By William K. Black
May 2, 2016 Bloomington, MN
Michael Bloomberg has just published, in Bloomberg, what he describes as “an adaptation of an address to the University of Michigan’s class of 2016.” Having graduated twice from Michigan, as did our eldest, I was intrigued. Bloomberg’s title was “Here’s Your Degree. Now Go Defeat Demagogues.” What Bloomberg means is that he is frightened that so many young people supported the “Occupy Wall Street” movement and support Bernie Sanders. I’ve written before about Bloomberg, a Wall Street billionaire, and the myths he tries to spread about Bernie. Wall Street elites fear Bernie. They know he won’t take their money, he will end the systemically dangerous banks, and he will imprison their leading felons. Bloomberg’s hate for, and fear of, Bernie is perfectly rational. Why he thinks that Michigan students will take his advice and learn to love Wall Street’s felons is a lot less clear.
Bloomberg conflates Trump attacking Mexicans as rapists and Muslims as terrorists with Bernie promising to prosecute elite Wall Street felons for their crimes and have the wealthy pay taxes far lower than they paid under President Eisenhower.
Our country is facing serious and difficult challenges. But rather than offering realistic solutions, candidates in both parties are blaming our problems on easy targets who breed resentment. For Republicans, it’s Mexicans here illegally and Muslims. And for Democrats, it’s the wealthy and Wall Street. The truth is: We cannot solve the problems we face by blaming anyone.
In context, Bloomberg’s advice to students to “defeat” any elected official who would hold Wall Street’s felons accountable for their crimes is even more incoherent than it appears on its face. Indeed, I will show why this is so in three different contexts.
The Context of Bloomberg’s Speech
First, Bloomberg was incoherent in the context of his overall talk. Bloomberg spent most of his time channeling his inner Trump and “blaming” university students for being upset by racism, sexism, homophobia, discrimination, and other forms of bigotry and bullying. Bloomberg claimed that students are not upset by bigotry, they are upset by “ideas” – such as the “ideas” that Mexicans are rapists and Muslims are terrorists. Bloomberg says students must stop objecting to such “ideas.” Funny, I thought that that the normal definition of people who spread such “ideas” is “demagogues” and that Bloomberg’s message to students was that they must “defeat demagogues.” If Bloomberg knew anything about Michigan he would know that there are vibrant debates about issues, including divisive issues such as the Israeli-Palestinian conflict.
The Context of Contemporaneous Articles on the Bloomberg Website
Second, in the context of Bloomberg’s on-line news in which Bloomberg posted his op ed based on his graduation speech, Bloomberg’s denunciation of anyone who “blame[s]” the Wall Street felons for the harm they caused in driving the financial crisis and the Great Recession through the three most destructive epidemics of “control fraud” in history is even more incoherent. On the same day as I read his revised speech, I read a series of stories on the Bloomberg site. The news stories in Bloomberg make clear, along with the thousands of pages I have written, that blaming the elite banking fraudsters for their crimes and the consequences of their crimes is an exercise in reality and accountability, not “scapegoating” as Bloomberg repeatedly asserted – with no evidence or reasoning.
The first story is about Standard Chartered, a massive UK bank, which engaged in tens of thousands of violations of money laundering and international and national sanctions against funding terrorists and Iran’s efforts to develop its nuclear project. When its U.S. compliance manager warned against continuing these practices his UK counterpart replied: “You f***ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?” The bank’s CEO, shortly after settling, claimed that the bank had done nothing wrong, which violated the settlement and led to a prompt retraction. The government monitor of the settlement found that Standard Chartered continued to violate the settlement, resulting in a substantially increased fine. Bloomberg now reports that the bank’s CEO has found continued unethical actions by a number of managers, leading him to get rid of at least three managing directors. The paper added that the bank was “riddled with bad loans.”
The second story is about JPMorgan’s announcement that it is being investigated by the Department of Justice and the SEC for suspected violations of the Foreign Corrupt Practices Act. The allegation is that the bank’s officers bribed Chinese officials by hiring their relatives in order to secure business with entities that those officials controlled.
The third story in Bloomberg covered how America’s most famous investor, Warren Buffett, had blasted Valeant’s managers – who explicitly brought Wall Street’s culture to pharma. Buffett described Valeant’s Wall Street business strategy as “enormously flawed.” Valeant’s strategy involved enormous increases in drug prices and a merger with an entity that is alleged to have engaged in accounting control fraud.
Valeant has endured months of turmoil as it became the face of price increases on drugs in the U.S., attracting scrutiny from regulators and politicians. Since its August peak, Valeant has lost more than 85 percent of its stock-market value, failed to file its annual report on time and said it is being investigated by the U.S. Securities and Exchange Commission.
Outgoing Chief Executive Officer Mike Pearson, former Chief Financial Officer Howard Schiller and billionaire investor Bill Ackman appeared before a U.S. Senate committee this week, apologizing for the company’s behavior and promising to lower the price of certain hospital drugs for all customers. They faced questions from senators Claire McCaskill of Missouri and Susan Collins of Maine.
Berkshire Vice Chairman Charles Munger has criticized Valeant’s practices, drawing return fire from activist investor Ackman, whose Pershing Square Capital Management is one of the biggest shareholders in the drugmaker.
“Valeant of course is a sewer, and those who created it deserve all the opprobrium that they got,” Munger said at Saturday’s annual meeting.
One of the smartest people in the world, a strong supporter of huge corporations, compared Wall Street morality to “a sewer.”
The fourth Bloomberg story is entitled “Valeant May Be Tip of Accounting Iceberg.” The author meant that it was the tip of the accounting fraud iceberg.
Abbott Laboratories may be worried it has another Valeant on its hands. And investors should be on the lookout for future look-a-likes.
The $58 billion medical-device company has raised “serious concerns” about the accuracy of financial information provided by Alere as part of their $8.4 billion merger agreement. That deal was announced just three months ago, but it’s been a busy three months. Alere has since been subpoenaed by the Justice Department in connection with its sales practices in some foreign areas and has repeatedly pushed back the filing of its annual report. This came on top of an SEC investigation disclosed in November, before terms with Abbott were finalized.
As with Valeant, the author realized that the key to successful accounting fraud is the financial industry – the ability to borrow huge sums.
Whatever the ultimate fate of this purchase, Valeant and Alere won’t be the last companies to surprise markets with potentially shoddy accounting. As the credit cycle turns, that’s when analysts expect to see more instances of flawed accounting, possibly at companies once heralded for holding great promise.
Here’s why: When investors are in a good mood, they’re happy to extend credit to almost anyone. Companies can easily get away with fewer financial disclosures and employ less-rigorous accounting standards. This risk of eventual accounting questions is especially high for lower-rated companies, particularly those that rely heavily on debt. Banks “are able to off-load credit risk through credit-default swaps, loan sales, and loan securitizations, and thus to extend more credit to risky borrowers,” according to a 2015 paper by University of Lethbridge’s Yutao Li and Gerald Lobo of University of Houston’s Bauer College of Business.
But all that changes when investors suddenly wake up to real, fundamental credit risk, and that’s what’s happening now.
Valeant’s bonds have lost more than $1.8 billion in market value since September. Stocks of SunEdison, the biggest U.S. solar energy company, fell more than 90 percent as it swiftly fell from golden star of hedge-fund portfolios to bankruptcy. Prices on Alere’s bonds surged when the deal with Abbott was announced, but they have since given up most of those gains.
The fifth Bloomberg article reports on Buffett’s condemnation of hedge funds. It is entitled “Buffett Says Hedge Funds Get ‘Unbelievable’ Fees for Bad Results.”
Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said large investors should be frustrated with fees they’re paying hedge fund managers who fail to match the returns of index funds.
“There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities,” Buffett said Saturday during Berkshire’s annual meeting in Omaha, Nebraska.
Large hedge fund heads are frequently billionaires. They are made extraordinarily wealthy as a reward for giving inferior investment advice that costs investors hundreds of billions of dollars in returns.
Buffett supports the presidential candidacy of Democrat Hillary Clinton, who has lamented that the nation’s top hedge fund managers earn more than all U.S. kindergarten teachers combined.
For further proof that markets are efficient and investors exemplify rational expectations please consult your local cephalopod – “I’m from Goldman Sachs, and I’m here to help you.”
Buffett found a wonderful way of illustrating how deeply inferior hedge fund returns are.
The billionaire made a bet in 2008 against Protege Partners that its strategy that invests in hedge funds couldn’t beat a Vanguard mutual fund that tracks the S&P 500 Index. The winner’s charity of choice gets $1 million when the wager ends at the end of next year.
The bundle of hedge funds in Protege’s bet returned 21.9 percent for the eight years through 2015, according to a Berkshire presentation Saturday. That compares with the 65.7 percent climb in the S&P Index fund.
The index return is three times the return on the hedge fund bundle. As Buffett and other experts have long warned, Wall Street is run for the benefit of the employees, not the customers. The employees that count and are most enriched, of course, are the officers that control the Wall Street firms.
The sixth Bloomberg article reports on Buffett’s condemnation of hedge funds and adds his explanation of why it is unwise to invest in the systemically dangerous banks.
While Buffett highlighted Berkshire’s holding of Wells Fargo & Co., he said he would probably avoid investing in 45 out of the 50 largest banks, citing hidden risks tied to the use of derivatives.
“It’s still a potential time bomb in the system,” Buffett said of the [derivative] contracts….
The seventh Bloomberg column in article by its Editorial Board about corruption in Mexico, rather than Wall Street’s corrupt culture, but it reveals a critical flaw in Bloomberg’s speech to the Michigan graduates. Note two things that disappear from the editorial board’s carefully constructed tale – and one reveal.
The sooner Mexico’s leaders take charge of the battle to clean up government, the sooner they can ease people’s concerns — and those of their friends and neighbors abroad. It’s been almost a year since Mexican citizens secured the passage of a series of constitutional reforms to limit corruption — an achievement rightly hailed by President Enrique Pena Nieto as a “paradigm shift.” But, unfortunately, the president’s own Institutional Revolutionary Party is now holding up laws that are needed to make those reforms stick.
Pena Nieto’s administration has made admirable health and energy reforms. Yet rampant corruption still casts a pall over commerce and undermines public support for future economic liberalization.
The first thing that disappears is business. The corporate bribes that corrupt the government are portrayed as pure governmental extortion of virtuous CEOs. Non-Mexicans also disappear, even though foreign firms are major sources of corruption, including HSBC, which knowingly laundered a billion dollars for the Sinaloa cartel. The “reveal” is that the editorial board openly states its real concern – public support “for further economic liberalization.” Bloomberg is all about trying to get the public to back failed neoliberal policies.
But the editorial board’s fundamental message is what refutes Bloomberg’s advice to Michigan’s students not to demand that the elite Wall Street felons be held accountable for their crimes. What petrifies Bloomberg and his Wall Street customers is that Bernie would appoint an Attorney General who would prosecute the Wall Street felons. The editorial board’s demand is that Mexico hold corrupt public officials accountable by restoring the rule of law and prosecuting them. The editorial board laments:
Worse, those who are caught have rarely been punished: Only 1.5 percent of corruption cases lodged in Mexico end in conviction.
The corruption on Wall Street is far deeper under the standard employed by the editorial board. Not a single officer who led any of three epidemics of financial fraud that drove the financial crisis has been prosecuted – much less convicted.
The Bloomberg context of Bloomberg’s speech to the Michigan grads demonstrates that Bloomberg is indeed open to different ideas. Each of the seven articles I cited that accompanied his printed version of his speech is supported by citations of facts from experts – and proves that Bernie is right about the critical need to restore the rule of law and morality in order to end Wall Street’s corrupt culture. Demagogues are the folks who ignore the facts and data and make biased assertions that just happen to be in their personal and commercial self-interest. That makes Bloomberg the demagogue.
The University of Michigan Context
The third context is the University of Michigan. Michigan students and administrators have special reasons to support Bernie’s promise to hold Wall Street felons accountable and to end the corruption of Wall Street that has rigged the system. Michigan has been shamed twice in recent years when its elites aided Wall Street corruption and fraud by rigging the system to make the unethical wealthy. Both events are well known to those in finance, so Bloomberg logically should have used the incidents to explain to the Michigan grads the consequences of Wall Street’s rigging of the system. The first scandal was when Michigan secretly sold its reputation for a pittance by rigging one of its crown jewels – the consumer-sentiment survey. This survey is known to move financial markets. Michigan sold early (by five minutes) access to the data to its partner’s clients.
The partner was Thompson-Reuters, one of Bloomberg’s chief rivals, so Bloomberg was so fixated on preventing Bernie being elected that he passed on an opportunity to embarrass a rival because doing so would have demonstrated Wall Street’s corrupt culture.
The folks that were buying the early access to Michigan’s survey (I’ll call them the “bishops”) were looking for a rigged system that would let them abuse customers and counterparties. What they often did not know was that the system had a second-level of rigging. The secret rigging was that a group that paid an even higher fee to Michigan’s partner (the “cardinals”) was given the report five minutes and two seconds before it was released to the public. The bishops did not know that the system that they thought was rigged in their favor was also being rigged to allow the cardinals to skin them alive. (In the article a market participant’s metaphor is that the bishops would be “flattened” by the cardinals.)
If you think that two second cannot allow much abuse you really do not comprehend modern finance and high velocity and frequency trading. A study found that the cardinals were able to take advantage of the rigged system within 10 milliseconds. That means that the cardinals were using algorithmic systems that were able to machine rea and analyze the market price implications of the Michigan consumer-sentiment survey, choose the trading strategy that would maximize profits given those market price implications, and execute the trades in time increments normally discussed in science fiction.
The Michigan officials involved in negotiating this disgusting rigging of the system did not need any special training in ethics to know that what they were doing was immoral and sure to humiliate the University if it became public. The additional fee they obtained for traducing the University’s reputation by agreeing to double-rig the financial system was trivial in economic terms. They too were treated as suckers by Wall Street. Here is sad rationalization presented for a public university aiding the rigging of the financial system. It is a fine example of the oxymoron that passes for ethics among orthodox economists.
Richard Curtin, an economist who runs the university’s survey, said he knows the deal gives an advantage to select investors.
“Hardly anyone would pay for it if they didn’t see a profit motive,” Mr. Curtin said. Later, he added: “This research is totally funded by private sources for the benefit of scientific analysis, to assess public policy, and to advance business interests. Without a source of revenue, the project would cease to exist and the benefits would disappear.”
The New York Attorney General embarrassed the University and its partner into ending the rigged system. Bloomberg replaced its rival Thompson-Reuters as Michigan’s partner.
The second scandal is when a prominent Michigan professor, who had chaired its med school’s neurology department for over 25 years, aided insider trading by multiple hedge funds by leaking confidential information on a drug trial.
The insider information allowed the hedge funds to rig the system. Both Michigan scandals would have provided the basis for superb ethical discussions with the students about the corrupt culture of Wall Street and how it infects and degrades others – including the university from which they were graduating. Bloomberg had no interest in exploring the need for the graduates to act to “defeat” those that were rigging the financial system to make themselves wealthy at the expense of the world and our Nation and people.