first majestic silver

Bailouts, Regulations and Re-Regulation

September 18, 2008


The most common and most difficult problem is to not confuse Cause and Effect because in so doing, we can never uncover the real underlying problem. Unless we can get to the heart of the matter and uncover the REAL problem, we will continuously get caught up in a vicious circle of regulating Effects instead of the Real problem and in so doing, we end up in a slew of unintended consequences as we get more and more mired in a mass of Socialist (feel good) regulation which is, by its very essence, designed to fail.

A.I.G, Lehman, Fannie, Freddie etc. - WHY DID THEY FAIL?

Unless and until you can answer this question properly, it is impossible to come up with any decent new regulations. Hindsight is 100% you say? Well, that is just not so. When you don’t know what to look for and you confuse cause and effect, there is no way you can create decent, effective regulations. In this case it seems that the primary objective is to place blame and punish someone; the shareholders (who are the only ones that are completely blameless) while allowing the big-wigs to slither off into the night with their giant severance packages and past unearned bonuses, only to resurface again in a few years.


The real problem is the incestuous (non-sexual) relationships between Congress, Wall Street, Washington and Wall Street Lawyers and their appointed regulators: All of whom are “frat buddies” out of the country’s premier Ivy League Schools and all steeped in Keynesian and Galbraithian economic theory and principles. I just finished listening to Barney Frank who couldn’t wait to politicize the issue while performing his Massachusetts Two Step, second only to the Texas Two Step as he called for more regulation pointing to the Insurance Industry as an example. I guess he didn’t realize that the Insurance industry is regulated by the States and not the Federal Government.

Did any of you notice that he mentioned a sort of Resolution Trust Corp. as a potential solution, but could not answer any questions as to how it would work. Instead he side stepped into it by saying it was the responsibility of the next Congress. Does he not think that he will still be the head in the next Congress? Perhaps he may have read my last letter where I suggested an RTC solution, but purposely did not go into too much detail.

NOTE: Congress makes all the Laws that everyone has to follow except of course Congress itself. They have exempted themselves from all laws that the rest of us must follow including the one about lying under oath, which of course they never do - take an oath that is! Can you just imagine if somehow a Law got passed that anytime a Congressman spoke in public it would be that same as if he was under oath? Can’t Happen, besides our Jails are already overcrowded.


It’s time to stop with the generalities and become more specific. The 1933-34 Act came about as a result of the 1929-32 Stock Market Crash. Somehow they got it right and it worked for more than 50 years. Eventually Congress succumbed to Wall Street pressure, backed by 100’s of millions of political contributions, and decided to gut the Act and eliminate its best and most important provisions, especially Glass Stegale.

What exactly was there about Glass Stegale that was so important? GLASS STEAGLE prohibited the merging either directly or through holding companies of Investment Banking Companies, Banks, Insurance and Mortgage Companies. When it came to mortgages, the Savings and Loan Industry was created to provide low cost mortgages. However, they could not engage in other banking business other than accepting deposits and they were given the right to pay higher interest rates than could the commercial banks.


Everything worked precisely as planned until the 1980’s. As inflation and nterest rates took off, investors could now get a higher return by buying Treasury Bonds than what the Savings and Loans were allowed to pay. However, the minimum Treasury Bond was $10,000, precluding the small saver from getting the higher rates. That became a political football and without thinking through all of the unintended consequences, the Usury laws were abolished. Without going in to too much detail, the Savings and Loan crisis was soon upon us for the same reasons as today. They were caught holding long term, low interest mortgages that they were funding with short term deposits and borrowings and their fate was sealed. Naturally, Congress (the real people at fault) soon found a number of scapegoats (like Keating) to be the RED HERRINGS so that no one would even look for the real problem and those responsible, congress. By not learning from our mistakes we were setting the stage for the problems that we are facing today.


Not being an Ivy League Graduate and therefore not an insider, I cannot tell you how long and hard Wall Street, their lawyers and their bought and paid for Congressmen worked in completing the gutting of Glass Stegale. Once the dam was broken the rest was easy -taking less than 10 years to open the flood gates to all the mergers and acquisitions that the ACT was designed to prevent (lessons learned form 1929). Today’s problems became inevitable.


He saw some of the problems, so he took on Wall Street but unfortunately, he was more interested in becoming Governor on his planned path to the Presidency. He collected a few $billion that was paid by the shareholders while senior management remained untouched as a couple of highly paid analysts were sacrificed (while being well paid to keep quiet). However, he did manage to establish a Chinese Wall between Research, Underwriting and the Retail Broker, all of which was nothing more than a sham. A Big Joke, but who’s laughing?


(The Good)

Believe it or not, sometimes the unintended consequences turn out to be good for all concerned. When I started my brokerage career, commissions were as high as $0.80 /share, with no right to negotiate regardless of the size of transactions. Volume on the NYSE was under a million shares a day. We used to have a pool every week as to who would get the first order of the week. Then along came Spitzer and others before him who dragged Wall Street kicking and screaming (small Stock Brokers, Mutual Funds and Insurance Companies who had more political clout than Wall Street) into negotiated rates that dropped trading costs drastically and volume exploded. Spitzer then forced Wall Street to narrow the spreads and eliminated ¼ point quotes droping them down to as low as I penny.. As any good economist can tell you, lower the cost of doing business and business will explode, which is exactly what happened.

(The Bad) You Ain’t Seen Nothing Yet!

If the whole world’s financial system and especially our own were not all cross collateralized, we would not be experiencing the problems we are having today!

Once Glass Stegale was shattered, the mergers began and with it came cross collateralizations. Banks merged with Brokers, Brokers merged with Insurance Companies (1st one was Prudential and Bache), Mortgage Companies with Banks and Brokers and all kinds of permutations and combinations. The end result was a bunch of dealmakers heading up these companies who were only interested in their options and their stock prices. They cared very little and understood even less as to how to run their new, highly complex, worldwide conglomerates. Risk Management, what’s the problem? You just package it, pay the rating agencies (another Sham) to give it a AAA rating a sell it off to someone else. Eventually, they got to believe their own B.S. and started buying their own JUNK. When it came to AIG, Spitzer got rid of the one man, who over a 35 years, had built his company from the ground up for strictly political reasons. Take notice that Greenberg has never been charged and although he is by far the largest single shareholder, he was barred without any hearings by the SEC from holding office in any public company. Had Greenberg still been in charge of A.I.G., I am convinced no FED bailout would have been needed.

This is not something new. Martha Stewart and her friend, the president of the company that discovered the single best anti-cancer drug and which was just bought out at $70/share, both went to jail because they were high profile scapegoats and along with Koslowski and Ken Lay, acted as red herrings so as to keep the focus off Congress and placate the public.


It was a lack of enforcement and the cancellation of existing regulation that was at fault. All of which was due to the incestuous relationships between the Regulators and the Regulated. Who are Rubin, Paulson, Greenspan and Bernanke - if not good old boy, Ivy League “frat buddies”. Do you really expect them to turn against their friends and their own previous companies in which they hold tons of options? How could any Government Over-Sight Committee and their Regulators that report to them, have allowed a completely unregulated Derivatives Market to expand into the 100’s of $ trillions without a single bit of regulation or oversight? And now they wonder what happened? As Derivatives began to expand at an exponential rate and when even I could not fully comprehend what was going on, I began to warn about the potential danger when that market was only approaching $ 1 trillion and still had the potential to .either be managed regulated or stopped.


How many people even know what they really are or how they work? It is obvious from listening to the financial media that no one I have ever seen on TV does. What is even more frightening is watching a bunch of journalists who do not have a clue about C.D.S’s. talking and attempting to influence policy, when they do not have enough knowledge to ask intelligent questions from guests who might be able to give them answers. It was the Derivatives that allowed for the Carry Trade to expand exponentially and it was the Carry Trade that allowed the US to keep interest rates low and continue to spend like drunken sailors (I apologize to all sailors – at least they were all spending their own money). The name of the game has always been buying votes and raising political contributions. How else can a person earning $35,000 per year come to Washington be worth $104 million after only 8 years in office?

THE DECADES OF THE 1920’s VS 2000’s

The similarity between the 1920’s and today is downright uncanny and terrifying. Will the 2010’s be the same as the 1930’s? HISTORY REPEATS. The question is will we ever learn? 1928 saw a Republican Hoover, a Socialist, become president who then instituted in 1929 what President Harding refused to allow him to do in 1919 when Hoover was Secretary of Commerce. The Depression of 1919-1920 lasted only a little over 18 months even though the initial drop was sharper than in 1929, that Depression never suffered the massive unemployment of the 1930’s for the simple reason that wages were allowed to fall along with the prices of all other goods. However in 1929, it was Hoover who started the New Deal and when the Republicans naturally lost in 1932, FDR took over and greatly expanded the New Deal which included strengthening the unions, cartelizing companies, passing laws forcing companies to maintain prices, disallowing discounting, burning crops and pouring milk into the streets in an attempt to maintain farm prices. He confused cause and effect. He thought since LOW prices and Depressions went hand in hand, if he could maintain prices, he could avoid Depression. The rest is History.

Today, we have a Democratic controlled Congress who are already writing bills to strengthen the Unions by eliminating the secret ballot and canceling the NAFTA free trade agreements. They have already killed the 7 years of Trade negotiations and are blocking trade agreements with our South American allies.

McCain is socialist, just like Hoover was, so it does not really matter who becomes president. If McCain wins, it will be an exact replay of 1928. Depression is already backed into the cake.

OUR ONLY POTENTIAL SALVATION IS SARAH PALIN: How good is she really? After all, Alaska is just a wee bit smaller than the USA and how much influence will she have over McCain should they win the election? More importantly, can they also win back control of the Senate? Without both things happening (winning control of the Senate and McCain listening to Palin), it will be an exact replay of the 1930’s. WILL WE EVER LEARN?


While watching TV this evening, I noticed that both Kudlow and Cramer mentioned an RTC type solution as a possible way out of our current real estate and financial crisis. Was it just a coincidence that an RTC type solution was part of my focus in my last two letters or is it possible that they have been reading my stuff on one of the many websites that publish my musings?


Don’t you think it’s about time you all subscribed to my letter UNCOMMON COMMON SENSE and got the straight talk two weeks before everyone else reads it? GET OUT OF DEBT, BUY GOLD AND WEAR DIAMONDS !


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Aubie Baltin CFA, CTA, CFP, PhD.

2078 Bonisle Circle

Palm Beach Gardens FL. 33418

[email protected]


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