Random Walk Down Wall Street by Burton Malkiel remains one of the best books I’ve ever read on the finance industry, and I’ve been working in it for going on 15 years. You can make and save money using professional financial services through diversification and tax avoidance. You can maybe make and save money using professional financial services through fundamental analysis of companies, anticipating markets and macro environments and generally not making terrible decisions as opposed to neutral/bad decisions. But in the end, there’s a reason no one beats the market in the long run: risk. Personally, I put all my hard earned money into low risk assets and REAL assets, and avoid the whole machine altogether unless I’m getting an employer match or through my 401k and tax advantages. I don’t make investments as if I’m a Vegas gambler- because I think that the fund I pick ‘is going to do awesome’. And when something doesn’t work out, I don’t cry about it because I knew the risk was there… Interest/dividends/price appreciation isn’t free. Everything is about risk and reward, regardless of a credit rating. If your primary metric for risk is a credit rating agency like Moody’s, then in my honest opinion you have already made a big mistake.

It shouldn’t be news to anyone that a ratings agency doesn’t truly operate as a wholly neutral body anyway. This is the agency model: the agency is effectively paid to award ratings. Even a 10th grader would recognize there’s a conflict of interest going on here. S&P downgraded the United States and the rate on treasuries went down, which shows just how little the investment community relies on these ratings. Everyone knows the ratings are, frankly, dog shit, which is why a fiduciary has their own internal ratings. That’s supposed to be how we outperform the market. Moody’s says something is A, we think it is B, so we buy it. Moody’s thinks something is B and so we feel it’s A, and so we sell.

Some argue that because ratings agencies exist and are defacto government entities, to hell with caveat emptor. But I disagree. Of course fraud should be punishable- and the burden here should be on those politicians who consistently look the other way, setting one troubling precedent after another. Time and time again they’ve allowed the SEC to let people settle without admitting guilt, then pay a fine that dwarfs the money made in the fraud. The people who run the SEC constantly go back to or come from the private sector. Washington is too reliant on Wall Street donations to do the right thing. If an individual works hard for their money, then head to the casino and flip a coin on it, should we feel badly for them? If they work hard for their money and then buy a complex financial instrument they don’t quite understand but are told by a shyster that it’s great and safe- and then it turns out to be quite the opposite… should we feel bad then?

With responsibility for individual’s decisions and actions seemingly being eliminated by today’s society, someone is to blame… not the mirror of course, but someone. There’s a fine line between investing and gambling, and when an individual works hard for their money, they should be careful with it. And if they aren’t careful, then they shouldn’t complain when it’s gone. I’m not trying to say that the agencies were right, but when assigning blame on the financial crises of the last few years, I don’t think they overwhelmingly at fault. When every kid on the last place team gets a trophy at the end of the year, and everyone should get golden years of retirement paid for (regardless of their contribution to the fund that pays for that retirement), and everyone should be entitled instant medical care, to everything else, we wonder: why has accountability vanished?

Ratings agencies helped this game along in two ways. First, banks needed them to sign off on the bogus math of the subprime era – the math that allowed banks to turn pools of home loans belonging to people so broke they couldn't even afford down payments into securities with higher credit ratings than corporations with billions of dollars in assets. But banks also needed the ratings agencies to sign off on the safety and reliability of these off-balance-sheet SIV structures.

The first ratings agency approach retorts that bankers are pushing boundaries, asking the raters to help them play the highly cynical hot-potato game, in which bad loans are originated en masse and then instantly passed off to suckers who will take on all the risk. "Bankers say why not originate bad loans, there is no penalty," the executive muses...

If banks don’t make risky loans to people who have shown they are incapable of saving a down payment, if they aren’t allowed to make those loans and repackage them… then the greed is not fueled by opportunity. Glass-Steagall solves all of this. Bill Clinton repealed Glass-Steagall in 1999. I repeat- Glass-Steagall solves all of this. Banks and lending should be a conservative, heavily regulated industry with reserves that ensure banks do not fail or lose too much money. Small banks still operate this way.

Rhinebridge, Cheyne and a hell of a lot of other subprime investments ultimately blew to smithereens, taking with them vast amounts of cash – 40% of the world's wealth was wiped out in the aftermath of the mortgage bubble, according to some estimates. 

If 40% of the words wealth was wiped out, is that really wealth? Economies should make things, and financial services should be a conduit of that, not the primary driver. Financial services don’t make anything. Wealth should be created when something is made and used and demanded, and when people are employed to help facilitate the creation and distribution of products and services, and society then benefits through transfers of expertise. Not through financial manipulation, which is all this game is…

Think about these values. Think about the commission on every trade or advice given or fee charged on the way up, on the way down, on the way up, etc.…

Jan 26th, 1996 – Dow – 5,271
Oct 5th, 2007 –Dow - 14,066
March 6th, 2009 - Dow 6,626
May 24, 2013 – Dow 15,354

Ok. Let’s say in 1996 we head off for college and there’s no Internet. By 2000 everyone is checking emails and using wireless cell phones. That is technology and wealth creation and progress. To me that justifies some rise in financial assets. Since then, though? What can possibly justify these swings in asset prices?

The when and the how much markets fall and rise is not due to anything that can be articulated, forecasted and backed up by algorithms on a go-forward basis. Except that figures lie and liars figure. Burton Malkiel. Caveat Emptor. Glass-Steagall. Yolo. TGIF. Let’s start a pizza shop… with a sign out front: ‘We Accept EBT’. Enough.

‘Big Jim Slade’ resides in Western Massachusetts.