Friday, January 13, 2012


Here we are in 2012 and Wall Street’s “structured investments’’ are still out of control. Unfettered free Markets reign!

At a time when political candidates talk about the need for jobs and investment, Wall Street continues to focus on ensuring that its high-stakes poker games go unregulated. 

The SEC defines structured investments under Rule 434 as: “Securities whose cash flow characteristics depend upon one or more indices or that have embedded forwards or options or securities where an investor’s investment return and the issuer’s payment obligations are contingent on, or highly sensitive to, changes in the value of underlying assets, indices, interest rates of cash flows.”

No wonder structured investments are hard to control – nobody really understands them. But that didn’t stop people like MF Global’s Jon Corzine, Lehman’s Dick Fuld, and does not other Wall Streeters from manufacturing these investment “products” to produce revenue for their firms. Do product liability laws apply to these products?

Jefferson, in a letter to Albert Gallatin, Treasury Secretary in 1802, said: “I believe that banking institutions are more dangerous to our liberties than standing armies.”

Everyone should know something about what has happened to our economy and society stemming from all the too complex to explain exponentially leveraged “securities.” And the greed behind all the structuring is still going on without meaningful restraint as we enter a new year. At least Occupy Wall Street is persistently protesting in the shadows of the Wall Street glitzy office buildings.

Protest is the only way to change the essential inhumanity of so much greed. Plutarch said: “An imbalance between rich and poor is the oldest and most common ailment of all Republics.”

Occupy Wall Street has led the way to a new awareness of the feelings of betrayal and being left out of the American Dream caused by the drive to grow net worth by the few against the best interests of the many. Financial products such as structured investments do not lead to capital formation that is required to create jobs.

And in 2012 there is a need to have the right conversation about the right to produce structured investments that may have $600,000,000,000 of leveraged derivatives, which defy rational explanations, just waiting for a new hiccup to explode – or is it implode?

Wall Street was instrumental in the development of our country. Wall Street raised the capital for industrialists to invest in plant and equipment and innovative ideas which created the strongest economy of all time. It helped produce the middle class and could help to resurrect it if it had the will. Why could Wall Street not put risk capital into American manufacturing rather than geometrically leveraged virtual value? Why not stop all the leverage, which generates huge fees in the short run, but puts our entire economy on the line?

Why can’t Wall Street take the lead and make money the old fashioned way – not at the expense of the people but to rebuild the lives of the 99 percent.

How can the Republican debaters’ and the media wonder how to rebuild trust? Trust in what – in a government that has failed to protect the public? Trust in banks that only care about structuring investments – so complex that the SEC definition is so arcane that only a few know what in the hell it could possibly mean?

Samuel Adams said: “It does not take a majority to prevail…but rather a tireless minority keen on setting brushfires of freedom in the minds of men.”

The Tea Party is an example of setting brush fires. However, its mission is to keep brush fires burning to obstruct passing the budget, or to avoid passing Obama’s jobs bill, or to get rid of health insurance for Americans who did not have access. These brush fires have been set to interfere with the freedom to care about the common good and our Government’s obligation to protect it.

Occupy Wall Street is a minority too. But its ethic is a function of restoring equality and fairness to the American Dream. We cannot allow unbridled, unfettered greed to permit the creation of “structured’’ financial products without investing in jobs or in capital formation. OWS certainly does not mean freedom for Congress to continue to be: of the lobbyists, for the ultra rich and by the ultra rich - who are the generals of the Mega Banks and the Corporations that ship jobs and profits off shore.

Jefferson noted: “The legitimate powers of government extend only to such acts as are injurious to others.” This was before germs, or automatic weapons, or nuclear bombs, or planes or the internet, or capitalism or 350 million Americans living on a globe with billions of people, connected to each other by laptops and facebook – and Huffington. So we need to view Jefferson’s profound concern for the public good in terms of today. We did manage to create the American Dream, but the deregulation of greed and the devaluation of ethics has become injurious to the 99 percent.

So now we have a new year, and a new election. And it is time to focus on the needs of the 99 percent and tear down party lines and obstructionist tactics. The truth is simple: It is time for all Americans to come together to understand that all the Greed and self interest is wrong. We need to fix it.

Congress along with Wall Street can step up to the line to do what is right for the people if there is a willingness to understand the reasons behind the brush fires, and go back to the basics that made our country great.


Tuesday, January 3, 2012


How is a 6.3 “billion dollar bet” – “prudent?” That’s what Corzine testified.

He, “always tried to do the right thing;” he placed the bet to make money because IM Gobal needed to become profitable, he testified. So he bet the store on the direction of the currency of five countries. There was “no intent” to do the wrong thing – or misplace $1,200,000,000 of customer funds – it was just “chaotic.” No admission of anything that could be construed as fraudulent behavior – just the empirical evidence of reality.

Is this acting in good faith toward his fiduciary responsibility to customers? Let alone to his clear legal obligation to not co-mingle customer’s funds? Funds which probably went down the drain to cover his positions going the wrong way.

Corzine is only testifying to set up a fraud defense, because prosecutors must prove willful intent – and Corzine is a man of prudence, as a former CEO of Goldman.

So huge leveraged betting on currency is not intentional, and is the right thing to do? Hedge fund managers know currency bets are at the highest level of risk. Speculation is never prudent, but volatile. More leverage equals geometrically more risk and more volatility.

Capitalism is on trial because of the way it is practiced at the expense of prudent behavior, and because so many Capitalists do not act in good faith.

To Act in Good Faith is a legal term and concept well defined by many areas of the law and established precedent. Simply put - it is an implied covenant of fair dealing and not breaking (keeping) your word. Significant SEC and Fed Bank Holding Company regulations stipulate the legal import and requirement to Act In Good Faith – which must be adhered to as significant regulations have the force of law behind them.

So where has acting in Good Faith gone?

The Lehman Bankruptcy in September of 2008 was the largest ever in US history. The Federal Bankruptcy Court just approved a plan to emerge from chapter 11 for 65 billion dollars, but the fighting for assets and valuations is not over.

Lehman leveraged itself to death, and when the market hit the fan on September 8, 2008, by the 10th it was clear that Lehman could not sell – flip all the egregiously leveraged and worse than junk bond debt it assumed it could always sell – no matter what?

Different suitors stepped forward to ostensibly buy or bail out Lehman. However, it became clear Lehman had manipulated an accounting of financial risks, replete with fictitious valuations through Hudson Castle, an entity set up to get the bad stuff off Lehman’s balance sheet. So with a myriad of other material issues – Lehman declared bankruptcy. The stock price now hovers at .025 cents.

Lehman Brothers did not practice Good Faith. And the Federal Bankruptcy Judge appointed an attorney from a prominent legal securities defense firm as the court’s Examiner.

The Examiner’s lengthy report reads like a brief in defense of Lehman. Jenner and Block, where Anton R. Valukas, the court appointed “Examiner,” is a very senior partner with a high profile national public record of defending actions alleging “breach of fiduciary duty,” and “securities fraud.”

The Examiner’s report concluded: “…there was insufficient evidence to support a colorable claim for breach of Fiduciary Duty regarding Lehman’s valuation errors (lies?) ... there was insufficient evidence that any Lehman officer acted with the necessary SCIENTER to impose liability.” Further the report concluded that Lehman had a “license to fail.” Which “establishes a future precedent” according to the Center for Policy and Research. What an examiner, what a business builder for future securities defense work.

Scienter refers to intent or knowledge of wrong doing.

Lehman advanced the ridiculous and implausible notion that when it doubled its risk from $300,000,000,000 to $630,000,000,000 the “630 Billion" was still acceptable risk;” because it was “prepared to lose $4,000,000,000 instead of $2,200,000,000.  Does this ring true?

Because, Lehman was “prepared to lose” (not investors), the Examiner did not consider this as “reckless behavior.” OK then – unbridled, geometric leverage to speculate in nuclear volatility is not reckless. Thank God for an Examiner with enough uncommon sense to let Lehman off the hook because it was prepared!

In fairness to Lehman it had backed up its risk – hedged it! Hedged 40 times its fictitious net capital, or possibly a higher multiple, an even more specious posture toward acceptable. Don’t forget September 2008 marks a date in history when it became public knowledge, for the first time, that financial engineered risk management was a cruel joke and clearly did not work.

Hedging is what you do when you know what you are going to do won’t work.

The Examiner’s extremely subjective value judgment (which read more like a legal defense) was: Lehman’s risk reword ratio was justifiable. Because the reward justified the risk – he concluded, “The rewards outweighed the risk.” And this conclusion from one of the most prominent security defense attorneys in the US establishes a precedent which could then be applied to any Bank Holding Company in the future that dies from gangrene due to a bowel explosion stemming from all their “manageable” and “worth it” mathematically risk measured, insane leverage.

Here’s a taste of Lehman’s not fraudulent practices: more than doubling its balance sheet valuation of Archstone - 2 times above market value; CDOs (“collaterized debt obligations)– termed asset backed securities, backed with either Swaps or pools of worse than junk bond real estate loans – had no real collateral considering any financial standards for what constitutes acceptable collateral for any bank in the US; fallacious accounting and the lack of collateral was not disclosed to investors, a severe violation of disclosure regulations; and the glaring lack of disclosure constitutes the “omission of significant information.” Further the Examiner found that as the economic downturn worsened Lehman consistently flagrantly inflated the value of its assets; while it continued to grossly overstate its expected (projected) return on investments. So was this accidental – because it was not intentional, as the Examiner has to conclude to let Lehman off the hook.

And Lehman was not alone in 2008 in their usual and customary business practices just described. But Paulson and Congress made certain that our government bailed out Goldman and its (investors) counter parties, along with the other culprits.

The Examiner’s report was justified, because THE CENTER FOR POLICY RESEARCH furnished the 99% with an Oversight Report of 33 pages. This is a Seaton Hall Law School “think tank?” and Mark Denbeaux, the Law Prof in charge – “…could find no legal reason to charge Lehman with misconduct.” Of course, the Seaton lawyers pointed out that their opinion was, “Pursuant to the standard practice of the Center…”

No legal reason: fallacious-fictitious risk management and fictitious valuations as policy. To disguise - conceal the true value of assets and the actual nature of unbridled purely speculative risk? No legal reason? How about the lack of disclosure and the omission of significant information!

There have been a number of articles recently on these findings and the emergence of Lehman from chapter 11. It is amazing how the ability to conduct critical thinking regarding the issuance of reports and legal conclusions is apparently missing in action. Acceptance of so called experts is what got us into this mess. Acceptance of Econ PhDs return to Laissez-faire theories designed to promote fees for the ultra rich rather than sanity and fairness is still the rule.

To Act in Good Faith is missing in action. As well as any critical analysis of so-called “risk management.”

It is not logical to mathematically measure risk because risk is subjective and qualitative; therefore can not be quantified. The Examiner supported the gravitas of virtual mathematical risk measurement by noting and seemingly condemning – “…Lehman valued these investments through gut feelings.” And their guts (based on greed) regarding unmitigated leverage were legally justified because they (Lehman) - “were prepared to lose.”

And Corzine testified his “bets were prudent.”  Just like bungee jumping without a cord.

The inscription on the tombstone of our devastated economy and the middle class should read – The rewards outweighed the risks. To Act in Good Faith is DEAD!



The stock market formerly was a place where savings were invested in corporate growth except for times in the past, like the events leading up to the Great Depression - when unbridled speculatio and greed ruled. Many corporations, still alive today, were started by Wall Street Financiers.

 Financiers helped innovators like Thomas Edison and Henry Ford obtain the capital they needed to build their companies and sold stock to raise capital. Shareholders understood why they were investing and knew there were risks that could not be guaranteed. Shareholders accepted risk investing in ideas or men who had ideas – which if successful would result in expanding companies which produced products in demand, and the companies along with their stock price, and dividends would grow in value.

So the Stock Market used to be a market which raised money for and sold shares in new companies or was a market to trade in existing investments called securities - which could be either bonds or stock.

And the process works when investment is real rather than financial.

Real investment produces improved, more productive, and more innovative plant and equipment which lead to increased GNP. Real is different than financial, because financial investment may only be reflected by a larger or lower personal income or net worth which is not translated into economic growth.

We have lived in a forward looking economy, and counted on the free market myth to push everything up. Personal savings for some time have not been invested in the growth of corporate values translated into dividends for shareholders. And corporate profits, for too many years, have not been invested in corporate growth, but have been paid out to CEOs and upper- level executives at an accelerated pace for the past thirty years, while necessary cash was borrowed. This equation works as long as everything goes forward, meaning up. So, as investments became more financial than real our markets turned into casinos where shareholders bet on the direction of stocks, or indexes, or anything that could be securitized to bet on.

A similar misdirection of savings occurred in the late 1920s when the stock market soared and “investors” gobbled up stocks on margin (LEVERAGE) in order to have a larger- than-life position in the market while stock prices soared due to unbridled greed and unfettered speculation.

When Wall Street’s stock market specializes primarily in complex (too complex to explain therefore too complex to understand) financial instruments, real investment is lost is the frenzy of an infinitely speculative, feverish and dogmatic pursuit to manufacture fees and bonuses.

 The stock market is now for the benefit of Wall Street Godfathers, who have little concern for what happens to investors’ savings except for the conversion which has taken place for many years – the conversion of investor savings into Wall Street Godfather family pockets.

Clearly - capital formation has been replaced by fee formation. And “financial masturbation” reigns supreme. This is a concept I raised in Invest for Success...which holds that masturbation is OK as long as you do not want to create anything real, but if you expect to achieve real financial results of substance in the future then it is not the right approach, and as I observed in 1990: “If the stock market becomes an arena of financial masturbation, then our economy suffers, as real investment is lost in the mad scramble to shuffle dollars.”

All the firewalls are gone. Wall Street achieved a great victory at the expense of our economy and the financial lives of millions of Americans.  Banks were the cohorts of Wall Street in the 20s and since 1999 (aided and abetted by Congress)   have been joined at the hip again.

Shortly before the book’s publication the OWS Movement began. It is not against Capitalism, but against how the misuse of Capitalism has caused so much financial displacement and anguish. Adam Smith, author of “The Wealth of Nations and a professor of Philosophy , postulated that Capitalism was supposed to be of benefit to society as a by product of a Free Market economy. However, the freedom has clearly been abused, because unfettered Greed knows no boundaries.

So is capitalism broken?  This is self-evident. 

Answers to correct the misdirection of capital from real investments to nothing but egregiously leveraged financial innovation to produce “structured investments” for fees are known. If Congress has the will and we the people vote out all who do not get it.

Our Government must find the will and integrity to rebuild the barriers against Greed by separating the banks from the investment banks; by restricting the ability to form bank holding companies (which results in down sizing) and the will to require banks to be lenders again, and disallow the ability for any bank to issue (to contrive is illegal) complex instruments.

Occupy has started the right conversation.  And there is a growing of fear of this desperately needed conversation and of OWS. which will not go away. And the reasons should be clear to anyone who cares about truth and the common Good and truth. For Wall Street it is the fear of losing their money machine; for Congress losing the hands that feeds, and for Big Business losing the ability to feed Congress.

For anyone that cares about the common good there is nothing to fear.

Excerpts from:  How We Got Swindled by Wall Street Godfathers, Greed & Financial Darwinism ~ The 30-Year War Against the American Dream; foreword by David Satterfield former business editor of the Miami Herald, 2 times Pulitzer Prize winner.  To know more: