The End of the World As We Know It?-Minyanville

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The End of the World As We Know It?

Todd Harrison Sep 25, 2008 10:30 am


		Treasury Secretary finds himself between a rock and a hard place.

“I was flipping channels the other night and caught a debate about whether "media is to blame" for the current financial shame. While I share concerns about how some prominent prognosticators conduct themselves (or, more specifically, that many folks still listen to them), pointing fingers at the media is endemic of the larger "pass the buck" mentality.

There was a witch-hunt for corporate malfeasance after the tech crash (there were surely bad apples in the bunch) and there's gonna be a lynching this time as well. Take me at my word, you're gonna see blame being placed all over the Street, from hedge funds to investment banks to mortgage companies to government sponsored agencies. We're in the top of the first inning as far as that's concerned.

But it's really not that simple.

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As a nation, we cannot continue to live beyond our means for evermore without eventually paying our debts. Life just doesn't work that way. My grandfather Ruby taught me "what goes around, comes around" and it applies in so many different instances. It applies in a way that will profoundly affect the livelihoods of our children unless we begin to assume responsibility for our financial choices.

So no, it's not the media's fault. And it's not entirely the Fed's fault although, if we took our medicine after the last bubble, we would be walking on the road to legitimate recovery by now. While they made our bed - and I would appreciate forthright bedtime stories as we lay in it - it is our dreams we continue to chase.

At the end of the day, no matter how we slice it, many people have themselves to blame for incessantly consuming, pushing out our obligations with zero percent financing, extracting value from our homes through adjustable rate mortgages and allowing themselves to be seduced by the bigger, better deal.

Market moves are characterized by three phases: denial, migration and panic. If the debt bubble has indeed cracked, as I believe it has, we've got a long, hard road ahead. I shared a similar thought in 2000 with regard to the trading dynamic and I offer it again in a much broader context. And please don't shoot the messenger. That, in many ways, is the same conditioned behavior that continues to plague our society.

Good luck and remember the risks when and after we rally. It should never take something bad to make us realize we've got it good and, well, we've had it good for a mighty long time. True redemption, in life, love and the markets, begins within.

Which Brings Us Back to Hank

When Hank Paulson stepped down as the CEO of Goldman Sachs to accept the position of Treasury Secretary, he sold $492 million worth of stock tax-free. The exemption was granted under the U.S. government ethics rule, which required him to sell the shares and saved him roughly $200 million.

I will further note that Hank has repeatedly demonstrated the desire to give back to charitable causes. A report early last year indicated that his intention is to donate up to $800 million—the majority of his wealth—to environmental causes. No matter how you slice that—if he indeed follows through—that’s a mighty fine demonstration of character.

My issues aren’t with Hank the man—I’ve never met him and I certainly don’t envy the position he inherited. My concerns—as a tax-paying American citizen—are two fold.

First, as the single savviest capitalist in Washington, he should have known about the underlying derivative machination. We monitored the steady stream of government assurances last April. Hank was at the head of the pack saying “I don’t see subprime mortgage troubles imposing a serious problem. I think it’s going to be largely contained.”

If he truly believed that, he lacked the fundamental understanding to be Treasury Secretary. If he didn’t, it becomes an issue of intellectual integrity.

Indeed, Minyans were warned last summer that if the wheels wobbled off the financial wagon, we were well warned. If a community with two metaphorical critters drew that conclusion, those who run the United States of American should have been aware of them as well.

There is also the issue of transparency. We’ve long offered that the only difference between intervention and manipulation is communication. The genesis of that opinion was our long held belief that the government had an invisible hand in the market.

The mainstream media and Wall Street establishment quickly branded us conspiracy theorists but our view has been validated in spades.

In July, we offered that we were trading against Hank Paulson and that he had a two-pronged agenda. The first was to juice the equity market so corporate could issue secondary offerings and alleviate the considerable credit strain. The second was that he wanted to get crude to $100 before the election, which was a far-fetched thought at the time.

As that plan failed to come together, we now find ourselves in a pretty pickle. On one side is the government bailout that will burden future generations with obscene obligations and guarantee a demonstrably lower standard of living for our once proud nation. On the other is a cataclysmic crash that will suck the capital construct into an abyss.

As I stated yesterday in Shock & Awe, there are no easy answers to our current conundrum, only the lesser of two evils. While I fully understand that this bailout would shift the burden from rich corporate owners to the masses formerly known as the middle class, inaction could conceivably lead to anarchy and—dare I say—revolution.

I very much want to see this situation resolved and believe there is a manner in which we can do that. It includes a bailout plan with a structure that effectively holds corporations accountable for their risks. As Mr. Practical said to me last night, “The savers in this country don’t care if JP Morgan (JPM) or Bank of America (BAC) are trading at $2, they simple need to know that their deposits are safe. That is much less expensive for taxpayers than keeping value in the equity, of which there is little if any.”

So with regards to Hank Paulson’s legacy, I would offer that the jury is still out.

What I will say—and this is critical, not only for him but with regard to the fabric of our nation—is that there must be accountability through the balance of powers. The current proposal states: "Decisions by the Secretary of the Treasury pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

There can be no immunity for Ben Bernanke and Hank Paulson. That isn’t to say they were complicit in the financial engineering but their actions of the past—and their path through the future—must be held accountable by definition of the Constitution of the United States of America.

If we, the people, agree to waive those rights, the eventual suspension of further amendments becomes a viable possibility. This is a critical historical juncture, not only for financial markets but for the foundational elements of democracy. There is a solution, Minyans, we simply need to stand together as we figure it out.

May peace be with you.

R.P.

Did you know the doors to Festivus 2008 are officially open? Have you yet locked your spot for the critter trot as last year's soiree sold out? (This is our annual event to commingle our professors, partners and Minyans while chowing down and listening to live music. The very best part? It's for the kids in the good name of my grandfather.)


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tags:

HANK, HARVARD, IMBALANCES

Comments (51)

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Ron Price

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09-26-2008, 8:56 am
Paulson umderstands financial markets and how to work them. He was CEO of goldman Sachs. I don't think he knows everyday people. The abyss probably looks 700 Billion times bigger to him than it looks to everyday people. Congressional over Read More

Jonathan Magid

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09-26-2008, 9:24 am
David: I left yesterday afternoon to go do work and life. I wish I had vastly more expertise in this area and recognize that I'm walking on thin ice here. MBS experts can weigh in and correct my misunderstandings later, I hope. Read More

Roger Lowe

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09-26-2008, 10:00 am
No one is talking about Bill Clinton 1999 pulling of the GSA of 1933... Basically, what was learned after 1929 was commercial banks and investment banks needed to be seperate, and without this law, the private sector was doomed to repeat history. S Read More

Amy M

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09-26-2008, 10:09 am
Lee - I agree on a practical level that insuring a 401(k) is hard. I think the best you could do is return most of the capital invested. My thoughts run towards (and they still do), is that if we are going to bailout the f Read More

Lee Stockhamer

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09-26-2008, 11:28 am
Fully agree on the bypass. Let the real economy funtion like Mr. Conine says. Maybe local banks can regain their original mission, lending to people they know and eat with at the diner. Short Letuce (I mean/misspell the expensive restaraunt, no Read More


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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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