By Simon Johnson
In the early and mid-2000s, Citigroup had compensation practices that can fairly be described as a disaster for shareholders (and for the broader economy). Top executives, such as then-CEO Chuck Prince, received big bonuses and generous stock options. Lower level managers and traders were paid along similar lines. These incentives encouraged Citi employees to take risks and boost profits. Unfortunately for shareholders, the profits proved largely illusory – when the dangers around housing and derivatives materialized fully, the consequences almost destroyed the firm.
The market value of Citigroup’s stock dropped from $277 billion in late 2006 to under $6 billion in early 2009. The shareholders could easily have been wiped out – they were saved from oblivion by a generous series of bailouts provided by the federal government (see Figure 7 in the final report of the Congressional Oversight Panel; direct TARP assistance was $50 billion but “total federal exposure” was close to $500 billion). In the next credit cycle, the experience for Citi shareholders could be even worse. So it is entirely reasonable for shareholders to look carefully at, among other things, the details of how executives and other key employees are paid – and to understand the current incentives for taking and managing risk.
But Citigroup is resisting efforts to disclose fully the structure of relevant compensation contracts. What is Citigroup hiding now? Continue reading
By James Kwak
This week I returned to one of my favorite topics: raising taxes, particularly on the rich. First I wrote an article for Medium about the single most obvious change that should be made to the tax code: eliminating the step-up in basis at death for capital gains taxes. If you’re not sure what step-up in basis means, or why it’s a ridiculous idea, you should read the article.
Then today I wrote an article for the Atlantic about why (a) killing 529 plans was a great idea in President Obama’s latest tax proposals and (b) why 529 plans are impossible to kill. Here’s the crux of the matter:
“If you’re poor, a 529 plan gives you nothing, since you don’t pay income taxes; the American Opportunity Tax Credit gives you $4,000 ($5,000 under Obama’s proposal) because you can take $1,000 of the credit per year even if you pay no taxes. If you’re in the ‘middle class’ (making at least $74,900 and able to save $3,000 per year per child), a 529 plan gives you $5,800; the AOTC gives you $10,000 ($12,500 under Obama’s proposal). If you’re in the upper class, a 529 plan gives you $26,300; the AOTC gives you nothing. Do I even need to write the rest of this article?”
My editor took out that last sentence, but I liked it so much I’m putting it back here. (Those number are based on some basic scenarios I described in the article.)
Every politician likes to say that he is in favor of simplifying the tax code, eliminating tax breaks for people who don’t need them, and helping the middle class. Only it just isn’t true.
By Simon Johnson
The Obama administration urgently needs to nominate a qualified individual as Undersecretary for Domestic Finance at the Treasury Department. The Dodd-Frank financial reforms are under sustained and determined attack, and the lack of a confirmed Undersecretary is making it significantly harder for Treasury to effectively defend this important legislation. Failing to fill this Undersecretary position would constitute a serious mistake that jeopardizes a signature achievement of this presidency.
In the continuing absence of an Undersecretary for Domestic Finance, the administration has recently displayed an inconsistent – or perhaps even incoherent – policy stance on financial sector issues. On the one hand, in mid-December, the White House agreed to rollback a significant part of Dodd-Frank – the so-called “swaps push-out,” which was shamefully attached at the behest of Citigroup to a must-pass government spending bill. The White House put up little resistance to this tactic and, at the critical moment, lobbied House Democrats to support the repeal of Section 716. Continue reading
By James Kwak
This morning I posted an article over at Medium about the question—raised again by Goldman analysts earlier this month—of whether JPMorgan should be broken up. The answer is obviously yes. The interesting thing is that this is not a socialist-vs.-capitalist, academic-vs.-manager, regulator-vs.-businessman sort of argument. It’s a shareholder-vs.-manager issue, and the shareholders are wondering why Jamie Dimon insists on defending an empire that is best known for crime and ineptitude.
Earlier this month I wrote another Medium article about whether or not directors have a so-called fiduciary duty to maximize profits. The answer is no. They can do pretty much whatever they want, as long as they have enough sense to come up with some sort of plausible justification for whatever else it is that they want to do. Whether that’s a good thing or a bad thing is a closer question, and it depends on whether you view directors as protectors of great institutions against rapacious fund managers, or whether you see them as cronies who are too willing to cater to their golf-club buddies in the executive suites.
By Simon Johnson
The shadow primary for the Democratic Party is in full swing. What will be the ideas, themes, and messages that win support in 2016 – and will they carry the day in the presidential election?
You can vote now at the Big Ideas project on almost every viable proposal from the progressive wing of the Democratic Party. Expressions of interest will feed into conversations on Capitol Hill and with presidential candidates. Nearly 1 million votes have already been cast.
Voting ends Friday at noon. Currently, in the section on the Economy & Jobs, the proposal to restore Glass-Steagall is in third place; breaking up Citigroup is close behind. (Vote now for these or for your own priorities.) Continue reading
By Simon Johnson
On January 7, 2015, Day 2 of the new Congress, the House Republicans put their cards on the table with regard to the 2010 Dodd-Frank financial reforms. The Republicans will chip away along all possible dimensions, using a combination of legislation and pressure on regulators – with the ultimate goal of relaxing the restrictions that have been placed on the activities of very large banks (such as Citigroup and JP Morgan Chase).
The initial target is the Volcker Rule, which limits the ability of megabanks to place very large proprietary bets – and their ability to incur massive losses, with big negative consequences for the rest of us. But we should expect the House Republican strategy to be applied more broadly, including all kinds of measures that will reduce capital requirements (i.e., make it easier for the largest banks to fund themselves with relatively more debt and less equity, taking more risk while remaining Too Big To Fail and thus benefiting from larger implicit government subsidies.)
The repeal of Dodd-Frank will not come in one fell swoop. Rather House Republicans are moving in several stages to reduce the scope of the Volcker Rule and to gut its effectiveness.
The first step in this direction came on Wednesday, with a bill brought to the floor of the House supposedly to “make technical corrections” to Dodd-Frank. This legislation was not considered in the House Financial Services Committee, and was rushed to the House floor without allowing the usual debate or potential for amendments (formally, there was a “suspension” of House rules). Continue reading
By James Kwak
I recently wrote two more articles for the Bull Market collection at Medium. The first was my explanation of the Second Circuit’s decision in United States v. Newman and Chiasson, which said that insider trading is only a crime if the original tipper gained a personal benefit from leaking confidential information, and if the eventual trader knew of that personal benefit. If you don’t like this outcome, the original problem is a poorly written Supreme Court opinion (isn’t that redundant?) from the 1980s, Dirks v. SEC.