BOB2 Wrote:
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> My favorite comment at some meetings I was at, on
> issuing public bonds for large transportation
> projects that clearly didn't have a credible
> financial repayment scheme, was from bond salesmen
> on commission from some big Wall Street names:
> "there are new realities in the market you don't
> understand"! As someone with a mathmatical
> economics degree I usually asked what the ROI was
> anyhow, and usually got some half assed non
> answer. Many of my colleagues-public sector
> planners-even thought it rude of me to ask.
>
> The scheme was to underwrite the dubious bonds on
> commission (up front, of course), then create
> credit default swaps (hedge bets without any
> underlying risk reserves, since they really
> weren't "insurance" which would legally require
> regulated risk reserves) package them and sell
> them as safe "backed by government bonds"
> instruments. Then these dubious instruments were
> sold to the unsuspecting school district as "safe"
> for an immediate commission and bonus. Or worse
> to the other firms that believed their own hype
> (there is no fool like a fool who believes his own
> lies?), then walk away.
>
> As long as nobody asked stupid questions about
> things like ROI (like me?)and trees continued to
> grow "forever to the sky"-everything was just
> fine. No transparency, no regulation, no
> integrity, and no consequences, since there were
> actually "bonds" or real mortagages at the bottom
> of this scheme-so technically it wasn't actually
> "legally" fraud.
>
> CIT is hardly one of the worst of the culprits,
> and are now more victims of the collapse on "main
> street"-the real theives were bailed out early and
> held harmless-and now it's become too much of a
> political risk to bail out these folks. The rail
> investments are practically sound compared to
> loans for inventories of things like "Crocs" that
> sit unsellable. It will really hurt cash flow
> strapped small businesses on "main street" who
> have been frozen out by the big guys, who are back
> into speculation based on some of the same
> nonsense, as we speak.

An excellent summary. As one who worked for many years in the rail finance business, it was interesting watching this house of cards getting built. The whole industry was driven by incredibly generous UPFRONT commissions that gave the "perps" virtually no interest in what happenedd long term. They could take their money and run. The whole executive compensation and incentive scheme needs tough governance standards that give shareholders greater transparency, more realistic shareholder control, and tough government regulation to curb the worst abuses.

I worked for a company that was conservatively managed, did deals that actually had ROI's, and didn't finance our business with credit swaps, equity sales to doctors and dentists, and other dubious financings. But we lost a LOT of business to the competitors who played fast and loose (they claimed they were more "creative"). We survived only because we had specialized technical skills, knew our markets, and had a reputation of actually doing what we said we would do.

But managing a publically held company was/is tough in an environment where investors expect perfect results each and every quarter, and where the penalty for a "burb", no matter how well managed, could lead to speculative takeovers. I'm retired now, but my old company is doing pretty well, which perhaps suggests to good guys don't always loose.

JBWX