Freaky Friday Potpourri: Adding Insult to Injury
New scandal erupts in already marred market
"All you have is your name and your word." --Ruby Peck
My grandfather taught me that there are three foundational elements to any successful relationship, be it business, family or friendship.
They are honesty, trust and respect.
If any one of those bonds were broken at any given time, the underlying dynamic would never be the same.
If more than one were breached, the odds were stacked against you.
If all three were violated, it would be game over, time to punch out and put a fork in any remnant faith.
Our concerns in the financial space have been highlighted for many moons. In June 2007, when the banking index was 65% higher than current levels, we scribed After the Gold Rush when mainstay averages were at all-time highs, M&A was on a trillion-dollar run rate and Blackstone (BX) billions were being minted.
We offered that "The financial sector currently represents roughly 21% of the S&P, not including "financials in drag" such as General Electric (GE) and General Motors (GM), which derive a large portion of their earnings from finance based operations."
"The natural question is therefore begged," we continued, "do you need exposure to the banks and brokers? It would appear that, given our finance-based economy and the risk of higher rates, investors are already there in spades."
Fast forward to the following fall, we cast a glance at the ivory towers at Wall and Broad and asked ye faithful to not hate the player, but hate the game. And I quote:
"What's clear is that changing the costume in the corner office won't turn the trick. Stan O'Neal, Chuck Prince and Warren Specter are all smart guys that played the same game as everyone else. They just haven't played it as well as their contemporaries and have been held to task in kind.
We saw similar stories manifest when the tech bubble burst and corporate malfeasance morphed into a modern-day witch-hunt. That's not to say these guys are Kozlowski or Ebbers or Lay. Their antics perpetuated fraud as opposed to a universally accepted, albeit misunderstood, systematic process.
But the structural imbalances, hidden risks, counter-party collateral exposure and embedded insecurities aren't one-and-done write-downs. That's not how the knitting is weaved with $500 trillion dollars of derivatives in play. In fact, one could argue that the inherent learning curve needed to unwind these interdependencies will allow the issues themselves to manifest.
The frightening part of these modern day sequels is that the same greed and reward-chasing behavior that was responsible for the universal acceptance of risk has again been so readily embraced. It is that story itself-the twisted tale of misguided agendas-that is the common thread of these seemingly disparate plots.
Trick or treat, my friends, and be wary of the bad apples. For when we bite into the forbidden fruit, we're liable to find the pin that pricks collective psychology and leaves us all howling at the moon."
The carnage we've since seen has been beyond mainstream imagination. Bear Stearns, Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), Lehman Brothers, Washington Mutual, IndyMac, Wachovia Bank (WB), Citigroup (C) and other once impenetrable institutions seized up and set into motion a derivative contagion that has threatened the very existence of the capital market construct.
We used the analogy that the financial dike was springing holes at a furious pace and only so many fingers were available to plug them.
With our collective hands, feet, heads and heavy hearts pressed hard against the wall of worry with hopes of stemming the crimson tide, the very last thing we needed was a kick to the groin.
Move Over, Shoeless Joe Jackson
It was well past 2:00 AM as our train made its way through the dark northeast corridor towards
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