Economic Warrior's Blog

“There is no more powerful expression of a society’s values than its economic institutions. In our case, we have created an economy that values money over all else, embraces inequality as if it were a virtue, and is ruthlessly destructive of life. The tragedy is that for most of us, the values of global capitalism are not are values. It is hardly surprising, therefore we find ourselves in psychological and social distress.” David Korten, economist

“Regret to me means something you feel you did wrong–I don’t have that.”  Daniel Sparks, former head of Goldman Sach’s mortgage department, April 27, 2010 testifying before the U.S. Senate panel investigative committee

“We did not cause the financial crisis. I do not think we did anything wrong.” Michael Swenson, Goldman Sachs managing director, April 27, 2010 testifying before the U.S. Senate panel investigative committee on the banks selling toxic securities to German client IKB bank, while simultaneously betting against the investment it sold.

During a full day of grilling in front of a Senate investigative committee, Goldman Sachs investment banking activities were put under the microscope and  continued to defend their actions as a market maker–in short–a bookie, the top bookie in Casino America.

 There is no question that Goldman, along with the rest of Wall Street originated toxic loans on a biblical scale, packaged this nuclear waste as salable securities,  got rating agencies such as Moody’s to slap triple AAA ratings and send out armies of salesman around the globe  to peddle this crap to unsuspecting, and not so unsuspecting buyers.

The net result was that Goldman Sachs made tens of billions of dollars, extracted more than 50% of this compensation to itself instead of the shareholders who own the bank and let the American taxpayer clean up the mess after their economic orgy almost burned down the U.S. economy.

While all this may be legal, it stinks to high heaven. It drags in the high and mighty. It drags in politicians like Barack Obama, Hillary Clinton, Chris Dodd, Charles Schumer, Tom Daschle, George W. Bush, John McCain and John Kerry–all who have received hundreds of thousands, if not millions in campaign contributions from Goldman Sachs and its employees.

It drags Warren Buffett in, he was 20% owner of Moody’s, and made a $5 billion investment in Goldman Sachs, with much better terms than the U.S. government got, I might add…

 Goldman Sachs purchased loans from Washington Mutual (WAMU), who in turn based its stated income loan business (liar’s loan) from Long Beach Mortgage. Long Beach Mortgage was founded by Roland Arnall, one of George W. Bush’s top contributors. Arnall’s old Ameriquest Mortgage, had lobbyists on staff like Massachusetts now governor Deval Patrick for over $300 thousand a year, while Arnall’s Ameriquest Mortgage hosted the Rolling Stones music tour to advertise its business, and paid the Texas Rangers baseball club for naming rights, Ameriquest Field.  Before Arnall died of cancer a few years ago, Bush appointed Arnall U.S. ambassador to the Netherlands. Washington Mutual was one of the most predatory mortgage lenders of them all. Before it collapsed, the mammoth leveraged buyout firm Texas Pacific Group (TPG)invested billions of pension fund assets into WAMU and loss it. TPG gets its money, like the rest of the private equity world, from state pension funds.

 Goldman Sachs also did business with New Century Financial, the ultimate Death Star bucket shop in subprime mortgage origination, who U.S. Bank originally owned 24% of the warrants of New Century. In 1998, Ernst & Young, gave New Century an entrepreneur of the year award.  Later in 1994 New Century Financial was dumped on the public by investment bank Friedman, Billings & Ramsey with the assistance of underwriters Merrill Lynch, Morgan Stanley and UBS. It was brought out as a REIT (real estate investment trust) so that it could game the tax laws.  By 2005, The Wall Street Journal called New Century a “top gun earner” with 222 offices from coast to coast using 47,000 mortgage brokers to originate more than $51 billion in toxic mortgage loans.

Goldman went on to create collateralized debt obligations, with the New Century loans, with additional toxic loans from Angelo Mozilo’s Countrywide Loans, which is now part of the bailed out Bank of America Merrill Lynch. By 2007, founders of New Century Financial, which were now and still are multimillionaires, which was paying loan processors as much as $100 thousand a year, filed bankruptcy. The Delaware bankruptcy judge called New Century a “ticking time bomb.”

Goldman Sachs may be the illuminati, but their fingerprints are everywhere. Pay attention, America. We have not even mentioned private equity…

“The TV business is a cruel and shallow money trench, a long plastic hallway where thieves and pimps run free and good men die like dogs.” Hunter S. Thompson

“Freedom of the press is Guaranteed only to those who own one.” A.J. Liebling

“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius–and a lot of courage–to move in the opposite direction.” Albert Einstein

Despite writing “The Pirates of Manhattan” which came out May 2007, which has gone to become an under the radar best seller, and sold off the internet to readers worldwide, I feel like Rodney Dangerfield because I don’t get no respect from the popular press. None. Nada. Niente. Climbing Mt. Everest in a swimsuit would have been easier, but as  A.J. Liebling, the great New Yorker writer says, “freedom of the press is guaranteed  only to those who own one.”

I have been turned down by virtually every august publication in the United States despite research which explained why banks have always been unstable and always will be, why mutual funds generally don’t work over long periods of time, why bank  deregulation has run over the consumer like an out-of-control Mad Max eighteen wheeler. I also gave consumers hope. Invest in yourself first. Save first, put your money in life insurance companies, preferably mutual ones because they are not leveraged like banks, don’t speculate like Wall Street, are protected by solvent state guarantee funds and must adhere to conservative portfolio guidelines set up by The Armstrong Commission in 1905 in New York.

In short, I maintain, and still do today, that life insurance companies, particularly general account products, are some of the safest places for capital in America today. My irrefutable research reveals that not only are life companies safe and exemplary custodians of capital, their products deliver numerous economic and societal benefits. Additional research I have done confirms, beyond the shadow of a doubt, that the Federal Reserve System 401(k), the $230 Billion Thrift Plan of the Federal Employees, the nation’s money center banks such as JPMorgan Chase, Bank of America, Wells Fargo, BNYMellon and thousand more invest their Tier One Capital either in life insurance products or guarantees.

Despite this, I have been turned down by virtually everybody. CNBC, The New York Times, Financial Times, Wall Street Journal, Bill Moyers, Boston Globe. I think I called on Marketplace Money, NPR at least twenty-five times. Yesterday, though I thought I had a shot with Bloomberg, and I finally was talking to a top editor about ways to protect peoples savings…but I knew it was going nowhere. The editor was not asking any questions, like it was all said before…I said that these new target-date mutual funds, they are so complicated that a nuclear air-craft carrier had less moving parts, and produced dismal returns. The editor asked, so what do you suggest we do? I said, “why don’t you write a positive article about life insurance companies and financial products with guarantees.”

She answered solemnly, “That will never happen.” Strong words, those.

We talked a little about diversification. I said diversification, was at the end of the day, somewhat of a joke. Look at the company you are working for. Michael Bloomberg, who is one of the wealthiest men alive in the United States, made his fortune supplying financial information to Wall Street and other financial institutions. Tiger Woods made his money by focusing on golf. Jay Leno makes his money by focusing on comedy. Larry Bird was great because he focused on basketball. But my argument was falling on deaf ears, and I knew it was not about me. It was about advertising, not the truth. It was a beauty contest, and I was not the prettiest.

What keeps me going? My faith. God. My kids. My friends. My fans. I have received the ultimate blessings any man could ask for. Born again Christians love my book, and some wonderful Jews love it too, and buy the book in quantities.  There is even a guy out on the West Coast who is a Muslim who buys my book in quantity to help his planning practice.  Another young man called me one  Saturday morning from Missouri, and after confiding to me that he was essentially disabled for life due to being hit by a drunk driver, told me that his cash value life insurance policies were now one of his greatest financial assets, and he has decided to become a financial planner using my book as a guide.

So have faith. Invest in yourself. Remember, Michael Bloomberg, with all his billions, made his money by supplying Wall Street, not investing in it.

“But sadly, all of this nation’s financial regulators–the Federal Reserve Bank, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision–are at best incompetent and at worse captive to the companies they are supposed to regulate. As I would later testify before Congress, ‘The SEC roars like a mouse and bites like a flea.’” Harry Markopolos, No One Would Listen-A True Financial Thriller-The Madoff Whistleblower

I never have had much faith in government regulators. I remember years back, when I had a rather large pension and thrift plan for major transportation company…and I resigned from the account when I found the owner, who was also a trustee for the plan, was using employee retirement  funds to prop up his business and as  a private piggy bank to take his family to skiing trips out west, junkets to Florida… Resigning from the account was painful as it was lucrative for me with a young family, and I reported all of my findings to the Department of Labor(DOL), as it was clearly white-collar theft. Despite laying the details out to the DOL, nothing ever happened. In another case, a business  owner simply spent over $100 thousand  in a profit-sharing plan, Nothing happened to him either, and the former employees had no funds to retain a lawyer to sue.

In his new book, Harry Markopolos writes in “No One Would Listen” about how, despite laying Bernie Madoff to the SEC on a silver platter, years ahead of his arrest in December 2008, that the SEC failed to act.  You should read it.  The SEC is not only impotent, but rather incompetent according to Mr. Markopolos.The SEC also missed R. Allan Stanford, his Ponzi scheme was only a $8 billion loss, while Madoff was $65 billion.  The SEC, less we forget, also missed the mutual fund scandal when an honest man named Peter Scannell from Quincy Massachusetts laid out the marketing timing scandal with Putnam Investments in Boston. No one would listen  to him either, not the SEC and he even got mugged for his honesty.

The SEC is a mess. It is now run by light touch regulator Mary Shapiro, who came to us from Finra, where she made $3 million in 2008, with  a $7 million retirement package while working for a not-for-profit regulator. Finra is a tornado unto itself. But now the SEC admits that at least thirty-three people, including 17 senior SEC employees earning between $99 thousand and $222 thousand a year where among those who watched porn on their office computers and laptops while they were traveling. One senior enforcement attorney in a regional office viewed porn during work hours and had a thumb drive containing five hard-core videos. Another attorney in Washington DC spent up to eight hours a day watching pornography and an accountant at a regional office was denied access to a porn site despite 16,000 tries.

These are the folks that are the watchdogs for us, and it appears that some important people are only watching porn. Your tax dollars at work. Your tax dollars buying porn.

“We shall not grow wiser before we learn much of what we have done was very foolish.” Friedrich August von Hayes

“I decided that there was only one place to make money in the mutual fund business as there is only one place for a temperate man to be in a saloon,  behind the bar and not in front of it…so I invested in the management company that runs them.” Paul Samuelson, the first American to win the Nobel Peace prize in economics, 1967, explaining why he invested not in mutual funds, but in the company that runs them.

Two of the greatest discoveries I have made, or rather they have revealed themselves to me is that banks, mutual funds, private equity firms and financiers of all stripes fail to consistently make money for their clients. However, they do make money for themselves in fees.

A second major discovery is this, all financial risk–has been dumped on the consumer. It is all about getting as much as possible of other peoples money, brainwashing them to send more in on a systematic basis and holding on to other peoples money as long as possible.

Such is the case with the current financial world…Your big financial institutions today, are for the most part not owned by the managers who run them, but owned by mutual fund companies and other institutional investors. So when the shit hits the fan, which today happens on a daily basis, it is Joe Six Pack who gets hammered in the deal, not the financial institution. And if the financial institution really screws up, then the taxpayer bails out the financial institution, and Joe Six Pack gets hit again, not the financier.

Give you perspective. Mutual funds and other institutional investors (endowments, pensions, sovereign wealth, ultra-wealthy) own 78% of Goldman Sachs, 75% of JPMorgan Chase, 77% of Morgan Stanley and 78% of Bank of New York Mellon. For publicly traded mutual fund companies, it gets much worse, 96% of Legg Mason and 91% of Janus is owned by funds and other institutions.

In normal businesses, virtually all of them believe that serving their customers is their road to profits. In banking, it is all about the profits, and if a customer is served, well, that is great, but not the main objective. It is all about them…

The biggest losers in Bear Stearns collapse was not Jim Cayne, he may have lost a billion on paper, but he had already pulled out another half billion in compensation outside of Bear stock. Vikram Pandit of Citigroup, which only takes about $125 thousand a year as CEO of Citigroup, but made over $160 million when he flipped his now shuttered Old Lane Partners hedge fund to Citigroup for $800 million in 2007.

Bill Miller, the legendary value investor at Legg Mason, which took over the toxic mutual business from Citigroup, lost billions for his investors in 2008 loading up on financial stocks such as Bear Stearns, AIG, Citigroup, Countrywide, Freddie Mac, Merrill Lynch, Wachovia and Washington Mutual.

But you would never know by Bill Millers ride. Miller, the last we knew owned the yacht Utopia, a 234 foot long Feadship yacht when he cut a very lucrative deal in mutual fund management fees he got from 2005-2007. His yacht has two VIP staterooms on the main deck, an owners suite one deck up, three double twin bed staterooms. Amenities include a Jacuzzi area with a sundeck, and a staircase with a helipad below, and the helipad is all in teak so that it can be used as a relaxation area, when his helicopter is flying about.

But the road to serfdom for individual mutual fund shareholders lives. Morningstar, back in March in 2010, found that mutual fund company Janus offerings collectively saw a -1% loss over ten years, which translates into a $58 billion loss of wealth. Putnam funds did not do much better, they lost $46.4 billion in shareholder wealth, while Alliance Bernstein saw losses of shareholder wealth of $11.4 billion and $10.1 billion respectively.

The big guns of the mutual fund industry, American Funds, Vanguard and Fidelity were actually wealth creators of $191 billion, $189 billion and $153 billion respectively…but folks…in real terms, in the aggregate, mutual fund companies did dismally, weighted returns over ten years were awful for the masters of the universe, weighted returns for American Funds were 4.1%, 2.9% for Vanguard and 2.1% for Fidelity.

The reality is, you would have been better off sticking your money in bonds, on in equity indexed or fixed annuity with a good life company.

Which leads us to the last portion of this already long blog. Target-date mutual funds, which are baskets of mutual funds, and about 7.3 million Americans own these Rube Goldberg financial devices, according to the Employee Benefits Research Institute. Despite getting walloped in the down market of 2008, loosing between 20 and 50 percent of their value, due to marketing and lobbying by the mutual fund industry, which sanctioned these financial Frankensteins with the Pension Protection Act of 2006.

Wall Street and the mutual fund world are completely obsessed with the myth of diversification, believing that diversification will rid them anyway of risk. If there is anything we have learned with diversification of late, it is diversification was a disaster with subprime mortgages, collateralized debt obligations, conduits, special investment vehicles, Enron, WorldCom, etc.

Looking underneath the hood of a Fidelity Freedom 2020 target-date fund is a big black box, a hall of mirrors, bordering on neurotic. In printing out the recent fund holdings, the printout on stock holdings alone were over 1/2 inch thick. It contained 11 domestic equity funds (including Fidelity Disciplined Equity which has huge exposure to Goldman Sachs), 9 international equity funds, seven bond funds (which include leveraged buyout and PIK bonds) and 2 short-term funds. The average equity fund has over 100 individual stocks, and I stopped printing when I looked on the bond holdings, one had 50 pages of holdings, another 24, another 15, 13, 2, and 54 pages. Short term bond fund had 38 pages. Institutional class another 10 pages.

Wall Street loves complexity and secrecy because no one can figure out where the risk really is. Invest in yourself. ” I suppose if I was to give advice it would be stay out of Wall Street.” John D. Rockefeller

“Pencey was full of crooks. Quite a few guys came from those wealthy families, but it was full of crooks anyway. The more expensive a school is, the more crooks it has–I’m not kidding.” Holden Caufield, The Catcher in the Rye, Chapter 1

Even to this day, every time I am in New York City I still remember Holden Caufield’s voice talking about phonies, wealthy elities and boarding schools…the more things change the more they remain the same. Ironically for me, I grew up in Andover MA on the edge of the campus were Phillips Andover Academy was–the training ground still for the super rich and Wall Street elites..still. Later in my twenties, after my father died from cancer, at the time I worked for RCA and used to frequent the New York home office in lower Manhattan, ironically the next door neighbor was Goldman Sachs. I did not who Goldman was at the time, but I sure do now. Perhaps I have had the inferiority complex of being an outsider, but today I embrace being an outsider, and look at it being an asset rather than a liability.

So what does this have to do with Michael Moore, Goldman Sachs and the Weinstein Brothers? I like Michael Moore…to a point. But Michael Moore is a grand stander of the first order, in “Capitalism: A Love Story.” In the movie, he talks about Wal-Mart using life insurance as an economic tool, but forgets to tell the audience that Wal-Mart unwound its arrangement over a decade ago. Mr. Moore, for all of his bravado, is doublespeak. Moore’s producers were Harvey & Bob Weinstein…the folks who brought you Pulp Fiction, Shakespeare in Love, Inglorious Bastards…but the Weinstein’s have gotten $1.2 billion of play money, and now a troublesome pile of debt from–Goldman Sachs.

So when Moore is telling people to come out of Goldman Sachs, he is, for lack of a better word, biting the hand that is feeding, the champion of the common man is in bed with the banker. And he is in bed with big media too. Moore’s film was co-financed and distributed domestically by Overture Films, which is a unit of John Malone’s Liberty Media Group–which is kind of like the Goldman Sachs of the media industry.