• Obama, Watch Consumers And Learn

American consumers are being accused of closing their wallets. This is evidenced in three months of contracted spending into the end of 2008. The new year has brought more of the same, and consumers are being admonished for spreading “weakness.”

Politicians, economists, and the media, have strained to peculiar characterizations in describing the source of the current protraction in economic activity. Most renderings are not flattering to consumers, and are aimed at stimulating feelings of guilt or culpability. The use of imagery such as “weakness feeding on itself,” with the weakness being the consumers’ spending, borders on ridicule of the consumer. “Consumer confidence falls,” is another great headline we are subjected to. Why is there such negative perception attaching itself to what is in fact an extremely positive reversal of past detrimental behavior by consumers?

Consumers are not panicking the way their leadership appears to be doing. Taxpayers are being conscientious with their hard earned dollars. Consumers increased their rate of savings to 3.6% of disposable income in December, representing a significant month to month increase from a 2.8% rate in November, and overall a marked improvement from the only 0.8% of last August. Consumers are prioritizing their purchases, and cutting back on credit card use. This is a positive trend that will strengthen the likelihood of a return to economic health in the mid to long term. It also suggests that consumers are discounting endless prognostications, including Obama’s, of a restoration of the economy’s wealth and health within 6 months.

Consumers should ignore the mainstream media, the pundits, the economists and most of all should ignore implorations of “spending” from politicians. The economy will not be fixed in the short term, and believing otherwise is ignoring reality. The turn around can only be realized gradually through a diligent and patient ascent along a very gradual incline. Consumers are first taking care of absolute needs such as food and shelter, and they will then endeavor to save for an uncertain tomorrow. From those savings will emerge confidence that will very gradually ensue to gradual, rational, and conscientious increases in spending levels. Current signals strongly suggest that consumers have learned a lesson, and will in future spend within reasonable means of their disposable incomes. It is safe to expect that consumers will treat their homes very differently, and will no longer perceive them as rapidly appreciating sources of cash.

Government’s artificial injections of taxpayer borrowed stimulus billions, over and above normal and required spending, are unlikely to deliver reliable foundations for establishing solid and sustainable economic pillars. Does no-one sitting at the new Presidential round-table of experts understand that a $15 trillion dollar economy is a “long build?” Short term thinking is what brought us the current mess. Why agitate taxpayers through fright and terror? Is this an attempt to justify incomprehensible spending programs to placate special interests? Will this lead consumers to remain uninquisitive as to the structures of the bailout packages, and their lack of contractual arrangements? Is this an attempt to win over the almost 60% of the population strongly against the stimulus and bailout package Obama and Congress are implementing? Rebuilding of the economy will be a lengthy process, and other than providing consumers with incentives to continue their current trends, government should get out of the way of its materializing.

The political leadership should listen to American consumers. Listen and observe. Doing so would temper the rush to explode the National debt to 70% of GDP. You can help no-one else, if your house is not in order. Consumers are not rummaging for “boom times.” They are searching for shelter in stability.

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• Should Bailout Beneficiaries Be Outsourcing Offshore?

Congress and the White House have left a moral dilemma for American taxpayers to resolve for themselves. Government has not shown diligence enough to install common sense agreements onto the multibillion dollar bailouts. Should recipients of taxpayer favors continue to send jobs offshore?

In the past year thousands of jobs, some very high paying jobs, have been eliminated across the country in companies receiving bailout money. The jobs have been terminated for U.S. workers, but they have reappeared in other countries. The benefactors? Hundreds of thousands in the Philippines and India, for example. These are beyond the usual consumer service and support types of jobs. These jobs are in research, bill payment and collection, credit analysis, and investment banking.

Why would Citigroup and Bank of America, among others, be gifted tens of billions by American taxpayers, without restrictions or conditions on use of the funds through contracts? Who is really handing out bailouts with no requests for the repatriation of jobs, where possible, such as all those jobs these companies outsourced? Are these stalwarts of American capitalism also receiving “bailout cash,” to swaddle their failures, from India and the Philippines perhaps? Not a chance. Why are senior corporate executives complaining about not being able to find necessary expertise when the competence was fired and replaced with talent on the far side of the globe? Any chance that this is rationalization by CEOs for the hiring of cheap labor?

Companies should be allowed freedom to manage as they see fit, …unless. When the Administration and Legislature decide to put taxpayers on the hook for trillions of dollars to bolster failing businesses, it is NOT right that those very same taxpayers be sent to the unemployment lines by those very same companies.

This lack of interest, ethics, humility, inquisitiveness, attention and duty by the Obama White House and the Pelosi Congress is confusing. Is no-one paying attention? Is leadership delinquent? Is pomp and circumstance the new prevailing flavor in Washington, overriding any expectation of thoroughness over such significant decisions? This leads one to become extremely suspect of the rush to implement stimulus packages. Nothing ever receives proper attention, or is ever effectively implemented behind the leadership of panic. This is not a welcome sign for the onerous road ahead. And don’t bother looking for any other signs pointing to creativity.

Of course, emerging markets have a right to continue flourishing, but this is not a debate on protectionism. This is a questioning of common sense. Taxpayers are not served well with the continuing export of jobs by the very companies they are sinking into debt for. Is the creation of JOBS not the principal objective of a "stimulus package?" It appears the navigators are too unfamiliar with the terrain, and diligence over the cordial doling out of billions is under the administration of extremely poor negotiators.

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• Disrespecting Taxpayers & Shareholders

As CEOs beg for Troubled Asset Relief Program (TARP) handouts, the new corporate mantra is, “maintain shareholder trust,” … sorry, make that the new corporate mantra is not, but should be, …”maintain shareholder trust.”

All Congress and White House promises of oversight on the bailouts don’t seem to apply to financial institutions. Bank of America received $45 billion from trusting taxpayers, and after its sloppily structured acquisitions of Merrill Lynch and Countrywide Financial, taxpayers watched helplessly as hundreds of millions were paid out in bonuses to the failed company executives. $2 billion went to the senior talent at Merrill for delivering $15 billion in losses for the last quarter. The excuse from B. of A., the 100 year old largest financial services company in the world, was that it couldn’t legally challenge the previously made promises for absurd payouts and bonuses to people who destroyed the companies they managed. Truth likely resides closer to lack of due diligence prior to the acquisition, and forgetting to impose much needed conditions upon closing.

How do The White House, Congress and B. of A. CEO Ken Lewis forget to make the cancellation of these extraordinary payouts part of the negotiation when the acquisitions of Merrill and Countrywide were being so brilliantly conceived? Now the Bank is looking for more bailout money from taxpayers. That’s after destroying one quarter of a trillion dollars in shareholder value. Why are taxpayers continuing to be so generous? Why are Obama and Congress not refusing to provide more money? Why are they not demanding removal of B. of A.’s Board of Directors and CEO? What has been perpetrated on taxpayers and shareholders is well beyond the bounds of abusive, and certainly not within the definition of “trust.”

Leaks of Merrill CEO John Thain spending over a million dollars to renovate his office pales compared to the $83 million he paid himself, before his company imploded, receiving $10 billion from taxpayers last October. Is anyone really paying attention? Handing out bailout money appears to be very easily done. Could it be dished out a little less sloppily perhaps?

The Citigroup version of abuse after receiving its $45 billion bailout from taxpayers includes a very visible $50 million executive jet. No flying coach for these managerial failures. Is there someone coaching these folks on effective PR? Now that the public distaste has become an impossible pill to swallow, Citigroup announces a decision not to take delivery of the plane. And this incompetence requires that it be paid millions in compensation so that it does not leave the fold for greener pastures? Who would hire these decision makers? Another bank adept at taxpayer and shareholder abuse?

Are Obama and Congress making good on their promises? It appears that such lack of interest is as extreme in disrespect of taxpayers and shareholders, as the extent of transparency, control and disclosure is lacking. Their response to the public outrage is disheartening and rather pathetic. What category of oversight does, “… (Citigroup) should not be spending its precious greenbacks on frivolous luxuries,” represent? Getting a Treasury Department official to ask Citigroup to rescind the decision after the furor became deafening was proof of incompetence in the execution of the duties to represent taxpayer interests. Should parameters for use of funds not have been decided on and agreed to before the cash bags were delivered?

Where in the rainbow of possibilities contained in the term, “accountability,” does the taxpayer-funded influence peddling of politicians by these companies, get such interpretation? Should taxpayers be grateful that B. of A. has decided to curtail its visible lobbying for bailout money? It will do so more privately from now on, and the rest of its lobbying activities will advance unabated. Politicians will continue to be influenced with taxpayer bailout money, but the manner of this manipulation will be much less embarrassing to taxpayers. Whatever partial non-lobbying the bank is not participating in, seems to be working. It’s expected to receive another traunch of TARP funds as its own exotic and toxic securities ferment into further billion dollar losses.

All of this has nothing to do with tightening regulations on the banking industry, though some is required. This is about setting in place firm agreements and conditions under which the hundreds of billions are to be accepted and spent on behalf of the taxpayers who will be on the hook for the money. This is about establishing a government agency that would, on behalf of taxpayers, become the guiding body watching over the complex intricacies of the whole financial system and its ability to create derivatives no one understands or analyses. This is also about showing respect for sweat that America’s broad middle class will endure to pay back all of this bailout money.

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• You’re Fired. Now, Where’s My Raise?

Today Microsoft announced a shaving of 5,000 jobs internally and a reduction of thousands of external jobs with its contractors or suppliers. This is rationalized by “economic conditions.” Did we read anything about wholesale compensation cutbacks? Not much.

This is not a condemnation of Microsoft, but a statement on Executive responsibility and attitude. Management in companies across this continent, particularly senior management, holds meetings on how and where to cut back roll calls, and diminish hard, non-discretionary costs weighing on the cash flow statements. The purpose of these thousands of meetings in fluorescence filled rooms is first, to save the most senior jobs, and second, to save the most senior jobs. Why? Because they can. Why? Because they’re more senior than the rest. If you are a senior executive in this economic climate you would have to commit evident fraud to get fired. The economy gives you all the rationalization for failure you will ever need, “It’s not my fault, and the economy sucks.”

None of these meetings are discussing the extermination of options from compensation packages. Starting with the CEO on down the layers of each corporate pyramid, each individual has been convinced that options are the way to riches. Middle and lower ranks dream of the day when they will get a taste. Wall Street pulled all of corporate America into its game. Brokerages influence companies through their prejudice of CEOs and Boards of Directors, and as well as through their control of the public trading markets of the companies these executives manage. Employee options are one key to that control. There are other schemes used to control CEOs, however, for the manipulation of the senior crowd, options are a perfect and very effective tool. Corporately, options can be argued to be effective in up-markets. The effectiveness argument looses fervency when options are under water, as is the case for many in the markets we are now experiencing. So why is no one arguing against them as an effective tool in the motivation arsenal? Options don’t work in a down turn. So why use them? DON’T.

Employees, including CEOs, should not be preoccupied with stock markets. Doing their jobs effectively will strengthen the company and that will, or should, satisfy shareholders. Forget the broker. This employee option business is a Wall Street subterfuge and everyone is familiar with the refrains that attempt to legitimize the practice. Any executive hiring a consultant who sings the “equity compensation” song to his board or to the shareholders, should be fired. Their rhyming couplet about, “aligning executive interest with shareholder interest,” is a fraud. Throw them out.

Middle America has been lulled into accepting that those at the top of the corporate food chain know something it doesn’t. Middle America has come to accept that the lofty layer of American capitalism somehow deserves hundreds of millions in annual compensation. The practice should be stopped and all shareholders should demand an end to it. The senior ladder of success should be compensated with salaries and bonuses structured around objectives intended on building the business. Objectives such as growth and profitability. You don’t need a complex algorithm to establish actuals against quotas for sales or margins that could be employed to dictate an employee’s compensation.

None of the above mentioned corporate meetings are having serious discussions on ethics, moral standards, sustaining the human community, or sustaining jobs through the recession by dramatic overall cuts in salaries and bonuses. Have any companies announced immediate 20% pay cuts to the top half of the employee spectrum? Is anyone making over $100,000 in total compensation getting chopped by 20%? Is anyone making over $250,000 getting a 25% haircut? As for anyone taking over $500,000, … hmm, OK, for you maybe we’ll, hang on, ... let’s talk about a loan back to the company, could we? You get the point. Implement major cut backs in salaries and bonuses, and save jobs. You can’t save all, but save as many as humanly possible. This will require an attitude shift in senior management.

Such a strategy would allow people to continue supporting their families, buy food, make car loan payments, and pay their rents or mortgages. I’m not suggesting that corporate America turn into Sally Ann, however, the whole economy needs creativity injected into its limbs if it is to by-pass a depression. Don’t keep positions that are not required or redundant, but most of the employees now being fired were hired for good reason. As markets shrink so too will payroll, but in these times of bailouts, the escalated compensations of senior staffs need revisiting. These senior levels must take compensation diet pills. Big ones. Such therapy can only be prescribed by those taking home the largest piece of the pie. All CEOs should make a visible and public effort to save the rank and file.

The economy does not need to read about any more cuts in work forces, as 3 million already lost their jobs last year, but it really needs to read that you, the CEOs, implemented drastic cuts in compensation. Even if you personally take one cut of $30,000 to save one job, that is a move in the right direction. Each company can do its part. The positive PR will do wonders for your frame of mind, for your company, and most importantly, you will be forever grateful. Really.

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• Bernie Madoff - A Letter Of Explanation?

The Editors of The Pacific Gate Post received an envelope from persons unknown, containing a letter apparently discarded in an alley behind an Upper East Side, Manhattan apartment building. The letter had been crumpled up into a ball and partially torn, possibly having been thrown out of a penthouse window. Its reconstruction was completed and we publish it hereunder, confident that even though it is a piece of fiction, it may contain shreds of clarification on recent economic events.

Dear Friends,

As I sit in my Upper East Side apartment living room, with nowhere to go, I watch the news and read as many publications as I can have sent up. It’s almost like I am observing some other person everyone is talking about. That characterization in the news is not the Bernie I know. I feel an urgent need to clear the air because, I’m not the person being portrayed. This whole thing has been completely contorted by the media. I am not so different from the rest of Wall Street. So please bear with me.

I am under house arrest, and the authorities are even searching my mail. I have more than enough time to contemplate the last 48 years. It’s been that long since Ruth and I formed this business of ours, and I feel bad that the downturn in the economy has been so destructive. I was always a very private man, have never liked public affairs and I’ve pretty well stayed to myself. Although my wife, Ruth, who is also my best friend, dragged me out to functions, I like peace and quiet. I’ve been accused by some of being antisocial, but that’s not the case. I just like being by myself. Just ask her. Even when we go out for dinner, it’s just the two of us. That’s it. She’s very patient with my mood swings, and she’s the best thing that’s happened to me. I prize privacy as much as I despise failure.

I also can’t stand blowhards and the investment business is full of them. Since in the past I did not wish to cast insult on anyone by excluding him or her, Ruth and I mostly stay by ourselves, or with our family. These people running hedge funds and investment banking companies have overinflated perceptions of themselves. Everyone worships them. Hard working Americans think these money managers know what they’re doing, because CNBC, or Barron’s, or the Wall Street Journal tells them they do. I’ve spent my life with these people. I’ll tell you what. They don’t know anything extraordinary, but they’re good at pretending. They don’t produce much, but they get paid more than anyone who actually works for a living.

Let me explain something here. For years I ran a successful business. I was a trader and my goal was to become the most successful fund manager on Wall Street and build the biggest fund on the planet. We did it all. Hedge fund, broker-dealer, trader. We had the latest and best technology, which gave us an edge. Technology was critical. Our software made it possible for me to manage the reports and payouts on the enormous amount of money that were thrown at me. I developed a reputation, a really outstanding reputation. No one could touch me. I had the Midas touch and from Miami to London every money manager running anything bigger than a bingo scurried energetically to attract my attention. I understood the big money boys, and I delivered exactly what they wanted, reasonable and steady returns.

I’ve noticed that some people, who invested with us, now appear indignant and are claiming losses. Such hypocritical behavior is downright pathetic. Ask them how much they made with me, year after year. If they were fund managers or fund aggregators, here’s a hint, check their overseas travel schedules from past years. Check the files of travel agents. They’re full of good news for any investigator worth his salt. When you think of Geneva, what do you see? You probably envision an idyllic, very European city overlooking beautiful Lake Geneva surrounded by the Swiss Alps. For years when I saw Geneva, and a few other cities like it, they were deep wellsprings of cash exchanged for a piece of the action. I am using Geneva as a metaphor here. A metaphor suggesting mountains of cash sitting discreetly in banks and safety deposit boxes around the world from kickbacks or commissions.

Private bankers are guys who manage pools of capital. No one can check how much he or she gets in “kick backs” because there is usually no conspiracy. By that I mean, … there are only two people in the room. That’s not a conspiracy. Just check some of the feeder funds, or the funds of funds, and their deal-maker managers. Not all of them of course, but some. That’s where I started the game for crying out loud. I arranged for others to set up funds, and they fed that capital into my companies. Initially it was just small investment groups, but those snowballs grew, and grew and grew. I became bored with repeating the refrain about my split conversion strategy using both put and call options, but before you knew it, we were raising more money than anyone could invest intelligently.

So many money managers would come with their exasperating questions, and the pretence of due diligence. Some of the idiots who really took themselves seriously even came with forms, asking about trading strategies, governance, compensation and using terms like fiduciary standards or benchmark performance. Like these barnstormers had a shred of any moral standards. These were the same crackbrains who charged their clients millions for “reinvesting” the money elsewhere because they couldn’t run a fund themselves. They are the modern version of snake oil salesmen. Getting them out of my hair was easy. I just made myself unavailable. You want in, give me a check. If not, get out. It worked. They couldn’t wait to hand over money.

The principal key to success for me was “perception.” Great PR is absolutely everything. That’s something my father never had the privilege of understanding. He tried to get into the money game, but had little success. I somewhat fell into the character of the aloof and insulated investment banker by accident. I didn’t want to answer questions about my trading strategies, and even when I consented to meeting with potential investors directly, I kept all meetings short. My aversion to meet, worked wonders and the more I became unmeetable, the more people wanted access. This evolved to the point where people threw hundreds of millions at us, just so that they could get twenty minutes in my office, or so they could be seen having lunch with me. How weird is that? I made sure that I joined the right organizations, which provided me some credibility, but in fact they would end up bragging that I was on their board, or part of their group, or that I was an advisor. Through goodwill, I created a long series of what you might call recursive loops of gullibility that brought me an infinite source of investors.

The games in the investment business may have a few rules but these are just veneer. The complexities that have evolved are intended to circumvent or confuse oversight. How can anyone, even those intimately familiar with trading, catch a trader worth the name who’s front-running, or naked short selling, for example? Unless you’re sloppy, you can get around legal restrictions without detection. Investigators know the game, but they have insurmountable difficulties when it comes to getting hard evidence. Today, volume and technology make illicit trading difficult to detect, yet many people on Wall Street do it. You do what you have to do in order to remain ahead of the next guy. If you don’t believe me, do your own research on how many of the major firms have been fined over the last thirty years with timid slaps of the hand. What they were doing was illegal, but who went to jail?

Loyalty was critical to me, and a central part of my strategy was to make sure that all investors understood unambiguously, if they took their money out of my hands, they would never be allowed back in. As a result, most investors never asked for their principal. If someone invested, we also demanded that they not divulge anything about their investment, or our business. That guaranteed that they would spread the word in hushed voices, punctuating our image of exclusivity. No one can keep a secret, least of all an ego with a pressing need to brag of its admittance into the most exclusive investment club in the nation. They can’t now be accused of gullibility when greed was their motivation.

In the past decade or so our total volume under management created momentum. The size of our volume provided us a perceived ability to affect the markets. Investors assumed that we could manipulate market sectors to our financial advantage. They were willing opportunists and ardent participants, knowing full well that such manipulation would have been illegal. This was another critical element in my strategy. These deliberate and enthusiastic partners in my game asked no questions once they were in. Even people with serious money “don’t want to know” although they might suspect. No one is innocent. As I said, good, effective PR is everything. With the right image everything is overlooked, including what you have or have not done.

How do you think all those salaries and bonuses on Wall Street are justified? Their image. They don’t call it Ponzi, but what’s the difference? Money is vanishing. Why do you think no one is getting any accounting of where the bailout money of the banking industry has really gone? Well over a trillion dollars has mysteriously disappeared into a giant black hole. Bailout money is being used to pay hundreds of millions in bonuses? Is anyone accountable? Oh, sure, Congress pretends it is going to ask questions. That will be about as effective as those questions I was asked by those investors who wanted to understand my bookkeeping. Why so much complacency when there is so much anger at me? Am I just a scapegoat, and the object of venting, that is a necessary relief valve absolving all of Wall Street? All cameras are focused on my front door while taxpayer bailout money is siphoned off to distant islands and yachts not registered in the U.S.?

There has been an assumption about my sons, Andy and Mark, and other family members having participated in my schemes. They worked with me but had nothing to do with it. Nothing. I needed them to take care of our private family interests and our charitable work. That was a central component of the family’s communal focus. My kids turned me in. I asked them to. They just pulled the trigger a little early though, I had some plans for a few days before the authorities showed up at the door. Same goes for my brother, Peter, who has been a loyal associate taking his instructions from me, overseeing our trading operation, but leaving all of the senior fund management alone. He is a lawyer by training, confused by investment strategy as most people are, and he knew nothing about trading and money management.

You will read of endless “trusting” investors having been swindled and you’ll hear their rationalizations. Most of them were just greedy. I also predict that you will read about the closing of hedge funds, and funds of funds over the next couple of years. Their leadership will not be questioned, although their actions were not much different from mine. They will simply slip away into the night. I am proud that I have at least had the decency to step up and take the blame. I decided to plead guilty in order to end the stress on everyone around me. I have taken a giant leap onto my sword, and I have instructed my lawyers to make sure any deal they conclude with the District Attorney is final, and all-inclusive.

People are told, “don’t manage your own money, hire a professional.” Think about that statement. Why is it that money is such an enigma to so many people? Why do they listen to the so-called experts? Why do they persist in asking to get ripped off? Investors continue to place their money in the hands of people they don’t really know. Do you really know an acquaintance? Do you truly know a friend? We barely know ourselves, yet we trust others with our hard earned cash?

I am not like Wall Street, I am Wall Street. Today I will ask my lawyers to see if I can do consulting for the investigators and legislators. I know this game. I could be the best thing that’s happened to cleaning up The Street in a hundred years.

Sincerely,
Bernie

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