Believe It or Not, We're In This Together

Like I did late last month, I again devoted my latest SpliceToday column to the financial crisis. As they were then, things are still extraordinarily busy, a primary reason for the lack of posts on the election. Since my "day job" is consuming so much of time, I thought I might as well write a little more about it, and about about my perspective on the current situation. This week things seem more "normal" than they have at any time since early September. It's my hope that this return to normalcy will continue and that, as a result, I'll be able to start writing more about the presidential race (which is now only two weeks away)!

So with that, here is this week's Splice column...

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Lehman Brothers’ September 8 filing for bankruptcy proved to be a catalyst for market turmoil, as nearly anyone with a stock portfolio or a 401(k) can easily attest. The subsequent five weeks have been the busiest of my career. As I wrote in my previous column, my job is to convince my customers to trade stocks with me and with my firm. As a general rule, market volatility breeds market activity (and to some extent, vice versa), but the bottom line is that the more fluctuations the market experiences, the busier I am. These last five weeks have been no exception.

When customers trade with my firm, they pay us commission—typically on a cents-per-share basis. For example, if a customer trades 1,000,000 shares with us on a given day at a commission rate of two cents per share, the firm takes in $20,000. Some of that revenue might be allocated to pay for the customer’s use of the firm’s research, some is used to cover the costs the firm incurs in order to be able to trade for the customer, and the rest is disbursed in any number of other ways. In theory, a portion of that will be reflected in my year-end bonus, though there is no exact formula and some degree of subjectivity involved in if and how that happens.

My firm is not one of the companies that has found itself in the headlines over the last few weeks and months. In many ways, our structure, philosophy and business model insulate us from many of the problems that have plagued some other Wall Street firms—Bear Stearns and Lehman Brothers foremost among them. Coupling that with how very busy we’ve been, one might think things are shaping up nicely for a big year for my company at year-end and, presumably, for me as well. But even as a bastion of financial responsibility amidst the irresponsible risk-takers that brought us here, we won’t be able to avoid sustaining some collateral damage.

Before assuming I am just another “greedy” Wall Streeter, there are probably a few things you ought to know. You might be surprised to hear that salaries on Wall Street are generally very low—so low that it might shock you given the tales of excessive wealth in the financial service industry. For most people working in finance, the bulk of their compensation is disproportionately represented by the year-end bonus, and this year bonuses are almost sure to take a major hit. (Indeed, it’s the bonuses that provide the eye-popping numbers for which Wall Street is infamous.) Keep in mind as well that quite often, a significant portion of the bonus consists of shares of the firm’s stock. And, like many other Americans, we have our own stock portfolios and our own 401(k) plans.

The end result is that as the market declines, we feel it and are impacted by it perhaps two, three or even four times more than someone working in another industry. I’m certainly not complaining; this is how it should be. After all, many of us working on Wall Street—most of my clients, in fact—are stewards of your investments. Some are making decisions about how to invest your retirement or pension funds, for example, and so it only makes sense that we should have an intensely vested interest in the market’s success. Being “doubled down” on the market’s rise or fall has the added benefit of ensuring that we do our work with fiduciary responsibility and with an adherence to an extremely high ethical standard. Most of us do.

Some don’t, though, and it is these very few who brought us Enron several years ago, who have brought us countless other financial scandals, and it is they who have brought the current financial crisis upon us. So as popular as it may be to blame “Wall Street” collectively, the reality is that many of us on “Wall Street” will be hurt as much and potentially more than most. The reckless risk-taking that proliferated our industry over the last decade in particular has likely come to a permanent end now. If new rules and regulations don’t bring an end to it, a new attitude from those in charge of financial firms certainly will. This, in the long run, is good news for all of us, and it is my hope that some faith in the financial markets and those who make a living working in it can be restored.

Any profession, whether on Wall Street or Main Street, rewards hard work, good performance, and results. My line of work is no different. I am now watching the expected reward for an entire year of hard work dramatically diminish (if not vanish) before my eyes in just over a month. The same, obviously, is true for my colleagues. The situation is worse for friends of mine in other areas of finance, particularly those who work for hedge funds whose income is completely and directly based on the performance of their investments. When the market plunges as it has in the last six weeks, there are few if any investments capable of avoiding decline, leaving many in the hedge fund community unsure of whether they’ll make a quarter of what they did last year.

My clients perhaps feel it the worst of all. As their year-to-date performance numbers melt down, they not only struggle with their own personal financial repercussions, but with the emotional and psychological drain of knowing that you’re going to be hurt as well. Several of my customers have lost their jobs, and others will likely face the same fate before the year is out. Even those clients who keep their jobs will undoubtedly be working with far less assets under management due not only to the declines in the market, but also because of fearful investors of theirs who have decided to pull the plug on their exposure to a frighteningly volatile market.

As I see others who do exactly what I do at less stable firms worrying about their job security—and even worse, others who did what I do at Bear or Lehman now looking for a new job—I am in many ways thankful simply to have a seat at the desk. I can’t tell you with certainty that we’ve seen our way through the current crisis in our financial system. Even if we have, attention is likely to now turn—as it arguably began to last week—to the more conventional problems that are weighing on the nation’s economy, creating yet another drag on the markets. Have faith, though, not only in the inherent fairness of the financial markets, but also in the knowledge that those of us on the front lines are working as hard as we can to get things moving in the right direction: higher—for you, and for ourselves.

(This post can also be seen at Splice Today: http://splicetoday.com/).

The Great Unknown

I took the opportunity in my weekly SpliceToday column this week to discuss our country's current financial crisis. I cannot recall a period of time in nearly nine years on Wall Street when I'v been busier or more stretched to the limit. As I prepare to head into work today, there is still no agreement on a bailout (or rescue -- see below) plan, and my Blackberry was buzzing last night with news of Washington Mutual's failure and subsequent acquisition by JP Morgan. These are crazy times...and it ain't over yet. Hang in there!

Without further ado, here's my Splice column...

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It’s been an extraordinary two weeks in what was already a rather exceptional year in the financial services industry. I work “on Wall Street.” In nearly nine years in this business, I have seen some significant ups and downs—September 11th, 2001 most notable among them. 9/11 was traumatic for this industry, but in reality the trauma was primarily psychological or emotional in nature. The last two weeks have also been psychologically and emotionally jarring, but in this case, the financial system of our country has been shaken on a fundamental and systematic level. As I write, both presidential candidates have returned to Washington to work with President Bush and their fellow members of Congress so that the federal government can provide some sort of solution to the current crisis.

It would be reasonable to assume that because I work on Wall Street, I’d be able to offer a unique perspective on what we now face. Yet in many ways, I know as much (or as little, as it were) as anyone else. The extent to which the specifics of the current situation surpass my understanding points to a crucial element of how it is we got here: we as a country, we as taxpayers, we as investors and even we fellow financial services industry workers have been betrayed by the reckless, irresponsible and, yes, greedy, actions of a very few individuals.

So, what exactly is it that I do? Put in the simplest terms, I am a salesman. My job is to convince institutional investors (mutual funds, pension funds, hedge funds, etc.) to buy and sell stocks with my firm. If I am successful in convincing such an entity to begin doing business, I then become something of a relationship manager, by which I mean that my job evolves into maintaining the customer’s business and, whenever possible, increasing the level of that business over time. To do my job effectively, I need a solid understanding of the financial markets—the stock market specifically. My customers do not need my advice on what to buy and sell. They are trained to do that themselves, or someone above them directs their transactions accordingly. What they do need and rely on, though, is my knowledge and feel of when to buy and sell their stocks, and what sort of result they can anticipate once their trade is complete. They count on me to alert them to important news not only about the specific stocks they are trading, but also about the markets in general. Information is vital to success in my job, and the ability to effectively communicate that information is the real key. These last two weeks have been as volatile, uncertain and unpredictable as any I’ve experienced, and without a doubt, everyone’s abilities have been put to the test.

The rollercoaster ride began in earnest earlier in the year, as Bear Stearns fell apart. We shook it off, though, only to watch in amazement again this summer as Fannie Mae and Freddie Mac teetered on the brink of failure, saved by a bailout from the federal government. Smart analysts had months ago warned that Lehman Brothers was in danger, noting the similarities between Bear and Lehman, and the uncomfortable correlation between the types of investments and debts weighing on both firms. While most believed there was no way that Lehman could (or would be allowed) to be “the next Bear,” early this month the writing was on the wall. The reasons for Lehman’s eventual failure are still being sorted out, but the impact of that failure had immediate repercussions.

There was panic. There was panic from customers who watched, ashen, as their portfolios lost value and their year-to-date gains disappeared. I saw very conservative, well-respected and cerebral investment firms engage in what I can only believe was true “panic selling.” There was panic from those entrusted with overseeing the very system now facing a real crisis. As is often the case, here too the panic largely resulted from the many, great unknowns. I certainly don’t know how much more toxic debt lies buried in the books of financial firms across our country, but there is no reason why I should know. More alarmingly, however, the men and women in charge of the very firms nearing their demise didn’t truly know the extent of their remaining exposure either. The SEC, the Federal Reserve, the Treasury Department—none truly knew the extent of the catastrophic precipice on which we found ourselves. Emergency actions were implemented such as a ban on the short selling of stock—something I could never have imagined as I had chuckled in the past on hearing of various emerging markets’ complete and total bans on short sales—or sometimes on selling at all! I’m not laughing any more.

The Thursday after Lehman filed for bankruptcy—in the midst of the most tumultuous week of trading I had ever seen—I had my only moment of true panic. Bear was gone. Lehman was now gone. Merrill Lynch was effectively gone, having been acquired days earlier by Bank of America. That left only two of the handful of Wall Street giants we had for so long been accustomed to: Morgan Stanley and Goldman Sachs. I remember vividly that Thursday as I watched the share price of Morgan Stanley plummet with a velocity and an intensity I’ve never witnessed. Tens of millions of shares of the stock were trading every hour, and early that afternoon, it appeared Morgan Stanley was headed for a Bear- or Lehman-like fate. In the space of only 30 minutes, Morgan Stanley’s stock had fallen more than 50 percent, at one point flirting with single digits. It was only the breaking news of the plan being hatched by Treasury Secretary Henry Paulson that rallied the markets, taking Morgan higher with it.

This small example points to the importance of what the media have taken to calling “the bailout plan.” I think a more appropriate moniker is “rescue.” We’re beyond bailing out. Bailing out is only a temporary stopgap. Bailing out invokes images of buckets fighting a losing battle against a vast amount of water. What we need is a rescue. Coast Guard helicopters, life boats, whatever it takes! Honestly, I can hardly believe I’m writing this. As a Republican (and a Republican primarily for fiscal reasons), the idea of increased government intervention or oversight on the nation’s economy is absolute anathema to me. With that said, it is my firm belief that Democrats and Republicans absolutely must come together to pass some version of the Paulson plan—and sooner rather than later. I hope it will be the most responsible plan possible with respect to the role the government will play in the financial industry in the future. I hope the Democrats won’t take advantage of the vulnerable situation we’re in to insert more government controls than are absolutely necessary. I hope the taxpayer will bear as little of the burden as possible, and that they will stand to reap the majority of the benefits of the plan’s potential upside. But I don’t feel as though now is a time to be picky, and I don’t think now is a time for partisanship.

Say what you will about President Bush, his speaking ability or anything else, but he was excellent when he addressed the nation on Wednesday night. In clear (if sobering) terms, he effectively laid out the facts of the present situation, and skillfully explained much of what led us here. As Bush said:

“The government’s top economic experts warn that without immediate action by Congress, American could slip into a financial panic, and a distressing scenario would unfold: More banks could fail…The stock market would drop even more…The value of your home could plummet. Foreclosures would rise dramatically…More businesses would close their doors, and millions of Americans could lose their jobs…it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.”

He’s right. This is unprecedented, and it’s dire. There is more bad news out there and more pain to come—the extent of which we just do not know. So the unknowns remain, and as unfortunate as it may be, a rescue from the federal government has become the best of a limited number of terrible choices. Those supposed to know don’t know. Those responsible for not letting this happen have let it happen. The actions of a very few have the very real possibility of dragging down all.

Remember, I’m no financial expert, but I do read the markets, and I do know my clients. The markets, my clients and my gut all agree that drastic action is necessary. Inaction is not an option. The sooner we swallow this pill, the sooner we can begin to heal. Take it from me—I’ve got a front row seat.

(This post can also be seen at Splice Today: http://splicetoday.com/).

Short & Sweet

Well, unless you've had your head buried in the sand for the last week, you've probably noticed that things on Wall Street have been a little hectic. Lehman Brothers filed for bankruptcy on Monday morning, insurance giant AIG nearly did the same on Tuesday, and the markets have generally been in turmoil -- the Dow down nearly 450 points yesterday, and then up over 400 points today. In over eight years "in the business", I cannot recall a busier week -- nor can I can recall seeing more volatility. Most alarming for me, I think, is that I can't recall seeing more uncertainty, even from so-called "experts". With the government's apparent plan to create an entity in which to dispose of all of the toxic debt plaguing so many financial firms, the buyers returned today with more conviction than I've seen all week.

Long story short, I've barely had time for lunch this week, and what is already a fairly stressful job has been even more so this week. As a result, blogging has been the last thing on the agenda. The last hour or so of today brought the first signs of potential stability, and should tomorrow be a return to (some semblance) of normalcy, I'll hope to be able to write a post or two this weekend and early next week. In the meantime, a few quick thoughts to leave you with...

• The McCain-Palin "bounce" in the polls following the Republican National Convention appears to have exhausted itself. This is not unexpected -- a "bounce" is inherently temporary.
• With that said, though, McCain likely catalyzed the reversal in the polls this week when, in the midst of Lehman Brothers' declaration of bankruptcy and a stock market meltdown Monday, he affirmed his belief that "the fundamentals of our economy are strong". He's not entirely incorrect, technically, but that was the last thing that nervous Americans wanted to hear, and it was remarkable in its political tone deafness given the slew of headlines people were seeing that indicated quite the opposite. The lead McCain has enjoyed in the polls since the convention immediately began to disappear, and as of today, he again trails Obama.
• According to CNN, Obama is now using the teleprompter for each and every speech he gives -- even for what would normally be considered fairly informal, casual stump speeches. I have a few thoughts on this bit of news. First, clearly the Obama Campaign had become concerned about the candidate's ability to stay "on message" when speaking extemporaneously, perhaps trying to avoid another "lipstick on a pig" moment. Second, this reinforces the belief many have that Obama lacks some degree of substance. He can absolutely write a great speech and he can sure as hell deliver a great speech, but every one of the "great" speeches he has delivered has been while using a teleprompter, and conversely, many of the missteps he has made have been when shooting from the hip. Lastly, this is just further evidence of the media's double-standard. Were this McCain who was now relying on a teleprompter for each and every word he uttered in public, the media would be in a frenzy, and the leftist blogs would be buzzing with claims that McCain is so old (or perhaps even approaching senility), and therefore he is unable to even remember his stump speech lines. (Were it President Bush who did this, the same crowd would be trumpeting how "stupid" Bush is, as evidenced by his need for a script whenever he speaks). With Obama, though, not so much as a peep. (NOTE: I stand corrected on this point thanks to a comment from a reader -- and a good friend -- Brandon. Thanks for the correction, Brando).
  
• A week from tomorrow is the first of three presidential debates -- Friday, September 26th at the University of Mississippi in Oxford, MS. I predict that Obama will maintain his lead -- perhaps even build on it slightly -- and head into next week's debate with a 3-5 point lead in the polls. I believe the debates are crucial this election year. A disastrous showing by either candidate could have a significant impact on the polls and on the election's ultimate outcome, so be sure to tune in and watch.
• After a series of missteps and strategic errors, Obama and his campaign enjoyed their first good series of days this week since the Republican Convention. While they seem to have regained their footing for now, he still appears unable to close the deal with American voters. If he had done so, he'd likely be leading by double-digits given the poisonous political environment for any candidate with the Republican "R" next to his or her name. Even still, this election has been and remains Obama's to lose.

I'll be back soon...