TENAC, THE ELECTION & CURRENT ECONOMIC CRISIS

Compensation Reform Now to End the Insanity

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Written by Jim McGrath Monday, 03 August 2009 21:04

BANKING REFORM NOW, END PERVERSE

BONUSES FOR THE BIG BOY NETWORK

What we need is a return to sensible banking and finance. The financial system can and must downsize by ending its practices of overleveraging, of growing "too big to fail" and of pursuing great risk for high fees at the cost of sound investment, and worst of all, bonuses and increasing salaries for those who created this crisis in the first place. All these practices, developed in the recent past, must be abandoned.  Back when banking was sensible, the reward for running your company into the ground by risky, fraudulent or overleveraged investments was job loss, but is now  millions in bonuses and raises -- the same perverse mindset that got us into this crisis by encouraging excessive risk taking without any threat of loss.

Now government guarantees against their losses mean more of the same, continuing a vicious cycle that has already begun to ruin the financial system.

On the contrary, the American people thought this would end, and certainly did not suspect that these perverse incentives would continue after government bail-outs.   They have essentially used taxpayer money to continue their existence as a grave, huge sized threat to our system. Obama and company must find a way to make them fail safely, or break them up so they are no longer too big to fail. We have anti-trust laws for this very purpose.  

It's time the politicians acted and return the bankers to good sense, whether they like it or not.  One New York Times good editorial accurately observes that we must fast-track reform that will work: tying compensation to performance and longterm investment success, and incentives to limit their size and excessive risk taking, at: http://www.nytimes.com/2009/07/27/opinion/27mon1.html

July 27, 2009  Editorial

Of Banks and Bonuses

Earlier this month, when Goldman Sachs reported record quarterly profits - and prepared to pay juicy bonuses - it was widely, and correctly, noted that the firm was leading the way back to a future in which outsized pay for short-term gains could once again foster excessive risk taking.

Sure enough, last week, Morgan Stanley explained its quarterly loss by saying that some of its traders were still "gun shy" after last year's near-death experience in the financial markets, but that the firm now planned to increase its risk taking. To try to stay competitive with Goldman and other banks, Morgan Stanley has also allocated a big chunk of its net revenue for compensation.

This from a couple of firms that 1) probably wouldn't even be around today were it not for ongoing government rescues of the financial system and 2) by dint of being too big to fail, now enjoy an implicit guarantee of future bailouts if their bets go wrong. The financial system may be stabilizing for now, but the danger to taxpayers if markets were to buckle again is at least as great as ever.

Financial regulatory reform is supposed to control that danger. For example, both the Obama administration's proposal and ideas from Congressional committees sensibly call for banks to hold more capital with which to absorb losses. A wise variation on that basic notion is that the bigger the bank, the higher the capital requirement should be. Insurance premiums paid to the government could also increase along with a bank's size. Such provisions would create incentives for banks to limit their size and in so doing, reduce the risk they pose to the system.

The problem is that the bonus-driven risk culture is reasserting itself now, while comprehensive reform will probably take until next year, if it occurs at all. A solution is for Congress to handle bankers' compensation as a stand-alone issue, as the House Financial Services Committee has said it is ready to do. There is no question about the need to end the perverse incentives that helped to set off the financial crisis. There is ample, and justified, anger among Americans about outsized pay - often to the very same bankers who profited from the bubble - to warrant fast-tracking the issue.

Among the needed pay reforms are rules to tie executive payouts to long-term results, like prohibitions against cashing out equity-based compensation until many years after options or shares have vested. Bonuses need to be delayed to ensure that the profits on which they are based do not prove transitory. An insightful reform recommended by Lucian Bebchuk, a Harvard Law professor and director of the law school's Program on Corporate Governance, would require that executive compensation be tied not only to the company's stock performance, but also to the long-term value of the firm's other securities, like bonds. That would encourage executives to be more conservative about using borrowed money to juice returns to capital, because it would expose them to the losses that leverage can exert on all the firm's investors.

Reforming the way bankers and traders are paid needs to be part of a newly regulated financial system. But it needn't and shouldn't wait for comprehensive reform to see the light of day.

TARP FUNDS USED TO PAY WALL STREET BONUSES

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Written by Jim McGrath Tuesday, 04 August 2009 16:27

The program Treasury designed to spur lending and rescue us from the greatest financial crisis since the Depression has been misused and abused by the same Wall Street geniuses that got us into this mess in the first place.  They literally used the TARP funds designed to grease banks' lending wheels in order to jumpstart the economy, to instead hoard, make themselves more able to swallow up lesser competitors, and most outrageous, paid billions in bonuses to the incompetents who engineered this crisis. They could not bring themselves to use our tax money for that noble (while still making a profit) purpose. No, they went for excess and selfish greed, again to reckless and possibly criminal behavior, in violation of their legal fiduciary duties. Then, they pursued an even worse form of self-aggrandizement than before the crisis, as it is compounded by the fact that all this was done with taxpayer money, whose purposes were spelled out -- and they made clear when they took it -- that they understood the public good's purpose for the billions bestowed them in capital injections, loans, etc, etc.  By now we recognize these as no longer stable banking and investment practices, but blind greed and excess they have long degenerated into, without any hint of repentance, reform or a return to sound behavior.  Using money granted for the public good to further reward their insane risk taking and management with billions in bonuses for practices they have grown to love, is indeed, stranger than fiction. Unfit by their own abilities to weather the crisis they caused, instead of going out of business as others do, they are now surviving, thriving, and continuing to reward perverse incentives. In the end, they are bound to become the albatross around the American economy that only letting them fail or breaking them up will remove. See these key expose articles from The Business Insider by John Carney (below) or see them at

http://www.businessinsider.com/yep-the-bailout-was-based-on-a-big-fat-lie-2009-8\\ 

 and http://www.businessinsider.com/barofsky-discovers-the-bailout-was-based-on-a-big-fat-lie-2009-7

AIG, EMBLEM OF WALL STREET GONE GREED MAD

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Written by Jim McGrath Thursday, 06 August 2009 23:37

AIG REWARDS INVENTORS OF FINANCIAL WMD's MILLIONS IN BONUSES, See:

AIG, the great insurance giant, that was to insure, wasn't it trillions, of credit default swaps and other overly risky and gimmicky (read fraudulent) investments, now requests permission to grant $325 million in bonuses to employees (the division that invented these financial WMDs -- phrase coined by Warren Buffet years ago--) at about the same time Citi analysts estimate AIG net worth at about zero, according to a recent report.  For full shock effect, compare the headlines illustrating these "co-existing contradictions" (bankers would use the term "financial norms") and click for the accompanying news briefs from John Carney of the Business Insider:

"CITI Says AIG May Be Worth Nothing" (July 30, 2009 headline)

AND...

"AIG Wants to Pay Financial Products Group $235 Million in Bonuses" (July 10 headline)

Click for articles:

http://www.businessinsider.com/citi-says-aig-may-be-worth-nothing-2009-7

http://www.businessinsider.com/aig-wants-to-pay-financial-products-group-235-million-in-bonuses-2009-7

Also, see:

AIG Is Even Worse Off Than You Think  (July 31, 2009)

http://www.businessinsider.com/aig-is-even-worse-off-than-you-think-2009-7

MORE ON EXECUTIVE SALARY RIP-OFFS

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Written by Jim McGrath Friday, 07 August 2009 00:20

NOT QUITE A CONFESSION, BUT A GOOD START

By Steven Pearlstein
The Washington Post, Wednesday, April 8, 2009; A11

For the past year, as the nation has engaged in a heated debate about how we got into the current financial mess and how we're going to get out of it, there's been one group noticeably missing from the conversation: leaders of the big Wall Street firms.

With the exception of the occasional public floggings organized by congressional committees and the quiet off-the-record lunches with newspaper editorial boards, the titans of finance have remained hunkered down in their bunkers. In public, at least, they have declined to accept personal and institutional responsibility for what went wrong, to explain more fully how and why it happened or even to express a simple thank you for the government's extraordinary rescue efforts. At a time when it was most needed, industry leadership has been nonexistent.

Until now. In a speech yesterday in Washington to the Council of Institutional Investors, Lloyd Blankfein, the chairman of Goldman Sachs, took the first trip through the public confessional, acknowledging that "the past year has been deeply humbling" for an industry that held itself out as expert but disappointed customers and shareholders by taking actions that "look self-serving and greedy in hindsight."

"We collectively neglected to raise enough questions about whether some of the trends and practices that became commonplace really served the public's long-term interests," said Blankfein, whose unflashy, straightforward style is more Mr. Whipple than Gordon Gekko.

Explaining why the industry failed to understand the risks it was taking, Blankfein identified the kinds of rationalizations that people latched on to: the growing strength of emerging markets, the plentiful supply of liquidity and the availability of new risk-hedging instruments.

"We rationalized because our self-interest in preserving and growing our market share, as competitors, sometimes blinds us -- especially when exuberance is at its peak," Blankfein said.

He also acknowledged that too much faith was put in risk models that turned out to be badly flawed and that the size of the firms and the complexity of the financial instruments had been allowed to grow faster than the "operational capacity to manage them."

To make sure it doesn't happen again, Blankfein called for stepped-up regulation of banks and even hedge funds. He also laid out a spot-on set of guidelines for industry bonuses that would give greater weight to the performance of the entire firm than just individual performance and reflect long-term risks as well as the short-term gains.

Okay, so it's not exactly up there with the confessions of St. Augustine, but it's a start.

There are some glaring factors, however, that Blankfein, like other Wall Street leaders, tends to overlook.

The most important is culture -- in the case of Wall Street, a culture that not only tolerates but almost celebrates taking advantage of customers. Here is an industry in which brokers traditionally get their start making cold calls to strangers, offering bogus stock tips, and investment bankers cut their teeth peddling bad merger and acquisition ideas to corporate clients. It is an industry in which the majority of money managers consistently underperform the broad market averages, analysts and strategists are almost always bullish, and firms rarely run into a security that can't be brought to market. These days, Wall Street is a place where the trading culture has supplanted the investment culture and score is kept on the basis of how many securities a banker or a firm underwrites rather than whether those securities actually turn out as good investments.

It's hard for anyone who grows up in an industry to see fundamental problems in its culture. But until Wall Street deals with this blind spot, it is likely to careen from one crisis to another.

Blankfein also makes the common mistake to think that the problem with compensation has only to do with how the pay is structured and not with the overall level of pay, which on Wall Street got to be ridiculously out of line with that of similarly skilled and equally successful people in other industries. No matter how it is structured, pay at such astronomical levels has a tendency to swell heads, inflate egos and tempt people to take undue risks of all sorts, ethical as well as financial.

The answer to that problem isn't for Congress to use the tax code to effectively legislate pay caps for Wall Street. In the current climate, however, the only way to beat back such bad ideas is to find some other ways of stopping and reversing the Wall Street arms race on pay.

Of course, an industry that earns so much profit that it can afford to pay multimillion-dollar bonuses to 26-year-old traders also has too much money to lavish on the political process in ways that undermine those who would regulate it. I wouldn't go as far as MIT economist Simon Johnson, who argues in the May Atlantic magazine that the United States has effectively become a banana republic with the Wall Street oligarchy running the show. What is undeniable, however, is that there are regulators here in Washington who have been reluctant to rein in the industry out of fear that they would be thwarted by the White House, the Treasury and key members of Congress acting under pressure from the industry.

It's all well and good for the Goldman Sachs chairman to call for better regulation of the financial industry. But regulators are unlikely to do much better during the next bubble unless we can find better ways to insulate them from Wall Street's outsize political influence.