“Appalled, Disgusted, Ashamed and Hugely Embarrassed”

No, that’s not someone talking about the banking industry. That’s Howard Wheeldon of BGC Partners (a brokerage firm) responding to Adair Turner’s statement last September that “Some financial activities which proliferated over the last 10 years were socially useless, and some parts of the system were swollen beyond their optimal size.” (Turner is head of the FSA, the United Kingdom’s primary bank regulator.) That’s from a recent profile of Turner on Bloomberg.

“‘How dare he?’ Wheeldon now says. ‘Markets will decide if something is too big or too small. It’s not for an individual, however powerful, to slam and damn nearly 1 million people.'”

Do we really need to point out that markets don’t always make the right decisions? Markets didn’t break up Standard Oil or AT&T–people did. And how is it wrong for public figures to be publicly stating their beliefs about what the objectives of public policy should be?

But the point of this post isn’t to single out another free-market zealot who apparently doesn’t think about the words he is saying. It’s to talk about John Paulson and Malcolm Gladwell.

Continue reading ““Appalled, Disgusted, Ashamed and Hugely Embarrassed”” →

Drill, Baby, Drill: Reviewing The Advice To The Financial Crisis Inquiry Commission

The NYT has a collection of potential questions for the Financial Crisis Inquiry Commission (FCIC) to ask four of the country’s leading bankers today.

Some of the proposed questions are technical or even philosophical.  These are interesting, but hardly likely to be effective.

I like where Yves Smith is going: what kind of bonuses were paid for trades on which firms ultimately lost money?  Bill Cohan and David Walker, coming from very different perspectives, are also pushing on issues related to compensation structure in general and bonuses in particular.

The real issue, of course, is the nature of the risk system itself.  But this is a big abstract question – and not suited to these kind of hearings.  The Commission needs to find concrete issues that people can relate to much more broadly, and bonuses are very much in the line of fire.  The fact that the 2009 bonuses are already in the works – and eerily, but not coincidentally, parallel to the 2007 bonuses – is going to make this hard for the bankers to spin.

Serious debate is just beginning – drill down into how bankers at Too Big To Fail firms really pay themselves, and you will be amazed at what you start to see more clearly.

By Simon Johnson

More from “The Lion”

In the short days between Christmas and New Year’s, BusinessWeek published an interview with Paul Volcker conducted by Charlie Rose headlined “The Lion Lets Loose.” Rose asked him why the U.S. economy has fallen behind in some areas, such as manufacturing. Here’s the segment:

“How did that happen?”
“What happened is our best and brightest got attracted to Wall Street. You’ve read about those big bonuses. These are generalizations, but I do think that the pull of Wall Street on bright young people, ambitious young people, has been tremendous.”

Continue reading “More from “The Lion”” →

Feed Problems?

I’ve gotten a few messages that our feed is not working properly. And, it occurs to me that I haven’t been getting email updates for the past couple of days.

The default feed produced by WordPress (https://baselinescenario.com/feed/) is working fine, and I can read the blog fine in Google Reader. But the Feedburner version (http://feeds.feedburner.com/BaselineScenario), which generates the emails, is stuck at January 8. I’ll look into it, but if you have any diagnostic details or suggestions let me know below.

(I suspect it is related to my having changed the number of items that go into the feed from 15 to 200; I was trying to figure out a better way to convert the blog to PDF, and that was one of the steps. I reset it this morning, so that may fix it.)

Update: Forcing Feedburner to ping the default feed worked; the Feedburner feed is up to date now. I’ll watch it to see if it picks up the next post or not.

Update 2: It did. I’m guessing that email subscribers will get an email tonight. (Of course, most of you aren’t here to read this.)

By James Kwak

The Financial Crisis Inquiry Commission: Ready For A Breakthrough

The Financial Crisis Inquiry Commission (FCIC) holds its first public session on Wednesday.  When the FCIC was established in May, the prevailing wisdom was that the hearings and final report would be dry and rather inconclusive.

But the debate around Big Banks has started to shifted markedly, particularly in recent weeks.  Anger about bonuses is increasingly expressed by the most mild-mannered policy experts.  The administration itself is proposing some sort of excess profits tax on the biggest banks.  And – most important – our top bankers have their tin ears prominently on display.

In the Daily Beast, I suggest exactly how the Commission can put this moment to productive use.  The point is to find for rather dull and difficult technical material to become names, dates, and numbers that catch the popular imagination – and provide a genuine warning.  The most obvious and reasonable way to do this is by drilling down into the details of the Wall Street compensation system, then and now – the more you dig, the more you understand why we are heading for trouble.

By Simon Johnson

Bank Tax Arrives

The Obama administration tipped its hand today – they are planning a new tax of some form on the banking sector.  But the details are deliberately left vague – perhaps “not completely decided” would be a better description.

The NYT’s Room for Debate is running some reactions and suggestions.  The administration is finally getting a small part of its act together – unfortunately too late to make a difference for the current round of bonuses. 

We know there is a G20 process underway looking at ways to measure “excess bank profits” and, with American leadership, this could lead towards a more reasonable tax system for finance.  In the meantime, my point is that taxing bonuses – under today’s circumstances – is not as bad as many people argue, particularly as it lets you target the biggest banks. 

By Simon Johnson

My Last Post on Ben Bernanke

His confirmation, that is. I summarized most of my position in Foreign Policy, which asked me to lay out the anti-confirmation argument. My reasons overlap with Simon’s but are not identical–I think Simon worries about cheap money and asset bubbles more than I do. I was originally not particularly motivated by the anti-Bernanke campaign, because I didn’t think Obama would appoint anyone better, but as Russ pointed out, whether Bernanke should be confirmed and what the alternative is are two separate questions.

Whom would I pick? I certainly don’t know the candidates well enough to make a good choice. But the first thing I would say is that the Federal Reserve chair does not need to be Superman. The Federal Reserve Board of Governors is a board, and while the chair is important, he or she should really be the first among equals. You want someone who will push the Board in a certain direction, but the chair can draw on the experience and skills of the other board members and the staff, who are technically very competent. The idea that the chair must be Superman seems to be a product of the Greenspan era, and we project it back onto Volcker because of his success in fighting inflation in the early 1980s. And it’s a bad idea, just like searching for a savior CEO. In this context, I think it’s limiting to insist that the nominee have experience on the board, or have government experience, or be a prominent academic, or anything in particular.

Continue reading “My Last Post on Ben Bernanke” →

Leading Indicator of Me

If I ever go to another school, you should run away from it as fast as you can. That is the practical implication of Felix Salmon’s post a few days ago rounding up arguments for why you should not get a Ph.D. in the humanities or go to law school.

Thomas Benton’s article, “Graduate School in the Humanities: Just Don’t Go,” nails the basic reasons why I went to UC Berkeley nineteen years ago: excitement in the subject, a history of high grades, the comforting structure of academia, romanticization of university life, and no practical application of academic skills. (See the six bullets halfway down the article.) When I left Berkeley in 1997, I could not get an academic job that I wanted … and the rest is history, I guess. If you do get a Ph.D. in the humanities these days, the numbers are even more heavily against you than they were then. First, American universities as a whole are shifting from tenure-track jobs to untenured adjunct positions; second, within universities, the jobs are shifting from the humanities into vocational fields like accounting and nursing. The ongoing bloodbath in state finances is only making things worse, since most of the good universities in the country are public.

Continue reading “Leading Indicator of Me” →

The Case For A Supertax On Big Bank Bonuses

The big banks are pre-testing their main messages for bonus season, which starts in earnest next week.  Their payouts relative to profits will be “record lows”, their people won’t make as much as in 2007 (except for Goldman), and they will pay a higher proportion of the bonus in stock than usual.  Behind the scenes, leading executives are still arguing out the details of the optics.

As they justify their pay packages, the bankers open up a broader relevant question: How much bonus do they deserve in this situation?  After all, bonus time is when you decide who made what kind of relative contribution to your bottom line – and you are able to recognize unusually strong achievement. 

Seen in these terms, the answer is easy: people working at our largest banks – say over $100 bn in total assets – should get zero bonus for 2009. Continue reading “The Case For A Supertax On Big Bank Bonuses” →

Obama and FDR

Kevin Drum found a great quotation from FDR and what he thought of bankers, monopolists, and speculators. It’s so good he deserves to have you go there and read it.

Drum’s point is that while health care may have required conciliation and moderation, “When it comes to financial regulatory reform, Obama needs to let us know whose side he’s on.” So far Obama has played the peacemaker, the reasonable man in the middle, the man who bridges divides. “My administration is the only thing between you and the pitchforks,” he said last March; note that he brought up the pitchforks, but positioned himself as the center, holding back the crazies.

Continue reading “Obama and FDR” →

Bernanke, Manager

There’s a platitude repeated by most CEOs that their main job is not anything so mundane as making decisions, but “mentoring and supporting people” or something like that. Most of the CEOs who repeat this are mediocre at best at mentoring or supporting people, since the key people for any CEO are not the people who work for him or her, but the members of the board of directors. But the truism that is still true is that when you are head of a large organization, you can’t do everything yourself, and your real impact is made through the people you hire, promote, and don’t fire.

In October, Ben Bernanke named Patrick Parkinson director of the Division of Bank Supervision and Regulation. Who is Patrick Parkinson?

Continue reading “Bernanke, Manager” →

Money and Financial Reform

Last week, Ryan Grim and Arthur Delaney wrote a story for the Huffington Post about the difficulty of getting substantive reform through the House Financial Services Committee. They focus on two main things. First, because a seat on the committee is valuable for fund-raising purposes, the Democratic House leadership seems to have stacked it with vulnerable freshman and sophomore representatives from Republican-leaning districts, meaning there are a lot of Democrats who are either personally inclined to vote with the financial services industry or feel a lot of political pressure to do so. Second, a lot of committee staffers end up switching sides to work as banking industry lobbyists, and some of them then come back to be committee staffers, raising the usual questions about the revolving door. Barney Frank comes off as something of a hero; the idea is that Frank and his senior staffers are so smart and skilled that they can get effective legislation through despite the cards being stacked against them.

Continue reading “Money and Financial Reform” →

When a 79.9% APR Is Good?

Adam Levitin wrote an informative post on Credit Slips a couple of weeks ago; I missed it but it looks like no one in my RSS reader has mentioned it, so here goes. One provision of last year’s credit card legislation limited up-front fees to 25% of the line of credit being offered. First Premier Bank currently offers a card with a $250 credit line, $124 in up-front one-time fees, a $48 annual fee, and a $7 monthly fee. Oh, and a 9.9% APR on purchases. That adds up to $179 that gets billed immediately, and a total of $256 over the first year–more than the credit line. Because this card will become illegal in February, they are test-marketing a new card that has a $300 credit line, $75 in up-frontfees (to conform with the law; there could be a monthly fee in addition), and a 79.9% APR.

Continue reading “When a 79.9% APR Is Good?” →

The Costs of “Extend and Pretend”

For months now, Calculated Risk has been criticizing the policy of “extend and pretend”–the practice of pretending that real estate loans are still worth their full value, making modifications so that borrowers can avoid going into default, so that banks don’t have to recognize losses on their assets. Here’s one story about “zombie buildings”–office buildings, in this case.

Alyssa Katz has a great article in The American Prospect about extend and pretend when it comes to multi-unit residential buildings, focusing on New York City. Expensive condo towers are now “see-through” buildings (so named because you see through the glass walls right through the empty floors–a phenomenon I first saw in 2001, after the Internet bust, along Highway 101 on the San Francisco Peninsula). Another problem is apartment complexes that were bought by private equity firms and flipped to developers during the boom with plans to evict the low-rent tenants and replace them with high-rent tenants; the high-rent tenants never arrived, the developers can’t make their loan payments, and no one is maintaining the buildings for the remaining tenants. (And no one is saying that property developers have a moral obligation to pay their debts rather than turn their properties over the bank.)

One of the underlying problems is that developers (or the banks that inherited their properties) have an incentive to hang on and hope for a return to prosperity that will deliver the promised condo buyers or high-rent tenants–in other words, betting on another boom. The alternative is selling the properties to someone who will convert or restore them to the type of housing that there is actually demand for–affordable rental units–but that means that someone has to take a loss, because an affordable building is simply worth less than one stuffed with investment bankers. Unfortunately, as Katz says, “With so many lenders at the brink of insolvency, the Treasury Department and the Federal Deposit Insurance Corporation (FDIC) appear to be in no rush to cause them further pain.” The lack of urgency was unwittingly confirmed by a Treasury spokesperson, who said, “The commercial real-estate market is something we’re watching closely, but it’s premature to discuss solutions.”

By James Kwak

Countdown to January 18: Goldman’s Bonus Day

Sources say that Goldman Sachs’ bonuses will be announced on Monday, January 18, and actually paid sometime between February 4 and February 7.  In previous years, the bonuses were paid in early January – but the financial year shifted when Goldman became a bank holding company.

For critics of the company and its fellow travelers, the timing could not be better.

Anxiety levels about the financial sector are on the increase, even on Capitol Hill.  The tension between high profits in banking and stress in the rest of the economy becomes increasingly a topic of discussion across the nation.

And you are hard pressed to find any government official who has not by now woken up – in private – to the dangerous hubris of big banks.  To add insult to injury (and many other insults), the Bank for International Settlements is holding a meeting to discuss excessive risk-taking in the financial sector; according to CNBC Thursday morning, Lloyd Blankfein of Goldman and Jamie Dimon of JPMorgan Chase were invited but did not show up (they really are very busy).

The smart strategy for Goldman in this context would be to pay no bonus for 2009 (in cash, stock or any other form), but this is not possible for three reasons. Continue reading “Countdown to January 18: Goldman’s Bonus Day” →