Hacker's lounge: Making Money Without

The CNN Washington Bureau’s morning speed read of the top stories making news from around the country and the world. Click on the headlines for more.

Compiled by Dan Merica

WASHINGTON/POLITICAL:

CNN: It’s still Romney on top in NH

Mitt Romney continues to hold a solid lead among likely Republican voters in New Hampshire in the run-up to the January 10 primary, according to a recent survey.

CNN: Gingrich, Perry fail to qualify for GOP primary ballot in Virginia

Former House Speaker Newt Gingrich failed to collect enough signatures to appear on the Virginia primary ballot, the Republican Party of Virginia announced Saturday morning, leaving the longtime Virginia resident without a place on the state's ballot and raising questions about his campaign's organization.

CNN: Weather will influence Iowa caucuses, Huckabee says

If the weather is good on January 3, Mitt Romney will win the Iowa caucuses; if the weather is bad, a weaker turnout will result in a victorious Ron Paul, former Republican presidential candidate Mike Huckabee predicted Sunday.

CNN: Lugar: I’m the Republicans’ best chance

Republican Sen. Dick Lugar said Sunday Republicans should support his candidacy if they want to hold onto his Indiana Senate seat in 2012.

NATIONAL:

CNN: Hackers target global think tank

Hackers targeted Stratfor, a global intelligence company, but it was unclear Sunday evening whether the breach and apparent release of credit card information was the work of the group Anonymous.

CNN: Feed America's hungry (and their pets), says nonprofit group

Food banks across the country kicked into high gear for the holiday season this week in an effort to feed America's hungry. But a few instead homed in on an often overlooked casualty of hard times - the family pet.

CNN: 'Horrible tragedy' mars Christmas in Connecticut

A fire at a house in Connecticut early Christmas morning killed two adults and three children, fire officials said. Two other people made it out alive.

CNN: Thrilling game ushers in shortened NBA season

The NBA rewarded patient fans Sunday with an exciting game that kick-started a season delayed five months by a lockout. The comeback New York Knicks, behind Carmelo Anthony's 37 points, edged the Boston Celtics 106-104.

INTERNATIONAL:

CNN: South Korean civilian delegation enters North to pay respects to Kim

A delegation of South Korean citizens left for North Korea on Monday morning, passing through the demilitarized zone between the two countries to express condolences over the death of the North Korean leader Kim Jong Il.

CNN: 13 more deaths reported in Syrian unrest

On the eve of the planned arrival of Arab League observers, 13 people died and scores were injured in volatile Syria on Sunday, according to the opposition movement.

CNN: Casualties from storm in Philippines continue to mount

The death toll from the tropical storm that lashed the southern Philippines just over a week ago has risen further, the government said Monday, as hundreds of thousands of people continue to receive assistance from evacuation centers in the stricken region.

CNN: Sudanese army: Rebel leader Ibrahim killed

A major Darfur rebel leader and some of his top commanders have been killed, a Sudanese army spokesman announced on state-run radio Sunday.

BUSINESS:

CNN Money: Dumbest moments in business

"Stupid." "Like a banana republic." Those are a few of the choice words investors used to describe Congress' behavior during the debt ceiling debate.

CNN Money: Stocks head into the final stretch

The week ahead on Wall Street is expected to be quiet with many market players taking time off for the holidays. Stock markets in the United States and Europe will be closed Monday for the Christmas holiday, with trading resuming on a normal schedule Tuesday.

CNN Money: Fortune 500: Top-performing stocks of 2011

It's been a hot and cold year for the stock market, but these Fortune 500 companies managed to float to the top with impressive gains. From Ross Stores to MasterCard, here are the biggest winners.

In Case You Missed It…

President Barack Obama visits with Marines and their families at Marine Corps Base Kaneohe Bay, Hawaii.

Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves by Mike Mayo is one of the more important books to be published since the start of the financial crisis. Part memoir, part revelatory narrative of Mike’s career, this highly personal but informative book provides some very important information about how Wall Street works – or doesn’t – and confirms the view of many people than most deals are bad deals, done only to enrich the parties but not investors.

By way of disclosure, I need to say that Mike and I both worked at Prudential Securities in the early 2000s, he as an analyst and myself as a tech banker, so we never really got to know each other. It may interest readers of The Big Picture to know that I have just joined Tangent Capital Partners in New York. I will be focusing on financial advisory and asset management opportunities, but remain Vice Chairman of Lord, Whalen LLC, parent of Institutional Risk Analytics. Maybe I’ll get to serve as receiver for Bank of America when they go belly up, but I digress.

A decade before Prudential, Mike and I almost crossed paths at the Fed, but he worked at the Board of Governors in Washington while I was at the Fed of New York. The former is supposedly in charge of the central bank’s operations, but the latter is the older and more important part of the Fed system. When Treasury Secretary Timothy Geithner was President of the New York Fed, he dispensed gifts and subsidies to Goldman Sachs and other banks without the prior knowledge or objection of Chairman Ben Bernanke and the other members of the Fed Board of Governors. Suffice to say that there are no tennis courts at the New York Fed.

Mayo provides a lot of important detail about how the major Wall Street firms operate and, in particular, why the larger banks and their clients are more concerned about making money than creating value. Mike learned as did I that truth is not beauty on Wall Street, except in those few, generally smaller firms that have been able to preserve a culture of client service and quality. As Mike points out several times in Exile, many large cap mergers are done simply to cash out the managers.

“Two things are worth noting about these super-size banks,” Mayo writes. “First, much of their growth has come from mergers and acquisitions. They are not growing like Google, by creating a product and doing it better than anyone else. Instead they are just buying out their competitors… Secondly, many of these banks would likely not have grown to their current size without federal assistance in the past. In all the bank crises of previous decades, bank failures were thought to be too economically disruptive. But government bailouts – including the most recent round – didn’t resolve that problem. They merely delayed it, allowing banks to keep growing in size and scope, making the potential cataclysm next time that much bigger.”

This quote hints at one of my criticisms of Exile on Wall Street, namely that Mike does not yet appreciate that nobody in Washington or on Wall Street wants banks, especially the largest banks, to behave. There are many places in the book where I expected Mike to turn that corner of epiphany and state this case, but let me do it for him.

Whether you talk of the National Bank Act of 1865, the creation of the Fed in 1913 or the subsequent birthing of the housing GSEs in the 1930s, both the business community and their lackeys in Washington were more concerned about stoking employment and sales today than in safety and soundness of money or banks. I touched on this point in my 2010 book, Inflated: How Money and Debt Built the American Dream, which begins with this quote from Hayek’s “Denationalization of Money” essay:

“I do not think it is an exaggeration to say that it is wholly impossible for a central bank subject to political control, or even exposed to serious political pressure, to regulate the quantity of money in a way conducive to a smoothly functioning market order. A good money, like good law, must operate without regard to the effect that decisions of the issuer will have on known groups or individuals. A benevolent dictator might conceivably disregard these effects; no democratic government dependent on a number of special interests can possibly do so.”

If you look at the decision to allow national banks to make real estate loans three quarters of a century ago or the S&L crisis in the 1980s, the point was jobs, jobs, jobs. This is why the socialists in the neo-Keynesian economic camp led by Paul Krugman chatter constantly about printing more money to grow nominal employment, even if these “workers” cannot afford to buy food at the grocery story due to galloping inflation.

The other, related point to make about Mayo’s memoir is his somewhat embarrassing paean to Paul Volcker. Like Mike, I have great personal regard for Chairman Volcker as a public citizen, but we cannot allow the author of a book about the bad behavior of large banks to get away with this omission. Simply stated, Paul Volcker is the father of “too big to fail.” A former Chase banker, Paul Volcker has always been an advocate of bailouts going back to the Penn Square Bank failure. As I wrote in Inflated:

“In his 2010 book Senseless Panic: How Washington Failed America, former FDIC Chairman William Issac confirms that Mike Bradfield, then general counsel of the Fed and now in the same position at the FDIC, demanded that the FDIC bail out Penn Square Bank, no doubt with the knowledge of Volker and other Fed governors. Issac responded that he would if the central bank shared the cost, but the Fed balked.”

Overall, Mike Mayo deserves great kudos for writing this readable and very personal narrative of his years on Wall Street. Like Mike, I have spent a lot of my career fighting the tendency of big banks and politicians alike to paper over the truth in the name of expediency. Exile on Main Street is a valuable, firsthand account of why in our democracy big banks and the people who run then tend to be less concerned about creating value for investors than in extracting value for themselves. And as long as America remains a messy, ill-managed free market system, it is likely to remain so.

Hacker's lounge

Monday, December 26, 2011

Making Money Without

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