Friday, July 31, 2009
Talk to you next week.
Thursday, July 30, 2009
I think there's a connection between the widening spread in income distribution and the growth of financial services as a percentage of GDP. When I was a kid, Wall Street was there, but it wasn't the center of the known universe. When I started working in New York in 1959, as a curatorial assistant in the European Paintings Department of the Metropolitan Museum of Art, I made roughly $6000 a year. And so did all my contemporaries, no matter what they did, whether they worked in publishing, fashion, the law, stock brokerage, art dealing. When I moved to Lehman Brothers in 1961, I started at $6250. But as time went on, and I rose in the firm, becoming a partner in 1967, I soon started making more than the CEOs of a number of my corporate clients - which made no sense at all. Then of course I left Lehman, went to Burnham, left Burnham, "consulted" for a while, and then in 1980 started writing and back down the financial slope I tumbled, passing a great many people with whom I'd been tight as a young man, and who were suddenly cashing in. A number of them were discovering how much they loved money, and the more they made, the more they loved it, which effecively ruined the dynamic of friendships that, twenty years ago, I would have bet on as lasting to the grave. It's like the verses in that great Bob Dylan song:
"With haunted hearts through the heat and cold,
We never thought we could ever get old.
We thought we could sit forever in fun
But our chances really was a million to one.
As easy it was to tell black from white,
It was all that easy to tell wrong from right.
And our choices were few and the thought never hit
That the one road we traveled would ever shatter and split."
Well, split it did - and as the paths further diverged some kind of social conscience replaced the wallet as my principal center of feeling. Go to downtown or central Brooklyn, walk to the bus, look around: see if you can help saying to yourself, "These people have nothing. What must their day be like?" It's not my fault, I know, but I can't help experiencing a brief shiver of guilt.
Well, there's one thing we need to face. The income and wealth inequality of the past thirty years has been built on a foundation of subsidy. Capital begets capital because Uncle Sam facilitates the birthing. Sooner or later, the only way to redress an imbalance that is moral as well as financial will be through a system of graduated taxation, both as to income and investment returns - but this will only work if the ruling premise is to tax AS rich what IS rich by the standards of today.
Of course the big problem is Washington. For fifteen years now, operating on the theory that you get the government you pay for, I've argued that we cannot expect much from legislative bodies whose members are paid less than third-line Wall Street people to preside over a $13 trillion economy. So we end up with people who can't afford to be in Congress (who else in America is required to maintain two residences, one in the district and one in the District) and are supported by K-Street off the books, and a Senate peopled with idiot millionaires. Then throw in the ratcheting-up of campaign costs...well, it figures. Time and again, in the Observer and elsewhere, I've fulminated on this point, and folks have looked at me like I'm nuts. At last, however, someone else has mounted the barricades, Matt Gimein, a writer for The Big Money. You can read him here.
And I'd like to see us go whole hog. Pay our legislators sufficient compensation tp keep them out of the hands of the K-Street pimps, and break up Washington as well. Leave the Congress, White House and Supreme Court in the District, and the Pentagon across the river. But relocate the departments to other parts of the country: State Department to Brooklyn (Atlantic Yards), Fed to Manhattan, Energy to Houston etc. etc. Tremendous local stimulus. After all, some wenty years ago, on some talk show, I observed that it was a terrible omen for the country that the hottest real estate market going was Washington, DC and its conurbation (a great word I'm pinchingfrm Jason Epstein's excellent piece on Jane Jacobs in the latest NY Review of Books.) I think I've been proven right.
Wednesday, July 29, 2009
But here's the thing. TARP and the FDIC "free money facility" and related stimulus/credit loosening initiatives are not supposed to finance that which Goldman does best. They are supposed to free up credit, not bankroll program/proprietary trading and positioning. To get its hands on this taxpayer money, Goldman became a bank - but it does nothing that banks do: it certainly conducts no retail lending business. I admire Goldman for its trading skills; just don't do it with my money.
One other thing: thanks to Henry Paulson, the "anyone else" whom Goldman does what it does better than has been shrunk by around 50%. Seeing one's competition cut in half does wonders for one's pricing and one's profits.
I don't know how the sums work out vis-a-vis projected health-care arithmetic, but there are many other good reasons for doing this. It has long been clear that retained profits are too valuable to be entrusted to management. Eliminating the tax on dividends at the source would encourage distribution across a broad range of equities that are now valued entirely on the basis of per-share earnings prospects that may never be monetized for the benefit of stockholders. This would have to be good for the economy - putting money in the hands of people and institutions that can use it now - and for the equity markets. My corporate-finance mentors at Leman Brothers, mainly the late, great Harold J. Szold, taught that when corporations require equity for capital projects, they should get it afresh from stockholders via underwritten rights offerings, which have all but vanished from present-day finance. A return of this practice would be good for Wall Street. There is something about a recurring, rising dividend that would not only posthumously warm the hearts of Graham & Dodd, but is more solid than the hit-or-miss, now-and-then stock buyback programs that have replaced dividends in corporate favor. And there is this: anything that favors equity financing, or lightens its capital-structure burden, may slow the headlong rush to borrowed-money leverage that has already cost us so dearly.
Tuesday, July 28, 2009
On Wall Street, the devil is always in the numbers, which may account for the indifference with which an innumerate or anumerate electorate regards the shenanigans. If you're interested, go here and follow the subsequent links.
My e-circulation list included a few people in what we broadly call media." Friends who happen to be journalists, people for whom I've written. Page Six wasn't on the list, not that I don't like Richard Johnson, and enjoy what he does, because I do - emphatically - but I simply didn't think the departure of an old guy of 73 after a gig that ran 22 years from first word to last wa very gossipworthy. I lawyer friend of mine is fond of saying, "In e-mail, the e' stands for 'evidence'" - advice that I've taken to heart, but - to repeat myself - I really didn't think there was any evidentiary interest in my having decided to go in the direction I have. That I used to refer to Donald Trump as "the Prince of Swine" is a matter of record; in my NYO column I took a view of the way people exhibited themselves in public (their private lives were off the record) and got themselves written about. Nicknames and sobriquets were a neat way of sticking a pin in; I was particularly fond of my coinage for Ralph Lauren: "the Wee Haberdasher." There were risks in this; having referred once to a fashion personality as "a shirtlifter," I found myself essentially blacklisted with regard to freelance assignments for a major publishing company. Anyway, public is as public does, and private is something else. I know Donald Trump's dirty secret, going back some 40 years, when we were both on the board of the much-missed Le Club. It is this: when he shrugs off the public persona that sells books and buildings and TV bullying, he's a very nice guy. But don't tell anyone!
Anyway, someone on my list obviously forwarded the e-mail to Page Six. I'm pretty certain I know who it is, because there are only one or two people on my circulation list to whose lives publicity - the trade-off of someone else's info for future mention of oneself - is as vital and essential a force as gravity is to the solar system. Not that it matters.
But that's really neither here nor there. It does prompt one or two reflections about my former employer. Some dozen years ago, it must have been, Conrad Black briefly flirted with the idea of buying the NYO. A mutual friend, the late, beloved Arthur Ross, called me up and invited me - then a NYO headliner - to meet Conrad for an exchange of views. After te usual pleasantries, I asked Conrad what he thought of NYO as a newspaper. I've never forgotten his answer: "The NYO isn't a newspaper," he said, "it's a mascot."
I think Conrad had a point. Long, long ago the paper hit a circulation wall at around the 50,000 mark - a level it's never surmounted since to any meaningful degree. This suggests that people grow into the paper and later grow out of it. In the past six months, I can't count how many times someone's come up to me and said "I see you're back in the NYO. I gave up my subscription but now I'll start reading it again."
Here's the thing. When you're young, at least until the recent economic mess, life is a lark, to be lived in and of the moment. You want to be hip, current, a la mode. You don't want serious - which is why most young people don't read newspapers, because the NYT et al traffic in the serious. But as you grow older, life starts to get more serious. Policy begins to matter more than personality. The latest fashion no longer matters, the latest scandal, the latest nightclub. They no longer make movies that anyone with an IQ over the national speed limit can suffer through, and hip-hop is unspeakable, so you quickly stop knowing exactly what the latest celebrity is famous for. You're no longer the person the NYO is written and published for. You give it up.
Most people won't believe this, but the NYO started life as a serious paper. The city already had enough of those, however, and Graydon Carter came along and created the editorial enlivenment that got the paper talked about. I stopped writing thinkpieces about capitalism and started calling people funny names, and Women's Wear Daily sent someone to interview me and take my picture. Pretty heady stuff.
The trick is, however, to hold your original audience while adding new readers. Twenty years ago, I pleaded with Arthur Carter to start a Medicine page, on the theory that of the straws that stir the New York drink, medicine is right up there with media and finance, and an aging readership, naturally more mindful of its health, of what are called "wellness issues," would stay with us. Just look at how New York does with its annual "Best Doctors" issue. Arthur didn't buy the idea. I tried again with the new publisher. He didn't answer my e-mail. I still think the idea's a good one.
In my demographic, no day begins without a lament for the late Sun. In culture, arts, sports - and in coverage of the city, which was NYO's original stakeout - it quickly rose right to the top. Made chopped liver of the NYT, with its pathetic, alienating effort to be groovy. Early on, Seth Lipsky asked me to write for his fledgling paper. I was also being importuned to return to the NYO. Here's what I told Seth: "I'm on the horns of a dilemma. Either I can be a juvenile on a grownup paper, or a grownup on a juvenile paper."
I think that says it all.
I'm simply trying to see GS plain. I think that firms, being composites of human nature, have a DNA of their own that ultimately determines their outcome. Lehman Brothers was a hotbed of self-destructive dissension when I was there (1961-1973), and after a number of attempts at suicide, finally succeeded. There was always something cheesy about Bear Stearns. Goldman seemed always to operate on the principle that if you're going to work within a system, you might as well work the system itself. Here's an example of what I mean. During my Wall Street time, Gus Levy was simultaneously managing partner of GS and Chairman of the New York Stock Exchange. It so happened that Gus and I found ourselves opposed in a tender offer for United Fruit, I on behalf of Zapata, Gus representing the late Eli Black. father of Apollo's Leon Black. In those days, the NYSE had a rule that firms (in this instance Lehman and GS) acting as dealer-managers in a tender could only accept "unsolicited orders" in the shares of the target company (United Fruit.) In other words, you couldn't just go out and round up the target shares, you were supposed to wait for thm to come to you. I was in my office one day when it was reported to me that GS had just crossed (had both sides of a buy-sell order) what looked like half the common stock of United Fruit. I called Gus. "Congratulations," I said, "that has to be the goddamdest unsolicited order ever." "well, Mike," Gus drawled in that syrupy Confederate way of his, "you know how these things are."
Well, if I hadn't before, I did now. But I've always wondered about the ethic of playing fast and loose with the rules of an organization you're the chair of. In 1929, Albert Wiggin, President of Chase, was shorting his bank's stock even as he was offering bland public assurances that all was well. Nothing changes.
What needs explaining to me is the rapidity with which GS has returned to fat profitability. Last all, it was theoretically on the ropes. Today, it's practically back to the level of profit it enjoyed back before anyone knew how to spell "subprime"(I exaggerate, for historical purposes, but readers will know what I mean.) That was a mere 9-10 months ago. Logic suggests that GS was in nowhere as desperate shape as was represented. Between the time Buffett made his deal and March, 2009, GS stock went from around $100 to around $50, even as TARP funds had been aded to Buffett's and Goldman was at the government trough, snout buried in virtually free taxpayer money. Its trading computers were whirring ceaseless and its competition had been decimated. Even though it was now a bank , it had no depositors, in the conventional sense, to look out for.
Great big firms simply don't turn around on a dime. One can only assume that GS was in nowhere as bad shape it let the bailout boys believe.
Monday, July 27, 2009
See here why I'm thrilled.
So, if Bernanke held nose then, why not apply Kleenex now: windfal/excess profits tax - proposed by me months ago in a col?
Listening to WNYC's Brian Lehrer, a true genius of an interviewer - but maestro of a show that, 9 times in 10, ought to be called "The Usual Suspects."
Finally finally finally!
For months I have been railing, in NYO and on Forbes.com, that Wall Street was turning a fat profit on the taxpayers' dollar thanks to the subsidies and guarantees made available at the Fed and FDIC. Now, at long long last, the mainstream media has picked up on the greatest bailout scandal of all. An excellent piece by Mark Gangloff in today's WSJ lays it out. You can read it here. The "lede" and "sublede" say it all:
Thanks to tax losses, that $24 BILLION! goes straight to the bottom line of GS and other deserving sorts. That's where the profits on which bonuses are based are coming from. It is - to repeat myself - the greatest scandal of the bailout, among the greatest scandals in history. In his grave, Jay Gould must be whirling with envy. Who knew it could be so easy?
Since that post, I've been pondering the matter, and it strikes me that there may have been another factor at work, which simple fairness insists on putting on the table. The Pecora hearings were a ind of "show trial," a relatively benign ancestor of the proceedings that would begin three years later in Moscow. The great names of Wall Street - of which GS was then not quite yet one - were hauled into a Senate hearing chamber and publicly pilloried, mainly by their own testimony.
At the same time, however, across the Atlantic, the Nazis had come to power. FDR had always been sensitive to Jewish concerns (see Arthur Hertzberg, The Jews in America, 1989) and these feelings, possibly coupled with advice from the likes of Felix Frankurter, with whom FDR was still on good terms, may have convinced him that to put an upstart Jewish firm on public trial, as it were, could be combustible. After all, this was a time when people like Father Charles Coughlin, a spewer of radio-borne ethnic and religious hatred, were getting up to speed.
Anyway, it's an interesting, happily minor historical puzzle.
Pecora's book has long been out of print, but it makes for fascinating reading; one can only wish that someone in Washington or the New York Fed had taken down a copy in, say, 2006. What I find so interesting about Pecora is that his investigation found exactly the same kind of causal abuses figuring in the runup to 1929 that analysts have been connected to the Credit Crash of 2008: leveraged and pyramided securities too complex to be understood, massive amounts of credit for investment, the system twisted inside out and so on and so on.
I think this is what Santayana had in mind when he spoke of the lesson of history. As far as present action is concerned, we tend to think of the uses of history in terms of outcomes rather than causes. The latter is what we get into after the fact, among the ruins. What Pecora seems to show is that certain behaviors - behaviors that need to be understood psychologically and pragmatically, in a way that no trading/investment algorithm can ever capture - are going to produce a crash. That when these behaviors manifest themselves in markets, they need to be put a stop to - or else there is going to be a convulsion.
In 2009, Wall Street is behaving the way it did in 1930: the worst is over, business is getting back to normal, time to buy stocks again and away we go. I missed this rally, which pains my brain almost as much as, among other vital organs, it pains my wallet. Still, I cannot suppress the conviction that the only one true constant in history is human nature, and that generations alternate in a cycle of remembrance and forgetting, and that we have a way to go yet before this drama is played out.
And now I think I'll go ponder the fact that Warren Buffett has earned approximately twice the return on his bailout investment in GS as Washington has on behalf of the taxpayers' bailout investment of multiples of billions more. Which is why I have taken to calling the Wall Street Rescue of 2008-09 "the Great Geithner Giveaway."
Sunday, July 26, 2009
the complete editorial freedom of this blog is appealing, although I may from time to time revert to those or other venues with a link here. I am also frankly tired of seeing stuff I write about crop up in some more famous column or from a bullier pulpit three or four weeks later, with no idea whether it was my thinking that struck the spark in a particular writer.
This blog will not be about me, or what I am up to. It will be about what I think, about what I like and dislike about the way we live now. I may write about books, food, the media, golf, music, Wall Street, manners, the writer's trade, Brooklyn, local politics, the Hamptons and other subjects that deeply interest me and that I think I have earned some small right - thanks to experience, research, observation and reflection - to discuss.
You might want to bookmark this space.