Geppetto's Creations

I must be hitting raw nerves of late, for I have been the recipient of rather colourful death threats. The good news (depending upon how one views it) is that the perpetrator is known to me. And it turns out they've been coming from my spouse, expressing hostility for my blogging and commenting upon others - ostensibly at the expense of marital and familial attention. Oooops.

Such faux pas are not lost upon me on a day when the thundering herd, Merrill Lynch, has 'fessed up to write-down of $8billion. First The Bear, then Citi, now Merrill. For those who are a tad less observant, I will point out to you that there is clearly a pattern here. Merrill, for all its size and retail might, has from where this Cassandra sits always been Wall Street's Lennie (of Steinbeck's "Of Mice & Men" fame), whereas Goldman Sachs could perhaps be seen as George. In the heady growth days of the 1980s, both Goldman and Morgan Stanley sported thoughtful, and erudite Chairmen (Whitehead & Fisher), who could be wheeled in front of supranational or blue-chip corporate clients, and suavely impress. Merrill would wheel out Kamansky, notorious for his use of colourful bigoted stereotypes, and the "N" word. But Merrill's embarassment didn't stop there. Their Prime Brokerage unit always seemingly got left holding the bag (remember Guinness Peat Aviation??), and their repo and stock loan desks were controlled directly from Corleone, Sicilia. No integrated P&L here! Merrill always lost their smartest guys, so that management was the result of attrition rather than talent. They weren't bad guys. In fact they were probably more honest than their competition - the result of being the biggest and therefore more in the public spotlight , and the multi-culti board that held sway over the self-centered white guys that would, under other, circumstances steal from your sick grandmother and her Dead-Pet Trust. But, hey, we're talking about Wall Street, and honesty is never relied upon to get one anywhere.

Now compare the aforementioned cast of characters and Merrill's behaviour during the "tech bubble". Morgan Stanley, underwriting Avanex (AVNX), and then touting it as "a buy" at $250/shr as the next JDSU (and they weren't wrong!). Unfortunately, they didn't mean that IT TOO would be worth 2-cents on the lightwave dollar. Oh well.
O.P.M., and mostly HNW. And Salomon-Citi was so conflicted with the whole WorldCon/Jack Grubman thing, they had to bring in an outsider AND a conservative blonde WOMAN (holy wow!) from the buy-side to prove their new-found religion and integrity to the suckers who bot WCOM shares and paper. And Goldman was right up there with the best of them. They were so conflicted, they were forced to stop making any recommendations in a way that a lawyer could fault them for, yielding to a dually-sanitized sector "view" and stock "view" that often meant: we hate the sector relative to the market, but like the stock relative to the other that we hate in the rest of sector, in the process erasing all traces of trying to establish a financial value, price targets, or even a simple "Buy", or "Sell" recommendations. This was brilliant as only the legal minds of Goldman might conceive!! Now even those measuring the performance of the analysts couldn't ferret out whether they were doing anything of any value. Merrill, of course got busted, and we know. Henry Blodgett was touting what he was told, or what he needed in order to goose IB and underwriting revs. And for their size, and lack of care, honesty (or perhaps legal advice given the undeniability of being caught red-handed, or stupidity, depending upon through which lens you view it) made them, confess, comply with investigators, and pay large. Citigroup, with the Grubman ball-and-chain around their proverbial necks, too, had no leg to stand on, and had to 'fess-up and pay. Interestingly however, Goldman and Morgan managed to lose the back-up tapes of their emails. ALL OF THEM!!! Didn't Nixon & Haldeman pull that one??!? But the culture of omerta and hush-money-bonuses runs deep and there was never a whistle-blower, or turncoat who came forward and said: That's just plain rubbish! The tapes are sitting in a vault in Jersey City (or Zurich, or Lichtenstein, or in a briefcase at the bottom of the East River). Miraculously, they paid a fine for non-compliance of record -keeping regulations amounting to an evening's Limo bill, never admitting or denying guilt in any regard, to conflict of interest, or knowingly purveying tainted research. I do not morally judge them (here at least), as it supports my point that, if they were not more "honest" (whatever that means), they were much smarter. Much.

And today, once again, we see Citi and Merrill in the limelight. Again they are 'fessing up to large losses of one inventory variety or another, likely reflections of an accumulation of greed, mis-deeds, stupidity, and poor management and risk control. The post-Enron era however makes a medium-security cell with Bubba a real possibility, so Mr O'Neal might enjoy his freedom and, anyway as CEO let's not take things too seriously since it IS other people's money, right, and management and revenue generators are just mere agents with wildly asymmetrical upside? "Fake it 'til you make it"

But fascinatingly we hear silence from the smart and annointed ones at Goldman and Morgan. Morgan might be forgiven for its fixed and mortgage businesses was never as big as GS. Yes the GS whiz kids could be masters of the universe (lord knows they recruit well!! and reward handsomely) and of course might have unloaded "it", or hedged "it", or done whatever a firm with such a gargantuan business and balance sheet does with such embarrassing things such as lowest-rated tranches of a CDO, or other ABS and the like, for instance: categorize them as Level 2 or Level 3 securities? But like the Japanese phalanx-like pursuit of opportunity, where there is money to made, it would be rare rare indeed that America's brightest and most avaricious boys would eschew it. Perhaps, the difference lies only in the honesty and integrity - either in marking the book, or in the BS sales pitch that it took to move the masses of rubbish off their books to the poor Taiwanese farmer's bank or Landesbank SIV.