We should rename the country Lake Woebegon

Lake Woebegon is the place where, in the words of Garrison Keillor, "all the women are strong, all the men are good looking, and all the children are above average." The belief that everybody is above average is permeating our culture. We see it in a number of American activities - rating securities, raising kids, the military, etc.

And, of course, it has been a factor in the pay of Fortune 500 CEOs; they get paid in comparison with their peers. It so happens that just about none of these CEOs is paid below the median compensation of their peers; most are paid above this median. This compensation is paid without regard to the results of the company they head.

Take Amgen as an example. The CEO got a got a raise of 37%, from $15,000,000 to $21,000,000 because he was deemed to fall in the 75th percentile of his peers. The shareholders have not done as well; the stock was down 3% in 2010 and 7% since 2006. And 3,000+ employees have lost their jobs. That's because the shareholders and employees live in America, not Lake Woebegon.

Fortune 500 CEOs are paid very well not only because of the Lake Woebegon effect, but because they also appoint many people to the board, people who are or become 'friends' who have a difficult time not paying the CEO what other CEOs make irrespective of the company's results.

Since the 1970s, median pay for executives at the nation’s largest companies has more than quadrupled, even after adjusting for inflation, according to researchers. Over the same period, pay for a typical non-supervisory worker has dropped more than 10 percent, according to Bureau of Labor statistics.

The Lake Woebegon Generation

Lake Woebegon where, in the words of Garrison Keillor, "all the women are strong, all the men are good looking, and all the children are above average." He meant it as a joke, but I think it has come to be the definition of America in the 21st century. We've seen it in parents hiring people to train their child to become a pro athlete. Other parents are so eager to have their kids end up on the right track that they spend a lot of money on the 'right' school; getting their kid into the right kindergarten requires the skills of a tutor for hire as does helping your kid get A's in high school. By and large we are willing to spend time and money on our kids to ensure that they are not 'average' and, in fact, they are above average. Of course, there is an assumption that if our kids are above average we must be. Or, if we have a lot of money, we must be above average in most things.

So, it should come as no surprise that a study of college freshmen finds them with an abundance of confidence. 60% of them think that they are above average intellectually. And why shouldn't they as 48% were A students in high school. Of course, some of these students also need to take remedial courses in college, at CUNY the 'some' were 75%. And on Monday New York state reported that only 37% of their high school graduates were ready for college, let alone being above average.

Maybe it will do some good

Okay, S&P cut their rating of the U.S. financial picture from AAA to AA+. Yes, it's true that S&P, as believers in Lake Woebegon, also rated 75% of the securities issued by mortgage lenders as AAA, so one must question their competency. They over-rated the mortgage securities because the lenders paid them. Maybe the Tea Party has paid them now to lower the country's rating. Who knows? And in the current climate I would not be quick to rule it out.

However, this downgrade may also give our idiotic leaders some pause and cause some of them to start working for us, rather than their re-election.

The SEC acts against the rating agencies

The only problem is that it has not acted against Moody's and the big rating agencies.  It's gone after a firm I've never heard of, Egan-Jones.  Egan-Jones makes its money from those who use its ratings. The big agencies get paid by the issuer, which is one of the reasons why their ratings were so skewed towards the Lake Woebegon proportions that were a major factor leading to the Great Recession.

The SEC is going after Egan-Jones because of problems with the firm's application to be a "nationally recognized statistical ratings organization."  The firm claims that one application matter stems from a different method of counting the number of ratings they had made. The other SEC concern involves investments in securities being rated; the firm claims these investments were of long-standing and were brought to the SEC's attention.  

It's possible these matters were sufficient to deny the firm's application. But the real question is why the SEC is going after a piddling firm and is doing nada about the big guys.  It looks like the major ratings agencies have been evaluated as TBTBI, Too Big To Be Indicted.

My Two Cents

Which is what my AIG stock will likely soon be worth.

You've heard various theories as to how we got to the collapse of Wall Street. Here's mine. It is comprised of several interlocking parts.

• The repeal of the Glass-Stegall Act which prohibited a single company from engaging in regular banking, investment banking and insurance.
• The belief that everyone should own a home. As some people cannot pitch in the National League, some don't earn enough to own a home.
• The rise of securitization, whereby the local bank did not hold your mortgage but sold it to another company that packaged your mortgage with hundreds of others as quickly as it could and, in turn, sold the package to another company that combined this package with other packages. Along the way, the credit companies rated these packages and were able, through magic, to figure out that I was a better risk than you and so they told the current packager that they could sell my mortgage and the other hundred mortgages so rated to another packager as an AA-rated security. This credit rating took place in Lake Woebegon, where everyone is above average. This re-packaging went on ad nauseam, with no one really knowing much about the underlying assets.
• The rise of computer modeling as a religion which analyzed and evaluated risks attendant on securities very few understood.
• The acceptance of supposed market values placed on securities not publicly traded.
• Over-reliance on leverage
  
• And, of course, greed.