Category: “Wall Street” – Wrongdoing

King of the Club

The Book of the Week is “King of the Club” by Charles Gasparino, published in 2007.

The subject of this book “… was suffering from the downside of loyalty; he spent so much time surrounding himself with people he could trust that he forgot he also needed smart people who could get a job done in times of crisis, and he was now facing… the greatest crisis of his career.”

Sounds familiar. It was actually “Richard Grasso and the Survival of the New York Stock Exchange.” When he was fifteen years old, Grasso began trading stocks in an account held in his mother’s name, getting stock tips from his drug-store-owner-employer.

The author was rather vague about Grasso’s two years of military service which allegedly began in the mid 1960’s, spent: “…in Fort Meade, Maryland, though he did make periodic trips to Vietnam.” Apparently, Grasso’s eyesight was good enough to get him drafted by the U.S. Army, but not good enough to get him hired by the New York City Police Department, his first-choice employer after the military.

Grasso therefore began work as a back-office Wall-Street clerk at the New York Stock Exchange (NYSE) in early 1968. The author failed to mention whether Grasso was told to put his stocks in a blind trust, or whether his new employer had a “don’t ask, don’t tell” policy.

Grasso meteorically moved up through the ranks. He was innovative in executing new marketing initiatives for the exchange. He also poached companies that were listed on either the American Stock Exchange or the NASDAQ– that provided fierce competition to the NYSE. All three were stock markets of corporate entities that wanted to sell their shares far and wide. But the companies could be listed in only one place. Grasso convinced them that the NYSE was the best place to list.

By 1980, Grasso controlled NYSE listings, its trading floor and almost all its trading operations. In the mid-1980’s, the chair of NASDAQ, Bernie Madoff, claimed his market’s trading was more fair for investors because it executed trades electronically, thus multiple players were interacting continuously while setting impartial prices. The argument went that electronic trading made the market more “efficient”– as no buyers or sellers had significantly better pricing information than others on which to trade, theoretically.

In 1990, Grasso stepped up to the second-most powerful position at the NYSE. He was in charge of the exchange listees and, at the same time, in charge of regulating them. He did the legwork of bringing new business to the exchange. His boss, the chairman, did the public relations work of delivering speeches globally and persuading the federal government to keep conditions favorable for the exchange.

Several of the NYSE’s board of directors were Wall Street executives who passively continued to keep the status quo– lavishly rewarding Grasso monetarily for his undivided attention to lavishly lining their pockets year after year when times were good.

There was honor among thieves, as Grasso’s henchmen turned a blind eye to the various forms of illegal activity that allowed them to make obscene amounts of money on the trading floor. Until there wasn’t honor among thieves– as conditions changed.

From a not-for-profit-organization-legal-standpoint, most of the parties and individuals involved were engaging in various highly unethical activities, at best; conflicts of interest abounded as participants in the exchange network cooperated in a way that maximized profits for everyone until, as usual, some individuals got too greedy.

Being head of the New York Stock Exchange is not unlike leading the U.S. government. The marriage of politics and commerce is always fraught with conflicts of interest. Some are avoidable. It’s a shame that politics in particular tends to attract dishonest attention whores with hubris syndrome whose ethics are in the basement. Of course, they usually use the “everybody does it” excuse and change the subject if they can.

But there ought to be equal justice under the law for any of the accused– after an investigation of where the evidence leads— with NO jumping to conclusions, assumptions or biases prior to a thorough review of all evidence, if any. Along these lines, one would do well to ignore the superlative-laden, repetitive, sensationalist drivel emanating from the teleprompter box, um, er– idiot box.

Anyway, starting in the late 1990’s, unbridled greed led to a bunch of scandals. There was Long Term Capital Management, Enron, WorldCom, the dot-com crash, various major SEC violations committed by big-name brokerages; not to mention 9/11’s impact on the financial markets. All on Grasso’s watch. Yet, his pay kept soaring, anyway. It wasn’t pay-for-performance anymore.

Finally, Grasso got the same treatment, figuratively speaking, as other major historical figures. One week he was flying high and the next, kicked to the curb. Grasso was suffering from a bad case of hubris syndrome. In early September 2003, herd mentality / groupthink seized the board; jealousy (possibly subconscious) of his pay package reached critical mass.

Read the book to learn of the usual occurrences in such a situation (investigation, litigation, political machination and myth propagation) that led to the changing of more things, and more of same.

A Memoir According to Kathy Griffin – BONUS POST

The Bonus Book of the Week is “A Memoir According to Kathy Griffin” by Kathy Griffin, published in 2009.

This memoir described the comedian whose shtick consisted of telling humorous, embarrassing stories about members of the entertainment industry. Or, as she characterized herself: “… someone who gets fired, stirs up trouble, and gets debated about on CNN for saying bad things on award shows.” Kudos to her for being an honest, amusing attention whore. She must have brought in sufficient profits for the entertainment industry to tolerate her behavior.

Born in November 1960 in Forest Park, Illinois, the youngest of five children, Griffin grew up in Oak Park, Illinois. At eighteen years old, she moved to Santa Monica, California to be an actress. She apparently had the talent, drive and creativity to get famous.

In the early 2000’s, Griffin performed sufficiently well at the Laugh Factory in Los Angeles to double the length of her show to two hours. This allowed the cocktail waitresses to make sufficient money to pay their rent, “Plus they loved serving the gays, because they were well-dressed, respectful and tipped well.”

Griffin didn’t talk about Anna Nicole Smith right after she died out of respect. As Greg Giraldo would have said, “Too soon, too soon.” Griffin revealed deeply personal information– both of her parents were functional alcoholics, and her oldest brother was a pedophile and substance abuser.

Griffin tried to raise the alarm about her brother, but, as she joked– her parents thought “denial” was a river in Egypt. She admitted to two major errors in her life– poor judgment in both her marriage and in having liposuction. Read the book to learn the details of this and other episodes.

SERIOUS ENDNOTE: Griffin had no qualms about making political statements unrelated to the awards shows she attended. It is therefore not inappropriate to make a political statement unrelated to Griffin’s book, below.

This nation seems to be in denial about the amount of debt load currently carried by not only individuals and businesses, but by the federal government and local governments. It appears that bankruptcies of government entities is the next financial crisis in the offing; the reason why, will be explained shortly.

Within the last thirty or so years alone, the United States has seen greed fests and then busts with regard to junk bonds, savings and loan associations, derivatives, tech stocks, and subprime mortgages, just to name a few. Mortgage-backed securities used to be one of the lowest-risk investments around. Tax-free municipal bonds are presumably still one of the lowest-risk investments around.

BUT one small bond brokerage (and possibly others, too) whose website says it “specialize[s] in tax-free municipal bonds. That’s all we do.” recently changed the language on its customers’ monthly statements. It is forcing them to accept the words, “trading & speculation” (!) for their “Investment objective/Risk tolerance” or else they won’t be able to purchase bonds. It makes itself sound like a penny-stock broker-dealer of the 1980’s that churns accounts. Or a currency broker.

The brokerage is so phobic about covering itself legally that there must be bond issuers who are going to go belly up AFTER THE CURRENT PRESIDENT HAS BEEN REELECTED or has left office, whenever that is. (It might be recalled that Detroit took the plunge in July 2013, after Obama was reelected.) Or its brokers are getting greedy and unscrupulous. Or both. Good luck with that, all.

Red Notice

The Book of the Week is “Red Notice, A True Story of High Finance, Murder and One Man’s Fight For Justice” by Bill Browder, published in 2015. This suspenseful, emotional saga should be made into a motion picture, as it is not only entertaining and engaging, but is a comprehensive picture of the extremes of human nature.

Rebelling against his left wing intellectual family, Browder became a capitalist. During his career, he worked under two big bosses who died under mysterious, suspicious circumstances– Bob Maxwell and Edmond Safra. As a young whippersnapper, he longed to do investment consulting in Eastern Europe, but had to settle for London. Browder got in on the ground floor when the Russian securities industry was in its infancy in the early 1990’s.

In early 2000, the power of Russian Federation president Vladimir Putin, was actually held by “… oligarchs, regional governors, and organized-crime groups.” Browder started a hedge fund called Hermitage. What with complex economic and political goings-on, his hedge fund became the victim of the Russian mentality. In 2006, Hermitage had to “… sell billions of dollars worth of Russian securities without anyone knowing.” That was just one of many traumatic episodes in Browder’s career.

The author had the brains and skills to become not only a successful financial consultant and investor, but a muckraker; however, this made him a “Darwin Award” candidate. He became involved in a true thriller with intrigue, greed, power hunger, human rights abuses and karma. Russia struck at his attorney, Sergei Magnitsky. Numerous Russians in positions of authority– in the government, prisons, the police– all lied to the world about what happened to Magnitsky. Under Putin’s rule, Russia had reverted to the Stalinism of the 1920’s, with thousands of dissidents tortured and killed.

The few people whose eyes were open, who were raising the alarm– were risking their own lives. The rest of the world didn’t want to get involved because they were of the mentality that the violence was confined to Russia, and it wouldn’t spread to them. And they might end up like those dissidents if they rocked the boat. Besides, in the 2000’s, people have become desensitized to human rights abuses due to the widespread, propagandized publicizing of them (like video clips arousing viewers’ morbid curiosity, of the alleged beheadings of journalists by Middle Easterners on YouTube).

(Please excuse the legalese in this paragraph- but it is the briefest way of explanation) Some people would say that Browder had “unclean hands” and there was “contributory negligence” on his part, so his story should not have deserved the special attention it got. Admittedly, he was out for revenge, not because he truly wanted to stem uncivil behavior in the world. He made his living in an industry full of greedy people whose scruples are less than stellar– securities. He made a ton of money by engaging in “self-dealing” and insider trading, which would be considered violations of American securities laws. He was from America, the country that gave rise to the corrupt economic system in Russia in the first place. It might be recalled that Harvard economist Jeffrey Sachs gave bad advice to Boris Yeltsin (to put it generously), convincing him to adopt “shock capitalism” — a ruinous financial plan. Lastly, Browder had “constructive knowledge” that doing business in Russia was especially risky (not just financially), compared to other countries. Arguably, he was trying to apply American morals and laws to get justice in a situation in which he had profited from Russian morals and lawlessness. Some people would say, “Pox on everyone’s house.”

Browder wrote, “There was something almost biblical about Sergei’s story, and even though I am not a religious man, as I sat there watching history unfold, I couldn’t help but feel that God had intervened in this case.” This blogger thinks that, but for Browder’s powerful professional and political contacts who intervened in this case, it would be just another infuriating, depressing, suppressed, and eventually forgotten human rights abuse story.

Read the book to learn the details of the story, including the actions taken against the morally bankrupt, brazen Russian criminals, and learn whether justice was done.

The Real Deal

The Book of the Week is “The Real Deal, My Life in Business and Philanthropy” by Sanford Weill and Judah S. Kraushaar, published in 2006. This career memoir describes how, over the course of about fifty years, Weill became a major change agent in the American financial services industry. His specialty became leading the execution of mergers and acquisitions for the investment, banking, and insurance companies of which he was an executive and board member.

In spring 1960, he started a securities brokerage, actually on Wall Street, with three partners. The stock market was bearish in 1962 and 1963. Interesting Side Note: “The typical stock in the Dow Index had a price 23 times its earnings as this downturn began, compared to a multiple of only 10 times in the early 1950s.”

Through the years, he gained more and more power and accumulated more and more wealth. When he attended events at which he had to speak to stockbrokers, he adopted a policy of brevity, saying, “You’ve heard enough speeches– what questions do you have for me?”

Although the author fostered a corporate culture of informality and “Management By Wandering Around” at his own company, in many instances, he failed to take into consideration the culture of the target company. His strengths lay more in bringing the top executives of the parties together to do the deals, and negotiating the new management structures. It was ironic that he was such a poor judge of how the two cultures would mesh once the integration process began.

At times, Weill tapped the power of his friends in high places, one of which was the government. It helped him change federal law to allow transactions to proceed. For instance, prior to 1999, certain banking and investment banking services could not be legally offered by the same company, due to financial conflicts and possibilities for abuses. He and his cohorts had a hand in making the historic change so that people within the same company could offer their clients all kinds of financial services.

Weill describes a whole bunch of instances that provided evidence for the necessity of strict financial auditing laws. In just a few years at the turn of the 21st Century, greed had spun out of control in the industry, leading to the accounting scandals of Enron and WorldCom, the dot-com crash, and a major hedge-fund crash that required a bailout. A terrorist attack didn’t help, either. By 2002, the chickens had come home to roost in the form of a bear market. “The regulators, the press, and politicians of all stripes…” played “the game of pointing fingers.”

And yet Weill writes, “…governance rules mandated by Sarbanes-Oxley (enacted in summer 2002) made it seem likely that bureaucratic needs would trump the fun of the business.” He also complains that businesses would have to spend more money preparing their financial statements. Sorry about that, Mr. Weill. Yes, pesky, bureaucratic, expensive laws reining in greed are no fun.

Six years later– same song, different verse… a whole lot worse. Need it be said– The more things change, the more they stay the same. History will continue to repeat itself, given human nature.

Read the book to learn the details of Weill’s career ups and downs and trials and tribulations. This blogger skipped the last chapter, in which Weill merely rambles on stating his opinions, and the endnote, which is an interview with his wife, whom he lavishly praises as loving and supportive throughout this ebook.

Why I Left Goldman Sachs

The Book of the Week is “Why I Left Goldman Sachs” by Greg Smith, published in 2012.

This career memoir details how the author experienced the change for the worse in corporate culture of stock brokerage Goldman Sachs (GS) over the course of a little more than a decade, from 2000 to early 2012. The company lost its way in terms of its mission and values, which embodied fiduciary duty and integrity.

In 2000, the author completed the selective, elitist, highly coveted summer internship program at the brokerage. He saw how principled the money managers were in recommending truly suitable transactions to their clients; not necessarily the most profitable ones.

When he began working there as a full-fledged staff member the following year, he took to the work, possessing the right combination of talents, skills and abilities to focus for long hours on conferring with clients and doing what was financially best for them. The goal was to build trust in order to foster a long-term relationship. It stands to reason that that is a more profitable course of action than seeking to rake in maximum money in the short term– which would provoke disloyalty from the client, when the client realizes he’s been taken advantage of.

Smith writes that a gradual change was occurring at his workplace around the start of 2005. At the time, he admittedly was “drinking the Kool Aid” like everyone else. The megabucks were multiplying because conflicts of interest were increasing betwen the brokerage and the government and other entities with which the brokerage was associated in various ways. The CEO and COO of GS were all for it. Their yearly letter to shareholders reasoned that such conflicts were inevitable, and were a sign that business was good. A telling example: GS netted approximately $100 million when it helped its client, the New York Stock Exchange merge with publicly traded, electronic exchange Archipelago in a $9 billion deal.

In the early 2000’s, one trend in the securities industry that would contribute to huge financial losses for the big firms including GS, was automated trading via software. The autotraders of the different firms were programmed to engage in largely the same behavior. They sought to trade in obscure, off-the-beaten path investments in markets in which it was difficult to find a buyer when it came time to sell. And they were all trying to sell at the same time. That was not a condition the autotrader creators had anticipated.

Another aspect of the big picture was that the people selling the financial products– more specifically, derivatives– did not themselves, understand what they were selling. It might be recalled that a derivatives debacle plagued the securities industry in 1994. Apparently, in 2007-2009, the greedy people involved in this rerun of a financial catastrophe failed to read their history, or had short memories. And governments of entire countries like Libya, were suffering losses of billions of dollars, thanks to GS, in 2007.

Read the book to learn much more about the outrageous occurrences borne of avarice witnessed by the author and the world during what became for him, an ordeal, characterized by the saying, “The fish rots from the head down.”

Webs of Power… – Bonus Post

This blogger “clicked” through the ebook, “Webs of Power: Notes from the Global Uprising” by Starhawk, published in 2002.

The ebook is the author’s description of what her activism is about. She explains that the way globalization is currently occurring is wrong because big corporations are favoring money over people. Greedy corporations (and governments) are destroying the earth and life on earth.

One specific way governments are allowing this, is through the World Trade Organization. The United States joined the Organization and signed the trade agreement called GATT. That agreement lets the Organization, whose member-countries’ representatives, appointed via cronyism, make laws whose disclosure is denied to the world. No hearings of their proceedings are permitted. The actions taken by this secret society affect workers and human rights worldwide and of course, the environment.

The negative consequences have included, for example, allowing poisons to permeate the world food supply, endangering species and keeping drug prices high, all to the benefit of global corporations. What is not a secret is that those companies have, in recent decades, increased their profitability by moving their production facilities to nations where they can get labor at minimal cost while avoiding pesky health, safety and environmental laws. The author argues that this has also resulted in significantly increased income inequality the world over.

Read the book to learn of additional ways greed and power hunger are wrecking the world, and the role the author has played, through planning and organizing protests, training protesters, protesting and writing in trying to prevent further harm; and of her various proposals for governance and allocating resources in ways that do the greatest good for the greatest number.

The Billionaire’s Apprentice

The Book of the Week is “The Billionaire’s Apprentice” by Anita Raghavan, published in 2013. This ebook describes the investigation into the activities of a few Wall Streeters who were accused of insider trading in the past several years. Most of the accused happened to be of South Asian descent–from  Sri Lanka and India.

One concept the book conveys to readers is that it is unknown how many American securities-industry professionals are benefiting from insider trading, but the people in this book just happened to get caught because there was sufficient evidence against them to prompt the SEC, US Attorney’s office and FBI to go after them, rather than other possible offenders. The departments involved included the SEC’s Market Abuse Unit and the Department of Justice’s Securities and Commodities Fraud Task Force in the legal jurisdiction of the Southern District of New York (covering Manhattan and the Bronx, according to the author).

Another concept is that the investigating organizations and the securities industry are staffed with many people who, during their careers, switch allegiances. They might go from being a prosecutor to being a defense attorney, or from brokerage executive to government regulator, or vice versa. In this book the “old boy network” is alive and well. Arguably, conflicts abound.

Read the book to learn, among other extremes, about wiretapping (not the NSA’s), about one of the accused who “had several phones– at least thirteen– and he used them all” and a $30 million legal bill.

King of Capital

The Book of the Week is “King of Capital” by David Carey and John E. Morris, published in 2012.  This ebook recounts the history of leveraged buyout (“LBO” or  “private equity”) firms, mostly Blackstone Group, from the 1980’s through the first decade of the 21st century. This ebook attempts to debunk the stereotype of greedy Wall Streeters.

Back in the 1980’s, one kind of transaction or “deal” the LBO firm did, was buy out companies that were publicly traded, taking them private. It risked only a tiny amount of its own money to take ownership and take over the management, usually 5-15% of the total price. The role of the firm was to arrange financing. The management of the company (client) being bought out, was the party risking the most, and doing the buying out– borrowing a large percentage of the purchase price (leveraging) — in essence, “robbing Peter to pay Paul” with the monies raised by the LBO firm from various financial institutions.

This was where “junk bonds” came in– very risky debt instruments that carried extremely high interest rates, as much as 19%. The reason for the risk and high return, was that, in the event that the client went bankrupt, bank loans were repaid to creditors first, and if there was any money left, then much later, the junk bonds would be repaid.

According to Carey and Morris, the goal of LBO firms that were “corporate raiders” was to capitalize on the hidden value of a target’s assets that was not being reflected in its stock price. The value was there but the directors and officers of the target were too busy looting their company by throwing lavish parties at their mansions and on their yachts, and zipping around in their corporate jets.

The raiders had no interest in owning the target, but wanted to make it leaner and meaner by firing the greedy CEO’s. Then they would cash out at a profit of several times their initial investment. Over time, the targets developed strategies, such as the “poison pill” to counter the raiders. Unfortunately, “For all their talk of overhauling badly run companies, the raiders seldom demonstrated much aptitude for improving companies.” Pox on both the houses of the raiders and targets.

Buyout firms that were not corporate raiders truly wanted to own the target. “…buyout investors look for companies that produce enough cash to cover the interest on the debt needed to buy them and which also are likely to increase in value.” A major part of the job of LBO firms is to identify possible deals through extensive financial research, and then decide whether to invest in the ones predicted to succeed.

The year 1981 was a great year for LBO’s because interest rates peaked, there was an economic downturn, and stocks were down. In the autumn of 1985, two partners, Steve Schwarzman and Pete Peterson started Blackstone Group. Schwarzman said that his partnership would not be able to compete with the older, more experienced LBO firms, unless it “…brought efficiencies to a company by way of cost improvements or revenue synergies.”

The early 2000’s became a rerun of the 1980’s as financial institutions took on excessive debt loads. Fall of 2008 saw the U.S. Treasury Department and the Federal Reserve Bank raise funds to try to bail out Lehman Brothers, Merrill Lynch and AIG by calling on private equity firms like Blackstone Group to help.

Read the book to learn more about the redistribution of wealth among the wealthy over the course of three decades, and the turnover, and victories and defeats of the partners at Blackstone Group.

Dot Bomb

The Book of the Week is “Dot Bomb” by J. David Kuo, published in 2001. This ebook details the business dealings and the ensuing suspenseful power struggle at a dot-com company called Value America between 1996 and 2001.

The online retailer’s intended brand image was to boast maximum selection of merchandise shipped directly from sellers. This delivery-on-demand arrangement allowed the company to remain inventory-free, and thus minimize overhead costs. However, in reality, it needed to use resellers for many of the supposedly infinite products it sold.

Value America’s founder and leader, Craig Winn, was a charming megalomaniac who had grand plans to partner with various major corporations in order to attract investors and make the company worthy of an IPO. Unfortunately, Winn had planned to sell stock to the public just after the peak of the dot-com boom, when brokerages’ confidence in internet companies had started to wane.

After Value America went public, Goldman Sachs issued a report that Amazon.com was the internet retailer with the highest potential for success because it had high sales margins on its then-merchandise consisting only of books; a $30 billion valuation was not out of the realm of possiblity. Goldman went on to say Value America had the worst prospects, with sales margins of 1% and runaway costs. It would have to achieve revenues of billions of dollars in order to make any money.

Toward the end of the story, the author realized “Despite the hype, headlines, and hysteria, this was just a gold rush we were in… a lot of us were kin to those poor, freezing fools in Alaska who had staked everything on turning up a glittering chunk of gold.”

Read the book to learn the fate of the author, his family and the other Value America employees with dollar signs in their eyeballs.