Posts Tagged: bankers

American Society / Banking / Business / Financial / Political — 0 Comments
18
Dec 09

Faux Powerlessness Part Deux

Less than twenty-four hours from my Monday post, Faux Powerlessness, we learn the true state affairs.  President Obama not only failed to use the powers of his office to admonish bankers, but also engaged in a virtual love fest with bankers at his vaunted Monday White House meetings with bankers.

The Banker -Administration Love Fest

Charles Gasparino broke the story in “Two Faces of O:”

In public, President Obama is on a tear against Wall Street. In private, not so much.

Over the weekend, Obama attacked fat-cat investment bankers, telling “60 Minutes” he didn’t become president to aid and abet Wall Street — which, only a year after the financial meltdown and taxpayer bailout, is now scheduled to hand out tens of billions of dollars in bonuses to its bankers and traders.

But the president’s meeting yesterday with the CEOs of the largest banks was nearly a love fest, I’m told by attendees.

The meeting was devoid of surprises.  The White House “telegraphed” their modest message through talking points sent to the attendees last week:

  • lend more to small business,
  • reduce bonuses
  • support Congressional efforts to enact regulatory reform.

Said one CEO who attended: “I expected to be taken to the woodshed, but the tone was quite the opposite.”

Obama has deemed these money center banks too big to fail and has guaranteed their debt. The Administration has allowed the banks to mint profits through: paying interest on reserves, eliminating competition through mergers, and steepening the yield curve so banks can borrow at zero and purchase higher yielding, long term government securities.  A zero interest rate policy coupled with government guarantees against failure irrationally has encouraged speculation.  Some of the speculative money flowed into commodities such as oil, driving up consumer prices.  Bank profits and bonuses have soared at the expense of Main Street.

Elites Grow More Powerful at the Expense of the Middle Class

The Bush Administration began many of these policies.  However, wasn’t Obama elected to effect change?  It appears the Administration is more interested in Wall Street’s treasure trove of campaign contributions than effecting meaningful change.  The outburst on 60 Minutes on Sunday night, in light of the Gasparino article, appears nothing more than a staged drama for the masses.  Citizens who had hoped for change are waking up to the reality that they may have wasted their vote. Meanwhile elites grow more powerful and the middle class shrinks.  This does not bode well for our republic.

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American Society / Banking / Business / Financial / Political — 0 Comments
14
Dec 09

Faux Powerlessness

In an appearance on Sixty Minutes President Obama lashed out at bankers.  Today’s  Wall Street Journal reported:

“I did not run for office to be helping out a bunch of fat cat bankers on Wall Street,” Mr. Obama said in an interview on CBS’s “60 Minutes” program on Sunday.

“They’re still puzzled why is it that people are mad at the banks. Well, let’s see,” he said. “You guys are drawing down $10, $20 million bonuses after America went through the worst economic year that it’s gone through in — in decades, and you guys caused the problem. And we’ve got 10% unemployment.”

President Obama is calling bankers to a meeting at the White House to discuss their failure to lend to small businesses and consumers.

Bankers Acting Badly

I have written much about the anti democratic nature of the early and massive efforts of government to bolster the banks.  These efforts have added to excessive risk taking, outsized bonuses and a reciprocal feeling on the part of the public that they can walk away from mortgages and credit card debt.  We have institutionalized moral hazard.

Exercising Power

This essay is really about power and the lack thereof.  As a long-time observer of corporate culture, there were obvious situations where executives in my company  should have been terminated.  But numerous times, I watched superiors decry their lack of power to take action.  I would scratch my head and wonder, “if you don’t have the power to terminate this person, who does?”  I call this behavior “faux powerlessness.”  These executives had absolute power to terminate an employee (who often richly deserved it), but instead they feigned powerlessness.  The executives would curse the fates, pound on their desks and look to the heavens to decry their plight.  Frankly, they were too scared or too political to take the necessary action, and the organization suffered.

How much more unbecoming is it for the President of the United States to go on national television and decry the bankers?  Isn’t the President the most powerful man in the free world?  Absent the irony and cinematic quality of the line, this is a true statement.  President Obama has multiple levers of power to affect banker behavior.  He has the Treasury, the FDIC, the Comptroller of the Currency, the SEC and other executive branch agencies which can change and influence banker behavior.  Further, if bonuses are excessive, propose a windfall tax on bankers’ bonuses.  The French and the English were able to do so. The concept does not have to be foreign. See French Join Brits on Supertax on Bonuses.

Talk is Cheap.  Do Something About It

Mr. President, if you truly believe the bankers have acted poorly, then do something about it. Stop pandering to the public and take some real action.  These actions would go a long way toward stemming the growing public anger and sense of inequity of the banker bailouts that you and your administration sanctioned.

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American Society / Banking / Economics / Financial / Political — 0 Comments
8
Dec 09

War on Prudence

Dear Prudence, won’t you come out to play
Dear Prudence, greet the brand new day

“Dear Prudence” – The Beatles

Lately, “prudence” is a virtue which has been in short supply.  Prudence is defined as “care, caution, and good judgment, as well as wisdom in looking ahead….”  This virtue has fallen into such disrepute that the American political and financial establishment have undertaken a war on prudence.  Closely allied to prudence are the virtues of thrift and savings.  Alas, these two handmaidens have also fallen on hard times.

Ignoring this virtue will only prolong the recession and economic malaise.

How We Got Into the Current Mess

Economic policy makers have exceptionally short memories.  We are in financial crisis because Americans took on too much debt and over consumed housing, autos, plasma televisions and stocks.  Americans also failed to save. Wall Street behavior made the crisis worse though reckless lending, highly leveraged trading and esoteric derivatives.

In short, we spent and borrowed too much and did not have the incomes to support the residual debt load.  We entered into what the late economist Hyman Minsky referred to as Stage 3 Ponzi finance.  That is, lenders knew that the debt could not be repaid based on the borrower’s income, yet they speculated on being repaid from presumed, ever increasing asset appreciation. For a longer discussion see Hoisington Investment Management, Quarterly Review and Outlook, 3rd Quarter 2009

Have the past two years ended the Ponzi finance system?

Back Doing Business at the Same Old Stand

The Obama and Bush administrations faced clear policy choices. Government could have encouraged savings, debt repayment and reductions in consumption.  Un-payable debts would have defaulted and yielded whatever the market would bear in negotiated settlements or bankrupt proceedings.  The choice would have been painful.  But markets and the economy would have reset.  Prudence on a personal and national level would have been restored.

Government’s alternate choice is now clear: reflate the bubble economy so we can party again as if it were 2005.  Mark to market accounting was suspended.  The Fed bought mortgage backed securities and other dubious debts at or near full value.  The large banks, credit card companies, GMAC, AIG and others were bailed out.  Where was Prudence?  Nowhere to be found!

Keeping interest rates at near zero punished the thrifty and encouraged an ill-equipped public to return to an overvalued stock market and speculate in commodities or high yield debt instruments.  On the consumption side the government encouraged home purchases through tax credits for new homes and cash for clunkers.

Prudence in Hiding on Wall Street

Prudence remains in hiding on Wall Street.  After accepting (and we now learn needing) government funds and guarantees, Wall Street is back to high risk, highly leveraged trading.  Goldman Sachs lost money on only one day in the last quarter.  Instead of thanking taxpayers by demonstrating proportionality and humility in compensation practices, Wall Street will pay itself record bonuses this year.  Perhaps the prudent course would be for these firms to reduce compensation levels and retain some of these record profits before the next storm.   In addition, why not force executives to have some personal risk through mandatory deferrals of compensation to incent more prudent long term behaviors.

Sometimes it is Characterological

Prudence is one of those old-fashioned values that have fallen out of favor.  Prudence requires delayed gratification, the acceptance of occasional loss and the accumulation of wealth slowly based on hard work and careful consumption.  But our current government policy is a reflection of us:  wanting a “quick fix” and a “do over” for the imprudent who lent and invested recklessly.  In sparing Wall Street pain, we have managed to inflict pain on the entire American economy: barely any growth in GDP, unemployment still at 10% and ever growing deficits which will tax future generations.

Maybe when the current course of action totally fails, we can get Dear Prudence to come out and play.

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Justice System / Political — 0 Comments
14
Sep 09

Why are We Investigating CIA Officers Instead of Bankers?

There are times when the American populace needs to be put through a values clarification exercise. An example: when a charity solicits us for a contribution, we often respond that we cannot afford to give.  What we really mean is that we would rather spend money on a movie, new clothes or a couple of beers. On a macro, social policy basis we also have trouble clarifying our values.  We rail against excessive health care costs, but we do not ban cigarettes or alcohol, or mandate that overweight people all attend Weight Watchers. We have technology to prevent a drunken driver from starting an automobile while inebriated, but after a DWI conviction do we consider mandating that safeguard?

This brings us to the main point: why are we investigating CIA officers instead of bankers?  On Monday August 24th, the New York Times had a front page article heralding that Attorney General Eric Holder was naming a veteran prosecutor to investigate CIA interrogation techniques during the Bush Administration. The purpose of the investigation is to decide whether or not to bring criminal prosecutions. Here is the obligatory disclaimer so human rights advocates can move on and finish reading this piece.  If there are bona fide legal abuses of prisoners’ civil rights, then by all means the Department of Justice, the military or other governmental bodies should thoroughly investigate such abuses and bring criminal cases, if warranted.

The actions of CIA officers should be examined in context.  Post-9-11, the government adopted a philosophical stance on terrorism and the threat to the US homeland.  The stance was that the United States was in mortal danger from jihadists and other terror organizations and, unchecked, these terrorists had the capability of inflicting untold harm on the American public.  Thus, as always, the CIA mandate was to protect the country. Post 9-11, these were extraordinary times and the danger was real and imminent.  Possibly extreme measures were needed to obtain information and protect Americans.

Every intelligence gathering or law enforcement agency probably has a small minority of unbalanced individuals who go overboard in exercising authority. My guess is that 99.99% of CIA, FBI and other agents are professional, disciplined, well-trained patriots acting in good faith and with the highest motives and integrity. These are professionals who give up time with their families on a GS pay scale to protect us. How do we repay them?  Post-hoc, we investigate them.  The average citizen has no idea what this means.  These officials being investigated may have to hire their own attorneys, pay for their defense out of pocket and hope to be reimbursed for these expenditures if exonerated.  This does not take into account the psychological strain on the individual, the public humiliation, opprobrium of friends and neighbors and the strain on families.   Moreover, there is a chilling, trickle down, effect on others in the agency.  No risks will be taken and the best and brightest in the agency will avoid being involved in interrogations. DOJ investigations take a long time and that is one large cloud to be under.

Contrast the treatment of CIA officials with the treatment of the principals in the financial industry who caused the 2008 market meltdown:

  • Rating agencies received a fee from the institutions that were being rated and essentially conspired to inflate ratings to the detriment of investors;
  • Stock brokers did not disclose the riskiness of investment products being sold to investors;
  • Real estate brokers pushed clients into houses they could not afford and conspired with mortgage brokers, banks and clients to obtain bogus financing;
  • Purchasers knowingly falsified their applications as to income and assets to obtain a larger mortgage or any mortgage;
  • Investment bankers took the suspect paper, packaged the paper into collateralized debt obligations and sold them to pension funds;
  • Pension fund managers had a fiduciary duty to investigate what they were buying, but instead chose to reach for a few extra basis points of yield to earn a bigger annual bonus;
  • Lawyers willing created CDOs and derivatives on the CDOs.  They counseled clients to provide the skimpiest of disclosures and misled investors.

The mortgage and housing arena is but one part of the financial meltdown and there are more principals in the financial industry worthy of investigation. But the reality is that few individuals and companies are being investigated. The standard apology for this lapse is that investigations would disrupt the economy.  Who could have really understood the magnitude of these problems? This did not occur during my administration!  Let’s let bygones be bygones.

That approach is too facile and disingenuous for my tastes.  For the average working man the catastrophic result has been lost homes, depleted retirement accounts, broken families and lost dreams.

Who is more deserving of prosecution, members of the financial industry or members of the CIA?  Patriots versus Scoundrels.   People who tried to save lives versus people who destroyed lives. People earning a GS pay scale versus Goldman Sachs executives scheduled to share in $11.4 billion in bonuses for the first six months of 2009.  A values clarification moment –you decide!

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