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Friday, December 19, 2008

The City Sinks Deeper

So, I'm glad to see, again, I wasn't wrong. The city was filthy with Madoff's "money." The NYTimes reported that dozens of major New York developers had given this guy money. That whole building projects might be in jeopardy because there's no more collateral. I am a bit surprised--I thought it was lawyers and auditors who were mostly going to take the hit for this. Seems like the other New York thing, real-estate has come to bear. Everybody knows this guy. And the people who didn't know him personally, wished they knew him. Even the doubters.

I've heard a few things which are disturbing. Some are saying the SEC's days are numbered. Remember, one of the principal reasons for establishing the SEC was to monitor the investment houses (which they stopped doing about thirty years ago, but now really have no excuse since there are no investment houses.)

If the SEC was dismantled--there would have to be a replacement. Securities, particularly after this debacle could not go unregulated. So they'd refit it, give it a new name. But who would they hire? The same administrative staff, the same investigators. Who, afterall, could take their place? The auditors? Clearly not. A new breed of investigator has to be born. Hire me. Not only do I want to investigate fraud, I have a natural distrust of big business, but at the same time, I'm extremely idealistic. I do think there are ethical businesses. Moreover, I think that there are plenty of businesses which have philandered ethically, which can be won back.

A little shamless self promotion. So what? I observed a few months ago that accountants are trained not to care. Or, more accurately, to only rely on the information they receive. They feel that it is not their job to make sure that companies stay on the straight and narrow. Just to add up figures, and ask questions when things don't add up. They only report to the company. And if the company doesn't like it, they can just find new auditors. And the auditors don't have to report anything, and in fact, would be liable if they did. So there is no accountability for fraudalent behavior according to the normal model. The only body that regulates financial statements is the SEC. The PCAOB and FASB make rules, but no one is required to submit anything to them. And who makes their rules? The big four, and a hodgepodge of former SEC staffers.

This sounds bad. I don't think the SEC is crooked. I don't think the auditors are crooked. I don't think the PCAOB or the FASB is crooked. What I think is crooked is the idea that business, and "The Market" is a self-regulating machine. It just ain't true. And if it were--the self regulation occurs only when people are injured. When shit like this happens. Well, to a certain extent, I think that's true: people forget, and markets are cyclical. The system operates well for a time, people get comfy, forget, and then the market crashes. Ostensibly, this happens every generation. Happened in 1830s, 1840s, 1870s, 1930s (earlier for europe) 1970s, 1980s (gulp!) and today (those dates correspond loosely to economic troubles--particulary for the earlier years) So with all that, you might assume that this has to happen. And be particularly glad when it does. As it is, young"ish" investors today stand at the threshold of a really prosperous time. With all the promised regulation, we should be looking at a period of real prosperity, not market inflation. I mean a period of epic growth, like after WWII.

Not to underscore the gravity of the situation, but we are nearing the bottom. Not of the recession, but of the market bottom. Up until now, all the news we've been reading has been backdated. Meaning, we're reaping what our economic masters had sewn two-three years ago. I think there may be a couple more revelations. That the Fed has created new rules for the credit card companies speaks volumes of this. Citibank got a bailout but before the layoffs happened. I don't know what to think about that. Bad news delayed is worse news. But bad news is bad enough. Neither the insurance business nor the credit card business have really faced the music yet. Bailout or no, they will. Both are inflated, both are fairly corrupt. Again--not as in "evil" but in the fact that they've operated sub rosa for too long.
At anyrate, it's like the old Chinese curse, "May you live in interesting times." Let's hope we stay above board. I'll close with a thought I wrote to AM-NY (who declined to publish it--ever since I quarreled with the editor they've ignored me) "As for the mistaken impressions about Darwinism and adaptation, mutations are random, and though success will be determined by survival, who and what survives is largely a combination of the randomly selected attributes that make up each individual (read: mistaken analogy.) In other words, good luck" To wit. The survivors of this latest revolution will have been in the right place at the right time--that's all. The tycoons of the future will have acted.

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