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Monday, May 3, 2010

Best of the Weekend

Some good material after the Goldman hearings this week

from the FT Folks in Las Vegas take umbrage and being compared to Goldman's wall street tactics:

When Goldman Sachs executives faced rhetorical fire from angry members of a US Senate committee this week, much of it invoked a city that had little to do with the bank but everything to do with negative public attitudes towards Wall Street.
Goldman, which has been charged with fraud by the US Securities and Exchange Commission, "had less oversight than a pit boss in Las Vegas", said Claire McCaskill, a Democratic member of the committee. Mark Pryor, a fellow Democrat, was more damning. "You're market-makers but you're also playing in that market," he told the Goldman executives. "Instead of Wall Street, it looks like Las Vegas."
The US investment bank has denied any wrongdoing and been defending itself vigorously. Also taking umbrage, however, are the people of Las Vegas.....

"It's very offensive," said Shelley Berkley, a Democratic congresswoman whose district covers the city's gaming strip and casinos, ranging from the luxurious Bellagio to the rather down-at-heel Binion's Gambling Hall & Hotel.
"Las Vegas casinos might not have clocks but we have rules, we have regulations, we have odds for sports betting," she said. "Everyone knows what the rules are and no one is getting ripped off."....

....."The reality is the gaming industry is very well regulated," said Ms Berkley. "What happened on Wall Street would never have happened in a Las Vegas casino . . . it's the most well- regulated industry on the planet."
That sentiment is echoed by gamblers interviewed by the Financial Times this week. Most said they were aware of the risks involved when they gambled.
"When you come to Las Vegas you know you'll lose some money," said Cheryl Westland, who was visiting from California and playing slots in the Tropicana. "What I'm not prepared to do is lose half the income on Wall Street that I've spent my life saving - but that's what happened."
Rob Clegghorn, president of a carbon stainless steel company in Ontario, was making his yearly trip to Las Vegas. He enjoyed a drink while playing a slot machine in the Mandalay Bay casino, one of the largest in the city.
"The odds are pretty slim and if you win it's a bonus," he said. "But I know the rules here and they don't change."
Bret Arends of the WSJ on 4 lessons for individual investors from l'affaire Goldman Sachs

it's a timely reminder that, for many big financial institutions on Wall Street, we're simply customers to be sold a product.The case is also a great example of how not to invest. You could go a long way in this life just by observing the behavior of wealthy and powerful investors in Abacus and then doing the opposite.
Never assume the big money is also the smart money.
What are the lessons?
1 Never put too much faith in a bank.
Typical Wall Street bankers have three priorities: their own bonuses for the year, their bosses' bonuses and their own stockholders. Customers -- you and me -- come a very distant fourth. It's a mistake to forget this
2 Think twice before buying any complicated financial product.
It still baffles me that investors are so willing to buy complex "synthetic" products that the banks have cooked up in the back room. These are usually a poor deal (for the customers, if not for the bankers).
That's because, even when they're not being put together as a sucker's bet, they're often being put together to sock you with high fees.

3 Be wary of investing in something you don't understand.
In the world of investing, the easiest way to end up looking really stupid is to try to do something really clever....

When it comes to investing, humility and common sense will go a long way. Investors in Abacus 2007-AC1 would have been far better off investing in some really boring blue-chip dividend stocks with business models like selling hamburgers or shampoo.

4 And when in doubt...
The doomed product was hustled by Goldman's Mr. Tourre. There's one simple question that the customers could have asked him that would have saved them a lot of grief, as well as about a billion dollars:
"How much of your own money are you putting into this?"
When all else fails, it's not the worst question to ask your broker. His reaction may tell you what you need to know.

The Goldman Sachs testimony put into interesting focus the issue of fiduciary responsibility which I have mentioned before in this blog.  As I have noted registeres investment advisers (like myself) are held to the fiduciary standard they must put the standards of their clients above their own. Brokers are held to a lower "suitability standard" in providing advice to their clients and have fought hard (successfully) to prevent the fiduciary standard from being extended to the under the financial reform legislation. The difference in the two standards was abundantly clear when Senator Olympia Snowe and others asked the Goldman execs if they had an obligation to act in the interests of their customers. The blank stare she received from the witnesses said quite alot imo.

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