“The relaxation of investment bankers’ standards in the late 1920s, and their use of ingenious means to enlarge their compensation, had unwholesome repercussions in the field of corporate management. But it may not be denied that devious and questionable means were frequently employed to secure these large bonuses to the management without full disclosure of their extent to the stockholders.”
The sound investment philosophy behind Security Analysis followed assiduously by the old Oracle of Omaha and tens of thousands of investors who came before him was established as a reaction to the corrupt practices of the Roaring Twenties. Here we are again, lo these many decades later, none the wiser. Taxpayers have been picked up by the ankles and shaken furiously for any remaining change, having been duped by the same Wall Street con artists who employed “devious and questionable means” as described above. Only this time, less than a century later, the bankers weren’t doing swan dives out their windows because they did learn one invaluable lesson from the past: If you’re going to bilk the system, make sure when it all goes bad that you control the release valve on the money flow by installing bankers inside the tank.
While most of America didn’t know what was going on behind the scenes of the recent financial crisis, people like Buffet sure did. Though no longer the wealthiest person in the world (he’s the third), Buffet has maintained his reputation as the preeminent investor on the planet for quite some time in a folksy and unassuming way. He’s the Wilford Brimley of investing, giving us a wink and telling us to eat our oatmeal and buy IBM. But his $5 billion bailout (what else can you call it?) of Goldman Sucks in 2008 shows that the old codger knows a good bet when he sees one, even if the company is rolling with loaded dice. (He got his money back, with a handsome interest payment, and retained warrants on $5 billion more of Goldman stock at what looks to be a favorable strike price.) From a bird’s-eye view, here was the con in a nutshell: Goldman CEO Lloyd Blankfein and company fleece the government for gobs of free money during the bailout—with people like Buffet backstopping their liquidity—to buy up the shitty investment packages they created, sold to their investors, and then bet against themselves.
That part is history. The ensuing game of smoke and mirrors—to restore sanity and transparency into the shit show they created—was to get the government to pony up billions more for their coffers at no cost (and no risk) so they could “invest” this money back into the economy.
Only it never went back into the real economy, instead weaving its way through the banking backchannels where free money flowed to investment banks, who gave it to hedge funds, who invested in government-backed securities, mega-corporations and, yes, even the same kooky “off-balance sheet” investments like swaps and derivatives being traded on offshore exchanges none of us can track. If you failed to spot the point where it actually came back to the taxpayers or funneled through the economy, you’re not crazy because it never happened.
Buffet may have built the most successful investment enterprise in history with Berkshire Hathaway by following the sound advice of people like Graham and Dodd, but it probably didn’t hurt to know that out of all the players in the multiple-bailout fiascos beginning in 2008, Goldman Sucks would wind up on top since nearly everyone involved in engineering the bailouts were former Goldman Suckers or beholden to them. Now we’re stuck in a bizarre carnival mirror economy with high unemployment, low consumer confidence, dwindling savings, and a global debt crisis while we’re being told at the same time the country is in a recovery, Wall Street firms and major corporations are posting incredible profits and the Dow Jones Industrial Average is trading above 12,000. Quite the disconnect, indeed.
It’s called a bubble, and it’s the last one left.
When I asked my friend Peter Klein, a financial advisor on Long Island, how he would characterize our current situation, he referred to it as “the stimulus bubble.” Now the question isn’t whether the bubble will pop, but when. And it’s people like Lloyd Blankfein that are holding the pin. But like every bubble, the average person never fully realizes when he or she is floating inside of it, particularly when receiving mixed messages like the ones above. But of all the opiate-like recovery indicators, it’s the Dow Jones Industrial Average that offers the greatest high when injected into the American psyche and, in this case, keeps the bubble inflated. As average citizens we tend to look at the Dow as the answer to the eternal Ed Koch question: “How am I doing?” Every top-of-the-hour market report on radio and television begins with a Wall Street update tethered to the performance of this antiquated measure of economic health.
For his part, Peter takes little comfort in the Dow’s astounding recovery from its low of around 6,600 in 2009, preferring to monitor indices such as the S&P 500 or the Russell 2000, which have a wider breadth and reach. The Dow, after all, is only comprised of 30 companies with familiar names like Coca-Cola, WalMart and General Electric, which give the illusion that these are somehow the type of corporations our economy is based on. It’s not that these are bad companies or even that the Dow is a lousy index, it’s just that they’re no longer relevant in today’s economy as an indicator of performance. Furthermore, it doesn’t claim to be. The problem is that the Dow is financial pabulum being fed to us by the media and Wall Street alike.
Because the Dow has traditionally been the criterion by which the average person gauges America’s overall economic health, there is a tendency to believe in its healing power. And to an extent it does make a little sense. After all, stocks don’t invest in themselves, right? The money has to come from somewhere. So, if the trading volume is still high, and our major corporations are swimming in investment cash, the logical question is: “Where is the money coming from?” When I asked Peter about this, he didn’t hesitate to respond: “Hedge funds are more or less controlling daily market flows.”
This is an astounding revelation, considering hedge funds didn’t even exist 20 years ago. But today, they are the henchmen that front the investment bank cartel because unlike mutual funds that dominated institutional trading before the rise of the hedge fund, these funds can be leveraged. So not only have the investment banks like Goldman seeded these funds with investment money, they provided them with tremendous loans comprised of…you guessed it… taxpayer money. All it takes is a little reverse engineering and logic to figure out why the Dow is still riding the wave while most Americans are out to sea believing a life raft is coming at any moment. Essentially, we’ve been had, because the only safe harbor is what writer Matt Taibbi sublimely refers to as the Grifter Archipelago—islands of entities teeming with corporate raiders accountable to no one and in control of everyone. It’s a beautiful thing, really, if you’re one of them.