They're Not Worthy! They're Not Worthy! - 04/29/10

The biggest market-deflating influence is the public and political outcry and the populism that will follow.

Wayne Campbell and Garth Algar: [to Alice Cooper] We're not worthy! We're not worthy!
Garth Algar: We're scum!
Wayne Campbell: We suck!

-- Wayne's World

I suppose we can say that Goldman Sachs' (GS) Daniel Sparks and Fabrice Tourre were the equivalent of Wayne Campbell and Garth Algar in this week's carnival in Washington, D.C. The politicians wanted a confession; they wanted Blankfein et al to say, "We're scum! We suck!"

"You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold."

-- William Jennings Bryan, Cross of Gold Speech

If we go back a little further in time, say 1896, Senator Levin, who chaired the subcommittee testimony (and clearly is no Alice Cooper), attempted to be the modern-day equivalent of William Jennings Bryan, who gave the Cross of Gold Speech at the 1896 Democratic National Convention in Chicago. That speech, among the most famous in American political history, castigated the moneyed interests who wanted a single gold standard and ushered in an era of populism. It also secured Bryan the Democratic Party and the Populist Party's nomination for President, though he ultimately lost to Republican William McKinley.

Let's go to the tape (back in 1896!).

In mid-April's "The Ramifications of the Goldman Sachs Case", I argued that my take from the SEC's suit against Goldman Sachs was not whether or not the brokerage committed fraud -- that will be left to the courts - but rather that many of the drivers of growth in the last economic cycle (unwieldy and unregulated derivatives, the growth of the securitization market and the distribution of credit from the shadow-banking industry) would be under increased scrutiny and will no longer flourish to the degree that they had in the past.

Goldman Sachs' Abacus product was the outgrowth of a steroid-induced world of financial and economic make-believe. Securitizations, derivatives and the shadow-banking industry inflated worldwide growth and has borrowed from future economic growth.

Let me repeat for emphasis, as it was clear as day on Tuesday, that the biggest economic- and market-deflating influence in the years ahead is the public and political outcry and the populism that will follow.

There remains a growing perception and resentment of an ever-widening schism in the U.S between the haves (the Goldmans) and the have-nots (the rest). Never before have the wealthy and large corporations been held in such contempt by the average Joe, who is anxiety-ridden under the cloud of high employment and hefty corporate cost-cutting measures, and his firm view that the country's wealth is concentrated and skewed in the hands of a few. This sentiment holds with it huge implications for further populist policy initiatives and even litigation. The gloves are now off, and the outgrowth of populism is higher taxes and more burdensome and costly regulation (aimed at hedge funds, banks, Wall Street, etc.).