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Moronic Criminal Bankers

Criminal or moronic, Wall Street's finest deserve dismissal, if not jail...

FOR THE LAST FEW MONTHS, writes Eric Fry for the Rude Awakening, the sordid tales of Wall Street's greed and deception have read like the story line from a riveting suspense thriller.

But the most recent tales are so unbelievably gruesome that they resemble something more macabre, like the story line from a documentary about Jeffrey Dahmer or John Wayne Gacy. Each subsequent act is more grisly and disturbing than the one before. And as the body count rises, and Lower Manhattan becomes a vast crime scene, I've become increasingly fearful of leafing through the Wall Street Journal at night, even with the doors locked and all the lights on.

The news is simply too terrifying. Even more terrifying is the fact that financial predators continue to roam freely among us and continue to occupy positions of power.

Early this month, for example, we learned that AIG, Citigroup and several other struggling financial institutions duped the US government out of billions of dollars, even as the government was trying to rescue them.

According to a report from the Congressional Oversight Panel, the US Treasury overpaid by about $78 billion for toxic assets from American banks. "The report showed," a Reuters story relates, "that the Treasury got the worst [of its many bad deals] on second-round investments in American International Group for $40 billion and Citigroup for $20 billion under special aid programs tailored for the two institutions.

"For each $100 spent on these two companies, the Treasury received securities worth $41."

In other words, for those readers who do not have an abacus handy, taxpayers lost $35.4 billion dollars the second they drove their toxic securities off the lot at AIG and Citigroup. But who do you suppose had the best idea about the true value of these securities? The government employees who purchased them...or the sellers at AIG and Citi? We'll go out on a limb here and guess that the folks at AIG and Citi knew better.

So if the sellers had an inkling that their assets were worth far less than the government was paying, didn't the sellers also have an obligation to divulge that information to the government?

And since the sellers did not divulge accurate values to the government, didn't the sellers commit a kind of fraud?

And if they did commit a kind of fraud, don't they also deserve a kind of prison sentence?

Let's not rush to judgment, however. If AIG executives legitimately had no idea that the prices the government was paying for AIG's securities were light-years away from real-world prices, they would not have been guilty of fraud. Instead, the executives would have been guilty of extreme incompetence...again.

But criminal or moronic, it's one or the other. Either way, they deserve dismissal.

The chilling storyline that is unfolding from Wall Street's corner offices prompts an obvious question that never seems to produce the obvious answer. Why does the government conduct bailouts at the top of America's socio-economic pyramid, where the perpetrators of the crisis reside, rather then at the bottom of the pyramid, where the victims reside?

Why, in other words, do we taxpayers continue to throw good money after bad? An alarming report by Mark Pittman and Bob Ivry of Bloomberg News emphasizes the point.

"The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed," the Bloomberg duo reveal. And these enormous pledges, Pittman and Ivry point out, would almost be enough to "pay off every home mortgage loan in the United States, calculated at $10.5 trillion by the Federal Reserve."

Despite this deluge of bailouts and guarantees that has rained down upon American financial institutions, the economy continues to atrophy and the finance sector remains comatose. So why continue the ruse? Why not squander taxpayer money to help families stay in their homes, rather than to help psychopaths stay in their Armani suits?

Maybe its time to try something different, like revising the most popular destinations for corporate retreats from Aspen and St. Barts to Sing Sing and San Quentin. But lest you think we are kicking America's corporate chieftains while they are down – or as close to down as we have seen them in a long time, which is actually not very down at all – we would remind you that here at the Rude Awakening we also kicked the corporate chieftains (often) while they were riding high.

Nearly four years ago, we remarked:

"A corporate culture of well-mannered avarice restrains the mighty American economy. Many public companies labor under a Soviet-style central planning – the sort of planning that arranges things very nicely for the planners themselves, but much less well for the proletariat...

"In 2003, the ratio between CEO pay and worker pay reached 301 to 1, up from 282 to 1 in 2002 according to a report from United for a Fair Economy. If the minimum wage had increased as quickly as CEO pay has since 1990, it would today be $15.76 per hour, rather than the current $5.15 per hour."

United for a Fair Economy now reports that CEO pay has soared to 344 times that of hourly workers. So today, as in 2005, "Many of today's executive compensation packages are excessive," as BusinessWeek asserted four years ago. "Too often, directors have awarded compensation packages that go well beyond what is required to attract and retain executives and have rewarded even poorly performing CEOs...Moreover, a poorly designed executive compensation package can reward decisions that are not in the long-term interests of a company, its shareholders and employees."

Shortly after airing these remarks, we followed up with a column entitled "Pinstriped Psychopaths". Regrettably, the observations within that column proved to be much more prescient and relevant than we could have ever imagined.

"We cannot always know, of course, who is psychopathic and who is merely 'tough'," we wrote. "But perhaps the time has come to attempt [back in 2005...!] to discern the difference. For too long, we have revered executives who seemed charismatic, visionary, and long as they were lifting profits and share prices."

Eric J.Fry has been a specialist in international equities since the early 1980s. A professional portfolio manager for more than 10 years, he wrote the first comprehensive guide to American Depositary Receipts, International Investing with ADRs. Today he reports on Wall Street from California for the renowned Daily Reckoning email service.

See full archive of Eric Fry articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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