Every day, it seems as if people are given more reasons to
distrust financial institutions and the leaders of those financial
Lloyd Blankfein has become a joke!
Banks are not to be believed!
And governments and members of governments have even lower
Finance is supposed to operate on trust and financial markets
are said to function because people have confidence in them.
Well, if this is the case anywhere at the present time it must
be in a parallel universe.
And the stories continue. "It's an open secret on Wall Street
that many big banks routinely-and legally-fudge their quarterly
"Window dressing is so pervasive on Wall Street…"
"The big question is the extent to which other banks (other than
Lehman Brothers and Bear Stearns) used, and still use, creative
financing, and whether they, like Lehman, broke any rules."
These quotes are from The New York Times article "
Crisis Panel to Probe Window-Dressing at Banks
It is not just the big banks. It is on the public record that
the Greek government lied to the world about its fiscal position.
What other governments might be falsifying their records?
State and local governments in the United States are not
forthcoming about their financial commitments and liabilities, such
as those connected with the funding of pensions and other
contracts. And many of these entities are facing the bankruptcy
court these days.
Ponzi schemes come in many different flavors.
But, those that work in financial markets claim, at least in
theory, that the markets are efficient, that the prices that exist
in financial markets reflect all relevant information. They assume
that participants in financial transactions are "sophisticated"
meaning that the participants are canny professionals who have all
the information they need.
That is why the executives at Goldman Sachs (
) can, in good conscience, argue that their customers are
"sophisticated" and are "big boys, fully capable of looking after
themselves." (See "
Goldman and the 'Sophisticated Investor'
" in The Wall Street Journal this morning.)
What? The financial wizards claim that investors have all the
information they need, yet they hide information from the public on
a regular basis.
And why does Lloyd Blankfein look silly testifying before
Congress or on the Charlie Rose program?
Government officials hide information from the public on a
And then these same officials cry foul when financial markets
sell off once the information on their lies becomes known.
Hello, Bernie Madoff…
We now know that Lehman Brothers and Bear Stearns used "shadow
financial vehicles" and produced results that mislead investors and
regulators. This seems to be the case most of the time in terms of
companies that fail.
I know from the bank turnarounds that I have been involved in
that one of the first requirements of new management is to open up
the books and let the world know what actually was going on in the
"troubled" institution. When this was done, the basic response I
got from the investment community was one of "incredulity" and
"disbelief." The investment community could not believe that I was
willing to make the books as open to them as I did. But, once they
got used to this "openness" they began to trust me and what was
being done at the troubled institution.
Secrecy, to me, is the worst thing the leadership of an
organization can pursue. But, then, people tend to run to secrecy
when things go wrong because they either were not capable of
running the organization or because they made bad decisions.
As a consequence, my experience has made me a firm believer that
openness and transparency, in all financial institutions…and
governments…are a requirement for sound finance. Openness and
transparency are a requirement for the building of trust in
organizations and the system so that investors will have confidence
Openness and transparency should be one of the building blocks
for any new financial reform and re-regulation that takes
Yet, the Obama Administration and the Congress seem to be
focused on the past; they are fighting the last war. And this means
that any reform package they get will be out-of-date and irrelevant
when it is passed. As The New York Times reports, "JP Morgan Chase
) and Goldman Sachs are examining how to use shadow vehicles to
help them borrow money in the future." The article points to such
major players as BSN Capital Partners in London as one firm that
has created such vehicles for banks in the past. Even the best seem
to need secrecy.
International financial markets still don't know all they need
to know about the Greek situation…and the Spanish situation, and
the Portuguese situation, and the Irish situation, and the Italian
situation, and the English situation, and so on and so on.
International financial markets still don't know all they need to
know about who holds the debt of these countries and how much of an
impact would take place if the debt were to be substantially
So we see that another financial crisis has taken place because
the expectations of investors were surprised. (See my post
.) Maybe we are asking the wrong question, that question being "Why
have investors lost confidence in these euro-zone securities?"
Maybe the question should be "Why did investors have confidence in
them in the first place?"
Goldman Sachs: Exceptional Trading or Something