Category Archives: Politics

Banking: The Besieged Profession

A former co-worker told me, “bankers get a bad rap.”

I disagree! Bankers deserve criticism. However, my former co-worker is correct that bankers get much more criticism than the general public and government in regards to the global financial crisis.

So why does it seem like banking is “public enemy number one?” Because in banking, even with just a hand-full of bad people with decision making authority, you have a recipe for disaster. This also holds true when there are good people in leadership roles who make bad decisions.

I worked at investment banks for nearly 20 years, and had business dealings with numerous commercial bankers as an entrepreneur, consultant, and on a personal level. I can say from first-hand experience, most bankers are hard working and honest people. But often endemic in business is a financial incentive to be devious – an incentive clearly present in banking.

What profession other than “check cashing stores” so aggressively targets the poor, uneducated, and vulnerable?

Of the investment banks I worked for that also had commercial banking units; each one was sued by governmental bodies for predatory lending while I worked there. Many of the cases were settled for significant monetary damages, with the banks admitting no wrong doing.

To give banks the benefit of the doubt, certainly some of the lawsuits against them were frivolous – but not all; at minimum, some were culpable of aggressively seeking profits with a blatant disregard for ethics. Banks are profit seeking entities. However, to what extent must one go in order to achieve profitability? The answer to this question depends on who you ask. It was apparent to me in my days on Wall Street, as it is now to the global masses, that some banks will go to nearly any extent to maximize revenue.

So now bankers must work hard to re-build public trust. It doesn’t help that a British bank was recently fined £290 million for attempting to fix the London interbank offered rate (LIBOR). The same bank now faces new charges for allegedly selling interest rate swaps to small businesses. The interest rate swaps were designed to protect against interest rate volatility, however, in numerous cases the buyers of the swaps were crippled by them – many lacked the capacity to understand the complexity of the transaction they were entering.

To reiterate, not all banks are bad, and not all bankers are evil. But just like there’s a heaven, there’s also a hell. Evil bankers created their own purgatory, and in doing so besieged the entire banking industry, and the world for that matter. It’s up to the good banks and honest bankers to always serve their clients with honesty and integrity. Only then will the trust of the public be restored, if this is even possible.

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Racial Profiling

The murder of Trayvon Martin on February 26, 2012, is a reminder that African Americans are often the victims of racial profiling, not just by the police, but by many in society.

In the early 1990’s, I worked a grueling job at an investment bank in New York City. Often, when I took a day off or had a vacation, I would stay in New York and do things I rarely got to do because I was always working. On one such day, I sat at the Pulitzer Fountain, across the street from the Plaza Hotel at Central Park South and Fifth Avenue. As I read a book and enjoyed my day, I made an observation. New York City police were stopping black drivers and giving them tickets. Though more than 90% of the vehicles I observed were driven by whites or Hispanics, the police only stopped black drivers. By definition, this was racial profiling.

There were two white police officers parked beside the Plaza Hotel. As cars drove eastbound in gridlock traffic on 58th Street, the officers stopped some of them for what I presume was running a stop sign. Though the cars couldn’t move faster than five miles an hour, the officers aggressively issued tickets. This helped ensure the police met their quota of tickets for the month.

In the opinion of many, there is an unwritten rule that New York City police must issue a certain number of tickets. This helps produce revenue for the city and increases the paperwork of police officers, thereby helping increase overtime pay. Ultimately, this inflates a police officer’s pension benefits at retirement if the current year is part of their pensionable earnings calculation.

After observing this pattern of racial profiling, I started taking notes. At one point, two black men in a commercial van were stopped. After what appeared to be a brief argument between the men and the police officers, the men were handcuffed and placed in the back seat of the police car. I approached the police car and wrote down its license plate number and car number. Then, an officer approached me and asked me what I was doing. Without replying, I wrote down the officer’s badge number. He then boastfully said,” I’m Officer McMurray,” and pointed to his name tag.

I replied, “I’m fine-tuning my documentation so I can report you.”

Officer McMurray replied, “Do you realize what a difficult job this is? We put our life on the line every day!”

I did not respond, but kept writing notes. The police could have harassed me or possibly arrested me for some bogus charge. However, they were scared. They knew what they were doing was wrong. They also clearly saw I was not intimidated.

The police got in their vehicle and drove off with the two black men in the back seat. As I watched, it appeared they were having a discussion. Before they got to the next corner, they stopped their car and let the two black men go – they were free. The police officers then drove away. As the black men walked back to their van, they thanked me.

The most dangerous thing to be in America is not a police officer or firefighter, it’s a black man. I don’t claim to know a solution to this, nor do I accept the fact that this will always be the case. However, to force change, blacks must be vigilant in removing the target clearly placed on us by some – we can’t expect others to do it for us.

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President Obama, the Antithesis of Arrogance

Yesterday I met President Barack Obama prior to his speech at a luncheon in Coral Gables, Florida.  What was extra special is I was able to bring my five year old son, Bradley – his second time meeting the President.  What amazes me most about President Obama is his genuine lack of ego – the antithesis of arrogance. Despite handling the most difficult job in the world, among a frenzy of people trying to shake hands and take photographs, he took the time to take a personal photo with my son, creating a cherished memory for my lineage.

I’ve been active in politics for decades, but in the midst of the global financial crisis, I became much more active. The future of America requires leadership and participation by people committed to doing the right thing. I can’t compare my level of service to some, but I have to do my part. Much of my attitude is inspired by President Obama.

Over the years I’ve met many business leaders and politicians. A few traits stand out among many: selfishness and arrogance. However, in President Obama I see a lack of  selfishness, combined with pride and a passion to do the right thing – helping all of us win, not one of us win at the expense of others.

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Jobs must be created to sustain the stock rally

In the context of market valuation, the U.S. stock market is overvalued. We are in a recovery phase that was artificially created via stimulus programs. For the global economy, the worst may be in the future.

In order for the broad U.S. stock market to achieve anything greater than moving sideways beyond the second quarter of 2010, real revenue growth is required, that is, growth not created via stimulus dollars, zero interest rate government loans to banks, and operational efficiencies. The level of consumer demand required to increase top line revenue is lacking, and I believe this trend will continue until the unemployment rate decreases.

Jobs must be created. Though some companies have started hiring, headcount increases won’t come close to pre-crisis employment levels. Companies are more efficient, performing required task with less staff; companies will continue to increase efficiencies, hence limiting headcount increases. The good news is that a large unemployment rate should keep inflation at bay in the short-term, the bad news is that more home foreclosures are on the horizon and real-estate values will remain under pressure.  However, we will eventually get inflation when we get close to full employment (NAIRU: Non-accelerating inflation rate of unemployment, aka, the natural rate of unemployment).

With limited private sector employment growth, the government’s ability to respond is limited by the massive U.S. budget deficit, which is already high and likely to go higher. This means that even if the current administration wanted to keep the Bush tax cuts, America cannot afford it. Also, the U.S. government lacks the funds to increase tax incentives in an effort to entice small businesses to hire (approximately 50% of the U.S. working population are employed by small businesses). Such incentives, if provided, would erode quickly, as did “cash for clunkers.” So where will the new jobs come from?

Sovereign spreads, a measure of the risk of lending to a sovereign government, have increased in much part due to the same inherent risks that hurt the U.S.  For much of the world, real-estate values are under pressure, banks have failed or were saved by the government, there is a lack of consumer demand, and there have been decreases in government revenue in the midst of increasing government expenditures.

While I hope the U.S. stock market continues the positive run its made since March, 2009, I’m realistic. Putting on my fundamentalist hat, I see the market as being overvalued based on an abundance of problems.

What I’m doing:

  1. I’m invested in U.S. domestic equities and emerging market ADRs and ETFs.
  2. I either have stop-loss orders on all of my long positions, or I own put protection, which I usually finance by selling call options, i.e. I’ve created low cost to zero cost collars, having both  covered calls and protective put positions.
  3. Since I trade in the short-term with a portion of my capital, I sell short at times. To limit my margin fees, I’m rarely short for more than a few days, preferring to buy put options when volatility is low, rather than staying short for extended durations.

I hope I’m wrong.  Good GDP numbers for the fourth quarter of 2009 and first quarter of 2010 might be realities (4-5% growth respectively).  However, if U.S. unemployment has not gone below 9% by mid-year 2010, with a U6 number below 14% (i.e. discouraged workers, marginally attached workers, and part-time workers who want full-time work, but can’t find full-time employment), I would brace for the worst.

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