The movie title “Dinner for Schmucks” suggests that, perhaps the small individuals, are the SCHMUCKS invited to play the investment game and being shown up as fools. There is no question that the market today is a trader’s market as opposed to a long term investors market. Everything seems to be geared to constantly repositioning ones portfolio to take advantage of the web and flow of stocks popularity. But, it is also obvious that the small, individual investor is at a tremendous disadvantage unless they constantly monitor the market like the pros do and make instant decisions to buy and sell. Most small investors obviously don’t do that and, if they wanted to, they do not possess the research tools, computer programs and other analytical aids necessary to implement a trading strategy. Despite the advertisements for programs that will provide trading platforms, the small individual investor is just not equipped or trained to move with the pros. So, the inescapable conclusion is that the small investors are the “Schmucks invited to the dinner”.

The Wall Street Journal today had an article about two billionaire brothers being charged for violating insider trading rules through the use of several off shore entities to hide their trades from the regulators and Oracle, a giant in the high tech world was charged with defrauding the U S government. It is hard to read the WSJ daily without running into one or more articles reporting criminal behavior by a range of market players from investment bankers to money managers to corporate directors etc. Small investors must feel that they are the “schmucks” for doing everything honestly and believing that long term investments in good companies will usually reward them well while others are taking “shortcuts” to wealth building. Reading bad stuff in the WSJ must suggest that what gets reported is just the tip of the iceberg and only represents those who were caught. Is it any wonder that individual investors have lost confidence and trust in Wall Street?

Maybe the financial reform legislation will correct a great deal of the ills, particularly through the “whistleblower” provisions that reward people for reporting bad deeds. But, in the meantime, individual investors should continue to fight the abuses in the financial markets that place them at substantial disadvantage and impair the safety of their investments.


The precipitous drop in the Dow last week should demonstrate to the regulators that programmed trading and high speed computer trading can and does destabilize the market. The question remains as to whether the regulators or the Congress will do anything about it.

Programmed and high speed trading contribute absolutely nothing to Gross National Product, provide nothing of value to the economy and place the individual shareholders at greater risk. The type of trading taking place is a “casino game” for a handful of traders designed to make them more money and, it doesn’t matter to them whether or not there is any benefit to the market or shareholders. Large Hedge Funds and money managers use these vehicles as a kind of “crap game” but one in which only they know the rules (the program). The way the sub-prime mortgage debacle damaged the economy because of a lack of regulation and controls suggests that Congress should pay special attention to these trading methods which contain the elements of a created automatic panic. In short, computer trading and high speed trading should be prohibited unless the traders can clearly demonstrate how these activities provide any benefit to anyone other than themselves. This is not to suggest that investment banks should be prohibited from trading. There is nothing wrong with the banks taking major positions for trading purposes as long as it is done by human decision makers and not according to some computer model developed by a clever mathematician. Experience has proven that the computerized models are much less than perfect when it comes to safeguards.

What should be disturbing to individual stockholders is the fact that the mentality of the stock market is short term oriented and is a trader mentality. The idea of making sound, reasoned investments and holding for the long term seems to be out of favor. But, typical individual investors should not be speculators in their pension plans and should be long term oriented. Short term trading is not appropriate for most individuals yet that is the focus of most market analysis. Congress should be urged to act in protecting the long term investment strategies of the individuals who put money into their pension plans anticipating a comfortable retirement. Individual investors who have done that have been burned twice. First by the Wall Street greed in the sub-prime mortgage activity and now the trading greed. These activities should be strongly objected to by investors via a bombardment of lettere and e-mails to elected representatives calling for greater protections. Individual investors shouldn’t have to face the prospect of going back to work after retiring because their investment portfolios were decimated by adverse market factors that could have been avoided if someone had been watching the store.


It is annual report season and shareholders have received or are receiving their Proxy statements. One of the understandable pieces of information in the Proxy material is usually the amount of money paid to the Auditing firm. These auditing fees, in the case of many of our public companies, are extraordinarily high in dollar terms even if not high relative to revenue. There are two important questions, however. The first is a question of the degree of protection received by the stockholders from the audit and the second is the understandability of the financial figures produced in the annual report.

In the wake of the financial meltdown, stockholders should wonder why the auditors did not discover the questionable procedures and activities of financial institutions involved in the subprime mortgage activity. If the auditors tested transactions, shouldn’t they have determined that loose underwriting procedures (no doc loans) and teaser interest rates added a substantial element of risk? One must wonder why, with the billions involved in subprime mortgages that just didn’t happen. Shouldn’t an audit of Bank of America, Merrill Lynch, Bear Stearns, and Lehman, Citicorp etc. been able to connect the dots and caution stockholders about the inherent risks their companies were taking? Are there other practices going on in our public companies that undermine the future of the company at the expense of a quick profit from a risky activity? If audits are not testing transactions and identifying situations that increase risk, then what is the protection received by the shareholders? It seems that the audited reports are designed to test compliance with accounting standards and applicable laws rather than provide the shareholders with understandable, useful information.

The Annual Reports themselves, when they arrive, are three months out of date and present financials in a completely obscured manner. All of the important information is included in footnotes to the financial statements where only a professional would find and understand the information. Wouldn’t it be great if the Accountants were required to produce a summary of salient footnotes with a cogent explanation as to what the information means to the shareholder? The financial details in annual reports seems to be produced for accountants and not laymen and it is left to stock analysts to pour through the reports in order to decide the relative merits of the companies. Isn’t it time for shareholders to lobby for easier to read and understand financial information designed for the typical layman and not only for the accountants and analysts?

There is no question that governmental regulation has added a great burden to corporate accounting. Perhaps it is time to revisit the regulations impacting auditing and re-examine the cost-benefit relationships again.

Finally, it is amusing that public corporations ask shareholders to vote on the Auditor. Why? Has it ever happened that a shareholder vote resulted in dumping an audit firm? That is just a charade to let the shareholders think they have a say in the governance of the company. It is just like the shareholder sponsored motions before an annual meeting. Has it ever happened that the Company recommends a “yes” vote on a shareholder sponsored motion?

There is really no place for shareholders to express their views on corporate management or accounting in any meaningful way. Any view to the contrary is a joke. If shareholders had a say would they choose the format of financial presentations used by the accountants? The Accountants are just another high cost of doing business that is made to appear approved by shareholders.


Reading Michael Lewis’s latest book, The Big Short, provides not only a fabulous story, well told, but also should put fear into the minds of investors everywhere. The bothersome question that remains is one of just how much trust should anyone place in investment banks and brokers?

Reading The Big Short leaves the impression that nothing coming out of Wall Street should be trusted. Firms like Goldman Sachs were selling their investors investments in subprime mortgages while at the same time shorting them in the belief that the values would plunge. Investment banks were creating pools of subprime mortgages and Collateral Debt Obligations in an apparent reckless manner because the rating agencies were willing to give these securities a high rating. And, the rating agencies were acting irresponsibly in both the manner of investigating the securities and issuing ratings because they were earning substantial profits by providing the ratings. What is astounding is the fact that relatively few people in the investment banks appeared to recognize the level of risk being foisted on the investors through this process. Obviously, the investors were all fools in permitting themselves to be duped by the ratings rather than questioning the composition of the securities they were buying. But that is hindsight. However, the investment bankers should have known better and should have applied the brakes very early on. Why didn’t they? It would seem that the reason was strictly attributable to the tremendous profits they were making from the activity. Despite the big losses suffered by investors and others who held the paper sold by the Wall Street firms, the movers and shakers got their bonuses and continue to get bonuses. The former CEO of Citicorp said in testimony before congress that they continued with the activity because to have discontinued it might have cost market share and/or the loss of key employees. So, is the Wall Street message one of engaging in a foolish activity just because it is so rewarding to some employees or because it raises market share?

Whether or not there was fraud or conspiracy involved in the subprime debacle remains for the regulators and courts to determine. Regardless of the outcome of investigations, the plain fact is that the greed of Wall Street almost caused a total collapse of the U S financial system and systems worldwide. What is curious is the fact that amid continued cries for fewer regulations, the Citicorp executives that testified before congress were quick to point the finger of blame at the regulators for their failure to see the crisis coming and stop the activity causing the crisis.

Stockholders should be completely skeptical of any notion that Wall Street or public companies will regulate or police themselves. That notion defies logic and lacks rational thinking. The motivation of greed can be counted on to take over behavior, particularly when it is other people’s money they are betting with. Sadly, all of the traders who contributed to the subprime mess earned big money and monstrous bonuses whether they were ultimately fired or kept their jobs. Only the investors and the public at large paid the price of their folly.


The annual report of the venerable General Electric (GE) contains some very interesting figures:

1. Consolidated Revenues were down almost 16% from 2008.
2. Total Segment Profit was down almost 27% from 2008
3. Consolidated Net Earnings Attributable to the Company were down almost 37% from 2008.
4. 24% of “Non-U S” Residential Mortgages were loans with introductory, below market rates that are scheduled to adjust at future dates, with high loan to value ratios at inception; whose terms permitted interest only payments; or whose terms resulted in negative amortization.
5. Impaired loans increased almost 360% over 2008.
6. The stock price fell almost 44% from the high in the 2nd Q of 2008 to the 4th Q of 2009.
7. The dividend was reduced by over 32%, from, $0.31 to $0.10 in the 2nd Q of 2009.
8. In 2009 vs. 2008 the Total Compensation of Jeffrey Immelt, CEO was 6.5% higher.
9. The total compensation of all other senior executives remained over 8 figures.
10. The only good news was that previously granted options were now “out of the money”.
GE obviously became involved in making questionable loans and, it remains to be seen how much more money will be lost in their financing and real estate operations or whether the amounts reserved for those losses will be adequate. But, the bottom line is that senior management, at least, is not suffering along with the shareholders. Their lives haven’t changed and they are still enjoying the perks of using the corporate jet, company paid financial planning, company provided autos etc. Many shareholders owned GE in their retirement accounts, looking to the once good dividends to help them enjoy retirement. However, that is now gone and the shareholders are left holding the bag while the executives do not appear to face any meaningful reduction in either their compensation or retirement benefits. One must wonder how these executives can face the shareholders, with a straight face, on the annual meeting day. Shareholders do not need a cadre of overpaid executives to lose money. They most probably could have done better with lower priced help.

It is really past the time when advisory votes on compensation are adequate to protect the shareholder interests. Shareholders should be able to fire executives for cause when their performance has been so abysmal and should be able to reign in their compensation and perks as well. The Board of Directors should be putting the senior executives collective “feet to the fire” and force them to accept some of the pain being suffered by shareholders. It is time for the management of public corporations to stop using the company as their private “candy jar”.


The testimony of former Citigroup officials before Congress should be an eye-opener for shareholders in all companies. These brilliant (?) men testified that they didn’t see the risks in the subprime mortgage market. Further, former CEO Prince testified that “Citigroup could have lost market share or key employees if it veered away from the sorts of bets that so many banks and securities firms were making at the time”. This is preposterous coming from men who knew or should have known better.

If the officials did not see the risks in the subprime mortgage market, then they must have been completely out of touch with the business practices raging at the time. Even a beginner in the real estate brokerage business must have realized that they were selling homes to people who couldn’t afford them even though they may have believed that continued price appreciation would make it all ok. Many experienced practitioners and observers of the real estate market recognized, as early as 2005, that some very questionable practices were rampant. Buyers were speculating on a continued rise in housing prices and were not the intended end user of the home purchased. They were buying to sell at a profit. Lenders were making loans with very low “teaser” rates of interest and knew that when the rate adjusted the borrower might have a difficult time making the payments. Lenders began making “no-doc” loans which meant that underwriting standards were being compromised. Mortgage brokers were having a field day with all of the refinancing activity that provided homeowners an opportunity to use their home as a “piggy bank”. And, at the end of the chain, Wall Street packaged good and bad loans into mortgage backed securities or CDO’s for sale to investors with a great assist from the rating agencies. Experienced practitioners recognized that all of this was a prescription for a disaster and that it wasn’t a matter of whether the market would tank but rather was only a question of when. It is impossible to believe that highly experienced, overpaid, supposedly brilliant bankers did not see all this coming. The answer is more probably contained in the testimony of Mr. Prince.

Unquestionably, the banks were earning substantial profits through their participation in this wild mortgage market and the testimony of Mr. Prince that “Citigroup might have lost market share or key employees if it veered away from these sorts of bets…” is probably closer to the underlying truth. These bankers must have recognized the risk but they were making so much money doing the deals that they closed their eyes to the risks. Unquestionably, they feared that if they gave up the activity their key employees, who were making big bonuses because of the activity, would have moved on to another employer where the activity continued. But, that is no good reason to “bet the farm”, which is what these bankers did.

Shareholders should be vigilant; particularly the large shareholders with enough stock to exercise influence, in demanding that their paid managers and directors act prudently and avoid taking risks just because their competitors are doing so. CEO’s and directors have a primary obligation to protect the shareholder investment. Institutions like Citigroup and Bank of America (among others) failed to do just that. Yet, toady, during Annual Report Season, looking at executive compensation suggests that our corporations haven’t learned too much from the past mistakes. Executives are still grossly overpaid for sub-standard performance


A press release announced that the New York attorney General had filed civil fraud charges against Ken Lewis and Joseph Price of the Bank of America in connection with the failure to disclose Merrill losses before the shareholder vote to acquire Merrill. Whether this suit will go anywhere or not remains to be seen. Still pending are the approval of a Bank of America settlement of $150 million with the SEC arising out of the same issue. Unfortunately, if the settlement is approved, there is no indication that any part of the $150 million will accrue to the benefit of the shareholders. It would appear that the SEC will get the money. Instead, the Bank of America will pay the fine with shareholder money. But, it was the shareholders and not the SEC who were injured by the failure to disclose. Something is wrong with this picture. The judge should probably not approve the settlement unless it is clear that the money would be paid to the shareholders directly and not to the SEC. The Bank does not pay fines. They come out of shareholder funds. To penalize the shareholders for the banks failure to disclose would clearly be unfair. On he other hand, if Ken Lewis and/or Joseph Price knew about the losses, decided not to disclose them, and were found guilty or wrongdoing, then any penalty applied to them personally would go some distance to right the wrong from the shareholder viewpoint.,

SEC VS. B of A

The SEC just announced that it will be seeking to file another lawsuit against Bank of America, with regard to the Merrill acqujisition, for failure to properly disclose information to shareholders. But, they also stated that the suit would not name any executives, directors or attorneys of the Bank of America because they had no evidence that these knowingly withheld information.

That approach seems to be the most idiotic ill reasoned approach imaginable. It seems to be a FACT that when sharehoders voted to approve the Merrill acquisition, the were notinformed about the mounting losses at Merrill or the intended massive bonuses to be paid to Merrill personnel. It seems totally inconceiveable that no executive, director, accountant or attorney for the bank had any knowledge of these thngs at the time they should have been disclosed. How can the corporation be sued for failure to disclose withiut naming the individuals within the corporation responsible for that failure? Corporations only act through their officials. They do not act on their own without human intervention. So, if the Bank is clearly guilty of failure to disclose, then the individuals who participated in that failure must be held accountable. To do otherwise is not n exercise designed to protect the shareholders. Ane, what if the SEC prevails against the Bank? What if they win a big money judegment for failure to disclose? Who pays? Obviously the Bank pays and not those responsible. And, whose money does the Bank payh with? Obviously the shareholders money. If all of this is true, then it is hard to see how this new lawsuit by the SEC will in any way protect the shareholders or compensate them for the damage done by the failure to disclose. The opposite seems to be the result. The shareholders will lose again. And our government is here to help us???


Warren Buffet used his ownership of a major block of KRAFT stock to raise an objection to the acquisition of Cadburry. That is good but not surprising. What is surprising is that the directors of KRAFT failed to put the brakes on the transaction. Instead, it took a shareholder to fight.

This points out the potential failures in board rooms where those supposedly watching out for the shareholders interests are not doing so. KRAFT shareholders are lucky that Warren Buffet is one of them, in a big way. Otherwise there would have been no one fighting for them.

It is really time that those responsible for corporate governance, in companies througout the world undertook a detailed self examination to assure that mechanisms are in place to assure that directors are focused first on the best interests of the shareholders and then on the deal. Too often making the deal becomes the only objective with a great push from the M & A people who will earn substantial fees. There must be more room on boards of directors for independent thinkers, like Warren Buffet, who will make sure that the shareholders interests are served.

Bank of America CEO Search

The Wall Street Journal of December 15, 2009 reported that talks between the B of A and Robert Kelly as the potential replacement for Kenneth Lewis as CEO had ended forcing the Board to reconsider two internal contenders.

The reason cited was pay and it was indicated that Mr. Kelly had sought a pay package of $20 million. But, that is not the only item of concern raised article. The fact that the Board appeared to prefer an outsider to internal candidates is an issue that is worth discussion.

Seeking a $20 million pay package suggests that CEO candidates and CEO’s may have a very overblown view of their worth to a company. They may be copying professional athletes who receive giant pay packages before hitting a home run, scoring a touchdown or sinking a three pointer. But, the athletes are a different story. Their presence on a team is viewed as making a material contribution to the success of the team thus giving rise to ticket sales and TV revenues that more than offset the pay. But, is there any evidence that the hiring of a CEO provides a benefit to the stockholders adequate to offset their extraordinary pay packages? To the extent that there is a shareholder benefit, it would not usually be reflected in the performance this season or next because an operating company has, in place, all of the operating plans for at least the next two years. An operating company is like a battleship in that it takes a long time to turn it around. Accordingly, the contribution of a new CRO, if any, will most likely be reflected in long term future performance rather than immediately. So, it would be reasonable to reward that performance with stock options, with exercise dates far into the future, which would have no value unless the stock price increased over time, in which case the shareholders would win too. But, up front guarantees of outrageous compensation packages make no sense. If a CEO is confident of his or her ability they should be willing to take a risk along with the shareholders and other employees. Insisting in an up-front guaranty is asking to win whether or not the shareholders win.

The other aspect of the search for a CEO is the question of why the Board decided to go outside of the Bank. Kenneth Lewis did not run the Bank alone. He was not a “one man band” and must have had a highly trained team of executives serving under him. It is impossible to imagine that there weren’t several of those executives qualified to take over as CEO. Members of the executive team must be assumed to have known more about the Bank’s business than any outsider could possibly know. Maybe the Board felt that whatever Ken Lewis was criticized for must have tainted all internal candidates. If that is so, then they would have overlooked the fact that the second, third, fourth or 64th in command (the executive team) does not take strong positions against the “chief” and hold on to their positions for long. The Board and not the “team” most probably bear responsibility for the questionable decisions of Ken Lewis due to a lack of adequate oversight on their part. Going outside to find a CEO, in an institution as large as B of A sends the wrong message to the “team” remaining behind. It says that no matter how hard you worked, no matter how qualified you are you are not going to get the top job. Is that a good message for employees to hear? Fortunately, the inability to attract Mr. Kelly or other outsiders has resulted in turning the search focus inward. One must wonder how much shareholder money was spent by the Board on the executive search when there were qualified candidates inside.