Tuesday, November 29, 2011

Bailouts Are Not Enough. Former Treasury Secretary Henry Paulson Gave Advance Tips to Friends (Big Surprise)

Finally we get a story about the inside information that former Treasury Secretary Henry Paulson provided to hedge fund friends (As the former CEO of Goldman Sachs, you can be sure he has many). This story is from bloomberg. It's long so I have excerpted parts below (but it is all worth a read).
"It was July 21, 2008, and market fears were mounting. Four months earlier, Bear Stearns Cos. had sold itself for just $10 a share to JPMorgan Chase & Co. (JPM)"
"On the morning of July 21, before the Eton Park meeting, Paulson had spoken to New York Times reporters and editors, according to his Treasury Department schedule. A Times article the next day said the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie’s books and cited Paulson as saying he expected their examination would give a signal of confidence to the markets."
"At the Eton Park meeting, he sent a different message, according to a fund manager who attended. Over sandwiches and pasta salad, he delivered that information to a group of men capable of profiting from any disclosure.
But of course! Tell the press one thing (what you know is a lie) and tell your friends the truth.
Around the conference room table were a dozen or so hedge- fund managers and other Wall Street executives -- at least five of them alumni of Goldman Sachs Group Inc. (GS), of which Paulson was chief executive officer and chairman from 1999 to 2006. In addition to Eton Park founder Eric Mindich, they included such boldface names as Lone Pine Capital LLC founder Stephen Mandel, Dinakar Singh of TPG-Axon Capital Management LP and Daniel Och of Och-Ziff Capital Management Group LLC.
After a perfunctory discussion of the market turmoil, the fund manager says, the discussion turned to Fannie Mae and Freddie Mac. Paulson said he had erred by not punishing Bear Stearns shareholders more severely. The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie into “conservatorship”."
"Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said."
"The fund manager says he was shocked that Paulson would furnish such specific information -- to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information."
“You just never ever do that as a government regulator -- transmit nonpublic market information to market participants,” says Black, who’s a former general counsel at the Federal Home Loan Bank of San Francisco. “There were no legitimate reasons for those disclosures.”
To be a little more accurate he should have said "You just never ever SHOULD do that as a government regulator." This story is only an example of what goes on all the time. 
"Janet Tavakoli, founder of Chicago-based financial consulting firm Tavakoli Structured Finance Inc., says the meeting fits a pattern.
“What is this but crony capitalism?” she asks. “Most people have had their fill of it.”"
"An official such as Paulson has no legal obligation to keep material nonpublic information to himself, says Phillip Kaplan, partner for litigation at Manatt Phelps & Phillips LLP, where he specializes in securities and class-action cases."
“I don’t think a government person is liable,” he says. “He didn’t profit from the information or trade on it.”
But here is the issue, to say that his actions were OK because he didn't profit or trade on it is a bunch of BS. First of all, how is it acceptable behavior to lie to the press (and therefore the Public you represent) while telling your friends the truth? Second of all, who is to say that he did not profit from it? Just because he himself didn't trade on it? Even if those he told did not trade on it, they could have told someone who did. The profit does not need to be immediate (many ways to work around insider trading rules). Good Old Boys network......Favor for a Favor......That it how these things work.

Saturday, November 26, 2011

Great Infographic on the Education Bubble & Are There Signs of a Leak?

Below is a nice infographic on the Education Bubble (a better term would be a Tuition Bubble) from Savingsaccount.org . The cost of a college degree is clearly out of whack relative to income and something at some point must change (when is the only question). We can only hope that the tuition decreases that have been announced by a small number of colleges is the first sign of a leak in the tuition bubble. As CNNMoney reported:
"As colleges across the country become increasingly pricey, these five schools are cutting tuition and fees by more than 10% -- and, in one case, by as much as 60%."
While that highlights only five colleges, a quick google search reveals that in some areas it appears like more of a trend. (unfortunately many are still raising tuitions...but for how long?)

Higher Education Tuition Bubble

Monday, November 21, 2011

Why is it hard to cut $1.2 Trillion out of the Budget over 10-years? (It's NOT!)

The reality is you only need to reduce one department (to its historical average funding level) and you could save more than 1.2 Trillion over ten years.

Everyone is talking about how the "Supercommittee" was unable to reach a deal to cut 1.2 Trillion from the budget over a 10-year period. As CBS news reports:
"After more than three months of negotiations, the congressional supercommittee announced Monday that it would not be able to reach a deal to reduce the deficit by the group's midnight deadline, citing 'inability to bridge the committee's significant differences'"
"According to the debt limit deal, the committee's inability to compromise will result in $1.2 trillion worth of automatic cuts in domestic and defense programs as of 2013. The so-called 'sequestration' was designed to serve as an incentive for compromise, and both parties had previously emphasized their commitment to avoiding those triggers."
This made anyone and everyone remotely connected to the military industrial complex scream bloody murder about the planned automatic cuts to the Pentagon. By default half of the 1.2 Trillion in cuts is supposed to come from Defense if no deal is reached. To that I say who cares?!? That is basically $60 Billion per year or less than 10% of the defense budget (and the cuts won't even take effect until 2013).

I don't understand how this "supercommittee" is unable to cut 1.2 Trillion over ten years (that's $120 Billion per year or less then 4% of what the US spent this year). What kind of "supercommittee" can't see what is staring them in the face?

A simple look at the crazy levels defense spending has reached gives you an obvious target. There is no need to touch ANYTHING until you first bring "defense" (cough cough) spending down to historical levels (levels which were never low in the first place).

The average amount for defense spending since 1948 (in inflation adjusted dollars) is about $442 Billion. I don't think anyone would say that our military was "weak" during any of this time. I am not even saying we must bring it below that level (although I think we easily could). However, just bringing US defense spending back to it's historical average would make the "supercommittee's" job complete.

Unfortunately, we have people trying to twist the message and defend ridiculously high levels of defense spending by comparing it to GDP....so you will be shown a graph like this

That one is from the heritage foundation. However, comparing defense spending to a GDP level is slightly moronic. How does the market value of the goods and services produced in country determine the cost of protecting it? Shouldn't it instead be more related to things like population size, land mass, number of bordering countries? By lowering our defense spending and reducing our presence in foreign countries we can REDUCE the aggression (out of sight out of mind). Ron Paul has a good speech about it, imagine if roles were reversed. Our military presence, not our economic standing is causing aggression.

This chart from the Economist puts in perspective how out of whack US military spending is. Do we really need to spend more on "defense" then all these countries combined? Well I'm sure according to Lockheed Martin, Boeing, Northrup Grumman, Raytheon, General Dynamics and the rest......it's not enough!


It's a sad reality that the "supercommittee" can't even make these OBVIOUS cuts. What are they going to do when it actually comes down to making the hard decisions? Because this $1.2 Trillion over ten years? That is NOTHING!
cartoon from heraldnet.com

Wednesday, November 16, 2011

Are Morningstar Mutual Fund Analysts Taking Happy Pills? Ratings Breakdown.

UPDATE: 8/1/12 - You can see updated ratings as of 6/30/12 here.
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So Morningstar has released new "Analyst Ratings" on 349 US based mutual funds as of 11/15/11. According to Morningstar
"The new scale runs from Gold, Silver, and Bronze on the positive end to Neutral and Negative. Expressed as medals, the top three tiers are reserved for funds our analyst team thinks have sustainable advantages that position them well versus peers and a relevant benchmark on a risk-adjusted basis over the long haul (at least the next five years)"

Morningstar considers Gold, Silver and Bronze to be positive analyst ratings. And obviously the other two are self explanatory. The exact definitions of each are below
Gold: Best-of-breed fund that distinguishes itself across the five pillars and has garnered the analysts’ highest level of conviction;  
Silver: Fund with notable advantages across several, but perhaps not all, of the five pillars—strengths that give the analysts a high level of conviction;
Bronze: Fund with advantages that outweigh any disadvantages across the five pillars, and sufficient level of analyst conviction to warrant a positive rating; 
Neutral: Fund that isn’t likely to deliver standout returns, but also isn’t likely to significantly underperform; and 
Negative: Fund that has at least one flaw likely to significantly hamper future performance, and is considered an inferior offering to its peers.
However, one has to question the way these ratings have been given out for this first batch of 349 funds. 



These must be the parents of Generation Z giving out these ratings because apparently they think you deserve a metal just for showing up. Of the first 349 funds rated, a full 311 or 89% received a "positive" rating deserving of a "metal". Another 30 they are indifferent about and they only have a negative view on 8 or about 2%. 

However, many studies have shown that the majority of actively managed mutual funds actually underperform their benchmarks. Below is a chart from Mclean Heuristics using data from Standard and Poor's Indices verses Active Funds Scorecard.

Clearly that is a sad showing for active managers as a whole. But lets get one thing clear.....I am NOT a supporter of index investing. In fact, I believe index investing (particularly using cap-weighted indexes) only adds to market inefficiency (but that's a rant for another day). 

However, what that chart does show is that if Morningstar was properly distributing it's ratings, it would likely be an inverted version of what they put out. With the majority falling in the "negative" category and the least falling in the "gold" category.

We'll see how the distribution of ratings turns out as Morningstar rolls out more over the next year, but so far it looks to be just as ridiculous as stock ratings given out by the industry. Analysts as a whole in the financial industry are not in short supply of happy pills. After all, Happy Sells!

Updated: 11/17/11 10:20pm ET

Tuesday, November 15, 2011

Complete listing of New Morningstar Analyst Ratings for Mutual Funds (All 1683)

UPDATE: 8/1/12 - You can see updated ratings as of 6/30/12 here.
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CORRECTION 11:25pm ET 11/15/11: Please note the reason the comprehensive listing (1,683 funds) is dramatically larger then that announced by Morningstar is because the comprehensive list includes European and Canadian mutual fund rankings. Sorry for the confusion...no need to read the rest of this post! Although you can view all US Fund ratings as of 11/15/11 here.

So Morningstar announced today  the release of it's new Analyst Rating system for Mutual Funds. (Bold added by me).
"Morningstar today published a new Morningstar Analyst Rating on roughly 350 mutual funds sold in the United States. As outlined in a series of recent articles, this new system is the summary view of Morningstar analysts' assessment of a fund's strengths and weaknesses across five key pillars: People, Process, Parent, Performance, and Price."  
"To see the Morningstar Analyst Ratings, read supporting analyses, and learn how funds stack up across the five pillars, visit Morningstar.com. We have roughly 350 Morningstar Analyst Ratings available today and will continue to publish new ratings and accompanying research daily as we ramp up to approximately 1,500 funds by the end of 2012." 

And they talk about the launch in this interview (excerpts below). Supposedly through the end of this year they will have 300-400 funds rated.....and they claim they will "ramp up" to about 1,500 funds by the end of next year.
"Stipp: So, lastly, Karen, this is obviously a very big endeavor for the fund research team. This is something that you're going to be rolling out over time. Can you give us a sense of when we'll expect to see these new reports and how many we'll see to start with and what you'll be doing afterward?
Dolan: ... We're not going to be re-rating our entire universe right off the bat. We are going to be working toward that throughout 2012, but what you'll see from us through the end of 2011 is about 300 to 400 funds will be rated, and then we are going to work up over time. ... We have to keep up with the ratings that we've already launched. So, we have to balance that maintenance of the research that people are relying on us for with the ramp-up of the new ratings. So, throughout 2012 we expect to ramp up to about 1,500 funds rated in this new system."
However, the reality is they have already rated 1,600 Funds and have another 82 listed as "Under Review" status. Clearly they did not secure this very well. You can view the PDF here if you can't still view it directly here http://corporate.morningstar.com/us/documents/AnalystRatings/CurrentAnalystRatings.pdf  

If the ratings are already there, what are their real motives behind only officially releasing the select "300-400" in 2011? How did they decide which ones to release?

Friday, November 11, 2011

The European situation....Telling it like it is!

Great video of Nigel Farage telling other Members of the European Parliament how it is.


Some of the truths he touches on are below (besides his nice rant that their jobs are not needed and they should be fired, which is around the 3min mark)


“….This pretends that everything is going incredibly well. The EU is marred in deep structural crisis. Greece and Portugal and Ireland cannot survive within inside the Euro.”

“…Yes sir, we all want a shared European cooperation for the future, but this most definitely is not the model!”

“By taking away from people there ability to govern themselves and transferring that power to the European Commission, we are headed for a Europe of rebellion and violence. Let’s take the democratic route.”

All those comments are on point.

edit: 11/12/11

Thursday, November 10, 2011

Rant for the Revolution T-Shirt (End The Fed Edition)

Thanks goes to Stan at Caveat-news.com for the below graphic. Just got myself a new T-Shirt with this that I'll be sporting at the gym. If you want you can order a T-Shirt or Sweatshirt with this on Zazzle steal the image and go somewhere to save a few bucks. If you choose to order it through me anyway, thanks!

Tuesday, November 8, 2011

Who is Best at Winning Business With Bribes?

Below is an interesting graph of the results from the latest Transparency International survey dubbed the "2011 Bribe Payers Index" . Higher scores means there is a lower perception of bribery by companies from those countries. Therefore, companies from the Netherlands are considered the least shady and companies from Russia are considered the most shady of the 28 countries involved in the survey. However, the report notes the obvious "The index shows that there is no country among the 28 major economies whose companies are perceived to be wholly clean and that do not engage in bribery."


A little background on the survey
"Transparency International’s 2011 Bribe Payers Survey asked more than 3,000 business executives worldwide about their views on the extent to which companies from 28 of the world’s leading economies engage in bribery when doing business abroad (Appendix A). The score for each country is based on the views of the business executives who had come into contact with companies from that country."
The survey then breaks it down by industry.....again the lower the score the higher the perception of bribery.

The survey clearly shows it is well known among business executives that "Public works contracts and construction" is where the most bribing is taking place by a significant margin. Although, I find it interesting that "banking and finance" is ranked where it is. However, I suppose this is a survey about the illegal activity of bribing vs the legalized shady practices of the Federal Reserve system, which in conjunction with the Primary Dealers, engages in what amounts to robbery from savers and tax payers alike......so I guess in that way it makes sense!

An interesting tidbit from the survey points out that prior to May 2011 it was not even a criminal offense for Chinese companies to bribe foreign government officials (not that it means it will actually be enforced). Besides, even when it is considered illegal, many companies just consider the resulting slap on the wrist the cost of doing business. We can be sure the recent AstraZeneca case is just business as usual.

Monday, November 7, 2011

Occupy Wall Street and the Tea Party should focus on their core ideas not their ideologies

It annoys me to no end to continuously read about how Occupy Wall Street and the Tea Party have completely opposing views. As the The Atlantic puts it
"Thanks to Occupy Wall Street and the Tea Party, America now has two national protest movements at opposite ends of the ideological spectrum, exemplifying our frenetic political culture. At last, there are diametric outlets for all the angst."
 There have been attempts to talk about their similarities.....such as the below chart from LA Weekly

However, that focuses more on the similarities of the participants than their ideas. 

Then we have this from Slate which says "The Venn diagram below plots the concerns, allies, heroes, and inspirations of the two movements."


Again that was trying to visualize more then just their ideas but it begins to get closer to the main hot button issues which fueled the rise of both movements.

Then there is this venn diagram from James Sinclair and made a little more attractive to the eyes by Ty Mortensen. This hits a lot more on the key issue.


However, I think the reality goes a step further then just this. Corporations have done more then just 'lobby' the government. Corporations have infiltrated the government! This was touched on in a 2009 article "The Quiet Coup" by The Atlantic (Read it if you didn't when it came out, it's just as relevant today, if not more). As it says in the article
"The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government"
Putting aside the irony of someone formerly from the IMF talking about corruption (a rant for another day), it goes on to point out a few of the connections at the time (a web that has only grown since).
"One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.
These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service."
We all know where Jon Corzine went after being governor...ya corrupt and now defunct MF global. As Dealbook points out about the MF global investigation.
"In a more surprising development, Gary Gensler, head of the Commodity Futures Trading Commission, will no longer participate in the investigation due to his long acquaintance with Mr. Corzine"
Take a wild guess where they knew each other from?
"Mr. Gensler had worked for Mr. Corzine while both were at Goldman Sachs in the 1990s." 
Ya, that was a little too easy. However, my point is not to discuss in detail the depth of corporations infiltration of our government and our regulatory agencies. My point is that the corruption and blurring of the lines between corporations and government is at the heart of both OWS and the Tea Party movements.

By focusing on their CORE IDEAS the movements together have hope of getting something accomplished. Otherwise it seems their messages will get watered down, twisted by the media, and turned into nothing but expressions of the ideologies of the "left" and "right"....something both movements were expressly against.

Both movements from the very start focused on the Federal Reserve. Why not start there? End the Fed.

Sunday, November 6, 2011

Rant for a Revolution

I have meant to start this blog for awhile. In fact, I registered the domain in December of last year (and that was after much procrastination!). I must admit the Occupy Wall St. protests have made the Wall Street Rant name appear to have a very strong association with it. While I can't say I have participated in any of the protests, I do support many of their ideas.

I didn't start this blog for so long because I was somewhat obsessed with laying out my core criticisms from the start about the financial industry, the political system, the media and people in general.........then I realized that is the purpose of a book not a blog. So I have decided to stop over-thinking and just do. Besides, I'll be lucky if anyone is reading my posts anyway.

The enthusiasm behind the Occupy Wall St. movement helped push me to finally start this blog. Like many people, camping out to support the cause is not an option. However, real movements are more then just protests on the street. Movements that lead to revolutions are about changing the way people think. It's not just about bombarding the streets with people, it's about bombarding people with facts where ever they are. Hopefully I can do my part on this blog, through the discussion of individual ideas instead of ideologies. I will always be hesitant to associate myself with a specific movement, because movements can be hijacked. Therefore, I will always choose to put my support behind ideas instead of labels.

If you have found my blog, I encourage you to subscribe via RSS or e-mail (links always on the right side) to hear my future rants. I encourage all comments, so feel free to rant back.