We know the super-rich don’t care. Not about you. Nor the American public. They can’t see. Can’t hear. Stay trapped in their Forbes-400 bubble. An echo chamber that isolates them. They see the public as faceless workers, customers, taxpayers. See GOP power on the ascent. Reaganomics is back. Unions on the run. Clueless masses are easily manipulated. Even Obama is secretly working with the GOP, will never touch his super-rich donors. Yes, the “Super-Rich Delusion” is that powerful, infecting all America.

Here’s how one savvy insider who knows described this “Super-Rich Delusion:” “The top-1% live privileged lives, aren’t worried about much. Families vacation at the best resorts. Their big concerns are finding the best Pilates teacher, best masseuse, best surgeons, best private schools. They aren’t concerned with the underlying deterioration of America or the world, except in the abstract, because they aren’t directly affected by it. That’s not to say they aren’t sympathetic, aware, or don’t talk about the issues you bring up. They are largely concerned with protecting and enhancing their socio-economic positions, ensuring their families live well. And nothing you write about will change things.” Warning, in 2011 that attitude is delusional, deadly, yet pervasive in America.

“Super-Rich” replaying 1920′s “Great Gatsby” era …
won’t learn till too late
Yes, trapped in the “Super-Rich Delusion” our top-1% actually believe they’re immune, protected from the unintended consequences of beating down average Americans for three decades with the free-market, trickle-down Reaganomics doctrines that made them “Super-Rich.” They honestly believe those same doctrines will protect them in the next depression. Why? Because they have megabucks stashed away. Provisions for the long haul. Live in gated compounds. Mercenaries guarding them.

They believe they’ll continue living just fine in a depression. But you won’t. Nor will your retirement. Neither will the rest of America. And still the “Super-Rich” don’t care about the rest of America, “except in the abstract, because they aren’t directly affected.”

Warning: The “Super-Rich Delusion” has pushed us to the edge of a great precipice: Remember the Roaring Twenties? The Crash of 1929? Great Depression? Just days before the crash one leading economist, Irving Fisher, predicted that stocks had “reached what looks like a permanently high plateau.” Yes, he was trapped in the “Great Gatsby Syndrome,” an earlier version of today’s “Super-Rich Delusion.” It was so blinding in 1929 that the president, Wall Street, all America were sucked in … until the critical mass hit a mysterious flashpoint, triggering the crash.

read full column on MarketWatch

Strip away all the esoteric rhetoric about Modern Portfolio Theory, the Capital Asset Pricing Model, Efficient Market Hypothesis, and you’ll see that Peter Bernstein’s brilliant book, Capital Ideas Evolving, is the perfect combat training manual for these “Alpha-Hunters” in a war worth over $200 billion annually to Wall Street.

Twenty-three centuries ago, Sun-Tsu’s Art of War guided generals. Two centuries ago, it was Clausewitz’s On War. Today it’s Petraeus’ Counterinsurgency Field Manual. But if you’re an “Alpha-Hunter,” then you need Capital Ideas Evolving. It’s a perfect manual, building on Bernstein’s original 1992 Capital Ideas: The Improbable Origins of Modern Wall Street and his 1998 Against the Gods.

But for Main Street’s “Beta-Builders,” this is a dangerous book, a wake-up call about a very dangerous enemy. Every day the Alpha-Hunters go into battle, and you are their enemy in a cunning psychological battle that targets your mind; distracting, misleading, softening, disarming you. Alpha-Hunters want you defenseless, the better to control your behavior, get you acting against your best economic interests.

Know your enemy: This book has no defensive strategies to help you Beta-Builders protect yourselves against Alpha-Hunters. No, it was written for Wall Street’s “Alpha-Hunters” on the attack. But you’ll be better able to defend yourself knowing your enemy’s strategies and weapons. This book should be in your library. But be forewarned, reading it will drive you nuts.

Brilliant, sophisticated, best about alpha-hunting quants!

Check the back cover: The lead endorser, Jack Bogle, says it’s “eminently readable.” Plus the second endorser is popular Wall Street Journal columnist Jason Zweig. So you’d assume it’s the perfect book for Main Street investors. Right? Wrong: Before you buy Bernstein’s book based praise from two guys popular with the masses, remember, it’s written for Wall Street insiders, hotshot portfolio managers, quantitative mathematicians, PhDs and Nobel Economists. Be prepared to wade into a minefield of confusing styles that will drive you nutty as it constantly shifts back and forth between what could be three separate books:

· History of the Markets: Bernstein covers the development of America’s financial markets from 1953 when Markowitz defined “Modern Portfolio Theory” to today’s “merger” of behavioral finance and quant math as Wall Street’s deadliest weapon. At the center of this unfolding drama is a war raging between beta and alpha, between generating average market returns and beating those averages, between indexing and active-management, between Main Street and Wall Street, between Beta-Builders and Alpha-Hunters.

· Interviews with Leaders: Bernstein’s book is based on interviews updating the thinking of theorists covered in his prior works; academicians like Samuelson, Markowitz, Sharpe and Shiller, today’s big-money gurus at institutions like Barclays, Yale and Goldman Sachs; plus new behavioral finance experts.

· B-School “Case Studies:” Between history lessons and interviews are endless esoteric text-book examples of core theories and practices, stuff familiar to professionals but ponderous for average investors: Everything from Fama’s Efficient Market Theory; Kahneman, Thaler and Odean’s studies of heuristics (mental shortcuts); Sharpe’s Capital Asset Pricing Model (CAPM); to Gross’ “Portable Alpha;” and much more.

Yet, in spite of these limitations, this book is a brilliant in detailing a reoccurring message about how quantitative mathematics has merged with behavioral finance to transform the financial markets. Buy it, but remember, it’s not “eminently readable.” Main Street investors will, however, find the book’s core lesson for them in a paragraph summarizing David Swensen’s work as the mega-successful manager of Yale’s Endowment Fund:

Swensen distinguishes “between the great mass of individual investors and the major institutional investors. He believes most investors should recognize that markets arealmost impossible to beat with any consistency, after adjusting for risk. These investors simple lack the resources and training of institutional staffs, and anyway, most of the institutions still come out with results that are no better than index fund returns.” Also see Swenson’s indexed “lazy portfolio” for individual investors.

Main Street investors are mere “collateral damage” in Alpha-Hunter wars

Bogle’s endorsement was puzzling for yet another strange reason: Bernstein’s book never mentions either Bogle or Vanguard’s pioneering efforts with America’s index mutual fund, arguably one of the most important market trends the past thirty years, a trend that not only parallels the more sophisticated trends Bernstein reviews, but paved the way for the Alpha-Hunter success.

Why this huge oversight? Good question. The answers opened my eyes to the fact that Wall Street sees Main Street investors as “collateral damage” in this war, necessary victims in the Alpha-Hunters’ drive to maximize their returns, not the Beta-Builders. In fact, Bernstein makes it clear that behavioral finance is now a tool used by Alpha-Hunters to identify Beta-Builders vulnerabilities (“market inefficiencies”) so that Wall Street’s alpha-hunting quants can move swiftly, like Special-Ops commandos, take advantage of these weaknesses, and make short-term profits at Beta-Builders’ expense.

Therefore, since individual investors are merely collateral damage, it’s no surprise that Bogle and Vanguard were omitted, even though Bogle is the ultimate “Beta-Builder,” whose name is synonymous with “indexing” for millions … and even though the $1 trillion Vanguard played a major historic role in becoming America’s largest index mutual fund company during the period covered by Bernstein.

Bogle shows how buy’n'hold index investors can beat Alpha-Hunters

Both Bernstein and Bogle were generous in their remarks about this oversight. Bernstein was thankful, noting he’d correct it in the next edition. Bogle praised Bernstein’s book again while noting that he “too was a bit surprised that it didn’t even mention the first index mutual fund, and the missionary zeal required to put it on the map.” Perhaps “the problem is that I’m a pragmatic indexer, not a theoretical or doctrinaire indexer.” Then, Bogle went to the heart of the matter: Indexing “does not depend on the Efficient Market Hypothesis (EMH) but on the Cost Matters Hypothesis (CMH). Whether markets are efficient or not, investors as a group must and do lose to the market by the amount of costs they incur.” And these “costs,” ironically, go into the pockets of Wall Street’s Alpha-Hunters as their profits. Remember, it’s a zero-sum game.

Bogle aptly summarized the “costs” issue: “My pragmatism goes straight to the record. In my recommendation in 1975 to the Vanguard Board that we start the first index mutual fund, I culled the records of all equity mutual funds over the prior 30 years, and found out that those funds lagged the S&P 500 by an average of 1.5 percentage points per year, meaning that a $1,000,000 initial investment would have grown to some $11,000,000 in those funds vs. $17,500,000 in the Index. Real money, accounted for almost entirely by the cost of operating those funds (CMH).”

Read Bernstein’s book to understand the strategies, tactics and weaponry used by Wall Street’s Alpha-Hunters in their war with Main Street’s Beta-Builders … then read Bogle’s new Little Book of Common Sense Investing and you’ll see how easy it is to beat the Alpha-Hunter at their own game!

original: MarketWatch July’07

Public Enemies

Dillinger must be the guy former SEC chairman, Arthur Levitt had in mind when he told Fortune: “America’s investors have been ripped off as massively as a bank being held up by a guy with a gun and a mask.” That was the last recession. Today, it’s a helluva lot worse in the “Great Recession:” Bad banks, financial WMDs, AK-47 derivatives. Yes, this time the banks are the gangsters. They’re robbing Main Street’s Treasury. And it’s an inside job. Hank Paulson, the “Goldman Conspiracy’s” Trojan Horse plays a “Dillinger,” leading a much bigger conspiracy, the “Happy Conspiracy,” that robbed America’s 300 million citizens and taxpayers. They made off with trillions, while our “guards,” a clueless Congress, laid down their guns and surrenders the keys to the vault.

The “Happy Conspiracy?” Yes, that’s what Vanguard founder Jack Bogle calls Wall Street in his bestseller, The Battle for the Soul of Capitalism. He sees Wall Street as a “pathological mutation” of capitalism. Adam Smith’s “invisible hand” no longer drives “capitalism in a healthy, positive direction.” Instead, Bogle sees the invisible hands of this elite “Happy Conspiracy” running capitalism to serve its own selfish, greedy agenda:

“Over the past century, a gradual move from owners’ capitalism—providing the lion’s share of the rewards of investment to those who put up the money and risk their own capital—has culminated in an extreme version of managers’ capitalism—providing vastly disproportionate rewards to those whom we have trusted to manage our enterprises in the interest of their owners.”

Today, the “Goldman Conspiracy” is the visible hand of Bogle’s invisible “Happy Conspiracy” that’s “ripping us off as massively as a bank being held up by a guy with a gun and a mask.” Except today: No masks, no guns. Congress just writes blank checks. The plot’s so hot we read all 1,243 comments, emails and links to related websites, such as goldmansachs666.com. What emerged has the makings of what may be the next mega-successful long-running television series. Here are some possible episodes and plot points for the first season:

Episode 1. “Goldman Conspiracy” as the new Mafia Godfather
Readers are mad as hell: One simply passed on “the inscription on the very first page of Mario Puzo’s The Godfather: ‘Behind every great fortune, is a great crime.’” So who’ll play the new Godfather? How about Michael Chiklis, the corrupt cop in The Shield?

Episode 2. “Goldman Conspiracy” hires Barney Frank guy as lobbyist
Great drama, like The Sopranos? Reader sent this Economic Policy Journal report: “The Goldman Sachs relationship with Congress has just gotten even more intimate. Goldman has grown another tentacle, designed to grab directly at the House Financial Services Committee chair Rep. Barney Frank, D-Mass. The new top lobbyist, Michael Paese, was recently the top staffer to Frank. He has been a registered lobbyist for the Securities Industries and Financial Markets Association since he left Frank’s committee in September.” Like Damages and Dexter, you can’t just make up a juicy plot like this.

Episode 3. “Goldman Conspiracy” amassing power to rule the world
One reader said it all: “This is not about Political Parties, Political Movements, or Control of Political theory. This is about Power! Pure, in your face, control of every asset and wealth variable in this world. Goldman Sachs and Co-conspirators have control and in the best position for control of much of the world’s investments and assets.” And many don’t like what they see: “Stop the looting. Start the prosecutions. Now!” Unfortunately Goldman is real and more dangerous than the conspiracies Jack Bauer destroys in “24.”

Episode 4. “Goldman Conspiracy” is manipulating stock market
“Something smells fishy in the market. And the aroma seems to be coming from Goldman Sachs,” says John Crudele in the NY Post. Stocks prices soaring. “So, who’s moving the market?” Not the little guy. “Professional traders, with Goldman Sachs leading the way.” NYSE numbers show “Goldman did twice the number of so-called big program trades during the week of April 13,” over a billion shares creating “a historic rally despite the fact that the economy continues to be in serious trouble.” Then he tells us why: Because the “Goldman Conspiracy” is using TARP and Fed money, churning the markets. They are “gambling with taxpayer money.”

Episode 5. “Goldman Conspiracy” Cartel? Plutocracy? Dictatorship?
“The Goldman Cartel like the Drug Cartel, like the mafia, like communism. Americans fell asleep at the wheel. We have crashed. We were brainwashed that America was good. We pledge allegiance to the flag, etc.” Yes, like many, this reader one were angry, ready to fight, near rebellion, because “now we are a fascist nation, maybe worse.”

Episode 6. “Goldman Conspiracy” repeating record 2006-07 earnings
In “Goldman Sachs Boosts Risk-taking at the Fastest Pace on Wall Street,” Bloomberg’s Christine Harper writes: CEO “Blankfein has shown no inclination to change the business model that helped Goldman Sachs set industry records for earnings and pay in 2006 and 2007.” At the November peak of the credit crisis, he said “nothing that happened this year altered the core of what Goldman Sachs is … we won’t stop doing the things that made us a leading investment bank.” Harper added: “First-quarter revenue-per-employee and compensation figures bear that out … Each of the firm’s 27,898 employees brought in, on average, $338,017 in revenue” while “compensation and benefits at Goldman Sachs totaled $4.71 billion in the quarter, an average of $168,829 per employee.”

Episode 7. “Goldman Conspiracy” sneaks in another Trojan Horse
Another reader added this: Gary Gensler, another long-time partner in the “Goldman Conspiracy” is Obama’s nominee for chairman of the Commodity Futures Trading Commission. Maybe the “Goldman Conspiracy” really does “own” Washington.

Episode 8. “Goldman Conspiracy” operates like Las Vegas casino
NY Observer columnist Michael Thomas imagines the Wall Street/Washington merger operating as a “publicly owned casino” where “every grifter, sharpie, shark imaginable” gets to play with the our money. “This stinks. Stinks to high heaven. Stinks all the way from Wall Street to K Street, whence you can be sure significant funds have been routed to Congress” as political payoff. And it did paid off last week killing a bill to let bankruptcy courts renegotiate over a million mortages held by underwater homeowners. The bill was defeated by lobbyists for the same banks taxpayers gave trillions to. The LA Times reported that the Consumer Federation of America attributed the defeat to the “bankers continuing clout to the fact that they are major financial players in campaign contributions, to Democrats as well as Republicans.” Remember the fun in TV’s Vegas?

Episode 9. “Goldman Conspiracy” is gambling with taxpayer money
The New York Times reported in “After Off-Year Wall Street Pay Bouncing Back,” that average pay is again around $570,000 at the “Goldman Conspiracy” branch of the “Happy Conspiracy.” What a comback: They were virtually insolvent six months ago till Paulson secretly arranged a $50 billion lifeline in a combo of TARP, Fed credits and the AIG bailout. His old “Goldman Conspiracy” buddies then doctored their balance sheets and it was back to “business as usual,” echoing the action in Prison Break.

Episode 10. “Goldman Conspiracy” expands in shadowy twilight zone
“It’s no secret that many of the top officials at the Fed and Treasury,” says reader, adding three more to Paulson and Kashkari: “Treasury Chief of Staff Mark Patterson, New York Fed President William Dudley, and New York Fed Chair Stephen Friedman were once executives, directors, or lobbyists for Goldman Sachs.” How many more? We have entered The Twilight Zone, Wall Street’s version of The Invasion of the Body Snatchers.

Episode 11. “Goldman Conspiracy:” No comparison to Founding Fathers
Another reader criticized the false choice: “The difference between our founding fathers and the Goldman Gang is the fact that the former risked their own fortunes while the latter risked yours and mine. These two groups shouldn’t even be mentioned in the same paragraph. I vote RICO.” Another saw no “change” when it comes to the “Goldman Conspiracy” running our government from the shadows: “It is apparent that Washington Lobbyists will not be outlawed, nor Goldman Sachs alumni refused Government rule, so nothing will change.” Apparently “change” is a great campaign slogan, as long as the “Goldman Conspiracy” gets more control. Think Terminator, but with no Salvation.

Episode 12. “Goldman Conspiracy” really is taking over the world.
“How far does The Goldman Conspiracy reach? Truth is stranger than fiction,” writes one reader. “The Federal Opposition Leader in Australia, Malcolm Turnbull, potentially the next Prime Minister, is a Goldman Sachs alumni. Spooky!” Yes, he was Chairman, Goldman Sachs Australia.” We already reported Goldman Trojans in the Bank of Canada and Bank of Italy, and now see Britain’s Independent reporting that Paul Deighton a Goldman banker is now planner for the 2012 Olympics; Gavyn Davies, a longtime Goldman economist was chairman of the BBC network; and Duncan Niederauer, Thain’s former deputy at Goldman was later with Thain modernizing the NYSE.

Episode 13. “Goldman Conspiracy” … can’t beat ‘em? So, join ‘em!?
“Goldman people are everywhere” observes a reader. “Perhaps we should all buy Goldman stock? Join the party instead of watching from afar. I think it is very scary, no point in having a stock market anymore.” Worse, no point in voting, doesn’t matter!

Thirteen episodes are often the number a network buys for a new series. But expect lots more. This one’s guaranteed to go on through at least three more seasons to the 2012 election … probably indefinitely, because the “Goldman Conspiracy” is secretly expanding beyond Washington … taking over the networks … Hollywood …EU … UN … ultimately the universe. Yes, the “Goldman Conspiracy” franchise is more powerful than Bond, Batman, 24, Bourne, Raiders, Die Hard and The Terminator. See it! Buy it!

orig post MarketWatch 5/4/09

Wake up Wall Street!
This film’s your biggest market timing signal of 2010!
Seriously, why now? Why after 23 years, did Stone decide to update the message of his famous 1987 “Wall Street.” Great question: The interviewer was Michael Lewis, former Salomon trader, author of Liar’s Poker, a guy who understands Wall Street’s soul.

Stone’s answer is in “Greed Never Left,” Lewis’ Vanity Fair review of Stone’s new movie, “Wall Street: Money Never Sleeps.” Stone had to think about it: “Why did I go back?” Why? “Because it’s important. It’s the collapse of capitalism and the collapse of our society. It is. Our way of life is going to change.”

The “collapse of capitalism?” Yes, Stone’s predicting the “collapse of capitalism.” Not just a stock market crash, the “collapse of capitalism.” He’s predicting the “collapse of our society.” Worse, Stone’s predicting: “Our way of life is going to change.” Is this really a market timing signal? Hey, it was in 1987. Will history repeat? The odds say yes.

Remember Stone’s predictions when you see the sequel, “Wall Street: Money Never Sleeps.” Lewis says Stone’s goal is not just to entertain you for a couple hours then send you back home to continue denying everything Wall Street’s fat-cat bankers, the real Gordon Gekkos, are doing every day to destroy capitalism, destroy democracy, destroy your retirement portfolio … no, Oliver Stone, the All-American filmmaker of Born on the Fourth of July, Platoon, JFK, Nixon, W, World Trade Center has a message … wake up America, you’re sleepwalking.

Wake up? America is unprepared for the coming disaster
Stone’s message is clear and powerful: You’re ignoring the coming collapse of capitalism … of our society … collapse of America. We are ignoring the end of our experiment in democracy. We are unprepared … “our way of life is going to change.” Wake up.

Unfortunately, Stone’s voice will likely be as ineffective in 2010 as in 1987. Few listen. Since the first film we’ve had bigger bubbles, bigger busts. Remember the Asian-Russian crises of 1997-98? Dotcoms in 2000? Subprime meltdown of 2007-08? “Oliver Stone’s 1987 Wall Street succeeded brilliantly in capturing a culture,” says Lewis, “and failed miserably as a call for change. To the director’s dismay, thousands of financial hotshots dreamed of becoming Gordon Gekko.” It was like a recruiting poster for terrorists. Why?

Wall Street insiders and Main Street day traders are by nature optimists and opportunists. It’s in their DNA. The love crises and volatility. Like the bomb-squad experts in “Hurt Locker,” they race into the kill-zone. This is a game to traders. They love the hunt, the thrill, the adrenaline rush … they have to minimize the risks, deny the danger, ignore the consequences as they rush in to capture the moment.

Seriously: Lewis says “Michael Douglas often expresses his astonishment at the many Wall Street males who have sought him out in public places just to say, ‘Man, I want to tell you, you are the single biggest reason I got into the business. I watched Wall Street, and I wanted to be Gordon Gekko.’ The film’s equally perplexed screenwriter, Stanley Weiser, has made the same point, in a different way. ‘We wanted to capture the hyper-materialism of the culture,’ he said. ‘That was always the intent of the movie. Not to make Gordon Gekko a hero’.” Remember, greed never left … greed never will leave.

Collapse! Chicken Little? Crying Wolf? Cassandra?
Wait a minute: Is this a conspiracy? That word, “collapse,” keeps popping up in news and literature: Jared Diamond, anthropologist, in his bestselling Collapse: How Societies Choose to Fail or Succeed … Hedge fund manager Byron Biggs in Wealth, War and Wisdom, warns of the “possibility of a breakdown of the civilized infrastructure.” Financial historian … Niall Ferguson, author of Colossus: The Rise and Fall of The American Empire, writing in “Collapse & Complexity: Empires on the Edge of Chaos,” warns we’ll fail to see a coming collapse. … Jack Bogle saw the problem years ago in The Battle for the Soul of Capitalism. … And Hong Kong economist Marc Faber used the dreaded “c-word” in his Doom, Boom & Gloom Report: “The future will be a total disaster, with a collapse of our capitalistic system … inevitable.”

But is Stone credible? Not just predict another collapse, but the timing? Or is he just another entertainer, like Mad Money’s Jim Cramer? Was it just coincidence that his film was released right after the October 1987 crash? Doesn’t matter: Lewis says Wall Street saw Stone as a guru. He denies it: “We didn’t know what was coming and we didn’t know this was a special period … People accused me of being a genius who predicted the stock-market crash of 1987. I didn’t predict the stock-market crash. I had no idea.”

But you have to wonder: Are Wall Street’s insiders right? Is Stone a guru, seer, great cosmic market timer? Is there a real link between the ’87 crash and 2010? Is he linked in to all the many references to the word ”collapse” by leading minds? And is Stone’s release of the sequel now a warning of an impending collapse, new market timing signal?

Swiss psychologist Carl Jung would tell us events like this are not random, unrelated “coincidences,” but a “synchronicity” of the “collective unconsciousness” surfacing in the voices of many tuned-in beings, warning us our world is in grave danger … that yes, a collapse is dead ahead … but that Wall Street, like bomb experts in “Hurt Locker,” will go deep into denial, naturally blind to the larger historical warning while focusing narrowly on trading opportunities in their kill-zone.

Yet, while Wall Street is in denial of the coming collapse, blind to everything except “the action,” some voices are speaking loudly for the “collective unconscious:” Lewis, Diamond, Ferguson, Bogle, Grantham, Bogle, Faber, Biggs, and others, each in their own way are repeating Stone’s message: “It’s important, it’s about the collapse of capitalism, the collapse of our society. … Our way of life is going to change.”

Reverse course? Save the “American Soul” from collapse?
Unfortunately, when the collapse ignites, it’s game-over. America will have passed the “point of no-return.” We will wake up too late to prepare. Collapse becomes destiny. As Ferguson puts it: “Collapse may come much more suddenly than many historians imagine. A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice,” and fall easily, without a push.

Yes, our destiny is locked deep in the DNA Wall Street’s insiders, in their insatiable short-term greed. America’s destiny is also locked in the long-term lifecyles of nations and economies, as we discovered in Ferguson’s historical works and Diamond’s anthropological research. Destiny repeats over time and through the ages, in new forms, new nations, new civilizations, yet always repeating the same patterns.

All this was predictable back in the winter of 2008, when at the center of the storm … when Wall Street was melting down … when a frightened Treasury Secretary Paulson’s sole objective was not America but saving his beloved Goldman and the other fat-cat banks from wholesale bankruptcy … back then when Washington and Wall Street were overwhelmed, blinded, Naomi Klein, author of Shock Doctrine: The Rise of Disaster Capitalism, accurated predicted another bubble/collapse for America:

“Free market ideology has always been a servant to the interests of capital … During boom times it’s profitable to preach laissez faire, because an absentee government allows speculative bubbles … When those bubbles burst, the ideology becomes a hindrance and goes dormant while big government rides to the rescue.” Then, free-market “ideology will come roaring back when the bailouts are done. The massive debts the public is accumulating to bail out the speculators will then become part of a global budget crisis.”

Cosmic market timing signal? “Death of America’s Soul?” Maybe both?
Stone may not fully understand his powers to see the future, but collectively, Stone, Klein, Ferguson, Diamond and many others do “see” the future. They see the lifecycles of societies, nations, empires and civilizations rise and collapse on rather predictable time schedules averaging 200 years. Yes, they “see” what Wall Street never “sees” because Wall Street’s DNA, their optimism, their animal instinct, focuses them narrowly on kill-zone opportunities, heightening their trading senses, blocking out dangers, risks, threats, as attack new market timing signals. Yes, 1987’s history may well be repeating in 2010. So you better be asking yourself: Is Oliver Stone traders the biggest stock market timing signal of 2010” Of the decade? Are you prepared? Or blind, in denial?

Original in MarketWatch.com

Burj Dubai’s real symbolic importance: It is mostly empty, and is likely to stay that way for the foreseeable future. Though most of its 900 apartments have been sold, nearly all were bought three years ago — near the top of the market — and primarily as investments, not as places to live. … And there’s virtually no demand in Dubai at the moment for office space, of which the Burj Dubai has 37 floors.

Yes, “mostly empty.” Both Wall Street and Burj Dubai are symbols of the blind arrogance of power of leaders and the super-rich, not just today but throughout time. In ancient Greece “hubris” was a crime. The works of Aristotle and Sophocles remind of the consequences. Today hubris also describes the behavior of our failed leaders, Greenspan, Paulson, Bernanke and the CEOs running Wall Street banks. Actually, with the Burj Dubai tower it’s less hubris and more just plain old investor stupidity, nobody was in power, no arrogance, no hubris, just ill-advised dumb money. Yes, “mostly empty,” not just that vast physical space, but the minds that led to a decision to build that monument. Hawthorne’s analysis of the economic and financial consequences was brilliant:

The extent to which the building had to battle worries about the wisdom of its construction even before it was finished — the way it seemed doomed while it was still going up — may be unique in the history of skyscraper design. In that sense, it seems impossible to write about the Burj Dubai without at least mentioning the Tower of Babel, which also, if the biblical story and various historical sketches are to be believed, combined a tapering, corkscrew design with heaps of overconfidence. …

Conceived at the height of local optimism about Dubai’s place in the region and the world, this seemingly endless beanstalk tower … is a powerful, iconic presence in ways that have little directly to do with its record-breaking height. To a remarkable degree, the metaphors and symbols of the built environment have been dominated in recent months by images of unneeded, sealed-off, ruined, forlorn or forsaken buildings and cityscapes. The Burj Dubai is just the latest — and biggest — in this string of monuments to architectural vacancy … easy credit, during the boom years and the sudden paralysis of the financial markets in the fall of 2008 have created an unprecedented supply of unwanted or under-occupied real estate around the world.

But the real problems lie in an uncertain future, and for that Hawthorne paints a depressing picture of Burj Dubai’s as a symbol of the 21st century, by drawing our attention to the some powerful cultural metaphors paralleling the architectural context of this unique skyscraper, metaphors that raise fears we have not learned our lessons, that this cycle is far from over, that the worst is yet to come:

Rising cultural worry about environmental disaster or some other end-of-days scenario has produced a stream of books, movies and photos imagining cities and pieces of architecture emptied of nearly all signs of human presence … the Sahara Hotel and Casino in Las Vegas had sealed off two of its three towers … watch the movie version of Cormac McCarthy’s 2006 novel “The Road,” in which a father and son wander through a post-apocalyptic landscape where buildings for the most part have been reduced to burned-out shells. … The Roland Emmerich destruction-fest ’2012′ … the upcoming Denzel Washington vehicle “The Book of Eli” are full of similar images … and Jason Reitman’s “Up in the Air” moves its characters through a series of downsized companies where abandoned desk chairs swim in empty space … [or Detroit where] Hantz Farms is planning to buy and plant as many as 5,000 acres of land within the Detroit city limits.

Dubai’s economy will recover, at least in some chastened form. But the hyperconfident Dubai that Smith’s tower was designed to mark and call global attention to is already dead, as is the broader notion, which the emirate came to symbolize over the last decade, that growth can operate as its own economic engine, feeding endlessly and ravenously on itself. If the Burj Dubai is too shiny, confidently designed and expertly engineered to be a ruin itself, it is surely the marker — the tombstone — for some ruined ideas.

Mostly empty. Temple of Hubris. Tower of Babel. The new Burj Dubai skyscraper, the world’s tallest building sitting in a desert metropolis on the far side of the planet will always be a Greek tragedy, another reminder of Wall Street’s blind hubris. And if history is any guide, we know hubris never dies, it is a virus that simply “finds a new host” … scales new heights of irrational exuberance … blows new bubbles … triggers new meltdowns, a new catastrophe, new bailouts … dumping more debt on future generations.

First we watched in awe as our Treasury Secretary and Fed Chairman threw away $787 billion in taxpayer money to bailout an arrogant, corrupt and bankrupt Wall Street. Then, within a year, in a dramatic turn-of-events as the economy sank deep into 17% underemployment, and after creating an estimated $23.7 trillion in new taxpayer debt, Wall Street quickly returned to business-as-ususal, paying record $25 billion averaging $500,000 bonuses while screwing the public at every possible turn, such as inflating credit card fees and manipulating the Fed to keep Wall Street’s own interest rates near zero. Bottom line: Once again Wall Street demonstrates they’ve not only lost touch with reality, they’ve lost their “moral compass” and are adrift in the dark world of “disaster capitalism.”

In Wall Street’s Orwellian world, everything must be seen with new eyes: “Disasters” are “IPOs,” opportunities to buy into a new “company.” Corporations like Lockheed-Martin are the real “emerging nations” of the world, not some dinky countries like Greece or Iceland. Wall Street banks generate huge profits, grow earnings. And seen through the new rose-colored glasses of “Disaster Capitalism” they are hot new investment opportunities. To more fully grasp this new economy, you must read what may be the most important book on economics in the 21th century, Naomi Klein’s The Shock Doctrine: The Rise of Disaster Capitalism, whose roots trace back the ideas of three 20th century giants:

1.      President Dwight D. Eisenhower, who warned us against the self-perpetuating and ever-expanding economic power of our “military-industrial complex.”
2.      Nobel Economist Milton Friedman,who said economic change never occurs without a crisis shocking the system; whether the crisis is natural, induced, or merely perceived, as with enflaming public fears of war and terror threats.
3.      Economist Joseph Schumpeter, whose saw “creative destruction” as a healthy process by which new technologies and new products made old ones obsolete.

“Disaster Capitalism” is financing a new world economic order says Klein, not just in “the divide between Baghdad’s Green and Red zones” but in other disaster zones, from post-tsunami Sri Lanka to post-Katrina New Orleans.” Disasters come in many ways: Weapons destroying power plants and hospitals, nature weakening bridges, hurricanes wiping out towns, ideological conflicts turning Africa’s farmlands into deserts, global banking systems favoring investors over public works, shopping malls over schools, sewage treatment and power plants, and so on.

Yes, this is a hot-button political issue. But for the moment, let’s put aside partisan politics, which many will find disturbing for the future of America. Let’s look at this strictly as investors and briefly consider what is may also be a guide for aggressive investors searching for investment opportunities in Disaster Capitalism. In a brilliant Harper’s excerpt from The Shock Doctrine, Klein makes clear how this new economy is the wave of the future for certain investors:

“Today, global instability does not just benefit a small group of arms dealers; it generates huge profits for the high-tech-homeland-security sector, for heavy construction, for private health-care companies, for the oil and gas sectors – and, of course, for defense contractors.” This new market is enormous: “Reconstruction is now such a big business that investors greet each new disaster with the excitement of hot new stock offering:$30 billion for Iraq reconstruction, $13 billion for tsunami reconstruction, $110 billion for New Orleans and the Gulf Coast.” Get it? Disasters are “IPOs!” Followed by on-going revenues for “projects” like the Blackwater security contracts and constructing the world’s largest embassy in the isolated Baghdad Green Zone. Think positive: The “Disaster Capitalism” played a major role in bringing America’s economy out of the 2000-2002 bear-recession: “The scale of the revenues at stake was certainly enough to fuel an economic boom. Lockheed Martin, whose former vice president chaired the Committee for the Liberation of Iraq, which loudly agitated for the invasion, received $25 billion in U.S. government contracts in 2005 alone.”

Putting that in perspective, Klein quotes Congressman Henry Waxman: That sum “exceeded that gross domestic product of 102 countries, including Iceland, Jordan and Costa Rica [and] was also larger than the combined budgets” of the Departments of Interior and Commerce, the SBA and the entire legislature. “Lockheed itself deserved to be characterized as an emerging market. Companies like Lockheed (whose stock price tripled between 2001 and 2005) are a large part of the reason why the U.S. stock market was saved” after 9/11, helping the recovery more than the housing boom!

Plus energy: “The oil and gas industry is so intimately entwined with the economy of disaster – both as a root cause behind many disasters and as a beneficiary from them – that it deserves to treated as an honorary adjunct of the disaster-capitalism complex.” Citing the “outrageous fortunes of the oil sector – a $40 billion profit in 2006 for ExxonMobil (XOM) alone … Like the fortunes of corporations linked to defense, heavy construction and homeland security, those of the oil sector improve with every war, terrorist attack, and Category 5 hurricane.”

How to invest in the new “Disaster Capitalism”

It’s easy to invest in the “Disaster Capitalism” and the new economy. See the Spade Defense Index (DXS) of defense, homeland security and aerospace stocks. Klein says it “went up 76 percent between 2001 and 2006, while the S&P 500 dropped 5 percent.” You can trade the Spade Index as a PowerShare ETF (PPA). In addition, the Fidelity Select Defense & Aerospace Fund (FSDAX) offers another opportunity. According to Morningstar data, there are similar stocks in both, including: General Dynamics (GD), Ratheon (RTN), Rockwell Collins (COL), Boeing (BA), Harris (HRS), Northrop Grumman (NOC), and United Technologies (UTX).

”The Shock Doctrine” is one of the best economic book of the 21st century because it reveals in one place the confluence of cultural forces coming together and (1) restructuring a world economy as growing populations fight over depleting natural resources, and (2) as America drifts away from representative democracy to a government controlled by multiple, competing, well-financed and shadowy special interests. Here’s an overview of trends from book as well as related ones:

One. Free market competes with government.
In the past, when major catastrophes resulted in economic disruptions and human losses governments responded with “New Deals” and “Marshall Plans,” says Klein. Today, “Disaster Capitalism” companies see government agencies (like FEMA) and non-profits (Red Cross) as “competition” taking away new business. Military drafts would lower the need for mercenaries, even wars for high profits after a disaster, while engaging in lobbying to undercut the “competition.”

Two. Privatization of government for the investor class.
These new forces are screaming to privatize our economy and government: After the Minneapolis bridge collapse Klein saw many calls for more private toll roads and bridges across America. Same with calls to privatize New York’s subways after rain closed them temporarily. Ditto with airports and their security. And in New Orleans, reconstruction moneys rebuilt private schools in upscale areas and neglected infrastructure in poor areas.

Three. War generates profits, peace hurts free markets.
”Disaster Capitalism” firms need wars to generate profits. And by sidestepping the draft, Iraq became a privatized war employing over 185,000 (20,000 more than the military), including truck drivers, PX clerks and mercenary soldiers. Blackwater was near bankruptcy before the war. Through secret no-bid contracts the US has pay for training centers which they now own. Peace does not generate disaster profits.

Four. Plutocratic government favoring wealthy over masses
“The vast infrastructure of the disaster industry, built up with taxpayer money, is all privately controlled” through special interests favoring the wealth classes during reconstruction. In New Orleans Klein saw the “so-called FEMA-villes: desolate out-of-the-way trailer camps for low-income evacuees [with guards that] treated survivors like criminals;” while the wealthy gated-communities quickly received water and power generators, private school and hospital services.

Five. Shadow banking system.
Private equity firms and hedge funds are making our Federal Reserve Bank less and less relevant. Today a private banking system is emerging nationally and globally that operates in relative outside the established system and beyond the oversight of securities and banking regulators and the legislature, out in parallel universe beyond the comprehension of the vast majority of American taxpayers and Main Street investors.

So folks: Is “Disaster Capitalism” merely a hot short-term investment opportunity for you? Or is it a national “crisis,” a warning bell, a “shocking” call to rise above euphemisms like “creative destruction,” get into action and rein in the new “Wall Street/Washington Conspiracy” that’s pushing America every closer to the edge and over into a disastrous, self-destruct future? You probably already know the answer.

Original:10/07

But it’s the other Paulson, Hank, the former U.S. Treasury Secretary, that should be worried. Why? Earlier Bloomberg reported that back in August 2006, the new Secretary privately warned the White House: “Over-the-counter derivatives [were] an example of financial innovation that could, under certain circumstances, blow up in Wall Street’s face and affect the whole economy.” Yet even at the last minute in 2008 Paulson was misleading America that they were “contained.” They weren’t and he knew it.

We saw this coming a year ago in our MarketWatch column about suing Goldman Sachs for RICO racketeering activity. Yes, we’ve been nudging Obama’s White House and the SEC for a long time. Here’s some more background on Goldman from my earlier columns:   

Even Jack Bauer can’t stop ‘The Goldman Conspiracy:’
10 reasons Wall Street has absolute power over America’s democracy (April 20, 2009)
http://www.marketwatch.com/story/even-jack-bauer-couldnt-stop

The ‘Goldman Conspiracy:’ RICO? Or Medal of Freedom?
Vote: Racketeers to be indicted or revolutionary American heroes? (April 28, 2009)
http://www.marketwatch.com/story/lets-nail-wall-street-with-a-racketerring-charge    

‘Goldman Conspiracy:’ Bogle’s ‘pathological mutation?’
Machinations on Wall Street, in government give rise to 13-episodes (May 4, 2009)
http://www.marketwatch.com/story/goldman-conspiracy-explosive-13-episode-tv-show   

Cheers for King Henry — world’s greatest nudger
Goldman Sachs “owes” Paulson a $1 billion bonus (July 20, 2009)
http://www.marketwatch.com/story/goldman-should-pay-paulson-a-1-billion-bonus   

Goldman’s new ‘American Socialism Manifesto’
8 ways ‘The Conspiracy’ is destroying our American democracy (August 4, 2009)
http://www.marketwatch.com/story/the-8-point-goldman-socialist-manifesto-2009-08-04   

But this fraud suit against Goldman is just the tip of the iceberg, expect more banks to share Goldman’s pain, even the former Secretary’s legacy is under attack. Bigger question: Politically you have have to wonder, will this chase away more of Obama’s supporters? The Wall Street lobbyists’ are turning against him, the “GOP Tea-Party of No” did long ago, and so have many independents … or will this guarantee he’s a two-term president?

But over at Reuters, “Liar’s Poker” author Michael Lewis wasn’t buying the propaganda. In an interview for his new book, “The Big Short: Inside the Doomsday Machine.” Lewis tells Reuters that a ”Wall Street reckoning is coming,“ a very different message for investors compared to what’s coming from Wall Street’s bubble machine. Here are a few quotes from Reuters and Lewis: 

Wall Street’s biggest banks could be broken up by the U.S. Congress in the coming year in an eventual reckoning over the financial meltdown of 2008. Lewis predicted a war will be waged in Washington as Senate Banking Committee Chairman Christopher Dodd tries to revamp U.S. financial rules. “Things can be busted up. I really think there is this collision coming that is just starting to happen with the Dodd bill,” Lewis said. ‘There is a war that is about to happen over not just who regulates Wall Street but what the rules are. … To put it in the crudest possible way, these firms have to be smaller and less profitable … If they were regulated properly and the rules of their game were sane, it would be less profitable to be a trader at a big Wall Street firm … It is really a war over money.’

The Big Short follows a motley group of outcasts who profited from the collapse of the subprime market. There’s the one-eyed doctor-turned-money-manager with Asperger’s Disorder and a penchant for reading regulatory filings and the lazy fund manager with a comic book obsession mourning the loss of a young son. There’s a bond trader with hair like Gordon Gekko in the 1987 film ‘Wall Street’ and a personality to match, plus two geeks working in a garden shed with a $110,000 brokerage account. ‘I could have picked others who were equally odd,’ said Lewis, noting nearly all of Wall Street was on the wrong side of the biggest trade of all time and the establishment failed to see disaster coming.

Yes, Lewis’ warnings not only run contrary to the “Wall Street Bubble Machine” hype, he’s echoing the warnings we reported on earlier about a coming collapse. Yes, 12 leading market experts warning that Wall Street won’t be able to “fake it” much longer. So for all you optimists who plan to actively invest in 2010 here’s some contrary input to factor into your equation. For a moment, take off your rose-colored glasses and listen to Shiller, Taleb, Faber, Grantham, Soros, Biggs, Stiglitz and others:

One. Faber: The “American Empire” has peaked, is on a decline
Hong Kong economist Marc Faber says “the average life span of the world’s greatest civilizations has been 200 years … Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent … overspends … costly wars … wealth inequity and social tensions increase; and society enters a secular decline.”

Two. Grantham: Learned nothing, doomed to repeat past, only bigger
Money manager Jeremy Grantham warns that our irrational nightmare will repeat. A year ago we came dangerously close to the “Great Depression 2.” Unfortunately, we’ve “learned nothing … condemning ourselves to another serious financial crisis in the not too-distant future.” We had our bear-market rally. Next, historical cycles plus our irrational behavior guarantees another, bigger global meltdown. We “learned nothing.”

Three. Stiglitz: Wall Street creating “short respite’ before next crash
Nobel Economist Joseph Stiglitz recently warned: Unless Wall Street’s incentive system is drastically reformed, “the financial sector will only try to circumvent whatever new regulations we put in place. We will simply have a short respite before the next crisis.” Warning, nothing’s changed, it’s worse: Lobbyists run Obama, Congress and the Fed.

Four. Johnson: “Running out of time” before “Great Depression 2”
Yes, “we’re running out of time … to prevent a true depression,” warns former IMF chief economist Simon Johnson. The “financial industry has effectively captured our government” and is “blocking essential reform,” and unless we break Wall Street’s “stranglehold” we will be unable prevent the “Great Depression 2.”

Five. Ferguson: Fed’s “easy money” fuels new bubbles, meltdowns
In the 400-year history of the stock market “there has been a long succession of financial bubbles,” says financial historian Niall Ferguson. Who’s the culprit? The Fed: “Without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks.” Another bubble (and crash) is virtually certain, thanks to Washington’s $23.7 trillion explosion in debt, the Fed’s support for the $670 trillion shadow banking system, and Wall Street lobbyists getting super-rich thanks to Wall Street’s insatiable greed.

Six. Taleb: Fed haunted by ghost of Greenspan’s failed Reaganomics
When Obama reappointed Bernanke, Taleb warned of a new disaster: “The world has never, never been as fragile,” yet Obama reappoints an economist who “doesn’t even know he doesn’t understand how things work.” New proof? At last week’s American Economic Association, Bernanke was still shifting the blame: “The best response to the housing bubble would have been regulatory, not monetary.” Wrong: He conveniently forgets he was advising Bush earlier, did nothing. Now Obama’s stuck with a Greenspan clone and an insane ideology focused solely on saving a failed banking system by flooding the world with inflated dollars guaranteed to trigger another meltdown

Seven. Soros: Dollar dead as a reserve currency, nest eggs dying
Soros’ New Paradigm: America’s 25-year “superboom … led to massive deregulation … blindly chasing free markets … unleashed excessive greed … created the dot-com and credit meltdowns” and a “shadow banking system” of derivatives. “The system is broken. The current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency,” warns Soros. “We’re now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances.”

Eight. Hedgers: make billions shorting stupid politicians, bankers
Soros isn’t alone. Lots of hedge fund buddies made hundreds of millions and billions betting on the stupidity of Washington with the Fed’s cheap money policies. Alpha magazine reports that four hedgers made more than $1 billion each in 2008. The top-25 “managers made $464 million each on average last year … a kingly sum, especially during a year of global recession, stock market wipeouts and vanishing wealth.”

Nine. Shiller: Dotcom, subprime meltdowns, “third episode” next
Shiller a “Dr. Doom?” Remember a decade ago with Irrational Exuberance? Now he’s warning: “Bubbles are primarily social phenomena. Until we understand and address the psychology that fuels them, they’re going to keep forming. We recently lived through two epidemics of excessive financial optimism, we are close to a third episode, only this one will spread irrational pessimism and distrust—not exuberance.”

Ten. Kaufman: Irrationality replaced reason, science, technology
Henry Kaufman was Salomon’s chief economist and “Dr. Doom” for 24 years: “Why are we so poor at managing our key economic institutions while at the same time so accomplished in medicine, engineering and telecommunications? Why can we land men on the moon with pinpoint accuracy, yet fail to steer our economy away from the rocks? Why do our computers work so well, except when we use them to manage derivatives and hedge funds?” Kaufman warns: “The computations were correct, but far too often the conclusions drawn from them were not.” Why? Selfish, myopic politicians and bankers.

Eleven. Biggs: Sell everything, buy guns, food, head for the hills
In his 2008 bestseller, Wealth, War and Wisdom, former Morgan Stanley research guru Barton Biggs warns us to prepare for a “breakdown of civilization … Your safe haven must be self-sufficient and capable of growing some kind of food … It should be well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc … A few rounds over the approaching brigands’ heads would probably be a compelling persuader that there are easier farms to pillage.” Biggs sounds like an anarchist militiaman.

Twelve. Diamond: Nations ignore obvious till it’s too late, then collapse
The end will be swift. In our age of short-term consumerism and instant gratification, few hear the warnings of our favorite evolutionary biologist, Jared Diamond. Societies fail because they’re unprepared, will be in denial till it’s too late: “Civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power.” The warnings were everywhere in 2008, but Greenspan, Bernanke and Paulson were in denial: It will happen again with Obama. Down-streaming problems will fail. Future bubbles get too big, crashes more deadly.

Yes, a “revolution.” Rolling Stone’s ever-provocative Matt Taibbi warned of an attack brewing in “The Big Takeover, how Wall Street insiders are using the bailout to stage a revolution.” Wall Street’s arrogant assumption that Main Street will bail them out when they fail again will backfire, with huge unintended consequences, the “Great Depression II.” Wall Street thinks it’s invincible, after avoiding the big one with the $787 billion TARP bailouts and an estimated $23.7 trillion in debt from The Fed and taxpayers. No, not avoided, merely delayed. And the next crash will grow ever bigger the more we delay it by pushing new debt onto future generations.

In “Future Bailouts of America: The Price Tag For Future Bailouts, Not Just Fannie & Freddie”, New York Times columnist Gretchen Mongenson updates ideas we found earlier in books like Barry Ritholtz’  Bailout Nation, which exposes America’s new ”Socialist-Capitalism” a new ideology that “privatizes profits” for Wall Street’s too-political-to-fail banks and leaves “socialized risk” for the taxpayers. Morgenson says:

Once a small membership organization comprising Fannie Mae and Freddie Mac, the mortgage finance giants, and the occasional troubled auto company, the Future Bailouts of America Club now includes a long list largely populated by financial institutions. We can’t be sure who the specific members of this club are — regulators simply say they know ’em when they see ’em. But this much is certain: They’ve seen a lot of them lately. [And] as taxpayers, we obviously can’t rely on lawmakers to address the risks … But because we are footing the bills for these rescues — and will do so again if more crises occur [Washington] should at least tell us the price tag.

Tell us the price tag? Never happen. That assumes everyone sets aside their ideological and commercial differences and jointly makes rational plans based on the so-called “facts.” While that quixotic notion makes journalists happy, more information won’t help the rest of the human race. The human brain, the ideologue’s brain, the politician’s brain and the Main Street investors’ brains all share the same infinite capacity to ignore “facts” that don’t agree with their preconceived beliefs, as proven daily with the climate change wars. Still, we can hope like Marvin Phaup, a research scholar at George Washington University. Morgenson notes Phaup is:

… an expert on government guarantees, his wholly sensible view is that it is dangerous for possible bailout costs to remain unmeasured and, of course, unrecognized in the budget. “If we are extending the safety net, extending the implied guarantee to the debts of a lot of other financial institutions, and we know those guarantees are valuable and costly, then we ought to start budgeting for it,” Mr. Phaup said in an interview. “We can’t reduce the costs of these subsidies if we can’t recognize them.”

The truth is, politicians, their lobbyists and corporate donors do not want costs “recognized.” Phaup should know. He was the Congressional Budget Office researcher who stepped on a landmine back in 1996 when he put a cost on taxpayer guarantees of Fannie and Freddie. Wow, did he ever live to regret exposing those “facts.”

In 1995, the report said, the value of the companies’ government subsidy totaled $6.5 billion … The C.B.O. report enraged Fannie and Freddie because it also showed how much of that financial benefit — fully one-third — the companies kept for themselves, their managers and their stockholders. … counter to the companies’ claims, Fannie and Freddie did not pass along all the benefits to homeowners in the form of lower mortgage rates. …

Fast-forward to today, and the government guarantees for Fannie and Freddie have become painfully explicit. … Today’s implied guarantees extend well beyond Fannie and Freddie. But owning up to future obligations associated with government backing is something that lawmakers are likely to fight vigorously. (Consider Social Security.) But ignoring such obligations doesn’t make them go away. …  if we assign a value to the guarantees, the government would be better able to charge for it.

But the sad truth is that politicians hate transparency as passionate as Wall Street and Corporate America. Transparancy exposes not just the facts about real conts, underlying policies and freespending voting patterns, transparency also exposes their personal greed, ideology and incompetence:

Lawmakers interested in re-election have little incentive to be truthful about what implied guarantees of powerful companies will cost the taxpayer. Better to brush it under the rug or pretend the costs don’t exist. Then, when they must be paid, policy makers can argue that it’s an unforeseen emergency and an odious necessity. [And] as the number of firms with implicit government backing has risen because of the crisis, so too have the expected costs [that] will be ignored until the recipient of the guarantee collapses — the precise moment when the guarantee is likely to cost taxpayers the most. Three years into the crisis, we are no closer to reining in too-powerful-to-fail companies or eliminating the risks they pose to taxpayers. Both goals are achievable, yet our legislators refuse to do what is necessary to protect us from trillion-dollar bailouts down the road.

Morgenson’s right. Wall Street is driving America headlong into another meltdown. Fast. But when she concludes “we are footing the bills for these rescues — and will do so again if more crises occur,” I says Americans will not buy it again. Yeds, Congress and the White House will wave the red flag of economic catastrophe, as we saw when Paulson waved his three-page $787 billion TARP proposal in Congress’ face. But in today’s  anti-government populist mood, the masses will rebel, expect to see an aggressive “tea party of no-no” public revolution.

But there’s a far bigger reason: America’s got too much debt … we can’t print enough paper money … can’t borrow from foreigners …  we’re going broke … the “Future Bailouts of America” is a non-starter … Americans won’t tolerate expanding the “Bailout Nation” into the “Bankrupt Nation” … We’ve avoided, delayed and deferred “it” for too long … you better prepare for the “Second Great Depression” … it’s coming soon … and as Morgenson, Phaup and so many others warn … we’re in denial about “the facts” … we won’t act till it’s too late.

When I joined Morgan Stanley in the early seventies it was a relatively small “family,” several hundred people who knew each other. But today, things are different. Morgan Stanley now has roughly 60,000 employees worldwide, and like all the other giants, only one thing matters, living up to Gekko‘s motto and getting independently wealthy. How else does an investment bank like Goldman Sachs amass $20 billion for year-end bonuses. Very simple: You use the “Iron Law of Wall Street” to maximize the returns to the million or so insiders in Wall Street’s War Machine, increasing their take by reducing the returns to America’s 95 million average investors.

Wall Street bankers, the “commanders-in-chief,” believe they rule by divine right, one even proclaimed it proudly in an ad back in the seventies: “If God Wanted to Do a Financing, He Would Call Morgan Stanley.” And yes, even after the credit meltdown, bailouts and shifting into the shadowy protection of the Fed, they all feel that way. But just who is America’s “new investment banker?” We know the familiar names: Morgan Stanley, Goldman Sachs and so forth. What about the secretive private equity firms, Blackstone, KKR, Apollo and Carlyle? Or, as financial power shifts overseas to oil-rich nations or sovereign states funds and Asia, how do they fit in with Wall Street and its very muddled “private-equity-hedge-fund-mega-merger-buyout-investment banker” trend (or whatever it’s being called lately)? The new trend’s hot, but is it really over? Or starting? Or same-old-stuff, nothing new, just constant flux?

Outside the box—the world’s new “shadow banking system”

Frankly folks, whatever it is—and most of the “little guys” on Main Street don’t have a clue—it’s got a long way to go. We’re way past the leading edge of a whole new chapter in American Capitalism, and the investment bankers are, for now, still in the mysterious epicenter of power, as the Chairmen of the Joint Chiefs in “Wall Street’s War to Control the Investors Mind.” So let’s search for the right label. Seriously, the media’s going bonkers with the name game. The “billionaire-maker trend” is the most descriptive term for me. Why? Because nothing’s really new. This trend is just a sequel to the late-nineties, with a twist. Back then it was IPOs. The little guy got a chance to buy stock, although founders, venture capitalists and investment bankers became the billionaires.

Throughout history, wealth has power over the masses

This new trend also has deep historical roots: Like the de Medici’s power in financing global trade during the Renaissance, Caesar’s financial power in ancient Rome, and JP Morgan’s power financing railroad and steel industries. Throughout history, capitalism has been Adam Smith’s “invisible hand” at work, although individual fingers often shock our conscience with their greed. But unless you’re an Utopian idealist, the truth is: Throughout history 90% of the economic power in every empire, nation and society has been controlled by 10% or less of the people, the moneyed elite, even today in democracies, especially in the American democracy.

The rich rule the poor and middle-classes. And today their lobbyists have all the money necessary buy votes and elect a Congress favorable to the members of the capitalist elite, regardless of which party rules. Here’s an overview of the news media’s discombobulated inability to describe and label the latest version of this massive historic trend—one that describes the evolving new Wall Street investment bankers and their monstrous octopus-like tentacles wrapping around and into all the other twenty five allies and their businesses described in this book:

• Fortune. “The Expanding Universe”
  Today there are fewer IPOs for the little guys to participate. And Wall Street loves it that way. They don’t want the little guy, gadflies and investor activists messing things up participating in management with the big money, at the front end or anytime. So now the smart money can get rich and become billionaires without sharing with the unwashed masses, by cutting out America’s pesky 95 million individual investors. More money’s been raised in 2006 by Blackstone, Carlyle, KKR, Bain and other private-equity buy-out firms than in the heyday of 2000 mania. These new “investment bankers” control over $1.2 trillion and leverage $26 trillion in derivatives.And their roster of “human capital” is their key to success, including many former political, financial and business power-players who in the past would settle in as board members on IPOs: George H. W. Bush, IBM CEO Lou Gerstner, Nixon’s Commerce Secretary Peter Peterson, British Prime Minister John Major, Ford CEO Jacques Nassar, Secretary of State James Baker, SEC chairman Arthur Levitt, Treasury Secretary Paul O’Neill, to name a few. These are the select few of heavy hitters who can open doors worldwide, earning huge rewards in their retirement.
• Newsweek: “Bursting Another Sort of Bubble”
  “So is it Bubble Alert Time? Yep.” A bubble of 9,000 hedge funds playing with $1.2 trillion in equity, leveraging huge debt. But like most of the media, they struggle with the new bubble’s name, inventing a clumsy name, “Alternative Assets,” a vague term whose very vagueness is a cover-up for their underlying goal: A massive historic effort to deregulated the securities industry, moving it back into the shadowy pre-1934 underworld where billions and billionaires were created in virtual secrecy.
• Investment News: “Blaming Sarbox for the slump in IPOs a bum rap”
  Lobbyists point out that five years ago 90% of the dollars raised by foreign companies were raised in the US. Today only 10%. So Treasury Secretary Paulson and SEC Chairman Chris Cox are siding with Wall Street and Corporate America insiders in another aggressive push to kill the disclosure provisions of Sarbanes-Oxley (Sarbox) that were passed not too long ago to protect the little guy from a new round of corporate and fund scandals.A separate report by the Committee of Capital Markets Regulation (a group of special interest insiders which critics call a “wolf in sheep’s clothing”) offers a novel argument: America over-reacted to the Enron-WorldCom scandals. So they say we’re now over-regulating and too much accountability makes Wall Street less competitive globally! Investor advocates say Sarbox’s not the problem. If Wall Street is less competitive, the real culprit is Corporate America’s blind rush to globalization and outsourcing: “You could repeal Sarbox [and big global firms would] still list overseas,” says Barbara Roper, a director at the Consumer Federation of America, because of weaker investor protections on their exchanges.
• CNNMoney/Fortune: “The private equity boom is breathtaking”
  These guys presented an in-depth survey of the positives: “It’s not just making investors rich, the wave is changing the mindset of corporate managers everywhere,” with results: “Private equity firms returned 22.5% vs 6.6% for the S&P 500, says Thompson Financial.” Here’s how: They attract the best managers with huge incentives, set short-term goals and specific performance measurements, and with minimum disclosure demands, the team focuses on goals without distractions (that often take 40% of a manager’s time) from the SEC, media, politicians, pesky gadflies and investor advocacy groups. Unfortunately, billions are siphoned off by this new ” Wall Street financial entity—and Main Street investors never get to participate as they did in IPOs back in the nineties, only later, after the new insiders take what they can out of the private company and a leaner company is again taken public.
• BusinessWeek: “Gluttons at the Gate”
  But the other side’s darker says a cover story about negatives. These unregulated deal-makers take advantage of buy-out companies using “slick new tricks” in four ways: Siphoning off huge one-time fees and dividends, ongoing withdrawals, quickly flipping companies like “condo-flippers” during the housing boom. Worse yet, many load up “companies with so much debt that their credit ratings are suffering; some of them even ending up in bankruptcy.” Then the company is finally taken public, after the bankers and buddies skin it.
• Time: “Below-the-radar investments for the rich”
  Buried in Time’s article is this disturbing fact: “Hedge-fund manager James Chanos of Kynikos Associates started a Washington-based trade group this year.” Rest assured, folks, all 9,000 funds are one massive, well-financed special-interest lobby that can buy whatever Congressional votes they need to assure they’ll not only get a license to continue operating in the shadows making billions, but get even more protection by watering down Sarbox and other legislation.
• The Journal: Private equity, Wall Street’s New Business Model
  The Wall Street Journal points out that although the Blackstone private equity group’s “business model has transformed Wall Street,” there’s hypocrisy in their taking the firm public. For years their founder Stephen Schwarzman “has been unsparingly calling public stock holding ‘a broken system’ and criticizing the 2002 Sarbanes-Oxley corporate accountability law as having ‘taken a lot of the entrepreneurial zeal out of a lot of corporate managers.’ As for quarterly earnings reports , he has said, create a ‘tyranny’ for public companies. Or maybe Blackstone’s boss smelled the coming peak and was tired after thirty years; just wanted to cash out before the next crash. In any event, these few players are among the joint chiefs in the war to control the investors’ mind.
• Economist: “Revolution in finance, the dark side of debt”
  The truth is, Corporate America hates the regulatory spotlight, and Wall Street’s investment bankers are helping them avoid it. They hate issuing new securities that trade on exchanges. They hate annual meetings exposed to little shareholders. They prefer private equity financing arranged outside the regulated banking system, plus leveraged credit derivatives traded off the exchanges, which now have a total notional value over $650 trillion. Consequently, in the recent era of cheap money, investment banks and their private equity buddies have been soaking up so much capital there’s little left on the table for normal channels, and Wall Street’s banker in the middle of the transformation.

The Economist calls this historic shift a “revolution in finance.” But it’s much bigger than even they imagine, and in the epicenter are Wall Street’s leading investment bankers. This revolution is part of a larger trend that began in the last decade, a rapid reversal of the early 20th century investor protections that created the SEC, Investment Company Act, AntiTrust Laws, Glass-Steagall Act, and other laws requiring disclosure and oversight. The truth is, Corporate America and Wall Street’s bankers are in a defacto conspiracy to dismantle all these protections, so they can operate in the shadows, as they did pre-1940.

By early 2007, the message was so loud, from so many quarters, you couldn’t miss the relentless hoopla about this new “investment banking/private-equity/hedge-fund/mega-merger/buyout” trend. But that term’s too darn clumsy. The truth is, Wall Street’s in transition to a new world order, increasing, expanding and consolidating its power over the financial markets, over the sources of capital, over the economy, and over the minds and pocketbooks of America’s clueless individual investors. Meanwhile, journalists are struggling to define this new world order: The truth is, they are all part of the emerging new Wall Street “billionaire-maker’s” club … the new American “investment banker.”

FirstPubDate: Dec’06