Calling All Shareholders

If you cast your mind back to when executive compensation and bonus limits first reached the mainstream debate, you may recall people saying these would be ineffective and the issue is a red herring.

These points do not now seem compelling.  People who work at the big banks are quite irked by what they see as unjustified limits on their bonuses.  Some of the “talent” is jumping ship.  Big bank leadership is lobbying hard to remove the restrictions or, failing that, for the right to pay back government TARP funds in order to escape the bonus cap – leading firms, such as Goldman Sachs, seem poised to raise new capital to that end.

This is a remarkable moment.  Excessive risk taking in large firms was based on inappropriate bonus structures (take risk and get compensated now; face the consequences of that risk down the road), facilitated by a deep failure to understand/control risk inside these organizations and probably made possible by the implicit put option from being too big or too complex to fail (i.e., Wall Street insiders own the upside; taxpayer owns the downside).  We have all focused of late on the costs for taxpayers, which of course are horrible, and going forward – with the implicit option now explicit – who can believe this will lead to anything other than further massive bailouts?

But think about this arrangement from the perspective of shareholders.  Are we looking at the greatest tunneling scheme in the history of organized finance?

How can the large banks persuade potential shareholders to put large amounts of new capital with them, given that their systems just failed massively, these systems have not been substantially changed, and – while there has been a bailout for insiders and creditors – shareholders were largely wiped out from mid 2007-end 2008? 

It could, of course, be the case that shareholders see great upside.  Anything that has fallen greatly may see some rebound.  The large banks have demonstrated their political muscle, so that should help with other forms of government protection and “rents” (economics jargon for easy money from business that others aren’t allowed into).  In the early stages of a recovery, perhaps the banks will be more generous to their shareholders; it could be that the excessive tunneling is a feature of a mad boom, and we seem some distance from having another of those.

But probably we are looking at a deeper market failure. Big money managers – including mutual funds, pension funds and insurance companies -have arguably failed in their fiduciary duty to ensure that major financial companies are run properly and in the interest of shareholders.  These money managers have great resources, many years of experience, and real power vis-a-vis the companies.  Why didn’t they push for stronger risk management?  Why are they so eager to hand over our money again?  Where exactly was or is their due diligence?

Instead of shareholder activism being limited primarily to scrutiny of companies (where it often seems to bounce off, particularly if it comes solely from small investors), it should probably be focused more intensely on money managers, including why they are not more effective at limiting the bonus culture of big finance.  Is this about their own bonus culture or their connections with the firms in which they are investing or something else?  In particular, allowing large banks to also be major money managers creates serious potential conflicts of interest at many levels.

There is discussion of encouraging people to move deposits away from big banks with a pattern of bad behavior.  But some of the most powerful banks rely relatively little on retail funding.  More effective could be reassessing the practices of debt and equity investment funds, and placing money only with those that are beyond reproach.

It may be that the behavior of these money managers cannot be corrected through the actions of their small investors acting directly or through their employers (after all, our employers should have bargaining power over the funds that manage pension money).  If we can’t sort this out through pressure, negotiation, and the market, perhaps money managers themselves should be subject to more specific legislation, implying greater regulation and sensible controls on their fee structure and strict caps on their own bonuses?

46 responses to “Calling All Shareholders

  1. Maybe shareholder rights, more than banking regulation, should be strengthened. Certainly an owner has a greater interest in maximizing real profits than a government regulator.

    It’s hard to imagine smart investors letting their company’s employees steal from them. But if the returns are good enough, everyone’s willing to look the other way. (If that wasn’t the case, surely investors wouldn’t have let AIG self implode and Bernie might have been caught earlier.)

  2. your description of the problem is essentially correct. looting from the inside, by stakeholders.

    this is not limited to finance companies. same story with GM.

    however, shareholders are only short-term owners. as long as they receive large dividends, they are just another stakeholder in the short term profit / long term liability game.

    so i don’t see a solution here. next!

  3. “This is a remarkable moment.”

    Yes, remarkable.

    Has there ever in all of history been such a gang of capital thieves who were so definitively CAUGHT, so utterly helpless before the force of justice (if there were still such a thing as justice in the world), and yet who were not only left free and at large with the loot, but allowed to continue and compound their crimes, and even to be so brazen as to publicly whine about the tiniest, most pathetic, most despicably meager little slap on the wrist that they’ve allegedly gotten?

    I wonder how history will remark upon it.

  4. “Instead of shareholder activism being limited primarily to scrutiny of companies (where it often seems to bounce off, particularly if it comes solely from small investors) … ”

    There is also “non-shareholder activism” — short sellers which are criticized by management of the companies being shorted. And by their congressmen. And by the SEC.

  5. Money Managers have clearly failed their shareholders. It is really hard to understand what happened to the “activist” Money Managers, let alone Money Mangers generally. These organizations have signficant power and influence over most of their investments but I don’t recall any of them raising critical issues about the many critical troubled financial institutions over the past couple of years. This is one more serious governance failure in the corporate governance framework which includes the Boards.

    There has been wide debate about the causes and cures for the financial crisis at the macro level but not as much at the micro level. Two of the key components at this level are the institutional investors and the Boards of Directors. Serious questions can, and should be asked about the actions taken by these two groups to identify and mitigate the impact of the financial crisis on their institutions/investments. Why did some organizatons survive and others not? It is understandable why firms fail under normal circumstances but too many financial firms in this crisis allowed themselves to take on excessive risks that threatened their very survival. No one had to be Roubini, Stiglitz, or Roach and predict the serious crisis ahead. The only thing they had to do was recognize that a position with 30:1 or more leverage, significant exposure to the housing market and misaligned incentives was risky if there was only a 5% or 10% decline in the housing market….hardly a “Black Swan” event. A level of caution that does not put an institution in jeopardy is a normal part of risk managememt.

    Specific steps to reduce exposure to the housing market could then have been taken to mitigate some of the negative impact. There would still have been a serious negative impact on the finances of these banks but at least they could survive to thrive another day.

    We cannot expect to address the overall problems if we do not include actions to push Money Mangers to represent their shareolders effectively and Boards to operate with an independent “state of mind”. The people involved generally have the expertise, experience and intellect to do what needs to be done. The much more diffcult question to answer clearly is why they did not do their jobs properly. I suspect it will take a behavioral study to identify the underlying factors. Your blog identified some of those factors that need to be examined.

  6. bobgreenfest

    I don’t believe that more legislation is the answer to stop the lifelong practice of big bonuses. The two greatest emotions – greed and guilt – will not be controlled by legislation. As you point out, retail customers have practically no say in what occurs because their voice is meaningless. We will need another Boston Tea Party to resolve issues such as the one you wrote about today. See http://www.bobgreenfest.wordpress.com for more insight.

  7. A lot of the problem of the “lost money” could be solved (after investigations and possible prosecution) by the addition of a fourth tax bracket of 60% beginning at $2M, with no deductions.

    If people choose to move to some capitalist paradise, like Dubai: Adios!

  8. there one thing that i don’t quite understand yet.

    a good deal of bonus compensation in banks _is_ tied to company performance. bonuses are usually part cash part restricted stock, and the restricted stock has a long vesting period — 3-5 years depending on the bank.

    bear stearns employees and ex-employees supposedly owned one third of company stock when it collapsed, and they took a 90% loss (and were quite lucky to get that).

    what better corporate governance do you want than employees?

  9. I wonder if the “socially conscious funds” have put banks on their no list. I won’t buy shares in most bank companies precisely for this reason.

    Since alot of pension funds probably own both the equity and the debt of many of the TARP 1 participant companies, their boards have probably bought into the idea that the failing or failed institutions are only in that shape because of the fed going too far on rate hikes, or some basket of nonsense blinding them from realizing that their banks have made money off of in a chain of fraud that recently backfired, and that is now getting bailedout by the us government.

    If you look closesly, i would bet that you would find the same conflict of interest in pension boards that you find in washington dc in that many directors probably have large personal stakes in the banks, or have some relationship to someone with large stakes—more self dealing when you boil the matter down.

  10. I recall 10 or so years ago John Bogle as lobbying mutual funds to “vote their shares” instead of ceding them to management–an all too common practice. I’ve little of his effort since.

    Of course, many money managers are not only representing their investors, they represent themselves. Their greed fuels the fires of risk taking. Why would they harass the management of these companies when the goose continues to lay golden eggs. I believe they don’t assess and manage risk for the same human reasons that virtually no one else did. In fact, I’d say a lot of the “risk management/due diligence” talk by the pundits is purely 20-20 hindsight and tautological reasoning. At any given time there are, say, 5% of the people saying the sky is going to fall while 95% either don’t want to believe it, are arrogant enough to believe they can exit in time, or know “this time is different.”
    We need less moralizing and more practical tools to assist all investors, funds and individuals, to protect against risk. MOst financial planners, brokers, economists are primitive when it comes to this. Consider the brain surgeon managing the countries pension funds–most of them took the same hit as joe 6pack. So tell me why they should command salaries for expertise. I could ruin the funds for half their salary–any takers?

  11. May we please ban the use of the phrase “going forward” on this site? Unfortunately it’s inescapable elsewhere, but at least here we might be free from it.

  12. “There is discussion of encouraging people to move deposits away from big banks with a pattern of bad behavior. But some of the most powerful banks rely relatively little on retail funding.”

    Good point, but withdrawing funds is one way to at least make a statement.

  13. Perfectly said.

  14. The Fed has to be dismantled.

    “REVIVE LINCOLN’S MONETARY POLICY: AN OPEN LETTER TO PRESIDENT OBAMA”
    – by Ellen Hodgsen Brown, J.D. (Author of “Web of Debt”)
    April 7, 2009

    excerpt:

    “The bankers had Lincoln’s government over a barrel, just as Wall Street has Congress in its vice-like grip today. The North needed money to fund a war, and the bankers were willing to lend it only under circumstances that amounted to extortion, involving staggering interest rates of 24 to 36 percent. Lincoln saw that this would bankrupt the North and asked a trusted colleague to research the matter and find a solution. In what may be the best piece of advice ever given to a sitting President, Colonel Dick Taylor of Illinois reported back that the Union had the power under the Constitution to solve its financing problem by printing its money as a sovereign government. Taylor said:

    “‘Just get Congress to pass a bill authorizing the printing of full legal tender treasury notes . . . and pay your soldiers with them and go ahead and win your war with them also. If you make them full legal tender . . . they will have the full sanction of the government and be just as good as any money; as Congress is given that express right by the Constitution.’

    “The Greenbacks actually were just as good as the bankers’ banknotes. Both were created on a printing press, but the banknotes had the veneer of legitimacy because they were ‘backed’ by gold. The catch was that this backing was based on ‘fractional reserves,’ meaning the bankers held only a small fraction of the gold necessary to support all the loans represented by their banknotes. The ‘fractional reserve’ ruse is still used today to create the impression that bankers are lending something other than mere debt created with accounting entries on their books.1″

    ~ http://www.webofdebt.com/articles/lincoln_obama.php

  15. ONe more thing–seems to me the right answer in general is to have standards for when some entitiy is too big to fail. when they reach that point, Uncle Sam steps in and breaks it up–just as is occasionally done with Standard Oil, AT&T etc. Anti-trust laws presumably break up or prevent monopolies in the larger interest of the whole economy. do the same for financial institutions or even hedge funds. that policy alone will incent some firms to spin off their units on their own terms rather than have it done to them.

    Obviously this require better and more thorough going reporting and disclosure than we have had but that is far better than government meddling in the management of private property (ie, a company). I can’t take the idea of the Banking Queen (Barney Frank) or an incompetent tax preparer (Timmy G)making decisions about how to run a company when none of them have ever run squat.

  16. Bogle is a giant hypocrite. Index funds (where managers own EVERY stock in the S&P 500 with NO DISCRETION on either a firm’s investment merit or governance) are a PRIME CAUSE of the failure of investors to police corporate boards and management. Vanguard is king of the indexers…

  17. Don’t forget that this can easily be extended to unsecured creditors who turned a blind eye to the explosion in bond supply or worse, presumed the government would bail them out. Two quick points in this regard: 1) The structure of the ratings agencies needs to be changed so they are not paid by the entities they analyze. Even huge firms making a ton of money view often risk management as overhead and the ratings agencies as currently structured encourage sloth. The “bottom-up” culture that has arisen in both stock and bond funds has crowded out thinking about macro risks. 2) The “relative value” culture of pension fund and retail managers has deeply perverse effects and needs to be changed. Not owning bank stocks is risk in this world, no matter how bad the industry fundamentals, since the sector has a large benchmark weight. Benchmark weights are determined by supply, so managers need to purchase more bank debt to reduce its risk to the benchmark. Sheer insanity. Whatever you think of hedge funds, their great benefit is that their managers get paid only if their clients profit, as they are oriented towards absolute, rather than relative returns. Getting compensation right will be perhaps the most important determinant of the health of the financial system in the long run.

  18. I’d rather see a transparent and automatic mechanism for preventing “too big to fail.” A graduated capital requirement – the bigger the institution, the higher the capital ratio – would discourage runaway mergers. Any limits requiring a judgment by government officials would bring about political favoritism or the appearance of it.

  19. restating the obvious

    NOW btraven IS TALKING ABOUT THE HEART OF THE MATTER–THE ABUSE OF POWER THAT IS IN THE PRIVATE FED RESERVE SYSTEM, NOW IN OUR FACE BUT FEW PEOPLE NOTICE!!!

  20. restating the obvious

    ANDREW JACKSON HAD IT RIGHT, BUT HE WAS DEMONIZED IN THE TEXTBOOKS TO SUPPORT THE PASSAGE OF THE FEDERAL RESERVE FINALLY—BANK JOBS THIS BIG TAKE DECADES TO PULL OFF…

  21. Tying a greater portion of compensation to long-term performance requires two things: GREATER ability for employees to trust that the money will actually be there in several years and GREATER willingness to tolerate truly massive payouts in public companies. Is either really likely?

    http://tauntermedia.com/2009/02/23/be-careful-what-you-ask-for/

    If you were asked to defer your comp for a decade, you would want to isolate it from the rest of the firm, which could look very different over the course of that decade (imagine you worked for Salomon Brothers in 1996). Otherwise you have the problem of the UAW workers at GM – you agreed to a very long-term payout, and then somewhere along the way the firm lost its capacity to pay through no fault of your own.

    And what of the firm’s willingness to pay? We have seen the AIG bonus drama, which dealt with fairly minor amounts of money per person. What if it was a bunch of Dick Grasso payments?

  22. …somewhere along the way…no fault of their own.

    That’s a knee slapper. How about the moment the UAW contract was signed? Not hard to see what killed the formerly Big Two…VEBA = Very Expensive Benefits for All…Jobs Bank, etc etc

  23. I meant no fault of the individual workers, who understood precious little of what was going on in the contract talks and were ill-served by a union that does not really represent them.

    As for the little game between the UAW and GM, sure, the negotiators knew what was happening:

    GM would put off wage increases for guys on the line in exchange for some imaginary benefit to be received thirty years in the future, and in the meantime, the retirees would continue to receive their gold-plated benefits. Since GM only cared about its current expenses (everything else can be excluded/adjusted in calculating EPS) and the UAW only cared about the retirees, it worked out wonderfully.

    The sucker is the guy who was twenty-five years old in 1980 and has worked his entire adult life for the benefit of the guys who retired in the wave of early 80s contraction.

  24. Silence Dogood

    Agreed.

  25. I am a Norwegian builder of boats. As many of you know that have been reading this blog, my pension fund assets were wiped out, literally, in this last meltdown of our global financial markets. I spent a lot of time, and keystrokes, on this blog letting you all know (in america, where this mess originated from) that I was furious. I am 51 years old. I have decided, that going forward, I will no longer invest “institutionally”. My family (wife, kids) and I have decided that we will no longer invest in “the markets”, as that is far too risky, due to greed and corruption. We will invest locally instead. Apartments, small businesses, perhaps some larger projects here i Norway that are offered publically, but thats it for us going forward.
    I “make” more than we spend. I build boats for a living, and we live comfortably, but not over our heads. A nice home, several cars, 2 kids, etc. In America, you would probably call my wife and I “Almost upper middle class”, but not quite. We can’t take any more chances at our age, however. I have at best, 20-years to recover what we lost in the big meltdown, and it was a lot (for us, anyway) almost $700,000 USD. All we had. Gone. I am aware that in the US thats pennies, but it represented 30 years of savings…..wiped out. I can’t take that chance again. Pension fund balance today” $122,000 USD. From $700K….big fall. Investing in US nonsense? We will never be that foolish again. NEVER. So, What I am trying to tell all of you, is that I hope that all of you over there in the US are NOT counting on all of us out here “across the pond” to continue to invest in your schemes. It’s not going to happen again. Your on your own going forward. If you want to continue with the nonsense, your going to have to steal from yourselves…the other 95% of the global population is done.
    My 2 cents.
    AA

  26. Your reaction and your plans are perfectly understandable and, while it does not ease your pain unfortunately, there are many others who have experienced the same disaster. Many Americans included and they are now paying twice through the bailouts. As Alan Blinder noted in the NYT – “A bunch of wealthy, supposedly smart financial “experts” made irresponsible bets that went bad, pushing our economy to the brink and taking the rest of us down with them. Millions of people worldwide have already lost jobs. Millions more will. And taxpayers are being handed monstrous bills for mistakes that were not their doing.” – the message is this was not caused by “all” Americans but rather by a relatively small number which really is the heart of the problem.

  27. Bingo!

  28. I think it is a human trait to underestimate risk and overestimate ones ability to extricate themselves from the consequences…

  29. John – true enough

    I have experience in disaster response. The best way to respond to a disaster is practice. The best practice is to boil down the tasks into standard operating procedures that are performed as routine operations. When a disaster occurs the actions required to respond are effectively automatic.
    How does this relate to this financial problem (other than the disaster part)? Simple: FDIC receivership for the TBTF banks. Its bigger than usual, but essentially the same tasks that need to take place. Non banks should go through bankruptcy – bigger than usual, etc.
    The simple solution is often the best. This can’t be worse for the economy as a whole than the current course of action, although the oligarchs will most likely be losers (good for them, I say).

  30. Well for full disclosure, I am a Canadian living in China. My comments were aimed at recognizing and acknowledging your situation and being fair to “All” Americans, the vast majority of whom have suffered in this crisis. I accept most of your points but hopefully you can also accept that not all Americans are “a joke”, nor did all Americans go looking for WMD, etc etc…..there are far more positive aspects in the US and its people then many others seem to recognize.

  31. @ AA
    While I can understand that you are rightly upset at the loss of your fortune, the US is not an individual. There are over 300 million of us here. Maybe 95% of the population is completely oblivious to anything other than their day to day life in their neighborhood. Blame them for their ignorance, but how many of those folks are children, sick, etc. who literally had nothing to do with this fiasco.
    The US citizen has seen their inflation adjusted incomes decline since the 1970’s. We sure haven’t been getting rich. You are confusing the 1 or 2 percent of americans who reaped (more like raped) enormous financial gain from the “trickle down” policies since the 1980’s. These are the people who have the political power. They send the average americans off to fight their wars while they do not endanger their children.
    Maybe you are old enough to have experienced fascism in the 1940’s. Maybe your relatives fought the Russians in Panzerdivision Wiking and can thus relate to americans fighting in Iraq. The situation in the US is similar to Norway in 1940-45, except the fascist takeover here was silent and bloodless…
    So before you blame ALL Americans, consider that not all of us deserve it.

  32. Once again, let me say this. Tim Geithner should take over the (at least) 10 largest banks. Replace all management and BOD’s, take off the toxic assets (put them in a separate entity for the PPIP investors), and break them up into many parts. Voila, no more outrageous bonuses, no more fiscal mismanagement. No more crazy deals. Reinstate Glass Steagel. Regulate, both nationally and internationally. Good luck. At least the economic future will not be subject to oligarchy rule. Public campaign financing. Everyone gets to contribute 10 tax dollars to fund the equal distribution of funds between parties and candidates. Voila, a real republic. This is necessary because our Congress is way too stupid (or influence) to effectively govern. Oh, and by the way, decrimalize personal use of all forms of drugs (look at the recently completed Portuguese experiment). This will save enough to bail out everybody, and free up half of the prison population. I just think that it’s time capitalists learned how to make money honestly — by actually providing a valid product or service in exchange for a reasonable payment. Where did that concept go?

  33. adios amigos

    Red,
    You make good points. However, none of you are doing anything at all to put a stop to it over there. Be honest with yourself Red, what have you done, personally, to end the greed and corruption in your homeland? Write some letters to your Congressman? Bulletin: your Congressman is (more often than not) probably part of the problem. You see, the reality is, that your government no longer fears you. I would suggest that your government rely’s on the fact that literally none of you will take any definitive action. Over here, we have had experiences with deeply corrupt government. For instance, did you see the response to the G20 meeting in London? It almost got out of control, the rioting. Would that happen in America today? No, it wouldn’t. And your government knows that, they count on you doing nothing that really affects them. Your government was a co-conspirator in this last scam, and all of you seem to know that from what I read in this blog…..but you all do nothing that will end the madness over there. I am praying to turn on the news one day SOON, and I see millions of you marching, armed, into Washington. Until you do that, they won’t fear you, and they will absolutely continue to steal. ITS WHAT THEY DO.

  34. adios amigos

    Bay,
    Where did it go? Well, it seems to have gone out the window when “big finance” came to town. It seems like every kid in America wanted to grow up, and open a hedge fund. I’m sure you remember when kids wanted to grow up and be a Fireman or a Pilot. Not anymore. I think a good place for America to get back to, is the place where the citizens view “finance” as a service, and not an actual industry. If too many people, are trying to make a living by leveraging the value of capital, well, it doesn’t seem to have a happy ending. Build something. A good, tangible product at a fair price, of exceptional quality, always has a happy ending.
    AA
    AA

  35. A good, tangible product at a fair price, of exceptional quality, always has a happy ending.

    Ahh, except when you’re selling it to the leveraged financiers…tell that to the Chinese and the Japanese, who’ve seen their exports fall at a 50% annual rate over the past 6 months.

  36. John H-
    Your notion of graduated capital requirements works for me. Any way to prevent an entity from becoming immensely large and immensely leveraged makes sense.

  37. Doesn’t Norway have a public pension fund financed by oil revenues? There was an article in Bloomberg about it – it’s had a bad year, but mainly because of equity investments; fixed income investments are basically flat. Or do you also have a private pension fund as well?

  38. @AA
    OK I tried to be nice. You really don’t understand the USA. This place is really big. There are multiple regional cultures. Coordinating the people of the US is like herding cats. It can be done, but it isn’t easy or rapid.
    Most of the people of the US believe in the legal system, rooted in and defined by the Constitution. All oaths of office are to the Constitution, not to the president. Rioting, while maybe acceptable in you part of the world, is not taken seriously here. Riots can and do happen, but the overwhelming public opinion of rioters is contempt. History has shown that civil disobedience is much more effective and durable when it comes to making changes in the US, but takes a long time. Any expectation of rioting in the streets here in the US is almost silly. Could it happen? Sure, but the odds are really long.
    One more thing: I pointed out that Norwegians volunteered to join the Waffen-SS during WW2, notably in the Panzerdivision Wiking. But there was also a sizable resistance to the nazis going on at the same time. Since you clearly do not understand how the US functions as a diverse and scattered population, then you are missing the fact that there are many layers of “resistance” presently going on. They are currently progressing lawfully (from both the left [New Way Forward] and the right [various Tea Parties] of the political spectrum), and probably will continue to do so given the track record of making meaningful and tangible political change via peaceful means. This will be how the US ultimately changes, and has the advantage of hindsight (rather than reaction).

    If you can’t wrap your brain around this, then I have some words for you that I’d rather say to your face, but I’d rather not go down that path…
    Oh and 70% losses since 2007 really aren’t that uncommon in the US nowadays, so you are only getting upset at folks that are in the same situation as yourself for the very same reasons. You are making enemies of your peers.

  39. Why don’t money managers attack corporate management? It’s very, very simple: they all went to the same prep schools, ivy league colleges and top 10 MBA programs together. They are the new nobility, and as everybody knows, no matter how much groups of the nobility may compete with each other, they quickly close ranks in order to make sure the commoners gain no advantage from the competition.

    The 2-and-20s don’t attack the $X,000,000 bonus crowd because they all get rich on the combination, and there’s a revolving door between them.

    We let these guys ennoble themselves with our worship of business and entepreneurs, and they are treating us exactly like the lords and generals treated their soldiers in WWI. We are the cannon fodder, and nobody is allowed to shoot at the officers on either side.

  40. adios amigos

    There are actually two government sponsored pension funds here. The largest is called “The Petroleum Fund”, and is about the size of Calpers, the State Of California’s pension fund. All in, it has about $350 billion in real assets. The second fund that the government manages is used to invest here at home, and the mostly buy stocks on the Oslo stock exchange with the money. The big debate here over both of these funds is over what businesses the money is invested in. In short, if the funds invest in businesses that make weapons, well, that gets the people here VERY concerned. We view it as supporting war-mongering and war profiteering. It’s not what we do.
    To answer your question regarding my personal losses, it was about 30-odd years of savings that went into non-government accounts. My wife and I chose to live our lives as savers in anticipation of having children (we have 2). We view saving (not sacrificing, saving) in anticipation of future financial needs as prudent. Raising kids, no matter where you do it, requires significant cash outlays from time to time. So, we saved….all of our lives. Well, for the last thirty years anyway. We have now lost about 85% of it…..toast. Mostly toxic home mortgage junk. I won’t say where the bad mortgages were originated, underwritten, rated and sold thru securitization. Whenever I identify the offending country, their countrymen start to whine in this blog. “We’re not ALL bad”. It’s pretty pathetic. Take some responsibility…..ever think of that?
    Sheesh!!
    AA

  41. adios amigos

    Red,
    The framers of your Constitution had seen (in England) what a deeply corrupted government is capable of doing to the citizenry. Having lived under the tyranny of unfair taxes (sound familiar?), no representation (do YOU have a personal Lobbyist Red?), the King hiring mercenaries to fight unpopular wars (can you say Blackwater?), appointing Judges that would always side with the King (no need to explain this one, Supreme Court anyone?)…this list could go on and on. I would suggest you sit down and read the Declaration Of Independence. It lists all the complaints of significance that the Founding Fathers had about the King Of England. Compare those exact complaints to what is really gong on in your country today. The similarities are truly amazing.
    The Founding Fathers of America realized that the only thing that would EVER get the attention of a now invasive and corrupt government, would be armed militias. Why do you think they put that provision in your Constitution? Certainly not so the NRA would have a leg to stand on. The Founding Fathers feared a Government that is out of control, and must be brought back in line, and by force if neccessary. Tell me, do you not think it somewhat odd that your Federal Government is literally paying off the exact same people who created this mess? AND at 100 cents on the dollar I might add. And even on investments that havn’t yet even gone bad yet i many cases. How do you explain that? It’s called corruption. It’s called generational theft. If there were EVER a time when you should all be marching into Washington…it’s right now. Mr. Obama promised “change we can believe in”…right? Then he hired Geithner, and the looting ensued. Do you know what Geithners job is? To make sure all the creditors (read: financial elites) get back literally every cent they had invested, and the master plan is to hang all the taxpayers with all the junk. Have you read PPIP? It’s pretty obvious. For PPIP to be a “success”, the taxpayers MUST get handed the junk. And tell me, do you really believe that if Citi, or BofA tanked you would all cease to exist? It’s the same old BS scare tactics they always use….remember the “terror alerts”? Code Red…etc? Remember when Bush got re-elected..the “Code Reds” ceased immediatly? Well, now it’s “if we don’t pay off all the (financial elite) creditors, the planets inhabitants will perish”. More scare tactics. Are you aware that there are laws on the books in the US that state very clearly what MUST be done in the event of a bank becoming insolvent….big banks are included. They are to be Nationalized, sorted out, and re-privatized. ITS THE LAW. Do you know why they are not replacing the management at these big, insolvent banks? The new managers, being held harmless of the failure, will immediatly report that the banks are insolvent after the perform some very minor audits about the health of the bank they are now running. At that moment, the bank MUST be taken over by The Fed and liquidated. The creditors get wiped out…..remember them? The Creditors? Those are the financial elites that Geithner, O’Bama & Bernanke are trying to bail out….AND SCREW YOU. And my sense is, that your going to let them do exactly that. I’m wondering how you are all planning on explaining all this to your grandkids.
    AA

  42. adios amigos

    C S,

    Point well made.

    AA

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  44. Let’s go back a few frames. GS and the others were inscrutable partnerships with limitations on their ability to act as principals in transactions. They sold shares and acquired other people’s money to put at risk, but remained inscrutable. Money managers wanted a piece of the action, they didn’t want to have to oversee anything very much. Banks wanted in on the game because making loans and taking deposits is a boring business and it’s not possible to generate a competitive return to investors unless you lever up the capital base with preferred stock and you get into the fee generating businesses, like advisory and securities. The answer to the incentive compensation riddle and much else that underlies our present predicament is not to limit the upsides, but to remove the invulnerability to downsides. There is no shortage of know-how on this kind of alignment of interests. The argument about retaining talent is a canard, completely. The big firms have deep benches and are a magnet for talent so long as they are profitable. It is very difficult to go out on your own and succeed against giants. There is no mystery as to why money managers were not on the lookout. We all know how it works. It doesn’t matter what a security is worth intrinsically really, all that matters is that somebody will buy it from you and you can make a profit. (On the way up, that dissociation from underlying or intrinsic value was the beauty of the late-lamented mark to market accounting.) Likewise, oversight is irrelevant when you are seeing steady upward trends in your managed money accounts. After the bubble bursts, we look for explanations. We demand regulation. We want to lock the barn up tight after the stallion has escaped. Goldman of all the firms knows it cannot long survive under any kind of supervision. The comp is the least of it,or rather it is just the visible signifier of all the rest.

  45. I’m primarily an index fund investor. To avoid investing in the big banks without getting out of the market entirely, one thing I’ve done is to shift out of Total Market/Large Cap index funds to mid caps, small caps, non-financial sector funds, and “growth” indexes.

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