Strong Advice For Big Bank Management in Dealing With the Increasing Influence of Blogs and New Media

It has come to my attention that several banks have actually blocked rank and file level access to my blog through their intranet. That, my dear friends, is asinine, and does nothing but engender distrust. While I admit I can be rather flamboyant in my writings, I am nonetheless quite fair. In addition, my opinions are analytically driven, by design. Thus, if you have a differing opinion all you really need to do is challenge me with the facts. One of us will be proven to be right, or at the very least it will be shown to all how we came to our conclusions. I have absolutely no problem admitting when I am wrong or have made a mistake. I have been right long enough and often enough that I have plenty of emotional and even egotistical room for error. I know fully that no one is perfect, and while I would much rather catch any error first, before a third party does it (particularly a dissenting third party) I know that things don’t always happen that way.

A commenter had a very intelligent dissent against my Goldman Sachs post on Zero Hedge the other day. While cogent, eloquent and very lengthy, it was still wrong but it definitely exemplified what a bank (or any other entity) should do when they feel that I am not in the right. Of course, if you put yourself out there, there is always the risk that you can be proven wrong as well. Believe it or not, and contrary to what you marketing and PR advisers may tell you – it is alright. As a matter of fact, it is actually good sometimes. You see, to many of the people that matter, it is not only acceptable, it is expected that you will not be right all of the time. Anybody who is right all of the time should be held up to a much higher level of scrutiny. Just ask Bernie Madoff. The true test of character and fortitude is to be able to publicly admit when you have made a boo-boo, and be willing to do something about it. That goes a lot farther in my eyes, than abject perfection. This is a lesson that the global and national banking industry in the US has yet to learn.

On that note, let’s go over a few emails that I have received recently…

Reggie,

Huge fan of yours. Just wanted to drop by and say that I am so thankful that you are out there.  You are shining the light on the people in the cave. Learned so much from your site.  Funny story, I used to work at smells fargo, and they have your site blocked.  I thought you might take a slight degree of satisfaction from knowing that.  Keep shining the light. One love.

As I have stated above, this is not the way to go about things. I truly believe my site to be a wellspring of information and opinion that is quite uncommon among media (both new and old). Confront the issues, don’t try and hide them. You should be able to tell from the demeanor of the ex-employee above how well the site/IP blocking endeavor has worked. Is this what Goldman, JP Morgan and Wells Fargo want from their employees?

Here is a another letter that really struck a nerve from a reader that has offered a considerable amount of unsolicited, yet constructive advice in my confronting the big banks on their reporting and quarterly performance. In response to his string of advice, I queried to find out who this guy was and the impetus behind his efforts. The following was his reply.

Reggie,
You ask who I am and fair enough. Why am I so passionate about this issue that I would write a total stranger with all sorts of unsolicited advice.

A few days ago, I got this letter from a friend who left a good job at IBM to work with the homeless – names and dates redacted, and just so you know “Ballard” is a neighborhood in Seattle.
>

Hello beautiful Washington Peeps,
> King County is planning to cut DESC’s HOST budget by over $800,000 per year. The annual budget of HOST is just over $1,000,000.  If implemented, this cut would eviscerate our street outreach program.  Late last week, DESC was informed of a draft plan for mental health budget reductions for a number of County programs funded by non-Medicaid money, including HOST.  The county has moved that decision to tomorrow morning (10/27)  Please look at the attached and contact your  the King County Executive and Director of Community and Human Services (via email or phone).  Your calls/emails today are extremely important.  Also, please consider contacting King County council members to raise the limit on supplantation authority from MIDD (Mental Illness and Drug Dependency) sales revenue to the maximum by the state legislature.
> As many of you know, I have had the privilege of working at DESC for X years and the HOST program for over X years.  I selected the HOST program because it’s specifically targets the chronic homeless mentally ill population that cannot access services on their own.  Some cannot access it due to their disability.  Many cannot access it because they are not eligible for Medicaid health benefits.  If this program is terminated, I will be releasing 75% of my case load to “self”.  Self means there is no program available to pick them up.  What does this mean?  Each of my clients would be a different story and I wish I could share them all.  “Jane” lived in Ballard and often slept near the Majestic Bay Theater.  She has a diagnosis of schizophrenia paranoid type.  She was detained for “harm to others” since she was frequently on buses, at churches, and markets yelling at people because she believed she was working for police department.  Since her release from the hospital she has accepted transitional housing, takes medication, meets with psychiatrist, goes to church daily and enjoys making Rosary Beads for her fellow church goers..  For her the end of this program means she no longer has access to the medication, psychiatrist, and case management that are essential for her to remain stabilized.  She is a typical HOST client! 
Thank-you for your time in reviewing this material. I hope it moves you to action today.

Sincerely,
XXXXXXXXXXX

As it happens, King County lost tens of millions in its own money and money it managed for municipalities on a phony Goldman ABCP deal (and here’s the pitch book for anyone who’s interested).

Before we go on, I would like to note how egregious the performance some of these mortgage and real estate deals actually were, and how easy it was to see that they were being done at the top of the market:

Excerpts from the must read ““:

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Does anybody think that Lehman was a “one off” occurrence? Or for that matter does anyone believe that only Goldman is guilty of a lack of actual performance for their clients vs. their bonus pool???

Then there is “Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!” of Thursday, April 15th, 2010. I believe anyone interested in this story should also review this post in its entirety, but here is an excerpt (when you review the post, be sure to download the bank fleecing model to determine how much you may have been fleeced as well):

I shorted GGP in November of 2007 at about $57. It was a volatile, bumpy ride but I was confident CRE was sure to crash and GGP was the CRE leveraged poster boy. The rest was bankruptcy history. Why am I recounting history? Well, it appears as if this blogger was on to something that the number one and number two investment banks in the world somehow missed. No, it wasn’t knowing that the CRE market would crash. I knew it, and I believed that at least some of the bankers and analysts at Goldman and Morgan Stanley knew it too. The big secret was how to go through the crash without FLEECING your clients.

In the post, “Doesn’t Morgan Stanley Read My Blog?”, I lamented on the fact that I made very clear in 2007 that anyone who bought the Sam Zell/Blackstone flips were guaranteed to lose money. It was literally etched in stone. It was a miracle that Blackstone didn’t lose their shirt. Well, guess who bought those buildings on behalf of their clients as they raked in the fees. You guessed it. None other than Morgan Stanley. This purchase was a 100% equity loss. The entire fund apparently lost about 61% of the shareholder’s money. See this WSJ article: Morgan Stanley Property Fund Faces $5.4 Billion Loss.

Not to be outdone. Goldman lost nearly 100% of thier clients money in a similar CRE fund. Reference this FT article: Goldman real estate fund down to $30m (they lost $1.76 billion, yes, that’s a very big percentage loss).

These funds did very well during the boom, but when the obvious bust came (and I blogged about it in full detail, so no one could say they didn’t see it coming), these funds crashed. Professional asset managers should know better. They are simply delivering market beta, not alpha. Investors are paying a fortune in fees to ride the ups and downs of the market.

Oh, yeah! About them Fees!

Last year I felt compelled to comment on Wall Street private fund fees after getting into a debate with a Morgan Stanley employee about the performance of the CRE funds. He had the nerve to brag about the fact that MS made money despite the fact they lost abuot 2/3rds of thier clients money. I though to myself, “Damn, now that’s some bold, hubristic s@$t”. So, I decided to attempt to lay it out for everybody in the blog, see ”Wall Street is Back to Paying Big Bonuses. Are You Sharing in this New Found Prosperity?“. I excerpted a large portion below. Remember, the model used for this article was designed directly from the MSREF V fund. That means the numbers are probably very accurate. Let’s look at what you Morgan Stanely investors lost, and how you lost it…

Okay, now that we have an adequate background wherein we can possibly determine how this municipality got fleeced for bonuses lost its money, we should return to the letter from the BoomBustBlog reader…

You can draw whatever political conclusion you like, but helpless people are going to be thrown into the street in part because money is not there and other people committed fraud with impunity causing money not to be there.

Like you, in 2007-2008 I realized that financial disaster was going to strike with Great Depression implications, all because otherwise respectable people decided to make money using massive fraud at every level of the mortgage business. Unlike you – although I tried – I could not persuade anybody that it was happening – that it had, in effect, already happened. I remember September 18, 2008. It was a beautiful day. I gave up and went to a bar – with my ex, actually – and we watched the people here in Seattle walking around in the sunshine with no idea the financial tsunami was coming.

It was a terrible feeling and it’s been no fun since. So, I make every effort to support, persuade and encourage people who are effective in carrying the message of the devastation wrought by this fraud – and the danger yet out there.

To you, it probably seems a task of persuading people of the intrinsic merit of your ideas. But what I’ve observed from politics is that it is and always has been the social role of persuasive people to represent many who are not so persuasive. Whatever your intent may be, when you’re out there you’re not just representing yourself – de facto. As a public person, you’ll find that people will like you – and help you – because this is what people do and this is the way it has always worked.

You’ll have to excuse me if I remain anonymous other than my name (which is real). I’m afraid I don’t have your confidence. To the extent my views are useful to you, I’m glad. If not,…

Time will tell if this reader’s benevolent take on mankind is accurate. As it stands, several banks are actually blocking my site. I believe the mentality on Wall Street does not take into consideration the damage that is done in the relentless pursuit of larger bonuses. The impetus in my writing the piece on Wall Street and fleecing of the private equity investor (), was the boasting and bragging of a CRE banker in saying that Morgan Stanley could not have lost money in their under performing funds due to the excessive fees that they charge. Whaaattt??!!! And you are comfortable boasting about this in public? Here are some extensive posts on the economics of said funds: Even With Clawbacks, the House Always Wins in Private Equity Funds and The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short?

The cogent commentator who laid into my GS quarterly opinion (A Few Questions on Goldman Sachs 3rd Quarter 2010 Results That No One Thought to Ask) made clear his admiration for Goldman and their operations. When I brought up the topic of big losses at the top of the bubble in relation to risk management we had a lengthy exchange. This is an excerpt:

Reggie says:

Was the architect of the Abacus deal fired? How about the Litton Loan purchase that failed to oversee the admin of document signing? Was the entire team of the GS RE fund that lost 92% of investors equity fired? You don’t get fired for taking stupid risk with shareholder’s money. You get fired for losing partner capital, which probably wasn’t even lost in the RE fund, at least not as drastically as its investors. To bad for the investors, though.

Commentator says:

    1. The architect of the Abacus deal did not need to be fired. It was a good risk deal for GS. Kinda sucky for the guarantor, but not bad for GS.
    2. Litton Loan? Good implementation of investment risk (MSRs in a distressed asset environment are an excellent business), lack of diligence on operational risk. Strike 1.
    3. The GE RE team which lost 92% of investors’ equity? That was not their only fund, and GS made money by being the asset manager. GS may have had money in it. Strike 2. But if you buy at the top and lose, so be it.

Now, don’t get me wrong. I actually believe this commentator appears to be a stand up (and very knowledgeable) guy from the very little that I know of him. He does appear to be BLINDED by the “revenue at all costs” mentality of Wall Street, though. These deals, products, services and structures are a lot more than potential bonus checks and wide girth swinging dick bragging rights! They are life lines for mentally disabled, widows retirement funds, potentially life saving programs for AIDS victims, domestic abuse victims, orphans, etc.

Hey, I’m all for making money (a lot of money even), and I know that in order for you to make money someone else has to lose it. There must be boundaries drawn, and ethics adhered to, though. It is a must! Don’t ban the web sites of guys who have the heart and the analytical insight to declare such. Investigate the allegations, and if they have merit act upon them. Do the right thing and you just might make more money by doing business that actually helps people versus fleecing them! There is a wave of law suits coming down the pike, and if the plaintiff’s lawyers can get their acts together (truly knowledgeable and persuasive expert witnesses and a true grasp of what actually is going on), there will be hell to pay in the banking industry. While there may not be much on can do about that now, you can work on changing the culture that caused it moving forward – or not!

Related reading for those in the know, or at least want to be!

  1. A Step by Step Guide to Exactly How Much Derivatives Risk Each of the 5 Big Banks Actually Have, and How It Could All Go Boom!Monday, October 25th, 2010
  2. Four Facts That BANG JP Morgan That You Just Won’t Hear From The Sell Side!!!Friday, October 22nd, 2010
  3. JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!!Sunday, October 17th, 2010
  4. Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?Friday, October 15th, 2010
  5. The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!Tuesday, October 12th, 2010
  6. Are We In a “Banking” Depression?Friday, October 1st, 2010
  7. The Great Global Macro Experiment, BoomBust Cycles, and the Refusal to See the Truth: Bubble Economics in the Mainstream MediaWednesday, September 1st, 2010