Thursday, July 15, 2010

Plus Ça Change, Plus C'est La Même Chose

The More Things Change, the More They Stay the Same

NOTE: The French version of the above epigram (colloquially abbreviated to “ Plus ça change,”) was created in mid-1800 by Jean-Baptise Alphonse Karr, a French journalist, critic, and novelist. While reading the article below, see if you can figure out its relevancy to the subject matter.

Whom Can You Trust?

“Is there anyone out there in the financial world left to trust? Think about it. In years past, the concept of trust and honesty was ingrained. On the rare occasions that concept has been violated, the general public was then surprised, shocked and disappointed. Now, a new paradigm has been created wherein dishonesty and a lack of integrity at the highest corporate levels are expected; where self-serving actions are even taken for granted as every day happenings; where trust has been replaced by a crisis in investor confidence that has been a major factor in inducing current market forces.

We are at the point where untrustworthiness not only dominates the headlines; it has destroyed faith in our basic institutions, professions, and corporations. Here is a partial list: Accountants; Attorneys, Financial Analysts; Brokerage Houses; the CIA; the FBI; the Catholic Church, Priests, and other religious practitioners; Politicians at every level of government; Corporate officers in multiple industries; Mutual Fund companies; Insurance Companies; Oil Companies; Health Related Companies; Charitable Organizations; and the list can go on and on.


Most readers of this publication are sophisticated, intelligent, and experienced. Allow me to pose an age-old question related to that: Does art imitate life, does life imitate art? Or, is it perhaps both? Recently, the answer is “yes” to all three, especially as it applies to financial markets.

I’ve come to that conclusion based in part on the 1987 movie, “Wall Street,” which was predicated on an accurate portrayal of what real life on Wall Street was at the time. The financial industry’s penchant for self-interest as depicted in the movie, regardless of the disastrous impact on its unsuspecting clients, was a harbinger of today’s headlines. Remember the famous words uttered by Gordon Gekko (Michael Douglas), “Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed in all its forms.” This movie was indeed art imitating life.

Unfortunately, the attitude towards the greed associated with the markets of the 1980’s as enunciated by Gordon Gekko has not only returned, it is more rampant and more prevalent than at any time in recent history. Life is now imitating art. [As an indication of its continuing relevance, as of this writing, the sequel to the movie, titled Wall Street: Money Never Sleeps, is scheduled to be released on September 24 th.]


It is possible that the original source for the concept that greed is good was the renowned economist of some 200 years ago, Adam Smith. Smith argued that the invisible hand of market forces would ensure that the efforts of individuals acting in pursuit of their own self-interest would actually improve society as a whole. This, of course, is the basic philosophy that produced the capitalistic system.

Yet, as a result of the recent revelations of what seems to be endemic malfeasance, we have been thrust into a crisis mode where an article in The New York Times runs with the headline, “Could Capitalists Actually Bring Down Capitalism?” That is not only distressing, it is an alarming commentary on the fragile nature of the human sprit. Fortunately, the article’s conclusion was that, ‘Ultimately, capitalism will almost certainly survive this onslaught from the capitalists—if only because survival is the most profitable outcome for all involved.’ Greed, and the drive for personal enrichment was the force motivating executives of so many corporations who implemented the illegal, unethical, and scandalous machinations that have received so much publicity of late. Recognition of this systemic weakness has created an imperative issue for investors.


Suspicion, is now the theme that dominates investor attitudes, leading to a crisis of confidence. If you can’t trust the revenues, earnings, or cash flow reports issued by household names of American corporations; if CEO’s and other officers of these corporations are potential liars and thieves; if audit reports are manipulated by avaricious accounting firms; If profits influence rating agency activities and opinions; if as an investor, you can’t know which company will be next on the list, what do you do? GET OUT OF EQUITIES! SELL! OPT FOR SAFETY!

I’m not necessarily advocating those actions. I’m suggesting that investors have followed those dictums creating a disconnect between a recovering economy that traditionally is reflected, in fact that traditionally is anticipated by virtue of escalating stock prices.

Investors are constantly warned of the perils inherent in investing in third world or emerging markets because transparency related to financial information and numbers was lacking. Yet, relevant to these markets, I don’t recall any caveats regarding outright lies, fraud, or self-serving that seem to define today’s American business model.

In an editorial in U.S. News & World Report, publisher Morton Zuckerman writes, “The public record is rife with instances of accounting malpractice, conflicts of interest, excessive executive compensation, especially for terminated CEO’s and lax board room supervision. All the while top executives have been enriching themselves with stock option awards, with stocks that boomed in the bubble but were exposed in the bear market. In a speech at the National Press Club, the CEO of Goldman Sachs said, ‘In my lifetime, American business has never been under such scrutiny [and], to be blunt, much of it is deserved.’”

“Plus ça change,”

If, after all of the publicity relating to the recent questionable activities of Goldman Sachs, and its chairman, Lloyd Blankfein, you are puzzled by the seeming honesty of that last statement, it was expressed by its then CEO, Henry S. Paulson. However, it was in fact conveyed in June 2002. Actually, the above entire article you just read was published in July 2002 in an Internet investment newsletter called the Kronish Chronicle sent to subscribers. Although several paragraphs have been omitted, of the almost 900 words, less than two-dozen had to be changed in order to update the contents. It should be obvious, that based on its relevancy to today’s economic and investment environment, in the eight years since that article was written, Plus ça change ––the more things change the more they remain the same. Or, as articulated so astutely by that sagacious pundit, Yogi Berra, “It’s déjà vu all over again.”