Too Big to Fail

The Glass-Steagall Act had been around under the Banking Act of 1934 until it was terminated during the Clinton administration. It separated regular banking activity from investment banking.

A similar law can probably be passed, without all the talk that casts gloom over industry and finance and sees to it that we remain in a deep recessionary funk longer than we ought.

Problem: It is easier to talk about, than legislate the separation of investment banking and ordinary banking, once the two have been so connected for years.

The question of proprietary trading arises. Both regular and investment banks execute such trades, ordinary banks to a lesser extent. Moreover, such trading generally represents a very small, insignificant amount of activity and income.

Furthermore, the definition of what is a proprietary or “prop” trade is hard to delineate.

The result we get, with all our populist politicians, and, it now appears, the Number One Populist in the White House, we have bombast, finger-pointing, and economic panic and damage.

We will probably wind up with a new version of old Glass-Steagall, named in honor of the politicians who introduce it.

The AIG Debacle

I have recently reported on human error as being instrumental in the financial meltdown and various bubbles that we have had.

In each case, there has been finger-pointing, usually by left-leaning, anti-business politicians and by bureaucrats whose immediate impulse is to blame big business, bankers; the usual scapegoats. That is the litany of criminalization in left-wing lexicon.

I have always blamed human error. Whether it be loose monetary policy of the Federal Reserve, in inflating currency, or inappropriate accounting rules for a securities market situation, to hasten the ruin of investment liquidity.

In the case of AIG, the value of its derivative insurance coverage was also being determined on the basis of fictitious existing market value. This time, not on possible claims in the future, at the maturing of company obligations, but at supposed current valuations.

That produced a condition that induced a premature bankruptcy, in a panic venue. Yet, once more a rush to judgment when cool heads and hands ought to have been the hallmarks of expertise.

Another incidence of rescuers acting in the AIG panic was evidenced by the rescuer’s paying of debts on the basis of 100 cents on the dollar to some bankers in this country and abroad. Especially after the government unfortunately decided to take over 79.9% of the business in its panic-driven haste.

Would not a government guarantee have sufficed, instead of all this taxpayer outlay?

Bankers, Ball Players and Bonuses

Do bankers make too much money?

They may if they earn commissions and options of hundreds of millions a year. But they do work at a job that takes years to perfect, a task that many cannot adequately handle.

Do baseball players earn too much money?

They certainly do, if they earn up to $30 million a year for playing a kid’s game. And which many sandlot amateurs do for nothing, but just a little less efficiently. The real difference in their ball-hitting capability is not learned but in their eyes to see the ball.

Do gymnasts deserve more than they earn?

They get practically no income despite all the incurred pain, and years of training and practice, and the need to overcome initial physical fear.

I have had personal experience with all three working practices, and for the life of me, it is difficult to see how bureaucrats and politicos in Washington are so ready to damn many hard-working bankers as a group for making “too much” money while other genuinely overpaid groups are left to make their fortunes politically undisturbed.

By the way, a high-priced TV star still gets a fancy bonus for leaving a job from a giant broadcaster, whose parent company is getting Uncle Sam’s bailout money. And ballplayers are indirectly being financed by bailout funds of their bosses’ subsidized ballparks.

How Much Will Your Portfolio Earn in The Future?

I find a major disconnect among investors on Main Street and Wall Street about what they expect to earn from their securities portfolio over the next ten, twenty, even fifty years, after tax and inflation.

Admittedly, that is a tough prediction because investors must take income taxes and inflation into account, along with projected securities’ yield and market returns. None of that is simple.

In one survey I noted net/net/net predicted return by a number of experts over the next fifty years. Interestingly, returns ranged only between 2% and 3% annually.

That is unusual and shocking to many. Investors’ experience from the past would have had expectations to be close to about 6%.

In other words, many securities markets observers believe that potential, along with taxation and inflation bites, will impair future market returns.

There is a possible solution to this quandary. Most investors who look ahead many years, some as much as fifty, tend to overlook it. It concerns the use of the corporate bond market and proper implementation of duration, to suit the investor’s personal horizon.

Corporate bonds can help overcome inflation and the dearth of income and potentially limited growth from stocks. Estimated earnings can well be at least 6% on a net, net, net basis, PROVIDED, strategy is wisely used.

I have broadly commented elsewhere on the subject. But be sure you invest in a low-cost bond mutual fund where interest earned is automatically reinvested in shares of the same fund each month.

Picking Stocks Like an Owner

Further to my recent report on buying securities on Wall Street:

I have found and investigated over 1,500 investment strategies.There are scores that an average investor can use, in which he or she can imagine buying as if they would their own business.

As such, the investor can take the same attitude as any owner would. The strategy can revolve around what an owner wants the company to accomplish. Everyday prices and values never enter business consideration. Not while the business is on a growth path.

As for the short-term, quick-buyers and sellers, most are trading company names.They really have no clue about what the business is, that they are buying and selling. Most of the financial reports they see are little more than hearsay and gossip from Wall Street pundits looking over each others’ shoulders.

And always remember, the clunker stock you are selling is usually considered a diamond-in-the-rough by the buyer.

Trying to Pick Stock Winners

It is harder to pick stock winners than you may think from reading some of the financial media. Yes, everyone believes they can, but after all the effort, how many Googles do they really find?

You hear about the big stock winners but how many of those potential lottery winners are available? Most importantly, how many are recognizable early on? It’s always easy to find those who did, well after the fact.

Furthermore, when you look at these relatively small numbers, you find that they had their periods of struggle. The profit numbers look excellent only after years of market wear and tear. How many investors had the stomach to buy those stocks at their lows and to hold on to them to their highs?

None of the successful securities had gone up in a straight line. Most hit bad cycles when most of the original holders lost faith, deserted ship and sold.

Market psychology is always a serious factor that dictates the lack of discipline in investors. Most take what profits they see on the way up, and run. So the odds of achieving huge winnings are even steeper.

And besides, it is almost impossible for an outside observer to properly evaluate management. Analysts who make it their profession cannot evaluate managers wisely or adeptly from the outside. Why believe the public can?

Therefore I have found the odds of this sweepstake are too steep in the long run, and suggest investing in low-cost index funds as your best bet.

Bashing Wall Street or Using Wall Street Wisely

There has been too much Wall Street bashing from left-leaning politicians, as well as the like-minded media.

I would, therefore, further explain criticism I have directed in the past at some in Wall Street who may have contributed to government=enhanced actions that helped foment financial panic.

I always have made this distinction about Wall Street: It’s both an investment and also a constant-trading medium.

Both are essential. But trading aspects can go to extremes. When extreme actions occur, there can be potential danger. It is thus essential that the public understand how Wall Street operates.

One: The knowledge opens the public’s eyes to the left-leaning politician’s Wall Street-baiting.

Two: The explanation lets individuals know how to be better investors.

I have found from experience that the average investor does well by avoiding trading extremes. That’s possible by sticking to a disciplined, favorite strategy and then forgetting daily market prices. You don’t need constant financial news, unless your investment strategy calls for it. Relatively few strategies do.

Short-term, in-and-out, frenzied trading by the pros is what causes financial meltdowns. It is the segment of Wall Street that I avoid. Stick to the good medium that Wall Street can offer individuals and institutional investors.

And avoid the siren song of Wall Street bashing from left-leaning politicians and the equally ignorant like-minded media.