We should pay attention when people sound alarms at their own peril

It fascinates me when an old post starts getting some attention. Right now, one called “Who is Paul O’Neill and why should his opinions matter?” is getting a few looks (a link is below). In essence, O’Neill was fired as Secretary of the Treasury for voicing an opinion the President did not like.

What did he say, you ask? He said he was concerned about the debt and felt the Bush Tax Cuts were unneeded. This is after Bill Clinton handed a surplus budget to the younger Bush. It should be noted the debt is now 5 times larger.

Recently, the well respected Director of National Intelligence Dan Coats resigned under pressure as he told the inconvenient truth about Russian influence and its continuation. Like O’Neill, this clarion call should be heeded. Like with General James Mattis’ resignation last December, Coats departure is giving GOP Senators pause, yet they refuse to act.

Back in late 2007, a Texas financial analyst noticed that people who could “fog a mirror,” were getting huge mortgage loans on properties that seemed to be over-inflated in value. He did his homework and was able to get a meeting with the CFO of Bear Stearns. He told the CFO he thought Bear Stearns was over-extended with risk and was going to to go under.The CFO thanked him and the guy uttered these parting words – well, I am going to bet against you. Within the year, Bear Stearns was bought for a very discounted price before it went under.

Colin Kaepernick is a good NFL quarterback, but he has been blackballed from the league after calling attention to the unequal rights and treatment of Blacks in America. His civil protest was hyper-politicized by a hyper-political president, so he was blackballed, a term which seems apt. Yet, we have a difference in how Blacks are treated. Even further, our society is more economically unequal than it has ever been, with haves owning much greater shares. A society cannot withstand such differentiation for too long. Kaepernick’s protest should be heeded not condemned. His protest is far more emblematic of American values than a flag or anthem ever could be.

Those who are giving clarion calls should be given due consideration. There are financial analysts who have cautioned against Brexit from the outset. Those concerns have fallen on too many deaf ears. Their corollary message is even more dire – do not leave the EU without a deal. That is beyond poor stewardship. It matters not what the current PM says. Yet, if it does happen, it is only fitting that Mr. Johnson is the one trying to deal with the fallout.

Before I close, let me go back to someone who is similar to the Texas man who tried to forewarn Bear Stearns. The movie “The Big Short” highlighted one person of several who saw the housing recession coming. When his concerns fell on deaf ears, he had them create a product to pay off if he was right.  The industry laughed at him until a couple of years later they realized he was right. His clients made a fortune. The movie ends by telling us what this man is now investing in – water. While it does not get much play here, we have a global water crisis which rivals climate change as a concern. He saw it coming.

https://musingsofanoldfart.wordpress.com/2013/03/20/who-is-paul-oneill-and-why-should-his-opinions-matter/

A big culprit in the housing crisis is punished

After living through the housing crisis and reading and watching news, books and movies, I read with interest that one of the biggest culprits has been punished – the rating agency Moody’s. In my view and the view of others, Moody’s failed in its job to forewarn investors of the true risks of packaged together mortgage loans. They fell into a “pay to play” modus operandi.

What is pay to play? Per an article in Reuters, “Moody’s ratings were ‘directly influenced by the demands of the powerful investment banking clients who issued the securities and paid Moody’s to rate them,’ Connecticut Attorney General George Jepsen said in a statement on Friday.” This would be akin to you paying off the inspector of the house you just built and want to sell. The buyer would not know the inspector was gaming the system against him or her.

So, individual investors, pension funds, 401(k) funds, states, and countries all fell prey to this pay to play ratings approach. Iceland had to declare bankruptcy, e.g. As a result of their actions, Moody’s was fined $864 million which will be distributed to twenty-one states and the federal government, who were part of the lawsuit.

We should not lose sight of an industry who became enamored with riskier investments and did not ask enough questions. Executives did not fully understand the risk they were taking on and it brought them down, along with the housing market, stock market and economy. An excellent movie to watch is called “The Big Short,” based on Michael Lewis’ book, which takes a complex topic and explains it with the dialogue, but also with clever sidebars which use laymen’s terms to define what things mean.

In essence, mortgage loans were given out to anyone who could fog a mirror, then these lesser risks were packaged together to spread risk and sold to investors. The problem is packaging bad risks does not make the risk less, it makes it concentrated bad risk. The law of large numbers to mitigate risk is only effective if good risks are mixed with some bad risks. Moody’s stamped these packaged loan investments with much higher ratings than they deserved. And, investors who trusted Moody’s and the seller bought them in good faith.

We rely on Moody’s and other rating agencies to take their job with seriousness of purpose and ethics. If they cannot shoot straight with us, they will let us down. And, that is precisely what they did. In my view, that fine may not be enough for the damage they helped perpetuate.

Three Current Movies worth seeing

I just completed watching a triumvirate of movies that deal with three uphill battles against institutions, where the latter had either harmed or took advantage of others. These movies are based on true stories and are worth our time to learn from what corruption can do and how hard it is to fight and expose it.

The three movies are “Spotlight,” “The Big Short,” and “Concussion.” I will give you a glimpse of each below, without stealing too much thunder. It is hard to avoid being a spoiler, as these stories are more widely known at this point. But, some of the challenges and stories beneath the corruption are not public knowledge.

Spotlight

The more sober of the three movies, but extremely well done, is the pursuit of a series of stories by reporters within a special investigative unit of The Boston Globe called Spotlight. This unit ties together what turns out to be a significant cover up of pedophile priests in the Boston area. This story helped shine a spotlight on a much bigger problem that was not restricted to Boston.

It has an excellent ensemble cast with Michael Keaton, Mark Ruffalo, Rachel MacAdams, Liev Schreiber, John Slattery, Brian d’Arcy James, Billy Crudup, Jamey Sheridan and Stanley Tucci. Tucci, in particular, is excellent as an attorney who is painted eccentric, but is the stalwart behind the kids who have been abused. And, the young adults who played the abused kids as adults are marvelous.

The movie will have the feel of “All the President’s Men,” as a team with support from the Editor try to get the story right before they go public. It is what good journalism represents and what is missing in so many places today.

The Big Short

This movie was directed by a comedy director, Adam McKay, based on the book by Michael Lewis on four groups of people who saw the housing meltdown in the US coming and tried to warn others. When they were laughed at, they helped the same bankers create an insurance product that would, in essence, allow them to short the market before it fell. They were laughed at in doing this as well and the banks gladly took their premiums.The one problem for the big bankers and investment community is these guys were right.

The movie has an all star cast with Christian Bale, Brad Pitt, Ryan Gosling, Steve Carell, Marisa Tomei and Finn Wittrock plus several other good performances. Since the topic could be very dry, the director, who also co-wrote the screenplay with Charles Randolph, peppers the film with a few cameos to explain what is going in layperson’s terms. Pitt serves as the conscious of the movie when he tells the guys not to celebrate too much as their gain means people will lose their homes and jobs.

Many parts of the industry are not shown in a favorable light, nor should be. From aggressive mortgage sales people who sold complex mortgages to people who did not fully understand them because they made more money off them to lenders who packaged high risk mortgages together and then sold them to investors to the rating agencies who sold their ratings for market share growth, there are many who are at fault. Of all of these groups, I have always held the rating agencies as the most blameworthy, as we trusted them the most.

Concussion

This is the movie the NFL did not want people to see. Just like the Catholic Church with abused kids, the NFL leadership covered up knowledge about their concussion problem. The also went to great lengths to discredit a Nigerian born pathologist, Dr. Bennet Omalu, who had significant other credentials, when he discovered that trauma from football eventually took the life of Mike Webster, a retired Hall of Fame center for the Pittsburgh Steelers.

Will Smith plays Omalu quite convincingly, with key roles played by Albert Brooks, Alec Baldwin, David Morse, Adewale Akinnuoye, Luke Wilson and Gugu Mbatha-Raw. Mbatha-Raw plays Omalu’s wife and you may remember her from “Belle” and “Larry Crown.” Morse does an excellent job as Webster, showing what transpired following his career. But, the movie is about Smith and his excellent portrayal of Omalu.

Each of these movies shows what corruption can lead to. The Catholic Church and NFL were both more interested in protecting their institutions than considering the victims. The Church preyed on its faithful flock to remain silent while they moved pedophile priests around. The NFL was more interested in band aiding its players while they served their game’s interests, then abandoning these men when they needed help. The players were unaware that their brains were being harmed as much as they were.

The financial sector also preyed on people through greed and arrogance. People were selling and trading stuff they did not fully understand and people were being harmed. Countries were being harmed. As a result, their bossed did not fully understand the risk, nor did their shareholders. Nor did the regulators.

Why does it take a Bennet Omalu, team of reporters or savvy investors to uncover the truth. These are the modern day “Erin Brockovich” with different institutional targets. If you have seen these movies, let me know your feedback. If you have not, I would still love your opinions.