Greed and Deception on Wall Street

[Originally published on February 6, 2009]

For the last several months, the sordid tales of greed and deception issuing from Wall Street have read like the story line from a riveting suspense thriller. But the most recent tales are so unbelievably gruesome that they resemble the story line from a documentary about Jeffrey Dahmer or John Wayne Gacy…or some other serial killer.

Each subsequent act is more grisly and disturbing than the one before it. Your editors are now afraid to open their Wall Street Journals at night, even with the doors locked and all the lights on.

The horrifying truth, dear investor, is that very few prison cells in America contain more psychopathy — pound for pound — than Wall Street’s corner offices and board rooms.

Late last week, for example, we learned that AIG, Citigroup and several other struggling financial institutions duped the US government out of billions of dollars, even as the government was in the process of tossing out lifelines to them. Yes, this story is revolting, but true.

The US Treasury overpaid by about $78 billion for toxic assets from American banks, according to a report from the Congressional Oversight Panel. “The report showed,” a Reuters news story reveals, “that the Treasury got the worst [of its many bad deals] on second-round investments in American International Group for $40 billion and Citigroup for $20 billion under special aid programs tailored for the two institutions.

“For each $100 spent on these two companies,” says Reuters, “the Treasury received securities worth $41.” In other words, for those readers who do not have an abacus handy, taxpayers lost $35.4 billion dollars the second they drove their toxic securities off the lot at AIG and Citigroup.

This is a very odd expression of gratitude — kind of like a drowning swimmer who, after being rescued from certain death, thanks the lifeguard by stealing his car.

Who do you suppose would have known best about the true value of the securities the government purchased from AIG? The government employees who purchased them or the sellers at AIG? We’ll go out on a limb here and guess that the folks at AIG knew better.

So if the sellers had an inkling that the assets were worth far less than the government was paying paid, didn’t the sellers also have an obligation to divulge that information to the government — the party that was saving them from their own recklessness and stupidity? This is not a trick question. Yes, is the answer.

But since the sellers at AIG did not divulge accurate values to the buyers at the government, didn’t the sellers commit a kind of fraud? And if they did, don’t they deserve a kind of prison sentence?

But let’s not rush to judgment. If AIG executives legitimately had no idea that the prices the government paid for their securities was light-years away from real-world prices, then they are not guilty of fraud. But if they are not guilty of fraud, they are nevertheless guilty of extreme incompetence…again.

Criminal or moron. It’s one or the other. Either way, they deserve dismissal.

The chilling storyline that is unfolding from Wall Street’s corner offices prompts an obvious question that never seems to produce the obvious answer? Why do the corrupt and/or inept individuals who were the architects of the current financial crisis remain in positions of well-compensated power? Why, in other words, do we taxpayers continue to throw good money after bad? And why does the government conduct bailouts from the top of America’s financial pyramid, where the perpetrators of the crisis reside, rather than from the bottom of the pyramid, where the victims reside?

Seems like that would have been a better way to squander taxpayer dollars.

Your editors understand the rationale for dispensing trillions of dollars to failing financial institutions rather than, say, failing individual homeowners. But we emphatically reject it. The government has managed to dispense trillions of dollars of bailouts and guarantees without producing any palpable benefit for the economy at large. Despite the deluge of bailouts and guarantees that has rained down upon American financial institutions, the economy continues to atrophy and the finance sector remains comatose. So why continue the ruse? Why not squander taxpayer money to help families stay in their homes, rather than help psychopaths stay in their Armani suits?

An alarming report by Mark Pittman and Bob Ivry of Bloomberg News emphasizes the point. “The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed,” the Bloomberg duo reveal… These enormous pledges, Pittman and Ivry point out, would almost be enough to “pay off every home mortgage loan in the US, calculated at $10.5 trillion by the Federal Reserve.”

But lest you think we are kicking America’s corporate chieftains while they are down — or as close to down as we have seen them in a long time, which is actually not very down at all — we would remind you that your editors also kicked the corporate chieftains (often) while they were riding high.

Nearly four years ago, we remarked:

“A corporate culture of well-mannered avarice restrains the mighty American economy. Many public companies labor under a Soviet-style central planning — the sort of planning that arranges things very nicely for the planners themselves, but much less well for the proletariat…

“‘In 2003, the ratio between CEO Pay and worker pay reached 301 to 1, up from 282 to 1 in 2002’ according to a report from United for a Fair Economy. ‘If the minimum wage had increased as quickly as CEO pay has since 1990, it would today be $15.76 per hour, rather than the current $5.15 per hour.’ [Editor’s update: United for a Fair Economy now reports that CEO pay has soared to 343 times that of hourly workers.]

“‘By any standard, many of today’s executive compensation packages are excessive,’ BusinessWeek asserts. ‘Too often, directors have awarded compensation packages that go well beyond what is required to attract and retain executives and have rewarded even poorly performing CEOs… Moreover, a poorly designed executive compensation package can reward decisions that are not in the long-term interests of a company, its shareholders and employees.’”

Shortly after airing these remarks, we followed up with a column entitled “Pinstriped Psychopaths.” Regrettably, the observations within that column proved to be much more prescient and relevant than we could have ever imagined. In short, it pays to learn a little bit about the guys who are overseeing your capital…and to avoid the bad ones.

Eric Fry
for The Daily Reckoning