Streetwise

Lauren Rudd

Sunday, June 22, 2014

A Letter to Dad

Dear Dad,

Last weekend saw another Father’s Day come and go. Sadly it reminded me that it has been 11 years since you passed away. I know I can never actually give you this letter but if you could read it you would undoubtedly be both surprised and saddened by the path taken not just by Wall Street but the country as well.

I recently came across the first book you gave me on Wall Street. It has an inscribed date of 1955 and I could not help but reminisce about those early 50’s. You had a NYSE brokerage firm, a seat on the Big Board and trading took place on Saturdays.

Remember how I was the Saturday chalk boy, ripping the latest Dow Jones Averages off the teletype machine each half hour and writing them on a blackboard for everyone in the office to see. Today there are no more Exchange seats. The New York Stock Exchange is now owned by IntercontinentalExchange.

Although both computer technology and sophisticated mathematics have become an integral part of investment analysis, many of the principles you taught graduate students using Graham and Dodd’s classic “Security Analysis” text remain relevant, even in today’s complex world of financial engineering.

And yes, I still have my well used and underlined fourth edition of Graham��s book from when I took your classes, although it is buried deep within an innumerable compliment of investment volumes, most of which bear a striking resemblance to treatises on advanced mathematics.

Perhaps if the Street had shown a greater adherence to Graham’s principles we would not have had the deadly development of toxic securities and rampant greed that trampled on our economy.

As chagrined as you always seemed to be with Wall Street’s supercilious attitude and unvarnished self-indulgence, its complicity with the bond rating industries would have concerned you the most. I remember when you left Wall Street to start D.C. National Bank because you felt that the ethics of the Street had degenerated, while the banking industry supposedly held itself to a higher standard. If only that was still the case.

Unfortunately, what concerned you about the Street back then would not even merit a slap on the wrist today. At the same time, the investment banks (now banks for regulatory purposes) have morphed into an industry that is often looked upon with scorn. When D.C. National was acquired by Bank of America, it was for its outstanding growth and performance record.

Remember back when you were D.C. National’s president and the Comptroller of the Currency would periodically ask for your assistance in helping out troubled banks? The banking industry certainly could have used your expertise over the past ten years.

The elimination of key parts of the regulation that kept a degree of order on Wall Street, including the Glass Steagall Act, brought about the collapse of not only the Street but the economy as well. History books will refer to it as the Great Recession.

You would have been somewhat astonished at how the Federal Reserve was forced into taking the leading role in resurrecting the economy and reducing an unemployment rate that hit 10 percent in October 2009. Called Quantitative Easing, the Fed at one point was purchasing $85 billion of Treasury and mortgage backed securities each month. Fed Chair Janet Yellen, yes we now have a woman leading the Fed, just reduced the amount to $35 billion but still a substantial addition to bank liquidity.

You would also be amazed at today’s interest rates. The 10-year Treasury note currently yields 2.61 percent. However, the last of the QE programs is set to end by October and interest rates have already begun to rise. This will come as a shock to many who hold bonds as bond prices begin a long slow downward slide.