1/27/2010
By Brian Sozzi, Research Analyst

More Articles by Brian Sozzi

I am having a great day today.  More often than not I have great days, but today I had a company smash consensus earnings estimates (came nearly in line with my estimate) and got to watch a free play on television.  Well, the drama unfolding on television, the public flogging of Henry Paulson and Tim Geithner, is not exactly free because the decisions made by these two put us, and future generations, on the hook for billions of dollars in debt servicing payments. 

However, this latest round of riveting testimony is useless in my opinion as it does not conjure up definitive ways to resolve the problems at hand.  Those problems include rising deficits and the subsequent overreliance on China to fund our economy, potential inflation from an easy Fed monetary policy, and tactics by the Obama Administration that reek of ant-growth measures. 

I ultimately think the testimony does not get to the root cause of the reason why we are in our current position; fundamental changes in the banking sector must occur in a manner that does not inhibit long-run economic growth.  When former Fed Chairman Alan Greenspan opened up the credit spigot post September 11, we had a massive explosion in leverage.  Fake wealth was created.  Lehman Brothers had a leverage ratio of over 40%, as the once storied brokerage loaded up on sub-prime debt, commercial real estimate holdings at the top of the market, and credit derivatives.  It was a party to be sure, one entirely fueled by cheap money and the desire by executives to garner significant bonuses. 

If one thing is apparent to me out of this entire mess, it's that Wall Street, which contains some of the best minds in the world, will devise new products to outsmart regulators and generate hefty revenues.  Heck, I have read articles recently that the securitization market has returned to almost proper functioning, no doubt aided by the easy money policy of the Fed and passage of time since the market's crash in the summer of 2007 (Bear Stearns hedge funds went bust).  I happen to view favorably Warren Buffett's proposal to constrain risk in the system by tying executive compensation to long-run performance.  The way I took his recent comments, if a company goes under soon after an executive leaves, and needs taxpayer assistance, his/her assets would be seized.  In other words, the actions of Angelo Mozilo (former Countrywide CEO) and Stan O'Neal (former Merril Lynch CEO) would no longer be able to occur.

To the guys on Capitol Hill looking in the rearview mirror today, take a look into the future and realize that we do not have the proper system in place to minimize systemic risk and support sustainable long-term economic growth.

Brian Sozzi
Wall Street Strategies