Streetwise for Sunday Feb 8, 2009

Streetwise

Lauren Rudd

Sunday, February 8, 2009

Groundhogs and Wall Street Have Much In Common

Groundhog Day has come and gone and once again selected members of Marmota monax found themselves yanked out of their comfortable dens at 7:34 a.m. to view their shadows, the purpose being to predict the weather six weeks into the future.

Given the expertise most groundhogs have with the English language, not to mention meteorology, there is probably some doubt as to scientific strength of this forecasting approach. Unfortunately, many on Wall Street have about the same aptitude and predictive capability as your local groundhog.

Consider a recent article that appeared in the New York Times regarding “troubled assets.” Apparently a mortgage-backed bond was valued by a division of Standard & Poor’s at 87 cents on the dollar, under ideal conditions, and 53 cents if defaults increase. The institution owning it said it was worth 97 cents on the dollar (chuckle).

That same bond recently traded at 38 cents on the dollar, which is what the market believed it was really worth. So much for “mark-to-market,” although it clearly illustrates why financial institutions are so opposed to the market valuation of those toxic assets they helped create.

To make matters worse, rather than question the efficacy of unrealistic forecasts, Wall Street continues to let greed and bloated ideas of self-worth run rampant over common sense. Hence, we have the reoccurrence of debacles in the credit and office supply markets. My only question is how much better does a parchment covered $1,400 receptacle, picked out by a designer whose fee was $800,000, hold trash than the version sold by Staples?

Actually, the item in question was a bargain. Norwood Antiques in New York would have offered up the more opulent fine leather edition for $3,750. All this would be humorous until you realize where the money is coming from...the commissions and fees paid by ordinary investors. Maybe trash cans and mortgage-backed securities are not the only over priced items on Wall Street.

Incidentally, the American Association of Individual Investors, a non-profit organization, just released their annual survey of deep discount brokerage firms. Scottrade was once again number one in customer satisfaction for the fifth consecutive year. TD Ameritrade came in second. The prices charged by the two firms are $7.00 and $9.99 respectively for an unlimited number of shares per trade.

No tirade on abject stupidity and arrogance would be complete without mentioning Wells Fargo’s ($25 billion in bailout funds) planned 12 nights at the Wynn Las Vegas and the Encore Las Vegas (two of the most expensive hotels in Las Vegas) for a company paid junket to entertain 1,000 of its employees. “It is part of our culture,” the bank was quoted as saying.

The Las Vegas trip was to provide a "unique opportunity" for Wells Fargo and newly acquired Wachovia, "To focus on continuing to do all we can for homeowners."

You mean like Mary Ann Smith of Adams County, Colo., who recently watched as the Sheriff’s Department put her belongings, and those of her four kids, on the street on a cold winter day due to a bank foreclosure. Unbeknown to Smith who rented the home, the homeowner had stopped paying the bank, hence the eviction. The tentacles of complicity, duplicity and collusion, made possible by deregulation, are now strangling Main Street.

Meanwhile, the Wells Fargo/Wachovia trip was to come shortly after Wells Fargo posted a loss of more than $2.3 billion last quarter. Luckily, a few terse comments from Congress such as, “They are going to Vegas to roll the dice on the taxpayer dime,” led to an abrupt cancellation of that boondoggle.