May 16

What Barack Obama and Mitt Romney’s Investments Say About Them

Obama RomneyBarack Obama and Mitt Romney both filed their Executive Branch Personnel Public Financial Disclosure Reports as required in order to seek the office of the Presidency in 2011. I have previously described the two men as Pragmatist and Opportunist, respectively, and the financial disclosures further buttress my position. Barack Obama’s investment disclosure (Schedule A) is a mere three pages in length, while Mitt Romney’s disclosure runs a staggering eight pages, with an additional four pages of detailed investments managed in tax-sheltered private accounts. Barack Obama’s investments read like the embodiment of the conservative investment strategies championed by Vanguard’s founder John C. Bogle and investment adviser and author Dan Solin, while Mitt Romney’s portfolio appears to be right at home with noted investment televangelist fraud Jim Cramer’s Lightning Round, during which the shyster offers up investment buy or sell recommendations at breakneck pace out of thin air.

Barack Obama’s largest asset is a diversified group of long term and short term treasury obligations. The bonds and notes are generally regarded as risk-free investments delivering modest returns, even more modest in the current low interest rate environment. Mr. Obama’s personal stock holdings are limited to three retirement accounts, all invested in the Vanguard 500 Index Fund. The fund is not actively managed nor speculative. It simply tracks the performance of the S&P 500 Index, nothing tricky or fancy, or creative. Mitt Romney on the other hand holds pages and pages of individual equities, individual corporate bonds, foreign securities and actively managed mutual funds, many of which are managed in so-called blind trusts. Romney does have significant assets in market tracking index funds as well, but he also has upwards of $500,000 in gold, perhaps the most speculative of all possible investments. While the two men offer very similar policies for Wall Street, the two banal baby-kissers could not be more contrasting in their handling of their own personal fortunes.

So, what does this say about the two men? It has been widely reported that President Obama harbors no adulation for Wall Street, but rather coddles and serves it out of a fear of the political consequences of not doing so. Whether Obama has made a poor political calculation in this regard is a subject for another day. However, Obama apparently views the endeavor of those who have chosen “finance” as their career as facile and uncreative, adding little of real value to society. In fact, during a meeting between Obama’s campaign director and Wall Street heavies, the executives pulled no punches, even demanding that the President apologize to Wall Street publicly.

One of the guests raised his hand; he knew how to solve the problem. The president had won plaudits for his speech on race during the last campaign, the guest noted. It was a soaring address that acknowledged white resentment and urged national unity. What if Obama gave a similarly healing speech about class and inequality? What if he urged an end to attacks on the rich? Around the table, some people shook their heads in disbelief.

“Most people in the financial world,” a top Obama donor later told me, “do not understand how most of America feels about them.” But they think they understand how the president’s inner circle feels about them. “This administration has a more contemptuous view of big money and of Wall Street than any administration in 40 years,” the donor said. “And it shows.”

Mitt Romney on the other hand embraces the myth of creative finance and wealth creation wholeheartedly. Even given his advanced age of sixty-five–by age-based investment strategies at least–he is far too heavily invested in individual equities, individual corporate bonds, and active managed mutual funds. Most responsible fee only investment advisers would counsel the GOP candidate to sell off much of his equity stake in lieu of safer fixed income investments. Mitt Romney however will apparently hear none of that. His investments evidence a heartfelt belief  in the soundness of the American financial system directly in line with his political rhetoric and hyperbole.

Most of us spend decades believing the hype surrounding individual stocks and pimply-faced mutual fund managers fresh from Harvard Business School notwithstanding the mountain of empirical data to the contrary. We call our brokers and financial advisers seeking the next hot tip. After all, they know what they’re doing, right? Study after study reports the ineffectiveness of actively managed mutual funds and investing upon the advice of brokers and commissioned advisers. It is not until we actually sit down and research the subject, or remove our head from Wall Street’s all-encompassing allegory surrounding its brilliance for long enough to pay close attention to someone who actually knows what he or she is talking about, that we adjust our strategy. President Obama, a self described pragmatist, must have undertaken this analysis years ago. He understands that no matter how rosy the claims or how flashy the public relations campaign, that those peddling financial stock-picking advice have a downright pitiful track record. He also understands that to truly reap extraordinary gains from the stock market over time, you must either risk losing your entire fortune on risky bets, or you must be privy to inside and often illegal information. Neither of the preceding two courses of action is particularly appealing to an individual aspiring to the highest office in the land, so hum drum practicality it has been for the Commander in Chief.

President Obama’s changeable challenger is the consummate opportunist. He believes that actively managed funds offer superior returns to stock index funds and bond index funds. He believes that those Wall Street boys clad in $5,000 suits while extracting 2% or more of the wealth of their clients in return for poor advice actually enjoy some level of expertise. It is not all that surprising in that Romney himself spent much of his career surrounded by folks who made their livings bilking people of onerous fees by touting “exclusive” yet utterly perfunctory “proprietary analysis” while poorly managing their investments. The crowd in which Romney moves honestly believes its own claims of brilliance. In contrast to the con-man who knows precisely how valueless his products are, the Romney’s of the world believe their advice and knowledge has some real value. They are, in a essence, delusional borderline sociopaths. Some have opined that Romney’s portfolio is overly conservative and carefully crafted to avoid any political pitfalls. This analysis only makes sense if the author continues to himself or herself subscribe to the long-since-discredited strategy of actively managing investments. Even in 2012, those who advocate for a strategy based upon empirical data and sound experiential reports continue to swim upstream. A testament to the depth and reach of the myth of the stock-picker.

I believe that the duo’s investments speak volumes concerning each man’s approach to governance. Obama almost certainly charges his staff and advisers with the responsibility of researching each and every social issue or economic policy question inside, up, out, and down, leaving no stone unturned. It is in his nature to do so. He is then presented with each and every data set and potential effect prior to his coming to a practical and pragmatic conclusion. That very conclusion is then simmered on low heat through a Bearnaise sauce of political consequences and an ultimate decision is reached. This is precisely how Obama handled the gay marriage debate. He understands that practically speaking gay marriage is of no consequence to him, his marriage, or the orderly functioning of society or government. He has no moral objections to the idea. He has said as much in the past. However, once placed upon the hot stove of electoral politics, he made a poor decision, and his statements on the issue during the 2008 campaign were overly-complicated, forced, and disingenuous. This is almost certainly how he has approached the closing of Guantanamo Bay Prison since being elected, among a whole host of other issues and questions that have but one clear and obvious practical solution.

Mr. Romney in part still believes in  making “gut” decisions. It would be unfair to cast him among the same ilk as George W. Bush and his nearly unexpurgated lack of reliance on data and practical effect, as Romney can indeed be a thoughtful and realistic man. However, having no occasion in his life to doubt the efficacy of efficient markets, Mr. Romney is almost certain to believe much of what he spews on the campaign trail. I am unquestionably confident that he believes that tax cuts spur economic growth and lead to job creation in the face of reams of data to the contrary. He almost assuredly believes that  military power can be used to solve centuries old civil and religious conflicts and restore peace. He without question holds the position that income inequality will not eventually erode society as a whole. If he is elected it is likely that Mr. Romney will make many poor decisions based upon an honest belief that he is correct notwithstanding opposing information. However, he will also make his share of practical decisions. The question is which of the two categories will be out of balance.

In 2012 we do not have to chose between an ideologue and a pragmatist, or a true believer and a statistician–assuming a vote for either of the two mega-parties. Neither of the major candidates ultimately believes in anything strongly enough to be swayed by ideology or morality alone. Each man can be swayed from a practical common sense solution by politics, so both men are inherently dangerous. One need only look to Obama’s treatment of Wall Street and Romney’s continual conversion on policy for evidence. It is ultimately irrelevant how thoughtful and pragmatic a leader may be at his or her core if practical considerations have no place at the policy table. In analyzing the two men’s investments, it is clear that one man is a practical sound decision-maker at his essence, and one man is practical yet inclined to surrender to his belief in the advantage of risk and reward. Whether it is more desirable for a leader to make poor decisions based upon an honest yet misguided belief in the anticipated results, or to make poor decisions based upon a political calculation in the face of a deep understanding of information to the contrary is a choice that each of you will have to make on your own. I however would like a third choice.

May 02

Apologize or Else

MarketApparently Wall Street and the wealthy generally are so incensed with President Obama that they have demanded a national apology in the form of a televised speech for what they regard as the unfair demonization of the rich by the administration. The demand  reportedly took place during a New York  meeting between Obama campaign manager Jim Messina and Wall Street political contributors.

For the next hour, the donors relayed to Messina what their friends had been saying. They felt unfairly demonized for being wealthy. They felt scapegoated for the recession…

One of the guests raised his hand; he knew how to solve the problem. The president had won plaudits for his speech on race during the last campaign, the guest noted. It was a soaring address that acknowledged white resentment and urged national unity. What if Obama gave a similarly healing speech about class and inequality? What if he urged an end to attacks on the rich? Around the table, some people shook their heads in disbelief….

“This administration has a more contemptuous view of big money and of Wall Street than any administration in 40 years,” [one] donor said. “And it shows.”

Much has been written about the vitriol felt by the wealthy and Wall Street toward Obama. It has been opined that the explanation for the hatred is rooted in his rhetoric concerning the wealthy and their need to pay their fair share of taxes. Obama has indeed been fond of touting the virtues of bottom-up economic growth rather than trickle-down. Another theory is that Wall Street is incensed by Obama’s attempts to promulgate new regulation following the financial collapse brought about by the very same folks now demanding an apology. The most simple explanation recently offered for the consternation of Obama claims simply that Wall Street insiders are nothing more than spoiled brats who whine when any barrier is placed between them and stealing the hard-earned money of every day Americans.

This episode if particularly sad because the current administration has done nothing but accommodate Wall Street at every turn. It refused to break up any of the large banks once it became clear that many in the group were no longer financially solvent. It refused to offer homeowners any real relief if any share of that relief would come from the hide of Wall Street. It capitulated to Wall Street in maintaining extraordinary capital inflows of taxpayer funds into the large banks for what has now been nearly four years. It has negotiated widespread immunity from civil action on behalf of Wall Street with all but one of the states’ Attorneys General in exchange for chump change. It has paid only lip service to any real attempt to reduce the principal owed on tens of millions of underwater homes. The list of charity provided to Wall Street is indeed lengthy and diffuse.

Back in April of 2009, Obama famously said that “My administration is the only thing between you and the pitchforks.”  He could not have been more accurate in his description. Yet, at this watershed moment, when it should have been abundantly clear to Obama that no amount of largess would satisfy them, he chose to play the role of referee rather than to pick up the ball and dunk it on behalf of the American people. The period since has been littered with obfuscation and outright malice toward Obama from Wall Street. Once it became obvious to Wall Street that Obama was going to pursue a course of mild regulation, wealthy power brokers all but cast aside any plans they had to support the President’s reelection efforts. This has borne itself out, as Wall Street has donated exponentially more money to Romney than to Obama. Wall Street hasn’t maintained its status-quo methodology of hedging its bets, rather it has gone all-in on the Republican candidate. As recently as 2008, Wall Street was goo goo for Obama, donating nearly 50% more to him than rival John McCain. This time around anger has translated to a windfall for Romney.

And in this election cycle, Wall Streeters didn’t have to look far for a more natural fit. Mitt Romney founded a leading private-equity firm, Bain Capital, and he promised to repeal Dodd-Frank altogether. By late fall, invitations to some of Romney’s New York fund-raisers were carrying the names of dozens of financial executives, many of whom knew Romney personally or had closed deals with him during his years at Bain. Some Romney donors started asking their Obama-supporting colleagues to Romney events just to tweak them.

Wall Street donors were also emerging as the financial engine behind Restore Our Future, a super PAC founded by former Romney aides. Even as Obama outpaced Romney in traditional fund-raising, Restore Our Future, exploiting the Supreme Court’s Citizens United decision and subsequent rulings and regulations, was bringing in millions of dollars in unlimited checks from hedge-fund and private-equity magnates.

By the end of February, the group had raised more than $43 million, almost half of it from Wall Street — more money than Obama raised from the industry during the entire 2008 campaign. Paul Tudor Jones was among the group’s donors, cutting Restore Our Future a $200,000 check in December. At the same time, a super PAC founded by former Obama aides, Priorities USA Action, was struggling, raising less than $5 million, much of it from Hollywood and unions. The Democratic group faced a particularly cold reception among Wall Street Democrats, some of whom feared any money they gave would be used to finance attacks on their own industry.

With the passage of the 850 page Dodd-Frank Act and the thousands of pages of analysis required by the act, Wall Street abandoned Obama entirely.

“I think it’s an unfixable relationship,” one Democrat involved in planning the March 1 fund-raisers told me this spring. “They hate him. They really, really do. They hate all the Democrats.”

Notwithstanding the meager reforms included in the legislation, Wall Street viewed it as a direct assault to their bow, and has fought back by bankrolling conservative candidates. Ultimately, the reform serves in some measure to prevent Wall Street from imploding itself or the larger economy. However, when a sector of the economy has an overt guarantee from the government to be rescued should it become unstable, no regulation is seen as responsible or necessary.

Obama does have the right instincts. It has been widely reported that he and his inner circle have not been willing to coddle and cavort with business power brokers as the Clinton’s had. He apparently is uncomfortable in small fundraising groups of Wall Street executives. He’s right to feel as he does. Wall Street and business executives don’t need his help. They don’t need him at all, they want nothing more than guarantees that he won’t overly restrict their efforts to continue to extract wealth from the economy for themselves. However, beginning in 2009 and continuing to this day, he has made poor decisions regarding which side to support in the war between banks and Wall Street and the American people. His rhetoric falls flat on many as it has become obvious that it will not be backed-up by policy initiatives. The administration has continued to funnel trillions of dollars though Wall Street in hopes that some measure of the riches would find its way to Main Street. It hasn’t happened.

Yet Wall Street despises him nonetheless. Had the President made the decision to allow several of the large banks to be broken apart, forced lenders to cram-down mortgage debt, and prosecuted those responsible for much of the fraud that caused the collapse, Wall Street would rightfully abhor him, but he would have the support of the people. In choosing  to capitulate to Wall Street from the very beginning, he has the excited support of neither.While it is unlikely that Obama will deliver a national save-the-rich speech anytime soon, he is almost certain to strike some deal with Wall Street that calls off the dogs.

May 01

Pragmatist or Opportunist?

Obama-RomneyEssentially the voters in 2012 will have a very simple choice to make, whether to elect a political pragmatist or a political opportunist. On the one side is President Barack Obama, who by all accounts holds very few, if any, ideological convictions. In fairness, he does lean just left of center, but rather than having a belief system rooted in progressive ideals, it appears that his belief system has been fashioned by his personal experiences and educational training alone. He is a no nonsense analytical thinker. He looks plainly at a situation and determines what can be accomplished. He then moves further away from his original position expecting that his opponents will do likewise, and embraces a series of compromises until some agreement is reached, however distant from his original position. While this jumping-off point normally lends itself to practical common sense solutions, it has failed to hold true in his case. However polarized the other side, he is determined to come away with something. Mitt Romney on the other hand also appears to lack any foundational ideology, while leaning marginally right. His early political career appears to have been fashioned by his experience at the feet of his father, the one time chief of American Motors and Governor of Michigan. His father is widely regarded as a right-leaning moderate. He has spent much of his adult life surrounded by business elites, and will advocate on their behalf so long as in doing so he treads upon the path of least resistance. He too seeks out practical solutions to the problem at hand, but he allows the political winds rather than any firmly held position to determine what is in fact practical. So, the question is whether it is better to elect an individual who refuses to bend when the longer term practical political consequences may be deleterious, or someone who will bend facilely.

Looking at some examples from Obama’s first term we can see the limits of political pragmatism and general rigidity. The most glaring example is his reaction to the financial crisis. His policy decisions following inauguration through today are generally accepted by his progressive base, as well as most rank and file Democrats, as being far too friendly to Wall Street and the financial sector generally. Much time and effort has been spent ensuring the solvency of the banking sector, while little or no help has been offered to those most affected by the crisis. Experts have opined that it is precisely the President’s pragmatic rigidity that has contributed to his failure to move toward a more progressive fair approach in addressing the depression. Interestingly, while disappointed, neither the Democratic base or independents have been willing to take Obama to task over his  continued willingness to assist Wall Street. Even while Obama has been reported to have a great degree of contempt for Wall Street and apparently views the fruits of its labor generally valueless, he has bent over backwards to help it. Even when pushed by the public and Congress to pass some sort of financial reform package, the result was an impotent regulatory regime in the name of Dodd-Frank, and facially attractive but only marginally  protective credit card and other consumer protection reforms. Yet Wall Street still views him with extreme and venomous derision. Continue reading