Retirement Planning: Fixing Wall Street with Moral Authority

Ask any cop on the street for their assessment of a drug bust. It goes, they will tell you something like this: “Sir, may I search you?” “Yes.” “There is crack in your pocket.” “Not my crack.” “But sir, it was in your pants.” “Not my pants.”

There are two key elements of success on Wall Street that President Obama overlooked when he addressed the financial crisis a year past. The first is the crisis itself.

To which the conversation would proceed something like this: “Sure. Go ahead and try to figure out where we took risks, what those risks were and why those risks were not our fault. Search all you want.” “You took those risks because there was no real regulation governing what you did.” “Not my problem.” “Then we should begin to look for these problems so it doesn’t happen again.” “Not at my financial institution.”

Ask any cop on the street and they will tell you that the drug busts they often make are due to stupidity and ironically, bad driving habits. Ask Wall Street and they will tell you the appetite for risk drove them to do what they did. Ask any cop on the street and they will tell you that the more felony laws you break, the less misdemeanors matter.

The second reason we still have lingering effects from what happened last year is reckless behavior. Had the appetite for increased risk not been laid on the doorsteps of our financial institutions (by the Bush administration in the form of ridiculously low interest rates, lax regulations and tax-based, incentive-based rewards for bad behavior), the address at Federal Hall would have been far different.

Wall Street bankers choose not to attend the meeting on the anniversary of the collapse of Lehman Brothers. Much like maligned athletes who do as they please, these CEOs do not want to be role models. The president was seeking what he refers to as “a broader sense of responsibility” when it comes to how they act, prodding them to lead the financial markets in the right direction. Knowing that the cameras would be trained on every facial tick, every sigh and every uncomfortable shift in their chairs, much the way the CEOs of the big three car companies were scrutinized, they stayed away.

Where Mr. Obama missed the mark was in taking the strength of his general popularity into the den of thieves, where his championing of the worker is often met with open derision. Suggesting that these financial titans should be beholden to the average citizen means the shareholder should be relegated to a lesser role in terms of consideration. To do that, the public sector would need to step in. And this is where the divide begins to widen.

Risk has never been adequately defined. For the small investor, it is a soul-searching exercise that is often fraught with anxiety and overtly quixotic. Unable to hedge their stance the way more savvy investors do, they simply take risk at face value, not as a mechanism designed to grow investments. The confusion starts for this group when they refer to their interaction with Wall Street (largely through their retirement plans and even though many were unaware, home ownership) as savings.

For the large investor, risk is the only reason they do what they do. Exotic products make the experience much more interesting and profitable. Lack of oversight makes the thrill doubly enticing. Using the government as a hedge against losses (not only of share value and assets but bonuses) made the process even more appealing. Is it any wonder that the headwind facing the president has picked up speed?

The main issue is how to regulate and protect. Currently the government does not have a single agency that can act in advance of such a storm. Having knowledge of an impending crisis would require you to have the ability to evacuate the innocent. Having that knowledge would require a federal agency to have much more private access to information than any publicly elected official would want, even the president.

We rely on the ability to learn lessons instead. Yet Wall Street uses another mechanism to understand the way markets work: forgetfulness. Understanding that politicians come and go suggests to these top financial folks that regulations should be either more fluid, able to evolve with the markets, or simply non-existent, employing a buyer beware sticker on each new product that makes its way to market.

Sen. Bob Corker (R., Tenn.), a member of the Senate Banking Committee suggested more introspection in the process: "Financial regulation needs to be done in an atmosphere of thoughtfulness." In other words, not at all. But reform does need to come in some shape or form. Doubts remain whether the president’s proposal of creating a consumer oversight committee to provide this sort of thoughtfulness will ever make it into law.

The ripple effect that spread in the aftermath of September 2008 still lingers in most of America. Billions of taxpayer dollars disappeared in an effort to bailout a system that few outside of Wall Street understood. Now we understand that the methodology employed by these brokers/traders/dealers/bankers offered no projection or even entertained the possibility of a fallout turns this into a politically charged topic. The moral authority of the president and his insistence that this will not happen again will turn this kind of regulation into a turf war with conservatives and financial interest groups.

Those that were instrumental in creating lax regulation will need to find a common ground with those that seek retributions for the market loses that followed the near-collapse of the financial system. The problem is determining which agency is best equipped to handle the new responsibility?

The Fed may not be the best choice. Their inability to see the crisis coming and possibly their own accommodative stance make them a poor candidate. The FDIC, which oversees the nation’s banking system doesn’t see their role as protector expanding to include all of the financial markets. Their grasp of regulation is still, even in the aftermath rather weak.

The Treasury would be an attempt to control by committee. Although Treasury Secretary Timothy Geithner pointed out that the Fed is both incremental and essential in the president’s plan, the markets, Wall Street is quick to point out, have begun to recover without any new oversight. Forget economists.

The bailout should not be cure enough. In many instances, it came without ties or questions and has even been offered back to the government. Doing so, often before it was clear that the bad times were ending suggests that Wall Street is aware that regulation would hamper their efforts at delving into new and more complicated methods for making a profit.

The cycle of dramatic financial events is shortening. While some suggest that this type of regulation will protect us ten years from now, there is a greater likelihood that another similar event will shake out in a matter of years. This also suggests that regulation is needed yesterday more than ever.

As the president searched Wall Street for answers to why they did what they did, they simply replied: “Not my pants.”

Rebuilding Your Wealth: Could Savings Sink Us?

There is an old philosophy joke that goes something like this: A man catches his wife in bed with his best friend. As the husband asks “what’s going on here?” his friend replies “are you going to believe me or what your eyes tell you?”

That is about where we are in this economy. There are plenty of reasons to see things are beginning to improve and yet, it is still difficult to see these improvements. The recent rise in spending (0.3% with an earnings increase of 1.4%) is curiously coupled with the recent rise in savings. How can that be? Or better why can that be?

Even those of us who fall squarely on the side that disagrees about the Obama administration’s attempt to fix this economy with a government spending program so massive the numbers simply boggle the imagination can agree that if it works it will be good to be wrong. Those of us who think that this is exactly how you fix the problem that over six months ago belonged to another president, are hopeful that we will be right because it would be no fun to be wrong.

Seeing what you want to see is of course, nothing but a defensive posture we all are capable of assuming when things look bleak. In his 1993 book titled “How We Know What Isn't So”, Thomas Gilovich suggests the endowment effect might have something to with this. He writes, “ownership creates inertia that prevents people from completing many seemingly beneficial transactions.” For the economy to move in a direction that many considered beneficial, keeping your money close will not necessarily have the same desirable effect as if you began spending it.

Numerous reasons have been given as to why Americans have chosen to rebuild their depleted accounts rather than spending some of this cash. Beginning with building emergency accounts to offset any potential hazard that, if it hasn’t already happened (it probably won’t) from occurring. There is also some speculation that the growth in these accounts is the direct result of the poor performance of our retirement accounts.

Both of these reasons seem to be not only believable but also just plain old good sense. Just about everybody who writes about personal finance will tell you, the ability to tap back-up cash (the amounts vary from between three, six or twelve months of income) in times of crisis is the first rule of a healthy personal balance sheet. It is unrealistic for the majority of us but good advice nonetheless. The most troubling aspect is the shift from what made us feel good (our ballooning retirement balances) to what we think will make us feel good (our fledgling savings accounts) now.

When it came to investing, I can be relatively safe in suggesting that we all thought we knew what we were doing. Those of us that took the time to study our options, did a little research and chose the investment that we thought would best fit our tolerance for risk probably thought you were doing better than most. This phenomenon is based on one of the most well researched topics among psychologists.

Our retirement accounts were an extension of our assessment of our own abilities. Mr. Gilovich writes: “ the average person purports to believe extremely flattering things about him or herself – beliefs that do not stand up to objective analysis”. Our self-serving assessments as Mr. Gilovich calls them make it difficult to “apportion responsibility for our success and failures”. When the market performed well and by default our investments, we took full credit of our skillful strategy and savvy. When the market failed to perform, giving up years of gains, we were quick to blame external circumstances.

Now we look to savings to save us and help us feel endowed once again. There are three problems with this approach and why it will stigmatize this recovery. The first being our assessment of risk is somewhat askew. We have more or less rubber-banded from fully stretched to a restive state. We have removed out-sized risk in favor of none.

The second problem facing the economy is that savings and our logic for keeping it stashed away is not logical. Our motives at regaining self-esteem through building a savings account will have the exact opposite effect on who and how you perceive yourself. You look for retirement to happen one day and you reason, when I reach it, I will have six months savings stashed away in the event that I might need it. More troubling, what if that is all you have?

By rebuilding (or in many cases building) a savings now might jeopardize the economy in ways you haven’t considered. Although much of the income increases recently reported were due to increased overtime by skeletal staffs, there is far less opportunity to invest or even where to when you are out of work. Those that still are employed have not yet returned to the markets as employer incentives such as matching funds have dwindled. Many pension plans have been frozen. To reverse this trend, some one needs to buy something.

There are goods but few buyers. The nature of the transaction, which does not necessarily need to be motivated by credit, has not shown an equal recovery as compared to what we saved in the same period.

Third, the opinion makers, the people we listened to when we were investment geniuses are not making any sense to us anymore. This motivation makes us turn to those that tell us what we want to hear. Studies support the idea that we look for not only the kind of information we want to hear but how much we need to ingest. Things are bad and you hear: could get worse; could be you; you should prepare. Things are good and you listen to experts that advise you on the ways to keep it good. Even when we find information that doesn’t jive with our thinking, we will dig around until we find something that supports what we want to believe. We want to be comfortable that what we are doing is what we should be doing.

John O'Donohue, poet, philosopher, and scholar, looks at the Irish imagination in his book Anam Cara observing, “To the inferior eye, everyone else is greater. To the indifferent eye, nothing calls or awakens. To the resentful eye, everything is begrudged. To the judgmental eye, everything is closed in definitive frames. To the greedy eye, everything can be possessed. To the fearful eye, all is threatening.”

Without risk, what we see is what, better yet all we will get. John Burroughs wrote: “A man can fail many times, but he isn't a failure until he begins to blame somebody else.” And no one will want to take the blame for what the next year holds as his/her own because of it.