144 Billion Dollars

How is your 401K doing?

With the recent surge in the markets maybe it’s in better shape than it was, but is it where it should be?

Maybe you have tapped out the 401K for living expenses in these difficult times or perhaps you could never afford to have a 401K and are trying desperately to save a few pennies but there appears to be no path to any kind of return.

We typically hand our investment and savings decisions over to an “advisor”, a broker or a banker. Some brave souls, with more courage and talent that I, even self manage their accounts.

In all cases, the money has to move through institutions and markets that are controlled by the folks on “Wall Street”. Even with a small savings account at your local bank, that money will typically touch the Wall Street folks somehow.

The working forecast of this year’s total compensation for the “Wall Street” folks is $144B. Is this reasonable remuneration for the great results they have produced managing our money? At Goldman Sachs compensation will top $500,000 per person. Now compensation obviously does not evenly distribute, but you get the idea. There will be more than a few Goldman Sachs folks in the high seven figures and some will have even more zeros than that at the end of their checks.

In stark contrast, one of our local farms was recently paved over to make way for another huge supermarket. I found out that the farmer who owned and operated it, had to bail out because he could not make ends meet. The irony, he is still farming, but for someone else. Without him, no food. Without these big buck folks, what would happen?

Here is the basic model. The more money the financial firms make (revenue), the larger the compensation. So far it seems fair, right?

There are two difficulties. These firms are publicly owned. Why doesn’t most of this largesse go to the share holders? An even more troubling point, if our 401K’s and other deposits were at least part of the the fuel for this engine, why didn’t we benefit in improved returns?

The focus on revenue and not on performance for their customers is the heart of the problem.

Let’s look at one example of “revenue” growth. Because of the almost zero rate that the Federal Reserve charges the financial institutions to borrow money, these folks can borrow at less than 1% and invest in government guaranteed mortgage bonds at 4%. By doing this they generate a LOT of revenue, and hand out most of it to themselves.

Did you see your 401K in there anywhere? Nope. Just a money making machine created by the Federal Government and subsidized by us.

To big to fail (TBTF) is what we were told as the TARP was being put together and then the same folks who said we needed TARP, helped the big get bigger. JP Morgan Chase absorbed Bear Stearns and Washington Mutual. Bank of America got Merrill Lynch. Wells Fargo got Wachovia.

So where will you invest your money? Would you like to help that twenty something hedge fund person buy their multi-million dollar apartment in Manhattan or would you like to help the farmer mentioned above?

How about moving your money to a truly local bank and asking them to only invest it in local businesses?

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