Friday, February 25, 2011


Back in the day brokerage firms were owned by partners. If the firm lost money, the partners were personally liable. Commission charges to buy and sell stocks and bonds were extremely high but no one forced anyone to buy and sell stocks and pay those fees. When I was originally a broker at E.F. Hutton and Company and I wanted to get a quote on a stock, I walked up to the front of the room, stood in a long line, picked up the phone and was able to request one quote and only one. I then had to find my way back to the desk through the throngs of other brokers, I would give my customer the quote which really wasn't current anymore, I would write out the order on what was called a trade ticket, I would put it in a vacuum tube, it would travel a long distance and about an hour later I would know if we bought the stock or not. Times have changed.

Somewheres along the line the powers that be decided that fixed and high commission rates were not the way to grow a hearty participation in American Capitalism among the people. Rates were then lowered, then lowered, then lowered, and then lowered. It also came to pass that "money management for a fee" began its monumental growth. We now can trade billions of shares a day explained by the cult of the necessity for a liquid market. The liquidity is well out of balance with the actual need and has turned stocks into the semblance of a gambling casino with all the rules and regulations of such activity very much in place within our markets. Research is superficial and shoddy at best, but thinking, fortunately, keeps evolving through higher and higher levels.

About the same time,Donaldson, Lufkin and Jenrette found a way to pierce the wall of the New York Stock Exchange prohibition requiring all member firms to be private. The cry became "the road to growth requires public capital and we as partners can no longer foresee having enough capital to sustain significant growth". The members of the exchange tried to maintain their historical rules of private companies but the opportunity for making the existing partners wealthy men controlled the outcome. So the door was opened and privately owned firms were able to create great wealth for their owners by selling shares in their privately owned companies. There is no question that I personally benefited from this "time in history". The combination of much lower commissions and the loss of the future money management asset growth, made the traditional brokerage business a heck of lot less profitable, even with the ancillary interest income.

In order to understand where I'm going with this you will have to allow me to tell you a quick story. My wife Sally and I, during the Internet bubble, were invited to attend a presentation by one of the best asset management firms in the world. This firm had scrupulously avoided investing their clients money in the overpriced companies. Unfortunately, it's performance had lagged its peers that had invested in those companies and the firm lost thirty percent of its assets under management, solely because they were thought to be an old dowdy company. At the meeting we attended, we were immediately introduced to the new Internet guru of this wonderful asset management firm. We were told he had appreciated money at an annual rate of 500% in the last year and now was the time for all the money that had left their firm to return and they would do all they could to compete with their new investment guru. Only a few "special clients", like us, would be "invited" into this "fantastic investment opportunity". In other words, at the very peak, the rate of asset loss to this money management firm and the enormous emotional pressure they felt was so great, they could not stop themselves from attempting to participate in the craziness. The Internet boom went bust a few months after this presentation, the young money manager was fired, all the money was lost, over $200 million dollars, and quite successfully, this money management firm continues to deliver a steady investment product.

Now we return to the public nature of brokerage firms and banks. As I have said in prior blogs, the recent financial crisis was all started by the government when it decided that housing had to be made more easily available to more and more people. My parents bought their first house for $4,000, then they bought a second house for $11,000, several years later it sold for $42,000 and no one at that time, many years ago, foresaw housing prices going up and up and up. There was absolutely no clear cut series of reasons to forecast that one should not liquidate their home because the prices would keep going up and up and up, even though homes were the ultimate symbol of success and the savings and capital base of most of our people.

Presidents Reagan, Eisenhower, Clinton, Bush, Nixon, Carter, let alone President Roosevelt, used the rhetoric of home ownership as a lever to attract votes. To try to explain what happened when the housing prices broke is as impossible as trying to determine what the true value is of almost anything.

Just to make this even a little clearer, if a bank received depository inflows from a poorer area and did not lend that money out to the people that wanted home loans in those areas it was called redlining or discrimination, it wasn't called determining if the potential homeowner was likely to pay the loan or not. It didn't matter to the mortgage lenders at that time because the new theory was the prices of the homes would go up anyhow, they always had. So wherever you went to get a mortgage loan, it had to be given to you at terms that were better than the terms up the block, because if my bank didn't give you the loan, then another would. Guess what would happen if I didn't give you the loan? The earnings of my bank, or institution or brokerage firm would slow down relative to my competitors, the shares of my company would not rise as much as my competitors and I would be criticized for not participating in what was obviously going to "go up forever". In other words, I had to get into the Internet boom or I would lose my assets under management and go out of business, and I had to give bank loans to virtually anyone or my shares would go down and I'd lose my job, since after all if the country allowed this, who was I (CEO of any Bank) to stand alone against the crowd. In so many respects corporate and investment decisions are nourished by a short term mentality.

I remember an investment manager yelling a the CEO of Fannie Mae, "you idiot, make more loans, I own your shares, you work for me".

This is what really happened, all else is sand on the beach.

Sorry for the length of this. Have a great weekend.

Wednesday, February 23, 2011


A quote from a very high ranking European Union politician: "How can we use our warships to stop the Somali pirates...Frankly we have to be concerned about their human rights."

Holy Moly.....

Tuesday, February 22, 2011


As the protection of minorities from the majority was central to Madison's Republican formation of our constitutional government; it shall be asked "Is a majority strictly to be measured by counting people or can a majority of power, in any format, be the equivalent of kingship?"
Obviously, ascending to power by the control of force or threat, short of or including armed conflict, is a form of power without votes.

It is very difficult to measure the inherent size of a mob protest, as most people won't come into the streets for fear of their person.

In America , the interactions of our society among and between and within groups, allows for the minimization of enduring conflict among persons. But Madison in the Federalist Papers, ascribed to humankind an innate propensity for conflict and aggression within almost any type of politically based organizations. Consequently, to know when accumulated duress will lead from active protests to an escalated road of violent protest, is always seen after the fact.

Such is the dilemma between any interest group and those not within its sphere of opinions.
As way of example, how can we ascribe, or even begin to understand, the hugeness of the mistake that would have been made by Israel if it would have allowed itself to be manipulated into appeasing neighboring countries, who are now being seen not to have had a propensity for binding agreements at any point.

There was a time when unions were an absolute necessity. But as we have said in earlier blogs, unionized industries have played a significant part in the weakening of our industrial base. It might have been better, from their own prospective, if they could have accepted an adjustment to their total compensation programs years ago so as the union movement would not have plunged into such a loss of membership in our industrial companies.

The challenge is clear, the long term answers may be simpler than many think. Stay tuned...

Monday, February 14, 2011


An interesting event occurred. The announced merger between the German exchange company, Deutsche Borse and the New York Stock Exchange. Rightly so, there will be people who feel that merging a major symbol of the American economy with a foreign entity should not happen.

There is a another side to the equation, the implied innuendo that if you attack New York, you also attack Germany. Positive internationalism in defiant terms.

Friday, February 4, 2011


President Roosevelt was arguably one of the top two or three Presidents in our country's history. I try to make a point in this blog, that's all.

When President Roosevelt proclaimed his consumer bill of rights he mentioned seven primary entitlements for the American people. The entitlements included the right to a useful job, the right to earn enough to provide basics including recreation, the right of the farmer to a decent living, the right to not have unfair competition, the right to a decent home, the right to medical care and health, and the right for economic assistance in old age.

Nowhere did he proclaim how these entitlements were to be paid for. He never said you have to earn it, he never said that people would get these things at different times, he never said certain people would not get them at all, he just said we were entitled. Possibly during the dark days of the depression, President Roosevelt's proclamations were necessary, but today is today.

Why may this be important? I lived most of my life in New York City. I traveled from the Bronx to City College and spent ten years in Harlem at the Fifth Avenue National Guard. I witnessed that the standard of living, in the most liberal city in the United States, didn't seem to rise significantly for most, for some time. I know there are some people that live a sheltered life in Manhattan proclaiming the merits of the intellectual capital and cultural base . They are mostly living behind security alarms, doormen, and have a huge police force to separate them from the reality that the standard of living in the city has gone nowhere for most people.

It's now seventy year later. We have to accept that we may be entitled to everything, but the world hasn't created a system that provides all these things to everyone in equal proportion and at the same time. That leaves us with only one thing to reflect on. How do we improve the standard of living?

The inflation adjusted per capita standard of living hasn't increased for nearly two decades, despite the huge technology and housing booms, a huge entitlements boom, and the lowest interest rates practically ever. Simply stated; we are in an economic mess. Sure we are in recovery from a severe recession. Economic cycles are nothing new.

The entitlement society, I believe, is just another form of semi-false security if stripped to its roots. The entitlement list will grow; we will all be entitled to a cell phone, a refrigerator, an air conditioner, luxury food, blood pressure machines, air conditioned cars, the best mattresses, lights everywhere, computers and on and on the list goes.

The entitlement mentality knows no end. Those who use its rhetoric are usually elected for a short time as voters love to feel they are going to get more and more seemingly for free. Well it just won't work. It can't work and will ultimately contribute to another severe recession and less security as the number of people doing the paying for the entitlements, can't keep up with the demand. Think about it.

The people who finally put together our constitution understood varying views. The impact of the Internet and the speed with which information travels may take the constitutional ball game outside the box.


Shepard Osherow. All Rights Reserved