Slouching Towards Wall Street… Notes for the Week Ending Friday, 26 August 2011
From Boca to Boston, from Washington to Wall Street — from Mineral, Virgina to Martha’s Vineyard — warning rumbles came from the depths of the earth, followed by a hurricane that ravaged the same coastal strip. “For us, this past week has been trying, at the least,” said Reverend Marian Windel of the Church of the Incarnation in Mineral, VA. The town of some four hundred souls that was the epicenter of Tuesday’s magnitude 5.8 earthquake (Forbes.com/AP, 28 August, “Town At Epicenter Of Quake Exhales As Irene Passes”). As Irene bore down towards the coast, Rev. Windel reassured her flock that “God was not mad at us in any way.” In the event, Mineral took a soaking, but the storm lumbered past without doing any damage.
We are not sure the same can be said of this week’s other major instance of benign inaction. Fed Chairman Bernanke announced that he will do nothing, and gave us a time frame: two years of inaction. In his bland presentation the Chairman seemed careful to point out that none of this is really his fault. The helicopter is set to hover in place and may spend its fuel well before the winds shift against it.
“Historically,” said the Chairman, hovering above Jackson Hole, “recessions have typically sowed the seeds of their own recoveries.” According to economic theory, with which Chairman Bernanke is well acquainted, reduced spending creates pent-up demand. So why aren’t we recovering? Bernanke says we are, and that “these restorative forces are at work today, and they will continue to promote recovery over time.” But the recession “besides being extraordinarily severe as well as global in scope, was also unusual in being associated with both a very deep slump in the housing market and a historic financial crisis.” His vaunted Princeton intellect notwithstanding, the Chairman appears to be trying to disassociate these interdependent causes — causes which, as head of the Federal Reserve, Mr. Bernanke was in a position to influence, if not absolutely derail. “These two features of the downturn, individually and in combination, have acted to slow the natural recovery process.”
We don’t speak the language of economists’ assumptions (“Expect-eranto?”) but Chairman Bernanke appears to be asking for sympathy from his fellow central bankers, meanwhile offering something they can play to their home audiences. “You see? It really was a Perfect Storm!”
While he rightly laid fault for creating this mess, as well as responsibility for fixing it, at the feet of Congress, Bernanke’s protestations do not jibe with his willingness to shoulder sole responsibility for the global economy, as he has done for much of the past three years. Unlike Secretary Geithner, who has on occasion flashed his undisguised contempt for the Congressional idiots he faces in hearings, Chairman Ben has been a team player, occasionally commenting that We Don’t Really Know Whether This Will Work, and No One Has Ever Tried This Before, but continuing to treat the global economy and America’s social contract as a thought experiment undertaken while strolling the grounds of Princeton’s Institute for Advanced Study. In the end, Bernanke’s assurance that rates will be held low for two years is an admission that he is stumped, yet it accomplishes major policy objectives. It assures the banks that the Fed will do nothing to disrupt their time spread arbitrage of borrowing versus lending, and the Bernanke view of credit demand indicates that the administration will not lambaste the banks for not lending. Meanwhile, as the Obama presidency is no longer about policy, but all about the forthcoming election, it provides a defined floor for candidate Obama’s forward-looking economic policy statements.
The Chairman did not take responsibility for anything, nor forcefully throw this mess into the laps of the lawmakers. And by allowing the Perfect Storm conceit to continue, he did not force anyone else anywhere in the world to take any policy steps to change the status quo. Bernanke has committed his renowned intellect and the resources of the federal government to a massive exercise in global inertia. While doing nothing is sometimes the best investment strategy, it does not make for successful policy.
Speaking of perfect storms, the Obama Administration is hurling lightning bolts at a public servant who has the audacity to believe he serves the people and not a conspiracy of Capitol Hill Wall Street toadies. We know that “audacity” is supposed to be an Obama word, but lately the President is puffing in exasperation at the audacity of New York State Attorney General Eric Schneiderman. Schneiderman sees himself as a gadfly, harassing wicked bankers in the public interest. But the Administration has pegged him as the fly in the ointment over a gaggle of states Attorneys General getting their hands on a major jackpot. The proposed global settlement of mortgage-related bank malfeasance is a keystone of Obama’s plan to get the economy moving again — not to mention a keystone of Obama’s plan to secure financing for his upcoming presidential campaign. The settlement could cost twenty-five billion dollars which, pace Senator Dirksen, is no longer real money, especially since the government has gotten into the habit of bailing out idiot bankers. No wonder the banks are lining up to claim the Get Out Of Jail Free card.
According to the NY Times (21 August, “Attorney General Of NYIs Said To Face Pressure On Bank Foreclosure Deal”) Schneiderman was buttonholed at this week’s memorial service for New York Governor Hugh Carey by New York Fed board member Kathryn S. Wylde, with whom he “became embroiled in a contentious conversation.” The Times notes that Wylde, in her capacity as a NY Fed board member, “represents the public,” which is what we thought the state attorney general does, as in “the People versus…”
Wylde told Schneiderman “Wall Street is our Main Street — love ‘em or hate ‘em, they are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.” We think it is the proposed settlement that is indefensible — which makes Wylde’s statement coherent. It is the attorneys general who are “doing something indefensible,” not the banks who, like chess players, are taking advantage of their opponents’ strategic lapse. The job of New York AG is seen as a launch pad for the governorship — itself possibly a springboard to the presidency. Wylde, for her part, is clearly itching for a Washington appointment, and might just snag it with this performance on behalf of America’s true power center. “The people,” indeed.
Schneiderman has resisted Presidential pressure to jump on the global settlement bandwagon, contending its guarantees against future litigation will shut down cases currently under development. Other state AGs also resisted the settlement, notably Delaware and Nevada, home to most of America’s corporations. Delaware with its corporate-friendly codes, and Nevada with its history of frankly loosey-goosey corporate oversight standards. If these two states are concerned, shouldn’t we be too?
Now the deal is set to go forward without them (Huffington Post, 23 August, “New York Attorney General Kicked Off Government Group Leading Foreclosure Probe”). Noting that “Schneiderman, along with attorneys general in Massachusetts, Delaware and Nevada were said to be ‘complicating’ the Obama Administration’s goal of reaching a ‘speedy’ settlement,” the HuffPost says the deal is rushing to a conclusion despite Congressional testimony from Elizabeth Warren “that government agencies may not have sufficiently investigated claims that borrowers’ homes were illegally seized.” Says Delaware’s AG, “the mortgage crisis must be fully investigated, including origination and securitization practices, before any broad immunity is granted.” Quoth the Delaware AG, “the American people deserve an investigation.” Quoth President Obama, “will no one rid me of this meddlesome Attorney General?!”
Despite its global price tag of $25 billion or more, the settlement would be particularly favorable to Bank of America, as it would draw a line under everything that has gone before. Which puts this week’s announcement of Warren Buffett’s $5 billion investment in a whole new light. On Tuesday the Huffington Post reports Schneiderman has been sidelined. On Wednesday Buffet calls Moynihan. On Thursday a deal is announced. Maybe the price action in B of A shares was simply a reaction to the fly being scooped out of the ointment. Maybe Buffett’s $5 billion investment was motivated by nothing more than this ongoing assurance that the government will bail him out. And maybe Bernanke’s oblique hint that the events of the last few years have caught central bankers the world over by surprise is of a piece with the administration manipulating this whole mess to give the banks a clear path.
As storms go, it doesn’t get any more perfect that that. All of which makes us take a great notion to jump in the river and drown.
Bank of America shares closed on Tuesday at $6.30, posting a modest 12-cent advance over their opening price. On Wednesday morning the stock gapped up, opening (according to Yahoo! Finance) at $6.53 on a surge of buying volume, which coincides with a conversation reportedly held that morning between Warren Buffett and B of A CEO Moynihan (NYT DealBook, 25 August, “Buffett Invests $5 Billion In Bank Of America”). This sequence of events reportedly kicked off with Mr. Buffett luxuriating in his bath on Tuesday — a detail we could have done without (DealBook, 25 August, “Buffett’s Bathtub Fixation”).
It seems Buffett was not alone in his bath, as others clearly shared in his Eureka! moment. B of A stock actually gapped down on the Tuesday open, perhaps because Buffett was late getting out of the tub. Its miraculous recovery on Wednesday morning — to say nothing of its close just under $7 a share, on strong volume — indicates to us that someone else may have been playing with Warren’s rubber ducky.
DealBook says that as a child, Buffett used to pass the time by racing marbles in the bathtub with his sisters. The fact of any media space at all being allocated to this detail is evidence that a business model predicated on filling up a certain number of column inches every day leads to uneven quality of reporting, even when overseen by the likes of Andrew Ross Sorkin.
They could have saved their virtual ink. Hedgeye has a unique link that gives us exclusive dibs on bathtub stories. For our new readers, Hedgeye’s main office occupies the Taft Mansion in New Haven, CT, across Whitney Avenue from the Yale campus. “Big Bill” Taft graduated from Yale in 1878, where he was Phi Beta Kappa and ranked second in his class. After leaving the White House in 1913 he returned to teach at Yale Law School where he took up studies in legal philosophy and continued his international campaign for world peace. In 1921 President Harding named Taft Chief Justice. Thus, Taft became the only former president to administer the oath of office to incoming presidents (Coolidge and Hoover), as well as the only Chief Justice to serve together with his own appointees.
All this has been forgotten, however. What survives is the story of President Taft and the White House clawfoot bathtub which, though it reads like a Mark Twain vignette, has been repeatedly sworn to by scores of authorities, none of whom was present when the alleged incident transpired. It appears that “Big Bill” Taft was truly big. He stood six foot two and weighed some 330 pounds. We are not sure whether Yale had a football team during his student years, but in the modern age he would have been a sure choice for nose tackle. It appears that, on his taking up residence in the White House, the presidential girth exceeded the capacity of the presidential clawfoot bathtub. When the Taft became wedged in the tub, it took four burly men and a gallon of butter to extricate the Presidential Person. A new bathtub was installed, measuring seven feet long, by three and one-half feet wide, and the chief of state was able to resume his intimate sessions with the rubber ducky-in-chief.
We wonder how many tubs of butter it will take before one of Buffett’s inner circle slips this time. The first member of the Bathtub Ring to slip was Berkshire heir apparent David Sokol, whom Berkshire deposited beneath a fast-moving wheeled public conveyance after he with $10 million of Lubrizol stock he bought personally, while advising Buffett to acquire the company for the Berkshire portfolio. Berkshire’s audit committee found Sokol’s behavior “violated company policies, including Berkshire Hathaway’s Code of Business Conduct and Ethics and its insider-trading policies and procedures.” It also put Buffett in a compromised position, as head of a company whose insider trading policy consisted of nothing more than the honor system.
Make no mistake: we are in favor of honor. Laws, rules, and procedures are only as good as the will of market participants to behave honorably. But the fact that laws are written by craven and dishonest men, to be implemented by self-aggrandizing fools, does not provide dispensation to those who violate them. Especially when, like the laws regarding insider trading, the law actually has a direct connection to a moral societal operating principle — in this case, market integrity.
The media have been brimming — like an overflowing bathtub –with praises of Buffett as “the smartest investor in the world,” and few have seen fit to challenge, or merely question the wisdom of Buffett’s putting five billion dollars of his shareholder’s money into the hands of B of A’s Brian “We have the capital and liquidity we need to run our business” Moynihan. If you would like some clarity on this, we point you to Financials sector head, Josh Steiner. For his forthcoming presentation on the Buffett / B of A transaction please contact sales@hedgeye.com.
We are less interested in the wisdom of Berkshire’s investment than in the action in B of A stock in the days leading up to the public announcement. We do not believe for a moment that the “new” SEC will be any more effective at its fundamental job — to protect investors and promote market integrity through a system of disclosures by market participants — but Enforcement Chief Khuzami has turned up the heat considerably since coming on the scene. Now that the SEC has formally launched the Office of the Whistleblower, we wonder which member of the Bathtub Ring will be first to break ranks. Will Buffett himself be implicated? We find it odd that the SEC is not pressing him directly in the Sokol matter. At the time it appeared that Berkshire has minimal compliance controls in place, which means that senior executives bear the burden directly. Buffett, as Chief Executive Rubber Duck Squeezer, should have the most to answer for. Given the action in B of A stock this week, we are waiting for the SEC to roll out charges. This is market action even a regulator couldn’t ignore. If they fail to nail the Bathtub Ring over what went down this week it will shock us, though not surprise us.
Buffett and his inner ring should know they can not remain immune forever. As Buffett himself said regarding his investment in Goldman, “the economy is a little like a bathtub. You can’t have cold water in the front and hot water in the back.” Other phenomena are like that too, including the flawed and highly manipulated justice system. Even super rich people outlive their usefulness. We don’t want to throw cold water on your celebration, Mr. Buffett, but don’t be surprised if you find yourself in hot water over this deal.
You don’t count the dead when God’s on your side.
- Bob Dylan, “With God on Our Side”
As the tenth anniversary of the 9/11 attacks approaches, a holy war is brewing in New York City, but not about radical Islam. The Wall Street Journal reports (24 August, “9/11 Exclusion Spurs Outrage”) local religious leaders are in a snit over Mayor Bloomberg’s intention to host this year’s memorial without inviting any clergy. New York City has run a memorial every year, and religious leaders were never on the podium. For some reason, the approaching tenth anniversary has sparked outcry from many local religious figures. Dare we call it a “Crusade”? A “Jihad”?
Former Bloomberg administration official Rudy Washington “organized an interfaith ceremony at Yankee Stadium shortly after the September 11. 2001, attacks” and is “outraged.” Says Washington, “This is America, and to have a memorial service where there’s no prayer, this appears to be insanity to me. I feel like America has lost its way.”
A Bloomberg spokeswoman emphasizes that the event focuses on the families of those who died at the Twin Towers, as it has in past years. Other religious leaders express the practical question of, who decides which religions get invited? Any member of a religious congregation knows how fraught group identity can be. It’s not enough to say we’ll invite clergy representing “the major religions” (who decides whether a religion is “major” or “minor”?) — not enough to say we’ll invite Christian clergy (who decides which of the thousands of groups and sects a “representative”?). But we hasten to make the one salient point glaringly omitted in the Journal’s piece: this nation is founded on the bedrock principle of separation of church and state. In its most basic form, this means government events do not sponsor religion, and inviting clergy as official guests risks violating this definitional precept. Not to mention that a choice to invite clergy to as important an event as the New York City tenth anniversary 9/11 memorial — to be attended by President Obama and a number of foreign dignitaries — will necessarily alienate adherents of other groups. (We imagine, for example, trying to figure out which Hindu leaders to invite to show respect to India’s Prime Minister Singh — who is a Sikh.)
The Bloomberg administration does not appear to be pushing back with a straightforward Constitutional argument — nor are the press making it on their behalf. This comes on the heels of Texas Governor Rick Perry’s recent call to prayer and fasting — the Texas event was not financed by public funds, preserving the Church / State split. The prayer event was limited to a tightly defined group of evangelical Christians — several hundred other Christian protesters marched outside Houston’s Reliant Stadium with signs decrying the event as “not Gospel” and “un-Christian.”
We recall that Governor Perry called for three days of prayer and fasting in April to bring an end to the state’s prolonged drought. The drought continues, leading skeptics to say “you see?” and believers to drone “O, ye of little faith!”
It may be un-Christian of us to say this evokes memories of Jerry Falwell saying “God does not hear the prayers of the unredeemed…” The growing influence of religion in American politics is a sign that our society is breaking down. If clergy — who in America are accorded freedom of action, freedom from taxation, and societal protections far beyond what they enjoy in any other country — turn against the principles of the Constitution, and if the press, or public figures, or elected officials promote this attack on Constitutional protections, we are perhaps on the cusp of a complete societal meltdown.
We recognize the role of religion in fostering morality, but we assert the Constitution’s unique protection as the ultimate guarantee of freedom and an open society. The resort to prayer is a sign that all else has failed. Just ask Chairman Bernanke.
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