“The dark days of deals are over. Financial institutions will have to decide if they want to be banks or if they want to engage in the risky financial trading that caused the collapse of firms like AIG.”
Okay, so it’s two sentences. More here, from the battle on financial reform taking place on the Hill. And here’s a paper I wrote a few years ago about the problem of credit default swaps.
It’s probably fair to say that the amount of lobbying dollars spent by the Wall Street banks in DC is directly correlated to the size of their profit margins under threat. So this is going to be one heckua fight. But let’s be clear – the debate over derivatives you’ll be hearing about in the weeks ahead has nothing to do with economic freedom, limiting customers’ flexibility, or any other rhetoric. Banks don’t want any transparency into derivatives because the margins are so large. Sunlight means less profit – full stop. And while there’s no bigger fan of profit than me, if it comes at the expense of pulling the wool over your customers’ eyes, then it’s fair to question how sustainable those profits really are.
Politics aside, I think the huge pushback the Wall Street banks are mounting to what really should be a no-brainer part of reform underscores one key insight for investors: these banks don’t have sustainable moats.
Whatever economies of scale they might have are dwarfed by the complexity of their businesses, and that scale is certainly not evident in their internal returns. While there are plenty of sharp folks who work for the big banks, from a business owner’s perspective, that’s kind of like seeing your competitive advantage walk out the door every night.
So a point that I think gets lost in all the rhetoric these days is that these banks are lousy businesses. I would have thought that obvious to anyone alive in 2008, yet somehow it is not. Wall Street banks don’t represent the best of American companies, nor do they have any interest in truly free markets. I suppose you might respect their power and their unique political connections, but they shouldn’t get any credit at all for building enduring businesses. And shouldn’t that be at least a little relevant here?
When it comes to financial reform, Wall Street banks certainly don’t deserve a seat at the negotiating table because they’ve earned it. They bought it. Here’s to hoping we see that change.
Update: Um, never mind. This is now the most amazing sentence I’ve read this week:
“U.S. Accuses Goldman Sachs of Fraud.”
Sounds similar to the Magnetar trade.
And from a political strategy perspective, this announcement is arguably brilliant in terms of timing. Not only has Goldman’s seat at the reform table imploded, but the other big banks just saw the height of their chairs drop by about a foot.
Well-played, Forces of Good. Now, break up the banks, and I’ll quit badmouthing you for at least a week.
My friend Neal in Key West sent me this note this week:
“In August 2008 my oldest daughter was 18 and in her first year of college. I sat down and drafted a one page list of what I thought at the time were timeless pearls of money wisdom and gave her the list. It was based on 20 plus years of personal experience and education regarding money management. Anyhow, I came across it last night and after reading it, I still think it represents timeless personal financial planning wisdom. I thought of you and I’ve attached a copy for you. I’m sure it’s pretty basic stuff for someone who manages money for a living but I thought you might like to see what type of advice some parents give to their teens.”
Here was Neal’s list:
-Save first, spend later: have emergency savings, retirement savings, and investment savings plans.
-Pay yourself first, live on what’s left: use automatic investments direct from pay or checking account.
-Live within your means: don’t try to compete with others.
-Be frugal, but not stingy: avoid wasting money.
-Diversify between and within investment classes.
-To excel at something, immerse yourself: educate yourself on whatever you invest in.
-Swear off debt: borrowing money is like wetting the bed, it may feel warm at first but the cold reality hits in soon.
-Do what you love: find work in something you love and it’s more like a hobby than work; there are few things worse than getting up everyday and going to a job you don’t enjoy just because you need the money.
-Know where your money goes: track income and expenses closely and analyze the results periodically.
-Equities build wealth: it’s the best way to build wealth over time.
-Money can’t buy happiness.
-Don’t get too good at the wrong stuff: be good at something that will get you noticed and that has a future for either growth or advancement.
-You can’t reliably beat the market; use index funds and take the average.
-Take risks where you can within your personal risk tolerance: greater risk normally means greater returns, but not always.
-If you can’t afford to lose your investment, don’t invest, save.
-Tap the power of compounding: start saving early.
-Carry small amounts of pocket cash and use small bills to avoid feeling wealthy which may deter needless impulse buying.
-One credit card maximum: for emergencies only and then pay off the balance each and every month.
-You can’t fight the market so join it; use index funds.
-Buy low, sell high: have a target buy price and sell price with reasons for both, and stick to it.
-Don’t follow the herd: if it makes sense for you, do it even if it runs counter to the crowd.
-You don’t know more than the market knows: use index funds.
-The less you pay, the more you keep: look for low costs or fees and/or tax free or deferred investments.
-Always get it in writing.
-Leave your money alone: rebalance your investment portfolio once a year.
-Invest for the long term: stay the course.
-Be humble about what you don’t know: don’t be afraid to ask questions.
-Develop a healthy skepticism: if it sounds too good to be true, it probably is.
-Be careful of the people you trust since by definition they are the only ones that get the chance to screw you.
-Ignore short term market swings: avoid trying to time the market, you can’t.
-Nobody plans to fail, but many people fail to plan: make one and stick to it.
-Real estate has been the secret to getting rich for centuries.
-Avoid speculation: don’t buy anything you don’t want or sell anything you don’t have.
-You can’t get something for nothing.
-Character, not assets, counts the most in the end: don’t lie, cheat or steal.
I think it’s great. What do you think?
Q. How can I tell if a company is playing games with its financial statements?
A. You may be the kind of person who likes to dabble in stocks. Perhaps you buy a few shares without doing research just because it gives you a thrill. Or maybe you have a small amount to invest and can’t see the point of putting in 40 hours of research to buy $50 worth of shares.
While I don’t want to discourage anyone from investing in stocks, one of the prerequisites should be that you understand how to read a company’s financial statements. If you don’t, that’s a pretty good sign you need some help when investing. If you can read the financials, there are a handful of things you can check fairly quickly that will help identify certain red flags. Below are seven of them. They are not fool-proof ways to spot fraud by any means, but they can be useful in abbreviated reviews.
1. A company’s earnings should be consistent with its operating cash flow. The two won’t be equal but they should move in the same direction and to a similar degree. Watch out if earnings grow much faster than cash flow for an extended period of time.
2. Be skeptical if current assets other than cash are growing. Keep a close eye on increases in inventories and/or accounts receivable compared to sales.
3. Make sure you understand the rationale behind any impairments or write-offs that are particularly large or recurring.
4. Any accounting policy changes should be explained simply and in a straightforward manner.
5. Depreciation and amortization practices should be consistent among competitors. Deferring these expenses over longer than usual periods of time is one way to artificially inflate profits.
6. Watch for dramatic changes in reserves against bad debt. This can signal deterioration in the quality of current assets.
7. Understand how the company makes money. If you can’t explain this to a five-year-old, it may be a fairly complicated business – and that could mean there is more room for management to play games with the financial statements.
@PhilipEtienne No, will watch for a bit. Here's to hoping for another overblown scare in a few weeks, though. in reply to PhilipEtienne 4 hrs ago
