The US Today: What Happens When You Let Investment Bankers Run a Country

Phoenix Capital Research's picture

If you’re
like me, you’ve probably looked at the US recently and wondered what has
happened to your country. I’m not talking about the GOP/ Obama situation nor am
I referring to capitalism vs. socialism…

 

I’m simply
talking about basic common sense items like: stay out of debt, don’t do
anything if it doesn’t make sense, do you homework before signing a contract,
etc.

 

Indeed, the
American government (I’m including the Federal Reserve in this category) began
charting a strange course as a country when the Financial Crisis first
accelerated with Bear Stearns’ collapse in February ‘08.

 

Granted we’d
flirted with government intervention several times before (Chrysler in the ‘70s,
Long-Term Capital Management, etc.). But we’ve since taken it to a whole new
level. The basic risk of capitalism (failure) has been removed from the
equation for most major US businesses. However, this risk was removed at the
expense of increasing the US’s debt load and putting the dollar at risk.

 

Pushing to
remove risks so you can pursue insane business practices? Crazy deals that
offer little benefit to the parties? Doing things quickly without actually
considering the consequences?

 

Sounds a lot
like investment banking doesn’t it?

 

Investment
banking as an industry runs almost completely contrary to wealth creation since
it thrives on fees rather that capital appreciation. Investment banking
is about making DEALS (any deals) regardless of whether the deals make sense or
benefit both parties (after all, the advisors to the deals, the investment
bankers, get paid based on commission and free stock).

 

Indeed,
investment banking is one of the few industries on the planet in which you can
get rich by creating debt for others to pay off. Goldman Sachs, as you know, is
an investment bank. And this financial crisis is riddled with former Goldman
Sachs and other Wall Street execs.

 

Indeed, you
can see the “investment banking” stamp everywhere.  Consider the major deals the Feds have created and consider
the actual benefit they offer to the parties involved:

 

§  Bear
Stearns/ JP Morgan

§  The
US taxpayer/ Fannie Mae and Freddie Mac

§  The
US taxpayer/ AIG (and all of its counterparties)

§  Merrill
Lynch/ Bank of America

 

All of these
deals were terrible. All of them were rushed through. And all of them were
allowed because of lax regulation/ poor analysis. To this day no one in the
mainstream media seems to have adequately analyzed these deals in a way that
includes actual numbers. Instead we get dopey adages like “it’s about stemming
the tide,” it’s important to “stop the bleeding,” “it’s about saving the
system.”

 

You can also
see the “investment banking” stamp on the Federal Reserve.  Three years ago give or take, the Fed balance
sheet was just  $800 billion worth
of Treasuries. Today, its balance sheet contains $2.5+ trillion worth of
assets, and with only $53 billion in capital, the Fed is leveraged at 47 to
1!

 

Tons of junk
assets that aren’t properly valued? Refusal to reveal the real worth of your
balance sheet? Leveraged to the hilt?

 

Sounds like
investment banking!

 

To me this
financial crisis is nowhere near over for one simple reason: we continue to
perpetuate the VERY same business practices that created it in the first place.
It’s like a junkie getting clean by continuing to use dope. In the US
government’s case, it’s just that the junkie has super clever explanations and
jargon to explain why this is a good idea. The reality is that it’s not. And it’s
going to end very, very badly.

 

Be Safe,

 

Graham
Summers

 

PS. If
you’re getting worried about the future of the stock market and have yet to
take steps to prepare for the Second Round of the Financial Crisis… I highly
suggest you download my FREE Special Report specifying exactly how to prepare
for what’s to come.

 

I call it The Financial Crisis “Round Two” Survival
Kit
. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).

 

Again, this
is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com
and click on FREE REPORTS.

 

PPS. We ALSO
publish a FREE Special Report on Inflation detailing three investments that
have all already SOARED as a result of the Fed’s monetary policy.

You can
access this Report at the link above.

 

 

 

 

 

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Tedster's picture

My father is 82, a long retired businessman. Trying to explain the late unpleasantness is interesting because things didn't work that way when he was growing up and later, in his working years.

Take just banking. One had to pay the bank to open a checking account, and no interest, such as it is. On the other hand, the law required savings accounts to pay a minimum of 4%, iirc. Banks, or, Savings and Loan companies held their mortgages, were local and knew their customers, and required a minimum of 20% down.

Trying to explain CDS and MBS to him was a real lesson, and the implosion of AIG and similar was difficult, because everything that's gone on was/is so outside the box. He graduated from a fine college on the GI Bill in business and despite the infirmities of age is still very sharp. Truthfully, it's guys like him who should be put in charge of cleaning up a lot of the mess - many of of the folks in congress (not all) just don't have the gray matter to even understand the problem much less solve anything.

Derivatives in particular - he was adamant that CDS are in reality a type of insurance, and thus under the purview of each state Insurance commissioner - maybe naive but probably correct.

Hulk's picture

Guys like your dad will never , ever, be allowed near this mess...

lynnybee's picture

thank you, ROBERT RUBIN & let's not forget that wonderful BILL CLINTON !!    can anyone say treason ?     

lynnybee's picture

good !  my favorite topic !   Yea, what does happen when you let ROBERT RUBIN run the country ?   

1.)  wages go down & jobs disappear because "investment bankers" are so greedy that they need to keep that savings for themselves & the jobs market collapses & our kids can't find work & the older people get to starve cause there are no jobs for them either !

2.)  the housing market collapses !! ..... they pump up a market to earn money on the upswing & when it falls they get to be bailed out by the poor people whose homes have lost 1/2 their value !

3.)  the currency collapses !!  (not yet, but soon to come) .   All that money that we older people have desperately tried to save basically evaporates into worthlessness.

4.)  the country collapses !! (coming to a country near you soon ! )  .......... our kids & grandkids have been abused by rich people, that is if we allow it .

.......... & that's what happens when you let ROBERT RUBIN, GOLDMAN SACHS, PAULSEN, SUMMERS, GEITNER, blah run the country.

Now, things weren't like this when I was growing up.   A bank was basically a public service, you walked in, put money in your passbook savings account & earned interest..........

CAN ANYONE REMEMBER THE WONDERS OF COMPOUND INTEREST !! ?

ROBERT RUBIN ......... may JUSTICE find you.

LawsofPhysics's picture

I remember a time when Bankers actually cared about the loans they made because there were NO BAILOUTS.  They followed the 3-6-3 rule and DID NOT TRADE.

What is the 3-6-3 rule?  Very simple, give 3% interest on savings, charge 6% interest on loans, and be on the golf course by 3:00 PM so you don't get greedy and fuck the whole thing up.  If banks had remained simply banks and done their due diligance, a good bit of this mess would never had happened.

LeBalance's picture

Dear Graham,

We do see that you think its "your country," but some of us are free of that psychological trap and do not identify with fairy tales like that.  I hope you can break free too, Neo.

Bend that spoon, babe.

topcallingtroll's picture

"Country" can be as abstract as all the people who live in a geographic area, not necessarily the specific form of government it is currently under.  Yes it is my country too.  I want all of us to take care of it and pass it down to future generations in better shape than we found it if we can.

Maybe none of that matters to you.

anonnn's picture

...DEALS (any deals) regardless...

Critical point overlooked:

Since "ANY DEALS, regardless" [whether profit or loss], where do the benefit and fees and bonuses come from?

Answer:...from the  past-accumulated wealth already sitting there...as cash, borrowings based on equity, etc. Essentially it is from hollowing-out the very company that employs the broker,banker, lender, etc. by liquifying the equity and feasting on the liquid assets...leaving a shell.

Most always, the founder/owner of the firm is long gone or dead and the firm is run by hired managers...parasites whose real intent is to milk the host to the max.

That's corporatism; not to be confused with capitalism.

King of Spain's picture

The real problem is that bankers are willing to implode the system before they stop. That is why we are doomed.  See, most Americans have come to grips with the reality of the Great Recession.  They have largely given up on the property bubble, downsized their home, reduced debt, and limited discretionary consumption. In a word, they have adjusted. Not the Bankers.  Someone who is used to a penthouse overlooking C. Park, a summer home in the Hamptons, 2 nannies, and a personal chauffer and limo will never EVER downsize their lifestyle. It is too anathema to their way of life. It is too much of an embarrasment should their banking peers find out. In a word, they will never leave the penthouse for a brownstone. They will never fire the nanny. And the kiddos will never go to a public school.  Because the life of a banker - any banker- requires $1-2 million per year just to break even in NYC, they must all make big bucks since they will never get off the grid.  So long as the Fed and policy makers are in their pockets, any ecenomic policy that is pursued will have an ulterior motive from whatever the stated purpose of said policy is: To enrich the bankers. As many of them as possible.  They would rather see America in shambles than adjust like everyone else. Take that to the bank.

Ned Zeppelin's picture

True, so true.  That is it in a nutshell.  And the bankers have co-opted the cops, and it's like the mob is in charge. We need the New Untouchables. 

LawsofPhysics's picture

As municipalities start firing half their police force, I don't know if the banksters can count on them as much.  But I might feed a few to guard my properties and land.

King of Spain's picture

The real problem is that bankers are willing to implode the system before they stop. That is why we are doomed.  See, most Americans have come to grips with the reality of the Great Recession.  They have largely given up on the property bubble, downsized their home, reduced debt, and limited discretionary consumption. In a word, they have adjusted. Not the Bankers.  Someone who is used to a penthouse overlooking C. Park, a summer home in the Hamptons, 2 nannies, and a personal chauffer and limo will never EVER downsize their lifestyle. It is too anathema to their way of life. It is too much of an embarrasment should their banking peers find out. In a word, they will never leave the penthouse for a brownstone. They will never fire the nanny. And the kiddos will never go to a public school.  Because the life of a banker - any banker- requires $1-2 million per year just to break even in NYC, they must all make big bucks since they will never get off the grid.  So long as the Fed and policy makers are in their pockets, any ecenomic policy that is pursued will have an ulterior motive from whatever the stated purpose of said policy is: To enrich the bankers. As many of them as possible.  They would rather see America in shambles than adjust like everyone else. Take that to the bank.

pitz's picture

So what's the fed's equity?  Gold?  If the Fed really isn't allowed to leverage, then doesn't that imply that gold is only being priced at 1/47th of its true market price? 

 

 

LawsofPhysics's picture

Of course.  Anything of real value is severely under-priced.  Wall streeters and financial sector only thinks that they have all the wealth.  They create NOTHING of real value.  Let it all crash.  The sooner, the better, and the sooner a person who creates things of real value can be properly compensated for their work.  Send all the financial fucktards to New York to eat each other.  I hope that they have gold, silver, or a strong back, because soon enough they won't be eating otherwise.

lynnybee's picture

yup, let it all crash.    i was listening to that ROAD to ROOTA guy on YOUTUBE today.    He says ALAN GREENSPAN is secretly one of the good guys............. now, if that plays out to be true, I will eat my car . .......... all paper will be destroyed.   the only ones to survive what is coming our way (currency collapse) are those who sit on piles of gold & silver & productive farmland ............. LIKE THE OLD DAYS !!  AS IT WAS IN THE BEGINNING OF THIS COUNTRY.   

LawsofPhysics's picture

Go ahead financial fuckwads, junk me all you want.  My family and my neighbors are all doing quite well.  On top of our own real value-added companies (created from nothing - no silver spoons here).  Many of us have seen this retardation before in the 70's and 80's.  I have enjoyed front running the fed as well as all the fallout of easy money policy.   This has been played out many times throughout history.  We are properly hedged as it were.

Hulk's picture

Its one junk LoP, don't get all worked up, they are meaningless...

pitz's picture

So what's the fed's equity?  Gold?  If the Fed really isn't allowed to leverage, then doesn't that imply that gold is only being priced at 1/47th of its true market price? 

 

 

More Critical Thinking Wanted's picture

 

FREE Special Report on Inflation detailing three investments that have all already SOARED as a result of the Fed’s monetary policy

LOL.

Hey genius, if what you say is true then how come iron ore prices went down while the Fed was injecting liquidity:

http://www.indexmundi.com/commodities/?commodity=iron-ore&months=12

And went up while there was no QE going on?

Maybe because you have ignored supply and demand forces and have obsessively and incorrectly focused on US monetary policy (which has little effect on global supply & demand and thus has little effect on global commodity prices)?

Maybe your "FREE Special Report" is worth the price you are asking for?

 

Ned Zeppelin's picture

More Critical, methinks you are a troll.  Good luck with your illusions/delusions. 

topcallingtroll's picture

Is everyone who has a different opinion and offers an alternative viewpoint a troll to you? 

 Your world must be full of trolls.

SteveNYC's picture

China. China is the biggest importer/consumer of ore by multiples over other countries. China's stimulus was timed differently to that of the US (late '08/early '09). Overlay an ore price chart on the Chinese stimulus announcement and subsequent disbursements and you will have your answer.

Your chart does not give the whole story, very selective and therefore defunct.

LawsofPhysics's picture

"Your chart does not give the whole story, very selective and therefore defunct."

I agree, this guys must be in the financial sector, being selective and defunct is their new mantra.

More Critical Thinking Wanted's picture

 

China. China is the biggest importer/consumer of ore by multiples over other countries.

You probably do not realize it but you have just proven my point :-)

Guess what the Chinese stimulus is influencing? Iron ore demand.

No matter how many trillions were eased on the US side, no matter how many commodities ETFs there exist, no matter that all the commodity exchanges are in the US and are close to 'free liquidity', no matter how many futures contracts were traded - it had no permanent effect on the price of iron ore.

Why? Because what I claimed above: that old-fashioned physical supply and demand is still king.

(Can supply and demand be impacted by a stimulus, by stimulating the real economy and increasing demand in iron ore? Of course, but that's the point of a stimulus: to stimulate economic activities...)

 

SteveNYC's picture

I realize it completely, thus my post. It took MASSIVE Chinese stimulus to "bubble up" iron ore to record prices and volumes again, to get China out of what would have been a disastrous economic meltdown. BHP and RIO are licking their lips.....for now. They and their staff, as well as the domestic economies in which they operate, are nothing more than beneficiaries of massive Chinese stimulus. Whether or not we could or should classify this as "real" supply and demand, is questionable.

China needs to have created a perpetual motion machine to keep prices and volumes at current levels. Their PMM is now overheating and inflating everything they touch. The PMM will soon become unstable.....

More Critical Thinking Wanted's picture

 

I realize it completely, thus my post. It took MASSIVE Chinese stimulus to "bubble up" iron ore to record prices and volumes again, to get China out of what would have been a disastrous economic meltdown.

Good for them as it appears China managed to pull off a fiscal policy during the greatest recession in 60+ years that avoided a significant dip in employment. It's certainly impressive in a way.

That's what China's trillion dollar cash reserve ('save in good times') and its very aggressive mercantilism ('spend in bad times') brought them.

It's the classic Keynesian 'save in good times, spend in bad times' stimulus policy - it's a really simple concept and it worked remarkably well in countries that fully applied it.

(China has done it at the expense of pretty much everyone else on the globe though, and policy makers in other countries seem to begin to realize the extent of the Chinese damage.)

Whether or not we could or should classify this as "real" supply and demand, is questionable.

Is civilization on this planet "real", or it just one giant bubble of unsustainable growth?

The answer really depends on your perspective and on your time frame.

Note how I used iron ore in my argument, and how my use of that example does not depend on the answer given to your question: I wanted to show that physical supply and demand (no matter how 'wise' it is in the big picture) is king in setting commodity prices.

You seem to largely agree with me there. (Correct me if I got you wrong.)

China needs to have created a perpetual motion machine to keep prices and volumes at current levels. Their PMM is now overheating and inflating everything they touch. The PMM will soon become unstable.....

100% agreed.

This has little to do with the government stimulus though and everything to do with other components of China's mercantilist policies: trying to undercut US export prices at any cost (i.e. selling the yuan against the dollar whenever the dollar weakens).

That Chinese policy will eventually blow up, if the dollar weakens below a certain threshold.

 

LawsofPhysics's picture

VERY simple answer.  When "free" money is circulating, no one really has to work and create anything of REAL value.  But when the free money ends, well damn, I guess Americans actually go back to work or survive and they need certain things to do that.  People still need to eat, energy reserves still need to be tapped etc.  These things require REAL commodities like STEEL.  You exemplify how easy it is for morons to use the web to pontificate the idiocracy.  Why don't you just tell everyone what wall street firm/bank you work for now and be done with it.

disabledvet's picture

that's not true.  in fact what the Fed is doing should be an inducement towards over-production as the theory (incorrect in my view) that "money is worthless" causes physical goods to be over produced in response.  I think what terrifies the supply side/so called Austrian school of happimeisters is the near total lack of over-production and "terrifying stickiness" of prices that is going along with it.  in a word "shortages" appear to be the empirical reality of the Bernank.  now if you're talking about being Alaric the Hun then sure, no problem.  But when last i checked the USA was a "little" on the urban side, too.  You blow out the price of fuel and guess what--you get "Cairo, Egypt" on a biblical scale right here in the USA.  Makes the protests in Madison appear laughable, no? 

LawsofPhysics's picture

Agree, the "theory" is incorrect.  We will see supply shortages and should fuel follow other commodities, then it gets interesting.  Most people see the fraud for what it is but remain apathetic.  People still need to eat and clothe themselves, but not really doing much more.  I dumped half my paper gold and bought land to lease to a local farming co-op in November.  My wife thinks I am nuts. Maybe, but now we can stable our own horses and gave my daughter a job.  Got tired of having to pay for this and some one else to care for the horses.  She does it now and others pay her.  Both of our properties have good wells and we currently capture run-off etc.  Other properties I rent are being eyed by developers and the city for expansion should things turn around.

But I digress.  I think in a nutshell, those that have been stealing wealth from those that actually create things of real value (socialization of losses by financial fuckwads) are starting to see what happens when real market fundamentals and the laws of thermodynamics and physics have their way in a horribly inefficient and corrupt system.  All my hedges basically have the U.S. in a position, similar to where Russia was before the collapse of communism.  Go ahead, kill ALL unions, kill the municipalities, send food and fuel to the moon.  Let's see what happens when all the populations of all these American cities find themselves unable to buy food or fuel and have no power, water, or sewage OR no silver or gold to bargain with for any if the basic necessities.  Sorry FEMA, T.V. is NOT a necessity.  They can certainly work for me or my like-minded neighbors on our farms.

Egypt indeed, but with the twist of a well-armed populace.  Biblical indeed.

topcallingtroll's picture

yuck!  Farming is hard work!  Also it is kinda dirty and isolated and you don't have any decent 3g service, at least not in our farm areas.

Give me a nice suburb next to a major city any day!  I am going to do my best to keep getting paid for thinking rather than sweating.  There are still a few thinking jobs out there.  I sure hope our future isn't all blue collar.

LawsofPhysics's picture

I don't do the sweating now and certainly won't when the cities empty.

Ned Zeppelin's picture

The "banks in charge" system, that of wealth extraction instead of wealth creation, is unsustainable and has a finite life span. 

More Critical Thinking Wanted's picture

 

Probably - civilization is surprisingly resilient against parasites, in the long run.

 

malikai's picture

"It" must be one of those fancy new Air Force blogger bots. Nobody could really be that stupid and be real, right? I hope..

LawsofPhysics's picture

Great, not only do I fight the bots on the exchange, now they are on the blogs  too?

Perhaps, my friend is right and some day it will be nothing but robots everywhere, doing everything and nothing.

More Critical Thinking Wanted's picture

 

When "free" money is circulating, no one really has to work and create anything of REAL value.

There are two inconvenient facts that contradict your claim straight away:

  • Production is going up everywhere - China, Europe and the US is producing more than it did when QE2 begin. There's record sales of cars in China.
  • Wages are not actually going up - due to endemic unemployment. So there's no 'free' money for people to spend and people certainly want to work.

So how do you explain that iron ore prices went down while food prices went up, if speculation with 'free money' cannot be the explanation? (Speculators, if they had any lasting effect on physical commodity prices, surely would bid up all commodities.)

The reason prices moved like that is plain old-fashioned supply and demand forces:

  • Food prices get impacted by record bad weather in Russia (wheat, sugar), China (wheat) and Australia (sugar)
  • Iron ore supplies do not depend on the weather (but depend on other forces)

Sometimes the truth can be so straightforward :-)

 

dark pools of soros's picture

so production goes up but unemployment stays endemic.  world population on normal incline. what else has changed?? ooh, money supply parabolic... yeah that has NOTHING to do with commodity prices

topcallingtroll's picture

yeah we have a huge overcapacity in export manufacturing in the world and a lack of investment in agriculture related areas and water.  These may be the assets of the future.  I sure hope someone else has to do the dirty work though.

More Critical Thinking Wanted's picture

 

and a lack of investment in agriculture related areas and water

It's not just the lack of investments, but a freak pattern of bad weather hitting key food production areas all around the globe: Russia, China, Australia, Brasil, you name it.

Which, if you look at global warming predictions, isn't all that 'freak' but rather 'fitting predictions rather well'. It fits visible trends as well:

http://www.ucar.edu/news/releases/2009/images/temps_2.jpg

But yes, responding to the shortages more food will be produced: sugar will be ok next year, wheat is more difficult to expand but will possibly be ok as well.

And hopefully more reserves will be held, in preparation to global warming induced weather volatility.