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The Biggest Lie

The Biggest Lie

The Left has made its case that the biggest lie of our time is that giving breaks to the rich will create more jobs for the rest of us.  While this lie has put a lot of our country’s hard earned dollars in a lot of undeserving pockets with no return to society, it is not the biggest lie, nor has it done the most damage.  The biggest and most damaging lie of our times is the oldest con in the world, dating back to ancient times.  The investment bankers who run Wall Street have told us they are the best and the brightest, that they graduated at the tops of their classes from the best schools in the world, that they command powerful scientific theories, that they can even predict the future.  Therefore we must let them do their magic unimpeded, we must let them take enormous shares of the deals they create, that as Masters of the Universe, they deserve to control the economy the rest of us live in.  I’m here to tell you, they are charlatans, no better that the witch doctors who commanded fear from primitive man.  They have garbed themselves in complexity and passed it off as superiority.  And by believing them, we have let them run not only this country’s, but the world’s economy into the ground.

First of all, they cannot predict the future.  They have models derived from mathematics that was originally used to describe such changeable systems as rockets in flight.  Yet, even the best stock pickers on Wall Street will always tell you that past performance is not a guarantee of future returns.  They wave their magic wand to impress us, yet they can’t perform the magic to our advantage.  In fact, Wall Street makes no money for being correct.  Brokers make a commission on trades.  They sucker people with money into making a trade based on the broker’s advice, and the broker makes his money on the trade, whether or not the investor makes any money of the investment.  And the investment bankers who demand a percentage of the billion dollar mergers they put together take their cut when the deal closes, whether or not the merger leads to success or failure.

So while they have convinced us that they can predict the future, and therefore we need them to broker our commerce, they do not tie their commissions to the success of any predictions.  This is the same as the ancient impresario who convinced the fearful masses that he could command the forces of nature.   Even in the face of failure, the wizard of old could stay in power by appearing to know magic, which set him apart and above the common man.  The modern day wizards of Wall Street have found an even more powerful tool than ancient man’s fear of the unknown to maintain their power: our own greed.  Our greedy desire to get a leg up on the market has led us to the charlatan’s doorstep.

If you have a problem that has complexities beyond your understanding, you hire a professional with the specialized knowledge that is needed.  Say fixing your car.  But if the car still doesn’t work when you get it out of the shop, you take it back and demand the job be done right.  So when you want to invest money, and you go to an investment advisor, and you pay him a percentage of your assets under management, you expect his expertise to make you money.  But when your portfolio loses money, the most you can do is fire the advisor and take what’s left of your portfolio elsewhere.  He keeps his fee even though he lost your money.

Same thing for the big money game of M&A.  In what other business on Earth can the investment of a few hundred man hours net a fee in the hundreds of millions of dollars?  Companies that don’t have the facility to do the due diligence and the legal drafting necessary to acquire companies hire investment bankers to do this legwork.  But part of their work is to recommend financing structures and integration strategies.  So the IBs don’t just crunch the numbers, they influence the shape of the deal.  It is this professional advice that allows them to cut themselves in on the deal and to take a fee based on the amount of money changing hands.  And what if the market hates the deal they put together, and the stock price doesn’t do what the parent company wanted?  The IB keeps their fee.  Sure their reputation takes a hit.  But they can tell future prospects the deal failed because of management’s execution, not their financial advice.  Even trial lawyers who take a percentage of a judgment or settlement as their fee have to first win their case before they get paid that percentage.  They risk their time and effort with a payday only if they win.  Wall Street takes no such risks, yet makes obscene amounts of money.

And most damaging of all, the same performance-free fees apply to the floating of debt vehicles.  Even government bond issues go through IBs hands.  During the housing bubble, the only reason banks were willing to sell houses to people who could not afford them was the availability of cheap money to lend.  These same wizards packaged high risk loan portfolios as high quality investments to keep the money flowing through the economy.  And they took their percentages of the deals, regardless of how those deals turned out.  The more they churned, the more they collected.  It was like printing money.  And like freely printing money, eventually the lack of real value caught up to the house of cards.  But the wizards had already made their billions.

The wizards of Wall Street have convinced us that we need them to buy and sell stocks, to build for our retirement, to buy our homes, to pay for our governments, and to acquire companies.  We need them so badly that we are willing to pay them percentages of the deals regardless of how bad the deals turn out to be.  Sounds an awful lot like the wizards of yesteryear, commanding respect from the perception of how badly they are needed.  But no witch doctor ever robbed his village into ruin and got away unscathed.  We eventually learned that we don’t need witch doctors to make the rain, or keep the rains away.  When are we going to learn that our modern day wizards have no real power either?

Categories: Politics
  1. Ron
    November 20, 2010 at 11:40 pm

    Jay, each one of your posts out does the last. Congratulations yet again on a superb entry that communicates its point well.

    More than ever, I think people are realizing that there is no more Magic to an eclipse, than there is savviness to investment success or the current economic model used by the Federal Reserve (a private bank) to run our country; it’s all smoke and mirrors. Anyone who doubts this need look no further than the Social Security system–a lie in and of itself. We have a so-called trust fund, that relies on government bonds for its security, but wait; doesn’t the same government that just refused to give the disabled and elderly a cost of living increase for the second year in a row, pay out more than it takes in? Do you see the enigma there? It borrows from itself to pay for a hamburger today, that won’t even be there Tuesday, when it asks to buy another, and roll the cost over again…maybe that’s a tortured analogy, but that’s how it works (Wimpy remains hungry regardless). I won’t get into how perverse I think that is, in the face of tax breaks for the richest top two percent of wealth owners in this country (who control 95% of the wealth here) and a bailout for corporations that engage in immoral and criminal financial practices, or a refusal to change health care to a single payer model.

    I think many have seen the light, but are just waking up to the reality of our system’s terminal illness–a perpetual debt creation system, that may very well implode.

  2. November 21, 2010 at 7:34 am

    Thank you for the kind words, Ron.

    Social Security is indeed a Ponzi scheme. But Congress won’t even give it a chance to work. Every year the federal government spends too much (like the last ten) it “borrows” billions from the SS fund. But when the gov’t pays it back over the next year, it never seems to be quite all of what was borrowed. And then it all gets borrowed back the next year anyway. It’s like paying your credit card bill, but then running up it back up to the max every month. Even with the massive unemployment we have, if Congress just paid back what it has borrowed from the fund, and left it paid back, the fund would remain self-sustaining for decades to come.

    You are right that SS is indicative of our borrowing society. Indeed, with money velocity being as high as it is (always being spent on something) we have become an economy of either borrowing money from someone else, or betting it (investing it) in someone else’s venture. No one saves money. And no one spends their own accumulated money on anything, because no one accumulates money anymore.

    The amount of money spent on debt service exceeded the amount of money spent on actual goods and services back in the 90s. Financial Services is now the largest sector of the world economy, bigger than agriculture, bigger than manufacturing. At some point mankind needs to realize it has allowed itself to be taken to the cleaners by the people it trusted to handle its finances.

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