look into the wallet of most people you won’t see that sort of cash (at least not in mine anyway). So it must be in bank ATM machines and retail cash registers, right? Under mattresses? Shoe boxes? Not really. They’ve looked into that and apparently those bills only make up a small portion of the total amount. So where is all this cash then?

David Kestenbaum of NPR talked with two economists who have their theories. Richard Porter speculates that about half of the money is abroad – the farmer in Argentina or the waiter in Istanbul will hold on to dollars to hedge against rapid inflation of their local currencies. But this still leaves a big chunk – something in the neighborhood of $300 billion – unaccounted for. Economic sleuth Ken Rogoff says this money likely resides in the underground economy off the radar of the IRS.

For all you The Wire fans out there, you know what that means; the money is with drug dealers in cities like Baltimore who are trying to avoid taxes and jail time. So instead of depositing those bills in banks for safekeeping, criminals doing business in the “informal economy” stash their mula in so-called “safe houses” vulnerable to the brazen hold-ups of the shotgun wielding Omar.

This broken money trail leads to one obvious question: shouldn’t the U.S. government be doing something about this since they are losing potential revenue? After all, the Treasury Department could use the extra help these days. Yep, the Feds probably should be trying to track the missing loot but after all we’ve seen over the past few months, David Simon’s fictional characters on “the street” seem a little less unsavory in light of the billion dollar investment scams which have been unearthed lately.

So if the government really wants to find the missing money, they don’t need to go far. There are enough white collar criminals on Wall Street to keep them busy for a while. The Treasury could start by opening their checkbook.

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Do we really need any more evidence that hedge funds should be regulated or even outlawed altogether? How many blowups does it take for us to realize that unregulated greed in the name of “free market” demagoguery does not work for working people and the broader economy.

The U.S. economy is failing for three main reasons. First, the increasing reliance on the use of leverage was a ticking time bomb that finally went off and decimated the balance sheets of banks and financial institutions, not just in the U.S. but around the world. Second, the invention of exotic securities, derivatives and other financial shenanigans by financial wizards at investment banks which bear zero correlation to economic value creation or worker productivity. And third, excessive influence of corporations and their lobbyists in the regulatory process. In all three cases, hedge funds have been the biggest culprits of these practices which not only put their investors at risk – like retiree savings and philanthropic foundations – but also taxpayers since it is they who end of having to foot the bill for the economic calamity that lies in the wake of the destruction.

Sure, the SEC may have missed the mark – perhaps on more than one occasion – in catching Bernard Madoff’s $50 billion ponzi scheme, but let’s not vilify the policeman for a crime committed by a criminal. For years, the SEC has been an underfunded agency devoid of real leadership (before Cox, there was the equally worthless Donaldson and Pitt) which has been unwilling to fully protect investors and instead ceded authority over and over again to the business community. It’s time to put a stop to these disastrous investment vehicles. Hedge funds are equal opportunity abusers; they hurt wealthy people, institutional investors, retirees and taxpayers and drain valuable resources from the government. Let’s take a stand and say enough is enough.

Solving this economic calamity will require efforts on many fronts. For starters, the Obama administration can help empower shareholders, the SEC and the DOJ to hold corporations and money managers accountable to society. Less regulation is not the solution; it’s the problem. I hope Summers, Rubin and other leftovers from the Clinton years who are now part of Obama’s inner circle have come to see the failure of their past aversion to responsible regulation of Wall Street. These luminaries can start on their road to redemption by cutting out the most cancerous tumor in our financial system. We will all be better for it.

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In a blog post a couple weeks back, I posed the question: Who do you trust with your pocket book? 87% of you said Obama. Seeing that a lot has happened since then in the global markets (a mild understatement!), I would like to revisit this topic as we enter the home stretch of the Presidential election. Is Obama or McCain better for your portfolio? The evidence seems to suggest that Wall Street performs better under Democratic administrations. Consider the below graph:

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Over the past few weeks, we’ve heard President Bush, Treasury Secretary Henry Paulson and various lawmakers declare that the root cause of the current financial crisis stems from illiquid assets related to mortgage-backed securities. But what does this really mean? And how can this “radioactive waste” be purged from the balance sheets of financial institutions holding these toxic securities.

John Sweeney, President of the AFL-CIO, responded to the original version of the bailout by describing it as “dangerous and ill-conceived.” Critics of the original proposal emphasize that the final plan must include limitations on executive pay and improved governance of public companies, taxpayer equity in distressed companies, independent Congressional oversight and a stimulus package designed to create more jobs.

Will the final $700 billion bailout plan resolve the fundamental cause of the crisis? What should the future relationship be between lawmakers in Washington DC and bankers on Wall Street? And how will the crisis impact the Presidential election? Dan Pedrotty, Director of the AFL-CIO’s Office of Investment, joins us to answer these questions and more.

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It was my intention in today’s post to review James K. Galbraith’s new book, The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too. However, the events unfolding Monday on Wall Street make a book review somewhat silly and inappropriate. While Galbraith’s insights are apropos to today’s events, stay tuned for the review. In the mean time . . .

If we are to believe the pundits, today’s events represent the worst financial crisis since the market crash of 1929. Only time will tell. While the fallout from this recent event and its repercussions will play out in the coming weeks, months and years, more important questions must be addressed. First, can those accountable be held responsible? Second, what can be done to help the millions of people harmed in big and small ways by this and other recent screw-ups in thefinancial sector by the government?

On the accountability front, I suspect that the securities lawyers are already in high gear, filing complaints as we speak in any courthouse still open. This will, of course, put pennies in place of dollars lost by shareholders and bondholders in the affected companies. Great. I for one am underwhelmed by the outcome of this effort.

Undoubtedly, Congress will recover from the fallout suffered from their own ineptitude, clamoring to pass laws to prevent such misdeeds from ever happening again. Yes, I’m worried that there will be another sub-prime lending frenzy followed by the securitization of massive mortgage debt based on huge volumes of questionable loans dumped on the markets.

At the end of the day, the question in regard to accountability lies in seeing that justice is sought and served upon those within Lehman Brothers and at other financial institutions brought down by the greed created in the opportunities wrung dry in the mortgage markets. Fundamentally, the drive behind this latest catastrophe stems from personal greed and arrogance coupled with the notion that government should keep its hands off of the market, the “let the market regulate itself” lie. I would call this a fallacy if it weren’t for the fact that it was intentional rather than a misguided philosophical error in judgment.

Will the CEO of Lehman Brothers have to cut back on his domestic staff in the Hamptons? Will Lehman’s board of directors lose more than their directors’ fees as a result of this mess? Let’s hope that the regulators get let loose and do what needs to be done. Let’s hope too that Congress has a more than just a knee jerk reaction to these events and does more than just rearrange the deck chairs at the hanging.

Now that thouisands of well educated, highly paid employees are out of jobs, will we ever recover as a nation? I think so. I am sorry that those people are out of jobs. Losing one’s job is a drag. But, unlike those at the bottom of the economic ladder, jobless, without proper education or training and relegated to the position of the hopelessly unemployed, I’m not too worried for the long term prospects for most if not all Lehman Brothers former employees. However, I am concerned that these events and those that are sure to follow will result in much more harm for those people at the bottom. Will the recent victims of the various hurricanes be unnecessarily denied help because our government has diverted so many resources? I’m afraid this will be the case. Will consumer credit get tighter and more expensive? Yes. Will home loans for those who really need them become scarce? Probably. At the end of the day, the question remains: can government do what needs to be done so as to make the lives of all people – not just those who think and live like the current president – better? This is the question and I hope that the elections in November deliver the answer.

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Which party is better for the U.S. stock market? The answer to this question may surprise some people. Studies consistently show that the stock market actually performs better under Democratic presidencies than Republican.

I know what you’re thinking. Conventional wisdom says that Republican presidents are preferred by big money donors on Wall Street. But evidence consistently suggests otherwise and investment professionals in the business of making money should re-think this view. According to a recent analysis by Ned Davis Research, the Dow Jones Industrial Average (DJIA) returned 7.2% during Democratic administrations compared to just 3.6% under Republican presidents. In fact, several other studies have also reached this conclusion. For example, a 2003 study by two finance professors at UCLA titled “The Presidential Puzzle: Political Cycles and the Stock Market” also found that the the stock market performs better and tends to be less volatile when Democrats are in power (1896 through 2001).

These results partially explain why Wall Street firms have increased their political giving to the DNC in recent years and both Obama and Clinton have strong ties to the financial community.

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