Meredith Whitney and Nuclear Winter for Us All

Image Courtesy of CNBC

Yikes! Meredith Whitney's report on CNBC is a draconian spin on current events if I ever heard one! Head for the hills!! (Of Utah as Meredith has done...)

In my opinion the only thing to fear at this point is fear itself.

I smell an agenda in between the lines of Meredith's report. She is now a private investment consultant. She doesn't hold positions in stocks, but she advises her clients and profits to some extent by how successful they are, and so she indirectly holds the positions they hold, but doesn't have to report that.

What is she advising them to do? Who is she working for now? These are interesting questions, because her words carry a lot of weight on Wall St. Is she talking down the financials so her clients can take more favorable positions? Is she under contract with the banking industry and lobbying against financial regulation? Either scenario is plausible. A third scenario is that we are headed for a double-dip recession, which will make this period equal to or worse than the Great Depression.

I refuse to believe the third hypothesis. I see Americans staying busy at all costs, even if it means heading back to learn a new skill. I feel that we, as Americans, are universally sympathetic and empathetic to our common plight and are not headed down the self-destructive road of infighting and recrimination.

I believe that we will use recent events, such as the collapse of Lehman Brothers and the Gulf Oil Disaster, to innovate and invigorate our economy in new and exciting directions. I believe that our central bank will ward off deflation by inflating the M1 money supply and will protect the bottom line of the money center banks by keeping the Fed Funds rate as close to zero as possible.

I believe that the European response to the credit crisis (fiscal restraint and budget cuts) spells a nuclear winter for Europe and a disaster for the European banks. And, weakness in Europe spells a slow-down for China, and continued demand for U.S. Treasuries as China fights to keep the renimbi weak.

At the end of the week, all this is good news for the United States and U.S. financial institutions.

I disagree with Meredith about the impact of U.S. Senate banking regulation. The regulations are populist in nature, but they are common-sense and operate at the margins in any event. If a particular state limits interest rates below the market and its residents can't get credit, then the limits will rise or people will move. This is not bad, but good. To charge less for debit card transactions is also common sense. To regulate merchant fees against an oligopolistic servicing market is also common sense.

The road out of this crisis is for Americans to keep their spirits up, keep busy, and keep building things. If we continue to design, innovate and produce we will be just fine.

Just ridding ourselves of our dependence on fossil fuels is the work of a generation, and that work is really just getting under way in earnest. Let's use rallying points like these to launch ourselves into a saner future.

Ethical Conflict?

The U.S. Senate Banking Committee's cross-examination today of Lloyd Blankfein was remarkable in many regards.

The most significant regard, in my opinion, is the apparent naivete or populist anger expressed by the senators, especially Chairman Levin and echoed less forcefully by Senator McCain. The naivete lies in the fundamental misunderstanding of what a business like Goldman Sachs is all about.

First and foremost, Goldman trades for their own account and their own profitability, not the profitability of their clients, is and has always been their main priority and concern.

Secondarily to this objective, Goldman creates and markets a wide variety of investment vehicles, acts as a middleman in corporate mergers and acquisitions, acts as market makers in new issues of stock, and operates a financial advisory division to manage other people's wealth, amongst other functions.

The central tenet of Levin's complaint hinges on his outrage that one division of Goldman would actively sell a security that another division might be placing bets against. I find this to be populist and naive. Not all investments that Goldman sells will go up (Goldman often simultaneously sells securities that represent opposite bets on the same position) and it is the buyer's responsibility to know what they are investing in, and why.

Just like millions of Americans bought homes near the peak in real estate values in this country (over 48% of current home loans are now "underwater"), thinking that home values would continue to rise as they had done in dramatic fashion over the preceding period, many investors actively sought exposure to the U.S. real estate market by way of the mortgage-backed securities that Goldman marketed.

The question here is whether it is morally tenable for Goldman to continue to make a market for securities that they believe are overpriced against the wishes of their clients who still maintain an appetite for these securities. I do not believe that this is an untenable position to be in. While Goldman is smart, they are be no means omniscient or omnipotent. The securities that they continue to market because of market demand, and simultaneously bet against in their own house account, could very well go up and leave Goldman's customers with a profit and Goldman with a loss.

Therefore, while Goldman's behavior on the face of it appears slimy and they appear to have their client's blood on their hands since they made money while others (including some of their clients) lost, the fact is that Goldman Sachs is in business for Goldman shareholders first and foremost, and Goldman cannot maintain an effective trading strategy if they are continuously obligated to disclose the myriad positions they hold in their house account.

This gets back to the free market premise that our government supported when people were making money but has forgotten now that people have been hurt which is LET THE BUYER BEWARE!

Lloyd Blankfein Scam Artist?

And, yeah, even Gollum seems surprised.

Well... that seems to be the gist of the SEC allegations against Goldman Sachs and Mr. Blankfein, who led GS during the period in question.

However, I doubt the SEC case is that simple and don't think the SEC can convict.

The problem that the SEC is facing is that GS was not alone in packaging Alt-A with conventional mortgages into mortgage backed securities. Either the entire industry was in collusion, or it occurred to no one that a few bad apples might ruin the bushel.

And that is going to be their primary defense. "Yes, we packaged less qualified mortgages with more conventional mortgages, but at the time the vast majority of mortgages were non-conventional in some way or another, and we were acting in a competitive marketplace where we were compelled to offer a generalized product."

So, yes they knew but, as long as equity values continued to rise, bundling alt-a with conventional loans was a low-risk proposal.

I tend to believe that the SEC is on a fishing expedition with two objectives:

1) Extract a settlement from Goldman Sachs
2) Further distance the Obama Administration from the actors who are held most centrally responsible for the current economic crisis.

And, as far as these two objective are concerned, the SEC may achieve their goals.

I just don't think they have a case.