Cheating Plus Bad Money Equals Depression

Wall Street is a lot like the educational system in America. Every ten years or so the experts call for reform, complaining about lower standards, lower test scores and incompetent teachers. The crisis we now face on Wall Street began in the classrooms of America’s business schools. There is simply a dearth of truth-tellers among us. “Getting and spending,” to borrow a phrase from the poet William Wordsworth, “we have laid waste a sordid boon.” Cheating often accompanies “getting and spending” both on Wall Street and on Capitol Hill.

It should come as little surprise then that cheating has become an art form permeating every sector of American culture:  sports, journalism, politics, and business. Many a good man on Wall Street has been corrupted by a lack of moral conviction and greed gone wild.    

Wall Street is full of con artists, and Lord knows I’ve seen my share during 12 years of walking the small-cap Street. But nothing I’ve seen compares with the schemes the big boys on Wall Street have concocted over the last 12 years. No one I’ve met could match the Madoffian skill set of a Jeffrey Skilling, the former Enron CEO serving a 24-year prison term for, to put it simply, lying and cheating; or that of John Thain, Merrill Lynch’s former chairman and chief executive, who paid out $3.6 billion in bonuses during the firm’s last desperate days shortly before its takeover by Bank of America.      

The Federal Government, using China’s money and our tax dollars, gave BofA $20 billion and guaranteed another $118 billion in bad debt to stop the hemorrhaging as they absorbed the fat, sloppy, beast called Merrill Lynch. Is there a better word for this three-tiered bailout than cheating? I think not.

It’s an interesting fact that every major study done on cheating in the last 30 years reveals that business students are the cheat leaders of our great country, according to Donald McCabe, an expert on academic dishonesty and a professor at Rutgers Business School.

A  Pennsylvania State University Study on Cheating in 2006, revealed the following:

A survey of 5,331 students at 32 graduate schools in the United States and Canada found an ‘alarming’ amount of cheating across disciplines but more among the nation’s future business leaders.

In the Penn State study, “56 percent of MBA students admitted to cheating — as in sneaking notes into tests or stealing another’s work to complete one’s master’s thesis.”

Even more concerning, the study showed that graduate level business students, “not only cheat; they brag about it.” Pride goeth before a fall, as the Good Book tell us.

Kevin Philips, the author of Bad Money, a chilling new book about the causes of the current financial crisis, discusses the collapse of the sub-prime mortgage market in great detail. At the core of the crisis, we had deceitful home buyers lying about their assets and liabilities; mortgage brokers faking applications; banks like Washington Mutual pushing a steady supply of bad paper, packaging it up, securitizing it and selling it off to pension funds and other institutions who then insured the risky product with credit derivative swaps. �
Philips explains that the thinking on Wall Street that property values would always go up, if even slightly, was the self-delusional belief upon which this house of cards was built. The exotic financial instruments, such as credit derivative swaps and collateralized debt obligations — the products of highly paid Ivy League MBAs — were designed to mitigate risk; but, in the end, the mathematical formulas were divorced from reality, from ethics, from history, from truth-telling, from everything but the hard calculations of man and machine tied together for one purpose:  to make more money (and, in this case, bad money piled upon bad money). And now what?

Harvard economist Robert J. Barro’s research shows that there is a 20% chance America will slide into a depression, defined as a 10% decline or more in per-person GDP. (See his Wall Street Journal opinion piece published March 4, 2009, “What Are the Odds of a Depression?”) I am not one to prognosticate on macro-economic issues, but my belief is that we will see the DOW at 6,200 by the middle of July 2009, unemployment of 11%, and negative 10% per-person GDP. In other words, I am predicting America will enter a depression late in the fourth quarter of 2009. In this paradigm, the Bad Money wins. The RedChip task of “Discovering Tomorrow’s Blue Chips Today”™ just got tougher, a lot tougher. Only the best need apply.

– Dave Gentry, President of RedChip Companies, Inc.