Customer Reviews

The 86 Biggest Lies on Wall Street

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1 star:		(3)

 

 

I love books that take conventional wisdom, the things "everyone knows to be true", and puts them under the microscope for renewed examination. John R. Talbott does this to Wall Street and investing in his book The 86 Biggest Lies on Wall Street. You may not agree with all of his conclusions, and a number of them might make you financially uncomfortable. But in any case, it's worth having your assumptions challenged to see if there might be a better path out there.

Contents:
Lies About What Caused This Mess; Lies About How to End the Crisis; Investment Strategy Lies; Stock Investing Lies; Bond Investing Lies; Lies About Other Investments; Lies in Economics; Lies in Finance; Lies About the Global Economy; Lies About Hedge Funds and the Derivatives Market; Lies About Government and Regulation; The Real Reform Needed on Wall Street; Index

The format here is pretty simple. You have "Lie #nn: " followed by the statement that tends to be spouted as a truth that everyone accepts. And then Talbott proceeds to smash it based on his observations and experience from a lifetime of working in Wall Street. Given his track record in calling the mortgage crisis and banking crisis, he does bear some attention. For instance, he starts out with a heavy hitter, and that is that the American economy was the strongest and most resilient in the world heading into the current crisis. When he digs below the stats usually cited to "prove" this, you see why he disagrees. He sees GDP growing due to population growth, not due to a strengthening economy. There's also the matter of illegal aliens hiding the true growth of the population. Borrowing has driven the increased consumption, which means that in addition to "growth" you have debt. Total debt outstanding in the US has gone from $25 trillion to $60 trillion in the last 10 years, and he doesn't even bring in the unfunded liabilities of Social Security and Medicare. Family income has also increased due to spouses joining the workforce, as opposed to real income per individual worker increasing. When you add all this up along with other observations he has, you realize that this economy was far from healthy and robust.

Talbott also has harsh words for the Troubled Asset Relief Program that Hank Paulson deemed critical to getting the markets unfrozen. In fact, lie #17 is "everything that Hank Paulson ever said about the Troubled Asset Relief Program". Can't get much more inclusive than that. He shows how the initial target of the plan was immediately dropped after the legislation was passed, and money was instead given to banks who were in good standing with Paulson. Talbott also shows how, if banks had really sold their bad properties to TARP, there would have been even worse financial ramifications, as it would then be possible to value the bad debt and banks would be forced to revalue their balance sheets (for the worst), leading to even more solvency issues due to being over-leveraged.

I felt the part that I struggled with most was on stock investing, as we've been told certain things for so long. Talbott takes on the low P/E recommendation, companies that should be able to weather any crisis, and how EBITDA is more reliable than net income in assessing a company's earning potential. He does have alternative recommendations for all of these situations that are worth considering. You may not agree, and you'll certainly get pushback from the industry "experts", but given how things have gone of late, their expertise may not be all it's been cracked up to be...

86 Lies is recommended reading if for nothing else to get an alternative view of how the economy is really functioning. You can then choose to agree or ignore, but at least you'll do so with a more complete picture of reality.

The title of this book might imply that it's a populist diatribe, but the book is so much more than that. John Talbott manages to provide very clear, concise, and (most importantly) logical explanations for the roots of the current financial crisis, along with his strong opinions about how it might have been handled, and what's in store for the future. Along the way, he does manage to dispel a number of popular myths about this recession.

Interestingly, the book is about as totally non-partisan as a book on the politics of economics could possibly be. He simultaneously lambastes the corporate world for it's greed, excesses, and short-sightedness, while at the same time strongly criticizing Obama's strategy for ending the economic malaise. He couches his explanations in terms other than liberal vs. conservative, or Republican vs. Democrat.

For people who would like to understand the roots of our current situation, and listen to some practical suggestions and (sadly, rather dour) prognostications on the future, this book is an excellent investment.

Very well written book, concise and to the point. I've learned quite a lot from reading it. Some author's beliefs I can't agree with but overall the picture he depicts is unfortunately very true.

My only criticism is author's premise that markets are efficient which leads him to conclude, for instance, that Harvard likely trades partially on inside info. While this certainly could be true, my research indicates that one can beat the market using short-term approach (granted it's not easy) and Harvard's trading team returns are certainly reasonable. In this day and age holding a belief that markets are efficient or they are a random walk is a clear bias people hold on to for psychological reasons since computer simulations can demonstrate that neither is true.

One thing I would add to the gloom and doom picture is often neglected aspect of environment. On top of all other purely economics problems, we also face an unprecedented environmental threat which can't be considered as entirely unrelated problem. For instance, we could soon reach a point when not regulating companies is not an option due to environmental hazard they create, but imposing regulations on them would push these companies into bankruptcy.

As for politics, I 100% agree that current model is unsustainable. In my view, it's ridiculous that we elect people based on how well they campaign. As a result, we have politicians making worst economic decisions possible.

The 86 Biggest Lies on Wall Street - John Talbott (Scribner)

February 3, 2010

Oh, we should have listened to John Talbott... Talbott was the one, who in 2003 foretold the coming economic collapse in the real estate market with his book "The Coming Crash in the Housing Market: 10 Things You Can Do Now to Protect Your Most Valuable Investment." Trouble was, as housing prices continued their meteoric rise, nobody listened.

Now Talbott returns with a myth-busting book detailing the real reasons behind the financial collapse on Wall Street that has had devastating consequences on Main Street as well. Talbott, a former Goldman Sachs banker, economic consultant and media commentator, details in plain english, the real reasons for the meltdown and how to separate the fact from fiction when listening to what business leaders and government wonks profess as the justification for massive Wall Street bailouts and the overall effects on the current economy.

By analyzing very specific trends and common `wisdom' (the so-called `86 lies') Talbott takes us under the hood to explain what some of these lies actually mean and how most of these circumstances came to be. By shining a light on problems in the financial system related to federal borrowing, overnight rates, and most importantly, the legalization of expanded leverage laws allowing banks to get in over their heads on assets of questionable merit, Talbott goes a long way to demystifying the sometimes confusing world of bank regulation, globalization, leverage, stock market hype, mortgages backed securities, credit default swaps and other highly engineered derivative instruments designed to make bankers profit, but only until the laws of deflation or over-leverage bring everything to a crashing halt.
Far too detailed to illuminate here, suffice it to say that `86 Biggest Lies' is essential reading if one is to try to decipher the mumbo-jumbo given out that passes for financial news in the bearish times in which we now live.

Mr. Talbot was successful in predicting recent calamities. He is not against the market, only against a self-destructive lawless market in the manner that Adam Smith himself opposed lawlessness. The only little flaw is this: while he introduces some absolutely original notions about the limitations of diversification, he does not discuss the problem of diversification in one place so that you would know up to what point diversification is good, and when it is foolish.

Warren Buffet says that he knows of no successful investor who does not read at least five hours per day. Authors like Talbott, Taleb, Shiller, Mauldin, Ritholtz, Roubini, and others have saved me a boat load of money over the years. Because of authors like them I was not burned by the Tech, Stock and Housing bubbles and have never had a down year overall with an emphasis on the preservation of capital and aggressive risk management. I guess you can label me a contrarian. According to the book, John reads these Amazon reviews and so I would like to challenge him to turn his skeptical eyes towards the claims of the Global Warming advocates. Joe Bastardi of Accuweather and many other top weather scientists claim that the "Global Warming" science and data is faulty and in fact has become a politically correct religion of sorts. It's premises are to not to be challenged nore do the Climate Change folks want to engage in debate over what they say is "settled science." I am only up to page 45 of the book and was very disappointed to see John's uncritical acceptance of this. I had no disagreement with anything else up to this point but had to put down the book and write this blurb before continuing on. Hopefully John is more discerning in the rest of the book.

It's never a bad idea to at least question generally accepted wisdom, especially about investing. This book raises a critical eyebrow at shaky statements like "Capitalism works equally well in all industries" and "We can save the auto industry with a $17 billion bailout by government" and"Tax cuts cause economic growth." Although some of the author's thoughts seemed a bit radical, I agreed with pretty much everything I read except for one misguided paragraph in his debunking of Lie #86. In that section, he claims that investors who pursue arbitration claims against brokers "don't know that the arbitrage system is controlled by Wall Street." Not true. On FINRA's three-person arbitration panels, one arbitrator is an "industry expert" who has considerable background in the financial business. That arbitrator, just like the other two, takes an oath to provide a fair hearing and an impartial ruling. I'm an "industry expert," with many years of experience as a financial writer, and I feel that all arbitrators take that oath very seriously. The author's carelessness on this one point made me wonder, as I finished the book, whether some of his other assertions were made as cavalierly.

Talbott has written a wonderful potboiler that deflates many of the balloons floated by Wall Street propagandists. Yet he himself can't seem to escape all the myths of free market capitalism. For example, his indoctrination in business school propaganda against "big government" has left him hanging on the horns of a dilemma (p. 230) "This puts me in quite a dilemma. You see, I don't trust big business to operate without rules and regulations, but I don't think the government is smart enough or independent enough from big business to write effective rules."

Talbott's solution to this dilemma? He says that we must have both smaller businesses and smaller government. The problem, of course, is that only much stronger and more broad-based government is capable of breaking up huge global corporations. Instead Talbott endorses campaigns of the anti big government forces that would actually weaken government, such as term limits (which would further empower bureaucrats and lobbyists) and citizen initiatives (which would be run by wealthy special interests to bypass Congress altogether).

However there are more realistic ways to reign in Wall Street, not cited by Mr. Talbott. We've already missed our first chance, which is to let Wall Street fail, destroying its wealth, hence its power, with government stepping in to create a new financial system serving Main Street, not speculators, and responsible to the public. However, the second way could still come to pass.

It could actually be powerful foreign governments that eventually reign in Wall Street. Already the Chinese and the oil states are maneuvering to replace the US dollar as the world reserve currency. And if US creditors ever really got serious, the corruption on Wall Street would likely be their first target, as Wall Street has victimized the whole world to satisfy its insatiable greed.

Meanwhile more public exposure to Talbott's "biggest lies on Wall Street" will support modest reforms, yet really effective long term reforms will require far more public outrage, both domestic and foreign.

Interesting but a little depressing book
describing what 'dirty tricks' are being used
by our financial elite to fleece the investors,
while our government does nothing about it.

This book helps readers understand how our country found itself in the current financial crisis. Since 1981, there was more and more push toward deregulation which in turn made businesses to operate in unethical and even illegal ways. This book is organized in a way that a "lie" is presented followed by text explaining why the statement is not true. Some of the "lies" I like reading about the most are listed below:

2. This was simply a subprime mortgage problem that no one could have foreseen.

7. Free-market capitalism works best with no regulation and no interference from government.

14. Like the Great Depression, this is primarily a liquidity problem, and injecting cash into the system will solve it.

I believe everyone should read this book. If you don't know how Wall Street works, then you might find yourself in a situation similar to what the author describes below:

"Wall Street is littered with the lost fortunes of doctors, dentists and lawyers who knew just enough about investing and finance to think they knew it all. As they say, if you do not know yourself, Wall Street is an expensive place to find yourself."

- Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market