Real Story or April Fool's Joke? "Anne Berkshire-Hathaway" and 6 Other Bizarre Economic Tales

Richard Eskow — Fri, 01 Apr 2011 20:55:16 -0400

Writers love coming up with absurd stories on April Fool's Day and then trying to pass them off as real news. So let's play a game: Which of these stories are real and which are just April Fool's Day pranks?

Meet my friend Berkshire and his wife, Anne: A review of past stock performance suggested that the stock price for Warren Buffett's Berkshire Hathaway corporation goes up whenever movie star Anne Hathaway is in the news.

News reports about the release of new Anne Hathaway movies like Rachel Getting Married, or her performance co-hosting the Oscars, may have increased the value of the billionaire Sage of Omaha's stock portfolio.

Lazy Dog Millionaire: A major bank's employees had a party for everyone who received a bonus in the million dollar range - which was a lot of people.

As one employee said, million-dollar bonuses were handed out "even if a guy is really lazy and has done s***."

Und you will like it! A few weeks later that bank's Chairman of the Board stood up at a financial gathering and said - in a German accent, no less - that "populations are not ready to voluntarily discipline themselves in more work, less rewards, and less security."

In a particularly Strangelovian turn of phrase, the banker said that we must "reinvigorate ourselves."

The East Is Red: The CEO of a major American bank says that a Communist system of banking regulation would be better for his business than ours.

Law of the Jungle: In the "over-regulated" United States, people are still losing their entire life savings with what banks promise are "low-risk" investments, but which aren't really regulated at all.

And we don't need pilots because airliners are so difficult to fly: The architect of bank deregulation, which caused the financial collapse of 2008, now argues that banks shouldn't be regulated because they're too complicated to understand. He also argued that we don't need regulations because the free market is almost perfect.

What the Dickens ...? An old colonial practice is back: debtors' prison.

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So which of these reports are true and which are just April Fool's pranks? Answer: They're all true. But you knew that, didn't you?

Anne Berkshire-Hathaway: As the Huffington Post's Dan Mirvish reported last week, "When Anne Hathaway makes headlines, the stock for Warren Buffett's Berkshire-Hathaway goes up." Mirvish then provided a list of dates when Hathaway made news and Berkshire-Hathaway stocks enjoyed a boost.

Mirvish's argument is persuasive, even if it's not completely proven. Why is it even plausible? Because billions of dollars are traded every day in what is known as "algorithmic trading" - ultrafast computer transactions with no human intervention. These "terminators in the casino" played a role in last year's "flash crash" and are still a threat to market stability. Mirvish speculates that the boost comes from software programs designed to scan headlines and look for increasing mentions of a particular company. Then the programs will execute light-speed purchases of that company's stock without human intervention.

Algorithmic trading companies make their money by executing a huge number of transactions, each of which may only earn pennies. In a heavily automated stock market, even he tiniest delay in the execution of a transaction can make a big difference in earnings, so these programs are in a kind of "arms race" to automatically collect information and react to it instantaneously.

Which means the story could be true.

Reports suggest that a third of all stock market transactions are algorithmic. As much as 75 percent of global equities are traded algorithmically.The cocoa market suffered a recent near-instantaneous plunge widely believed to have been caused by algorithmic trading, during which U.S. cocoa prices fell more than 10 percent in sixty seconds.

Denials by the CEO of ICE, which operates the global futures exchange, were unconvincing. And Kurt Vonnegut readers may find themselves associating the name "ICE" with "Ice Nine," the seemingly-safe invention in Cat's Cradle which freezes all the oceans on Earth by mistake.

The point of Vonnegut's novel: Not every new technology will make things better, especially it it's used carelessly.

Even lazy guys who didn't do sh*t ... Business Insider quoted an employee of Barclays Capital in London who said that even these "lazy guys" got 600,000 pound bonuses. That's just under a million dollars ($980,000) at current exchange rates.

They also reported that some of the personal assistants at Barclay' Capital in London got bonuses in the $100,000 range. A nearby Mercedes Benz dealership observed that "it's been a busy day."

"Submit to our voluntary discipline ..." This story's also true, although we cheated a little: The banker spoke in a German accent because he's German.

Another story from Business Insider reported that Hans-Jörg Rudloff, Chairman of the Board at Barclays Capital, told the Forum of Economic News that the European Union should cut social benefits in half, require longer working hours, and delay retirements even further than is currently being planned.

Red Dimon. According to Bloomberg News, JPMorgan Chase CEO Jamie Dimon told a U.S. Chamber of Commerce conference that American banks are at a competitive disadvantage because "India, China, Japan and South Korea don't have the same restrictions on financial firms that are found in the U.S." All of China's major banks are owned by the state and managed by Communist Party leaders.

Dimon also said that "Singapore is licking its chops, hoping that a lot of the business goes over there." An analyst summarized the findings of the conservative Heritage Foundation by noting that "as much as 60 percent of Singapore's national output ... came from partially state-owned companies."

The architect of bank deregulation ... That would be Alan Greenspan, who has descended to new lows of incoherence in attempting to defend both his failed record and his failed deregulatory philosophy. Felix Salmon, who's a pretty judicious and fair-minded guy, said that "Greenspan could hardly have made himself look like more of an idiot if he'd tried."

Alex Eichler's review of Greenspan's editorial in the Financial Times was entitled "Why Everybody Is Laughing At Alan Greenspan Today."

I could almost feel sorry for the old gent, if it weren't for his almost sociopathic disregard for the consequences of his own actions. Much sport was made of the fact that Greenspan said the free market works "with notably rare exceptions (2008, for example)." Write your own joke, as Ed McMahon would say.

Over-Regulated America From The Nation's Investigative Fund: "Structured products must be registered with the Securities and Exchange Commission, but that's about it. No regulator reviews them before they're sold. When Congress enacted the 2010 Dodd-Frank financial-reform law, these complex products were ignored. The law created a new Consumer Financial Protection Bureau, which will investigate deceptive marketing practices (among other duties), but the new agency won't oversee the securities industry."

The Nation told several stories like that of Rob Brunhild of West Bloomfield , MI, who lost $275,000 after investing in Lehman structured notes through UBS Bank. "The broker implied that the notes were like U.S. Treasuries," said Brunhild.

Wall Street sold more than $51 billion of these investments last year. Investors have already lost $164 billion in these and similar products - and both sales and losses are expected to increase. Welcome to your "super-overregulated" nation.

Debtors' Prison: The Wall Street Journal reports on the increasing use of the criminal justice system to arrest and jail people for owing money - sometimes before they've even been notified that they do owe money. The Journal cites the growing backlash to "sloppy, incomplete or even false documentation that can result in borrowers having no idea before being locked up that they were sued to collect an outstanding debt."

This is not from a report in the Nation, Rolling Stone, or even (God forbid) the Huffington Post. This is from the Wall Street Journal - Rupert Murdoch's Wall Street Journal.

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In other news: Senior executives at NASDAQ and the New York Stock Exchange announced most stock transactions will now be executed at faster-than-light speed through a random number-generation process that will, in their words, "combine the high-speed efficiency of a cascading power failure with the predictive accuracy of chicken-entrail reading."

CEOs at the country's five largest banks announced they will be turned into workers' collectives. Management decisions will be made by a workers' Soviet comprised of unionized clerical employees, drivers, maintenance workers, and other members of the staff who are untainted by excessively capitalistic tendencies. In recognition of the "Anne Hathaway" phenomenon, the CEOs also announced that each of their banks will be re-named after celebrities. JPMorgan Chase will henceforth be known as the "Bank of Snooki."

It was also reported that ... ahh, forget it. I'm not going to come up with anything as strange or funny as these real stories. That is, they would be funny - if they weren't causing so much real-world pain and difficulty.

There's still a staggeringly high unemployment rate, we're still at risk of another recession, and a guy can't even write a stranger-than-fiction economics piece anymore. Some April Fool's Day this turned out to be.
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This post was produced as part of the Curbing Wall Street project.

Warren Buffett, Rating Agencies and Corruption

Zach Carter — Wed, 02 Jun 2010 08:30:18 -0400

Today's Financial Crisis Inquiry Commission hearing on credit rating agencies promises to shed quite a bit of light on one of the most profitable and corrupt businesses in Corporate America. Rating agencies score huge profits regardless of how accurate their ratings prove, and thus never felt any serious pain from the financial crisis, despite the central role rating agencies played in the collapse.

The basic model for rating agencies like Moody's, Standard & Poor's and Fitch Ratings is a conflict of interest. These companies rate securities-- if a bank wants to package a bunch of mortgages into a security to sell to investors, the rating agencies stamp a rating on that security to indicate how safe the investment is. But Moody's et al do not get paid by the investors who use their ratings. Instead, they get paid by the banks that create and package the securities. That creates a clear incentive to inflate ratings in order to win more business from banks.

So not surprisingly, the rating agencies have a pretty terrible record. They slapped top-grade AAA ratings on trillions of dollars worth of mortgage-backed securities, only to watch those securities plummet in value and default like crazy when home prices started to decline in 2007.

Expect lots of discussion about the way whistleblowers at rating agencies were treated, and lots of damaging emails about rating agency top brass pressuring underlings to ignore clear signs of stress in securities they were rating.

But also pay close attention to the testimony of Berkshire Hathaway chief Warren Buffett. Buffett was once viewed as a financier who invested in quality firms and didn't hesitate to criticize major problems with the financial system. That reputation has been severely tarnished by the financial crisis and the following battle for financial reform-- Buffett spent decades criticizing the market for derivatives, but has since lobbied hard to protect his own derivatives interests. He's lobbied so hard, in fact, that Buffett's Senator, Democrat Ben Nelson of Nebraska, joined a Republican filibuster to block Wall Street reform.

Buffett has adopted a similar strategy on ratings. He's been very critical of rating agencies for years, all while owning a huge stake in Moody's, and making a killing off of it.

Nobody likes the rating agencies. Even staunch defenders of big Wall Street banks hate Moody's and Fitch and S&P because they provide a convenient scapegoat. But it's important not to loose sight of the fact that, even at their worst, rating agencies were essentially just acting as agents of the big banks. And despite this widespread animosity, rating agencies still hold a very prominent place in the global economy by rating sovereign debt. With Greece and Spain under intense budget pressure, rating agency downgrades of each nation's debt has a tremendous impact on bond markets and the ability of government's to finance basic public services. Moody's has been particularly nefarious in this respect, even threatening to downgrade U.S. government debt, despite no evidence of default, and heavy demand among investors for U.S. Treasury bonds.

All of these are major issues involving Wall Street reform, many of which are still up in the air as Congress moves to reconcile the House and Senate bills. Come to the America's Future Now! conference from July 7 through July 9 to hear from some of the top experts on these issues: Simon Johnson, Robert Johnson, Heather Booth, Heather McGhee, even Phil Angelides, the Chair of the FCIC, will all be there.