Ralph Cioffi and Matthew Tannin found not guilty

The announcement that two former Bear Stearns hedge fund managers were acquitted in the collapse of the organization was a major setback for federal prosecutors. Ralph Cioffi and Matthew Tannin, who managed two failed mortgage-bond hedge funds, were found not guilty in misleading investors to the tune of $1.4 billion dollars. At the heart of the prosecution’s case were the defendant’s e-mails including one that said the subprime market “looks pretty damn ugly”. What the defendant’s said in their e-mails contradicted what they told their bosses. Jurors later said that the evidence wasn’t strong enough to convict.

It’s unfortunate that the jurors didn’t see what was really going on here. The defendant’s were clearly involved in wrong-doings, which ended up leading to the demise of Bear Stearns. The tone in their e-mails compared to their public point of view painted a picture of fraud, deceit and intent. E-mailed words as evidence have won convictions in the last decade and they should have in this case. While the interpretation of e-mail text is open for some interpretation, so are wiretaps. Whether you type a comment or say one on a phone, there is always a gray area on what the defendant is trying to communicate. We still use wiretaps today to convict people and we should be using e-mails as well. Why do you think corporations have an entire strategy in managing internal e-mails? They want to limit their liability. Since this case was the only major criminal case to emerge from the mortgage meltdown, the jurors had a real opportunity to send a message to the Wall Street that fraud will not be tolerated. This verdict now opens the door for those who want to continue to make money at the expense of others. How many more victims will there be before we take a tougher approach?

Maurice R. Greenberg

It was recently noted that Maurice R. Greenberg, the man who built the American International Group (AIG), is at it again. To fill the ranks of his new venture, C.V. Starr & Company, he is hiring some people he once employed at AIG. Mr. Greenberg’s success may be at the expense of taxpayers. It might be a matter of time before AIG’s business gets siphoned off along with its people. That would impact AIG’s ability to repay its debt to the government.

While Mr. Greenberg is AIG’s largest shareholder aside from the government, it’s clear that Mr. Greenberg’s intent is to build an AIG 2. His new firm seems to be focusing on specialized lines of business insurance that once made AIG stand out. In my opinion, Mr. Greenberg was key in the demise of AIG; from his accounting scandal to risky trading of derivatives. How can taxpayers sit by and watch as the government props up AIG, only to watch a “new” AIG develop with no liability to taxpayers? Only in America can a crook build a business and trump the government at the same time. It’s amazing what money and greed do to people. Somehow, government officials need to either let AIG fold (something they will not do given the investment made) or develop incentives and controls around AIG’s current business model. If the government is unwilling to do this, then once again it’s been duped by a person who’s motive is money; not the wellbeing of the American economy. It’s great to live within a “free enterprise” system where businesses can be built to drive economic growth. It’s unfortunate that being a “crook” doesn’t really make any difference in this process.

Wall Street’s expectations?

Stocks ended mostly unchanged on Monday. There is much anticipation with quarterly earnings reports due on the financials and many other benchmark companies. The question on everyone’s mind is will corporate America’s performance continue to fuel the stock rally by beating Wall Street’s expectations? But the bigger question is, while the recession has depleted trillions in household wealth, can the American consumer drive economic improvement?

Do not underestimate the American consumer. The American consumer will lead us out of this recession and fuel economic growth. Earnings from corporate America for the most part have been very encouraging with many companies reporting top-line sales growth. This reflects consumer demand is there in a number of segments. While consumers have become more price/value driven, they are willing to spend if the right deal is presented. In addition, with the stock markets continued push toward a 10,000 Dow, consumers are feeling better about their 401(k) accounts and portfolios. This will translate into more consumer spending which in turn will fuel job growth. Do not underestimate the American consumer. The dynamics in how they purchase may be different but his consumer will buy – and that’s a good thing.

Robert B. Zoellick, World Bank

The president of the World Bank recently issued a statement suggesting that America’s days as an unchallenged economic superpower might be numbered and that the Dollar was likely to lose it’s favored position. Additionally, it was suggested that the euro and Chinese renminbi would assume bigger roles in the world’s economy. The World Bank, which is financed by governments around the globe, has no say over the economic policies or large nations or over currency matters.

While World Bank president, Robert B. Zoellick’s comments might seem unusual, his experience as a trade representative and deputy Secretary of State provide a creditable backdrop. When you dig deeper into his comments, he’s clearly taking a shot at Obama’s financial policies and the role of the Federal Reserve. His underlying comments suggest that the U.S. government will struggle as it tries to strengthen the financial system. This is the same government, through lax and failed policies, has allowed the country to fall into one of the worst recessions in history. What Robert B. Zoellick is alluding to is the government has a poor record of accomplishment in fixing anything, so why should they start now? Given the growth potential in the international markets, especially in China, Zoellick’s comments seem well founded. While Obama and the government wrestle with ways to improve our economy, growth is well underway around the world. Is Obama playing for the short-term or long-term? Does he understand that U.S. economic growth depends on the free market system with incentives to grow business, not more government policies and higher taxes? The jury is still out but maybe Robert B. Zoellick knows more than we think.

Consumer borrowing

The Federal Reserve recently reported that consumers ratcheted back their credit by $21.6 billion from June. This was the most on record dating back to 1943. Demand for nonrevolving credit used to finance cars, vacations and other things fell by $15.4 billion and revolving credit (credit cards) declined by $6.1 billion in July. These statistics highlight a continued trend that consumers are spending less as they cope with the impact of the recession.

This report comes with a Good News, Bad News story line. The fact that consumers are reducing their credit spend is a good thing. This correction must happen for the economy to get to a better place. Over the last years, consumers have kept piling on credit spend to fuel a lifestyle that was really beyond the means of many. As the country fell into a recession, consumers with high debt were the ones to be first exposed. With a reduction in consumer debt comes less spending to fuel the economy and that’s a bad thing. Consumer spending accounts for 70% of the economic growth. This reduction in credit demand is also being fueled by continuing job losses. With these insights, lets hope that our officials in Washington understand that incenting job growth; specifically with small business is where the game needs to be played. People need to go back to work and begin to get confidence in the economy. Only then will we see consumer spending start to drive the economic engine. Imagine where we could be - consumers working and spending again….but also saving more and managing their debt load more effectively. Lets hope we learn a few things from this recession. That consumers are serious about better managing their credit spend and that the government knows where to spend our stimulus dollars. Together, this is a powerful combination.

Nicolas Sarkozy

France has recently announced new policies that will curb the excessive compensation in the Banking industry including how bonuses are paid out. This was done in response to a challenge laid out by G-20 leaders in April. French President Nicolas Sarkozy also plans to push for tighter international rules at a meeting of global leaders next month.

I applaud the leadership taken by France, not only to tie bonuses to a 3-year performance plan (thus eliminating the short-term focus) but also challenge the G-20 leaders to take action. When you look at the amount of monies paid out in bonuses by Banks, the average person on the street can’t relate. How did Banks bonuses get to be so large? One reason is the Banks fear of losing top talent…so the bonuses get going higher. The Banks have lost sight in why bonuses exist in the first place. This misplaced use of bonuses has fueled the short-term focus and the general “greed” prevalent in the Banking industry. This greed is what caused this global recession in the first place. So, now that we’ve bailed out the Banks, they want to go back to status quo. I don’t think so and neither does France and Germany. If we’re going to learn anything from the banking crisis, we can’t incent the Banks to focus on short-term gains. France’s approach seems right on by tying bonuses to performance over a 3-year window...poor performance?, no bonus. Do you think Obama and the Federal regulators get this? I’ll be watching the results of next month’s meeting. I hope the US has the same passion to eliminate “greed” as it did to eliminate “clunkers”!

The Federal Reserve

In a recent announcement, the Federal Reserve has extended a program intended to spur lending to consumers and small businesses. This program, which was scheduled to end on Dec 31, will now be extended through March 31. The TALF program is seen as a key plank in helping to ease credit, stabilize the financial system and leading the US to an end of the recession.

While I’m normally not in favor of the government trying to stimulate anything, I believe the Obama administration got this one right. The severity of this recession and the impact to the financial markets has required an “all hands on deck” approach. Getting the credit markets going again and making loans available is necessary to get this economy going, which is the focus of the TALF program. Given it’s slow start, this program hasn’t gained the traction the administration wanted. By extending this program an additional three months, consumers and small business will hopefully get the loans they need, which in turn will fuel the economy. However, I hope the government doesn’t just extend the program and call it a day. Let us hope they are reviewing why this program has been slow in getting loans to the right people. A program is only as good as its execution. Extending a poorly run program doesn’t really do anything but reinforce people’s perception that the government can’t really run anything. The government has the opportunity to get this one right.