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I think the most proper way to view financial sector bonuses is to view them in context of money laundering. In UK law the common law definition of money laundering actually captures illegal bonuses quite nicely:
"taking any action with property of any form which is either wholly or in part the proceeds of a crime that will disguise the fact that that property is the proceeds of a crime or obscure the beneficial ownership of said property."
Actually the US Office of the Comptroller of the Currency also uses the definition in which any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting constitutes money laundering.
In view of the level of corruption and "capture" of regulators it is naive to think that the US could pass legislation limiting bonuses, but there is there is much more social value in a windfall tax for bonuses that exceed certain threshold, than a short-sighted public act of revenge against "banksters". Public will definitely applaud when a dozen of rascal would be hanging from lamp posts, but that does not solve the problem.
Windfall tax can be viewed as a measure that helps to suppress illegal or semi-illegal (HFT, gambling using taxpayer money) activity without excessive litigation. I think that's why the measure has and will have broad international support: none of the countries, including Switzerland, wants to became a pariah in a new international financial framework.
But there are serious problems in imposing windfall tax too. One widely understood problem is that the utility banking is now inextricably linked with the "casino banking." The other problem is that large banks play crucial role in Fed bonds auctions. In a way, US government is afraid to disturb this delicate balance.
But structurally high unemployment might generate some political will despite those problems. Balance of power is now shifting as credibility of banking elite is now openly challenged and era of "Big Swinging Dicks" of trading might be over. Also the litigation against large bank brass is the "Sword of Damocles" that hands over the "bonus culture". Banks position in structured products litigation is weak and courts now tend to scrutinize related activity much harsher then before; it may eventually play a role as the implicit windfall tax on bonuses because of fines and/or sentences imposed. So 2009 bank bonuses might the last Hurrah. In this context GS move to award bonuses to top brass totally in stock can be viewed as a preemptive measure to lessen the threat.
I think the issue here is not about "a short-sighted public act of revenge against bankers" as many try to represent it. It's about basic fairness. The real issue is the special relationship and revolving door between current and former government officials (judicial, legislative, and executive) and current and former brass of the major investment firms. The distinction between the public and private sector has become blurred and the only the commonality between both is that neither is looking out for the taxpayers.
I would understand if bailout money were used to innovate in an
important areas like energy but not to bail out inventors of a new
casino games like CDS. I would prefer them to be nationalized and all
brass top brass removed. Basically this was a gambling: people made bets
that made short term money, got paid bonuses for that, those bets went
south, the government stepped in and replenished their coffers, they
made more bets, which are now profitable in the short term and they,
again, collect bonuses for those bets.
And I would distinguish between sports/music celebrities and traders. I know that whatever I try I will never be Paul McCartney or Michael Jordan. But if somebody give me a hundred of million at 0% and let me trade any market, I think I would earn at least 8% this year without too much risk. Does this mean that I deserve a million in bonus? Therefore, those who get money due to special relationships with the government should generally be taxed accordingly on all income above, say $250K.
December 11, 2009 | FT.com
Britain is doing it, France is doing it. Should the US impose a windfall tax on bankers' bonuses too? Let me set out what I understand to be the case for the prosecution. I invite readers to comment on whether you think it stacks up or not.
1. People on Main Street are furious about Wall Street bonuses.
2. This anger is justified because the bonuses are based in large part on windfall profits. These profits derive from taxpayer-backed interventions that stabilised the financial system, paving the way for a recovery in financial markets and collapse of risk spreads.
3. All banks benefited from this bailout - not just the ones that took or still have Tarp funds. Even the strong gained hugely from Fed liquidity and government actions to ensure none of their weaker counterparties failed (including but by no means limited to the AIG case).
4. In an ideal world, these interventions would have been structured up front in a way that ensured the value created did not leak out to banks and bankers. But they were not.
5. This is understandable given the pressures on decision makers mid-crisis. However, this means we have to consider the cost/benefits of acting retrospectively.
6. If policymakers do not act to address justified public anger, there will be long term costs.
7. People have lost faith in economic institutions such as the Fed and Treasury because they believe these institutions are working in the interest of Wall Street rather than the general public.
8. This is likely to lead to bad policies, including reforms that undermine the powers and independence of the Fed, high rates of tax on high incomes earned in normal competitive markets and the wrong type of financial regulatory reform.
9. It is also the worst possible starting point for a serious debate about fiscal consolidation, which at its heart is a debate about national burden-sharing.
10. The best way to lance the boil is to recoup the value created by taxpayer-backed interventions through a windfall tax.
11. Having imposed a windfall tax the Treasury and the Fed would be in a better position to resist bad policies, e.g. punitively high rates of tax on high earners on an ongoing basis.
12. A well-designed windfall tax with measures to limit avoidance might raise roughly $30bn. (Math follows: with $140bn in planned bonuses and one third successfully diverted to avoid the tax, a UK style 50 per cent surcharge on bonuses net of 35 per cent income tax would yield $30bn.)
13. This sum is small relative to the deficit but it is not trivial. For instance, it could finance a one-time $5,000 per job hiring tax credit for up to 6m jobs. Suppose nine out of ten of these jobs would have been created anyway. That is still 600,000 extra jobs.
14. Any resulting increase in banks cost of capital due to a political risk premium is likely to be small because: a) the tax relates to a truly one-time event; b) it falls on employees not shareholders; and c) past windfall taxes e.g. on the UK privatised utilities did not result in large increases in the cost of capital.
Well… what do you think?
Tags: bank taxes, fed, tax on banks, windfall tax
- It is definitely not obvious how Congress, which has limited power, can apply a windfall profits tax easily, especially on an ex-post factor basis like in the UK or France. Besides, the banks doing well now, having repaid TARP, did pay dividends that were not insignificant. So, with a relatively "guaranteed" upside already for the banks that did not default, if they wanted equity upside too then they should have gotten equity in the first place but they didn't.
This is not to say that business as usual in Wall Street is a good thing - it's a disgrace.
Posted by: constantine gonatas | December 11 12:55am | Report this comment | Options
- Isn't it much simpler than 1-14? (1) In large part, the bonuses are driven (claimedly) by the banks' need to retain employees who generate large trading profits. (2) Since every trading gain equals a counter-party's loss, overall they produce no economic benefit. (3) Moreover, the bonuses incentivize pernicious side-effects. (4) They also distort societal values. A trader is many times more valuable to society than a teacher? (5) Whatever action can be taken, promptly, should therefore be taken by Washington to match the British and French actions.
Posted by: 10024 | December 11 3:32am | Report this comment | Options
- Sounds sensible to me. I'd keep it in place until a full financial reform package is in place. Will never happen though, Obama works for the street.
Posted by: JDA Boston | December 11 3:52am | Report this comment | Options
- Can't these Wall Street companies give "bonuses" in forms other than cash or stock options? Call it "retroactive contributive hiring re-gifting credit" or some such nonsense?
And a "non-binding" board decision? Guess I'm a "populist," the word now used to label an indignant American public as a pitch-fork wielding, stupid, crowd of creeps.
Posted by: N. Can | December 11 7:39am | Report this comment | Options
- Whether it is an accurate representation or not, most people seem to believe there is an element of regulatory capture in the US (and the UK).
For instance, it can't be good for democracy or the banks to have so many ex Goldman employees working in the government. They might be intelligent and hardworking but I'm sure you can find similar talents in other organizations. That reinforces your point 7.
Moreover, the banks aren't just beneficiaries of the Treasury's largesse; they also benefit from the Fed's policy of zero interest rates. It's easy to make money when yield curves are steep. Rightly or wrongly, many people find it hard to understand why you should bail out the banks when many other companies have gone bust.
I would have thought that any banker with some self-awareness would have recognized the dangers of paying bonuses this year. The risk, as you say, is that by not accepting the pain this year (after all, the banks told us it was the worst crisis in living memory), politicians come after them with a bigger regulatory stick. And their apparent 'supporters' in policymaking circles are defenestrated at the same time.
Posted by: Econoclast | December 11 8:28am | Report this comment | Options
- 1. Why just bank ? Why not insurance companies, Asset managers, in fact all financial institutions.
2. No one seems to be talking about the ROI on TARP funds that the gov made when banks paid back the money.
Posted by: Anshuman Mukherjee | December 11 10:32am | Report this comment | Options
- 9. If highly paid employees in subsidised industries are subject to extra taxes, this should not be restricted to banking. It should also apply to farming, for example - owners of large farms have been enjoying huge, taxpayer-subsidised incomes for decades.
Posted by: M | December 11 10:47am | Report this comment | Options
- 10. @M Some might suggest that it is right to keep an excess of farming capacity for emergencies. I'm not sure the same is true for investment banking, I also doubt many farmers get million pound bonuses in any year.
Posted by: Richard Crozier | December 11 11:02am | Report this comment | Options
- 1 - Only a minority of bankers are traders
2 - Only very small minority of bankers ever got a million pound bonus
3 - Most of investment bank's bankers are highly skilled people, a lot of them with PhDs
4 - Given the above, why should most bankers start earning much less than most lawyers, doctors (a lot of them incompetent) etc?
4 - Why should all bankers pay for the mistakes of a minority of them
5 - Most of bankers are just like you and me trying to pay a mortgage
6 - If taxes apply for bankers they should apply to everyone
Posted by: Anonymous | December 11 11:13am | Report this comment | Options
- Well though the logic of applying a windfall tax has its merits, why should the entire banking community be penalized for the transgression of few. Those few are primarily the investment bankers who came out with so called "credit derivatives" that created havoc with the financial world. Taxing them and only them would make sense but then the few of them are probably 2 big to be annoyed.
Posted by: SK | December 11 11:23am | Report this comment | Options
- The Windfall tax in the US will have to be approved by congress.
Who benefits from the windfall tax? the "taxpayer" , but this term is way too large it doesn t really defines the constituencies of the congressmen, these constituencies are by large the ones suffering the least from the current economic environment as most of the US voters -35% or so of the total electorate- are high earners. upsetting as bonuses are, these populist measures are a no go in US politics.
The last time it was tried -Big Oil profits- it didn t go much further than a couple of congressional hearings. US congress is skewed towards the rich, the ones who most regularly vote in the US.
Posted by: pascual dejuan | December 11 11:51am | Report this comment | Options
- Clearly a windfall tax such as discussed would not sail easily through Congress. And I suspect the Administration will more urgently focus on more, urgent issues - health care reform, Aghanistan, an more.
So even if popular with a large share of Americans I doubt if we shall see anything like a UK-like initiative, unless something happens to further support the factual/logical case made by Krishna Guha.
Posted by: GB | December 11 12:38pm | Report this comment | Options
- While the windfall tax is an unfortunate way of doing it, something needs to be done. The problem is that the utility of banking, which TARP and fed policy was meant to save, is inextricably linked with the "casino" of banking. The bank recapitalization as engineered by the fed pumping cash at 0% was meant to bolster the utility of banking. Borrow at 0% from the fed and lend it at something higher, maybe even buy US treasuries and improve the capital situation of the institution.
But free money became the bankroll for the casino and generated large profits. Very little of that profit had anything to do with the skill of the traders involved. If the banks were to honestly separate the "alpha" of value-added by an individual trader from the "beta" of the banking activity itself making money and paid bonuses based on alpha and not beta then there would be precious little to pay since there was no alpha generated this year. But that is not what is being done and the public is understandably incensed.
Posted by: SNY | December 11 1:36pm | Report this comment | Options
- Evidence of surprisingly short term memory or the super infuence of bankers ... in US politics?!
Instead of using the crisis to make important structural changes (including compensation), things are conveniently reverting back to pre-crisis days!
Posted by: Neo | December 11 2:58pm | Report this comment | Options
- Very good idea....I don't know if this will change the way the public feels about Banks. What happened was the biggest crime foisted upon the American people ever. I think that the trust has been lost. Most of middle America see the big corporations and bankers working together to suck them dry.
Then, they move their headquarters out of the US....like Haliburton to Dubai.
The young adults are in the midst of this and hopefully they won't forget. They need to be the next guardians.
Tax the Banks, their bonuses, their houses. Tax them back to the stone age.
Posted by: Charles Seifried | December 11 3:17pm | Report this comment | Options
- 19. Great, thought-provoking comments. Keep them coming! Meanwhile, a few thoughts in response...
@Constantine @ Anshuman the argument is that even a reasonable ROI on Tarp capital injections represents only a few cents on the dollar in terms of the true value of the wider insurance the authorities provided for the system as a whole at the taxpayers risk.
@JDA @Pascual I hope you are wrong about the admin and Congress working for the rich. I'm not sure this is true, but it is the belief advocates of a windfall tax say the tax would correct.
@Econoclast I like you wish bankers had themselves acted to forestall public rage by showing real restraint on bonuses this year. But there are serious collective action problems.
@10024 @Anonymous @SK @SNY Windfall profits are concentrated in trading (though eg those involved in capital raising also benefited from interventions that reopened markets). The big bonuses are also concentrated in trading, so you could exempt eg the first $200,000 from a bonus surcharge and shield the less rich from some of the pain.
But bankers are not sole traders: everyone exploits the brand and balance sheet of the firm and benefited from interventions that insured it against failure. So if there is a windfall tax it strikes me that non-traders should not be exempt from it.
As to the value created by trading - I think there is some, but it is not as large as the bonuses associated with it suggest, and there is @SNY a lot of beta masquerading as alpha.
@Anshuman there is a good case for extending the scope of any windfall tax beyond banks to financial institutions more broadly.
@M @Richard subsidised farmers should lose their subsidies or be subject to ongoing higher taxation. The case for a windfall tax is that bankers benefited from a one-time subsidy and so should be hit with a one-time tax - not an ongoing surcharge.
@Anonymous Why only bankers (or @Anshuman financiers more broadly)? Because the windfall gains from specific taxpayer-backed interventions accrued overwhelmingly to this group.
The strongest argument against a windfall tax in my view is the claim that Congress would not stop with a one-time levy but would keep coming back for more.
Still, it is not obvious to me that it is easier to resist a soak-the-rich strategy from a position that denies any recovery of windfall gains. Taxing the windfall but not punitively taxing future success might be a more defensible position.
Posted by: Krishna Guha | December 11 3:19pm | Report this comment | Options
- Some of my thoughts:
1. What stops banks to give out bonuses as simply as an increase in base pay? Most traders start off with a low base salary and are compensated through bonuses. They can simply increase the base to a significant amount and reduce the bonus amounts, thus avoiding a some of the taxes.
2. I am still unsure what the taxing of bonuses is meant for. The changes that the system needs and that should come out as a result of the crises should lead to stopping excessive risk taking. Taxing bonuses does not curb it in any way. I think far too much effort and discussion has gone into this topic when other more pressing matters should be dealt with.
If people on Main Street are angry and the taxes are meant to punish bankers for making money, then be it, but then it should be accepted that this would be a populist policy.
3. I will agree that without taxpayer funded money, the bonuses would likely not be possible. Would it be wrong to say, however, that the American taxpayers needed to provide TARP as much as the banks needed it? Banks were able to quickly use that money, generate profits and repay the taxpayers. This wouldn't have been possible without the traders and other bankers so why shouldn't they be reimbursed for it? This is where the discussion turns to excessive pays, but in what other business do a few groups of people create billions worth of profits?
Posted by: VK | December 11 4:06pm | Report this comment | Options
- The case for a windfall tax in the US is really quite simple and can be explained by a single bullet: It is politically popular for politicians to rail against successful people when the biggest number of constituents are made up of envious, undeserving, contemptible little people with skill sets of low value, who feel they're entitled to something even though they've done reward-worthy.
But because the people who matter are those who receive rewards, as they should, for their higher-level skill sets, I suspect there will be a lot of talk and little real action. The US is still a bastion of free markets where athletes make $10 million / year, and all the inconsequential people can be placated by tough talk and no action because time passes and the second-handers think something must have happened for all the talk, even though life for those with high-level skill sets (i.e. "bankers") carries on as usual. Sound and fury.
Posted by: H Roark | December 11 4:44pm | Report this comment | Options
- You make a compelling argument, however, you do not address the potential consequences of such a tax.
Ultimately, this could lead to regulatory arbitrage, in turn decreasing New York´s competitiveness in international financial markets.
Although this will not occur instantaneously a windfall tax will have long-term and unforeseen implications. Instead of following in the footsteps of London and Paris, Washington needs to author legislation that balances investment bankers´ appetite for risk and financial prudence.
Easier said than done, but, in my view, a better option than slapping on a windfall tax on bonuses.
Posted by: Árni Tómasson | December 11 6:28pm | Report this comment | Options
- There is a need to change the incentive system. I'm not sure a windfall tax is the answer. Even if a windfall tax is enacted, bankers will figure out a fancier way to compensate themselves. This is somewhat similar to the debate in the US regarding whether doctors should be paid a salary or a fee for service. Once you have fed these bankers on a diet, it is difficult to wean them away from it.
Posted by: ganesan.srinivasan | December 11 7:36pm | Report this comment | Options
- Let's suspend conventional disbelief for a minute and connect the proverbial dots.
The banks in question here are public companies, no? As public companies they are, by definition, owned by a combination of their shareholders and bondholders.
Topping the list of shareholders for Goldman Sachs are names like Alliance Bernstein, BlackRock, and Fidelity - asset managers, some owned by banks, some independent but equally as embattled in this whole debate as the banks.
But who do they serve? Who's money is the reported $3.8B worth of Goldman Sachs stock that Alliance Bernstein "owns" because a quick look at their balance sheet would suggest that, unless they're very good at hiding assets, it's most certainly not their own.
These companies are retained to manage money for the numerous large pools of money floating our the global economy, no? Pools owned by defined contribution and defined benefit plans held by the employees or by companies on behalf of their employees or governments like the behemoth CalPERS, or by charitable organizations and educational endowments who derive their livelihoods from returns generated in financial markets, or by plain old main street investors, you and I, who investor through some intermediary who custodies our assets for us. On this thinking, who is a windfall tax similar to the UK or French iteration really penalizing?
Ultimately, the management and employees of a company are stewards of a business, those chosen by a board which is elected by shareholders as those best to maximize value created by leveraging a firm's competitive strengths. By levying a tax to be paid by these businesses, which is in effect a siphon of money from company/shareholder pockets to government coffers in the pursuit of the ephemeral, subjective greater goods of job creation (ephemeral) or debt reduction (the assumption of debt being subject to government determination), you're not penalizing the employees of an institution or its management nearly to the extent that you penalize shareholders in so much as you would penalize someone renting a car by totaling it. The same could be said for having employees bear the brunt of the tax who for a short while will be compensated less, but in the longer run are free to seek other opportunities, depriving the shareholders of the company of their value-adding abilities. On that front, for those who claim the value add in financial services is net 0 or that banking is a utility, let's see you underwrite an equity or debt offering successfully or simply model a stock and defend it. Recent demonization of instruments such as credit default swaps aside, these and other innovations do add value and I'm implore you to use a broader scope than the past 18 months when passing judgment.
The point I'm trying to illustrate is that, much to many a persons chagrin, this distinction that's developed between Wall Street and Main Street is by and large, non-existent. Wall Street is Main Street and Main Street is Wall Street, ad infinitum. Both are each others biggest client and as such, any move to punitively tax one will undoubtedly benefit neither.
Posted by: smith | December 11 7:46pm | Report this comment | Options
- 1) Basing taxation decisions purely on public sentiment makes a terrible public policy precident
2) There is no such thing as a "purely one-time" windfall tax. Markets would never believe that this event will never re-occur or will not be transposed on another industry
3) If you think public is angry about the bonuses, just wait and see what the public will say if the unemployment rate this summer is above 8.5%. A windfall tax based solely on public sentiment will create uncertainty which would likely prolong high unemployment numbers
4) A retroactive windfall tax is basically a form of thievery disguised with populist rhetoric. Such tricks might work in Europe but Americans usually have a healthy dose of skepticism about populist political crusades
5) Americans are not angry about lavish bonuses but are VERY ANGRY at an environment in which taxpayers are held hostage to banks involved in extensive risk taking. Taxing bonuses will not solve this problem. It is a very misguided form of populism which totally misses that point and public will totally see through it
6) Bonuses had very little to do with the nature of the crisis. The biggest financial offenders other than AIG, were relatively low-paying firms FNMA and FreddyMac. These firms are still insolvent and are biggest "black holes" for the taxpayer dollars. Both of these Government-Sponsored Enterprises were presumed to be tightly regulated and supervised by their sponsors in Washington, hence excessive populism and righteousness by the Feds will only renew discussions about the Government's massive failures in regulating GSEs
Posted by: Yevgeny Frenkel | December 11 9:24pm | Report this comment | Options
- A good argument making the rounds on the blogs is less macro and more micro.
WHY PAY ANYONE AT GOLDMAN?
Goldman has lost its top perch in M&A (which would be the fault of John Weinberg and Michael Evans), it has collapsed in Leveraged Finance (which happened under Ed Forst), it lost $3 billion in leveraged loans (which was the group Ed Forst built), its Alpha Fund and Asset Management in general has returned the worst percentages of any major bank (where everyone is to blame), its lost its top spot in equities (which is Kevin Kennedy's fault, and who ofcourse approved all the deals during the Internet mania that cost Goldman $100 million in penalties) and then there is Lloyd Blankfein and the majority of the committee (which personify how the trading side of the business took over the firm and drove it to the precipice of bankruptcy last year).
Of course Ed Forst has worked at the firm only one month this year having abruptly departed last year for Harvard, and having done nothing to save it during the financial crisis, has abruptly left Harvard to rejoin Goldman.
Posted by: Sandy London | December 11 10:57pm | Report this comment | Options
- 30. It's interesting that you raise this issue ahead of the meeting of President Obama and the large bank heads next week. Any chance that this is a trial balloon?
I think retrospectively taxing bonuses might placate some Americans... but the $30 billion number proposed is insignificant compared to what the taxpayers have transferred to the banking industry in direct cash subsidies and implicit guarantees.
I think the more useful tax which will be adopted is the Tobin tax on financial transactions. The EU just "urged" the IMF to "pursue" this tax. There is near global unanimity for such a tax.
It's most valuable contribution will be to lower the volume of interest rate and credit derivatives. This will improve global financial stability.
The global money center banks trading books are laden with an excess of these products. This excess of cross insuring each others risks (and end users) was profitable but makes the system too interconnected (AIG anyone?).
The only thing standing in the way of the implementation of the Tobin tax in the US is Treasury Secretary Geithner. After watching his performance in the US Senate with the Congressional Oversight Panel yesterday I don't think he will remain in the Administration for long. (start at 100 minutes) http://cop.senate....21009-geithner.cfm
Americans sorely need confidence in their financial system restored. The best way to do this is forward looking and is the Tobin tax.
Posted by: Cate Long | December 11 11:42pm | Report this comment | Options
- 31. I thought the purpose of bankers and wall street was to make effiecent use of money, where they brought people who had money to lend to people who had a use for it. Now what wall street has become is a place where people wanna get rich fast buy speculating, taking excessive risk, etc. When they screw up the tax payers have to come in bail them out while they keep all the earning upto this year. It may be a zero sum game but the mutual fund and pension funds are the losers.
We should tax not only bonuses of this year but bonuses of the past 10 years.
Posted by: AHMED AMINI | December 12 1:29am | Report this comment | Options
- 32. @Frenkel: "Taxing bonuses will not solve this problem. It is a very misguided form of populism which totally misses that point and public will totally see through it"
Obscene bonuses are just tip of the iceberg of casino capitalism with its redistribution of wealth to banking elite. And it is casino capitalism that people are protesting. I think it is very dangerous to underestimate the level of resentment GS and other banksters generated. This lead to the situation when elite cannot govern as usual and the rise of anti-semitism might be one of the side effects.
In no way we should underestimate the possibility of dramatic societal shifts. You need to remember Germany 1935 election.
Posted by: bezroun | December 12 1:59am | Report this comment | Options
- @Cate Long It's most valuable contribution will be to lower the volume of interest rate and credit derivatives. This will improve global financial stability.
I am not sure what your experience with markets is but if you have been watching what has transpired over the past 2 years, it would be clear to you that absence of liquidity in the markets increases volatility and increases risks. A Tobin tax will DECREASE liquidity in financial markets and will INCREASE volatility. While you are right that Geitner is not very popular with his own constituancy, he is not the main impediment to a Tobin tax. The problem for Mr. Obama is that US is among the World largest borrowers and our government borrows money by issuing bonds (traded securities). Presence of a Tobin tax will decrease trading volumes due to higher cost of inventory management and hence will increase yields. US government will loose more on debt service than any possible tax procedes it might hope for.
Additional points to note that IMF (thankfully) has no juristiction over any country unless this country needs an emergency loan. We might be on our way to an IMF bailout but not yet....
Also, when you mention a unanimous agreement on the Tobin tax, do you include Singapore, Dubai, Moscow, Zurich, Honk Kong in your assertions? We in the US already import most of our consumer goods from China, we dont want to end up in a situation where we will be importing our financial services as well.
Posted by: Yevgeny Frenkel | December 12 2:53am | Report this comment | Options
- It is virtually astonishing that the leadership that was part of the problem now wants to be part of the s solution. The first step toward credible solutions is credible leadership. Leadership untainted and with a clean slate.
I believe that a compelling case was made by Institutional risk analytics
Three Strikes on Ben Bernanke: AIG, Goldman Sachs & BAC/TARP
December 7, 2009
Coming together with the friends of Mark Pittman ended a grim week.
Many of us in the financial community were wading hip-deep through
barnyard debris as we watched Federal Reserve Chairman Bernanke dodge
and weave in front of the television cameras during his Senate
confirmation hearing. We have to believe that Mark would have been
pleased as Senators on both sides of the aisle asked questions that
came directly from some of his reporting -- and a few of our own
To us, the confirmation hearings last week before the Senate Banking
Committee only reaffirm in our minds that Benjamin Shalom Bernanke
does not deserve a second term as Chairman of the Board of Governors
of the Federal Reserve System. Including our comments on Bank of
America (BAC) featured by Alan Abelson this week in Barron's, we have
three reasons for this view:
First is the law. The bailout of American International Group (AIG)
was clearly a violation of the Federal Reserve Act, both in terms of
the "loans" made to the insolvent insurer and the hideous process
whereby the loans were approved, after the fact, by Chairman Bernanke
and the Fed Board. The loans were not adequately collateralized. This
is publicly evidenced by the fact that the Fed of New York (FRBNY)
exchanged debt claims on AIG itself for equity stakes in two insolvent
insurance underwriting units. What more need be said?
As we've noted in The IRA previously, we think the AIG insurance
operations are more problematic than the infamous financial products
unit where the credit default swaps pyramid scheme resided. And we
doubt that any diligence was performed by Geither and/or the FRBNY
staff on AIG prior to the decision taken by Tim Geithner to make the
loan. We'll be talking further about AIG in a future comment.
Last week the Senate Banking Committee spent a lot of time talking
with Chairman Bernanke about why payouts were made to AIG
counterparties like Goldman Sachs (GS) and Deutsche Bank (DB), but the
real issue is why Tim Geithner and the GS-controlled board of
directors of the FRBNY were permitted to make the supposed "loans" to
AIG in the first place. The primary legal duty of the Fed Board is to
supervise the activities of the Reserve Banks. In this case, Chairman
Bernanke and the rest of the Board seemingly got rolled by Tim
Geithner and GS, to the detriment of the Fed's reputation, the
financial interests of all taxpayers and due process of law.
Martin Mayer reminded us last week that the Fed is meant to be
"independent" from the White House, not the Congress from which its
legal authority comes by way of the Constitution. Nor does Fed
independence mean that the officers of the Federal Reserve Banks or
the Board are allowed to make laws. None of the officials of the Fed
are officers of the United States. No Fed official has any power to
make commitments on behalf of the Treasury, unless and except when
directed by the Secretary. Given the losses to the Treasury due to the
Fed's own losses, this is an important point that members of the
Senate need to investigate further.
The FRBNY not only used but abused the Fed's power's under Section
13(3) of the Federal Reserve Act. In AIG, the FRBNY under Tim Geithner
invoked the "unusual and exigent" clause again and again, but there is
a serious legal question whether the then-FRBNY President and the
FRBNY's board had the right to commit trillions without any due
diligence process or deliberate, prior approval of the Fed Board in
Washington, as required by law. The financial commitments to GS and
other dealers regarding AIG were made always on a weekend with
Geithner "negotiating" alone in New York, while Chairman Bernanke,
Vice Chairman Donald Kohn and the rest of the BOG were sitting in DC
without any real financial understanding of the substance of the
transactions or the relationships between the people involved in the
Was Tim Geithner technically qualified or legally empowered to "make
deals' without the prior consent of the Fed Board? We don't think so.
Shouldn't there have been financial fairness opinions re: the
We understand that the first order of business in any Fed audit sought
by members of the Senate opposed to Chairman Bernanke's re-appointment
is to review the internal Fed legal memoranda and FRBNY board minutes
supporting the AIG bailout. These documents, if they exist at all,
should be provided to the Senate before a vote on the Bernanke
nomination. Indeed, if the panel established to review the AIG bailout
and related events investigates the issue of how and when certain
commitments were made by the FRBNY, we wouldn't be surprised if they
find that Geithner acted illegally and that Bernanke and the Fed Board
were negligent in not stopping this looting of the national patrimony
by Geithjner, acting as de facto agent for the largest dealer banks in
New York and London.
The second strike against Chairman Bernanke is leadership. In an
exchange with SBC Chairman Christopher Dodd (D-CT), Bernanke said that
he could not force the counterparties of AIG to take a haircuts on
their CDS positions because he had "no leverage." Again, this goes
back to the issue of why the loan to AIG was made at all.
Having made the first error,Bernanke and other Fed officials seek to
use it as justification for further acts of idiocy. Chairman Dodd look
incredulous and replied "you are the Chairman of the Federal Reserve,"
to which Bernanke replied that he did not want to abuse his
"supervisory powers." Dodd replied "apparently not" in seeming
We have been privileged to know Fed chairmen going back to Arthur
Burns. Regardless of their politics or views on economic policies, Fed
Chairmen like Burns, Paul Volcker and even Alan Greenspan all knew
that the Fed's power is as much about moral suasion as explicit legal
authority. After all, the Chairman of the Fed is essentially the
Treasury's investment banker. In the financial markets, there are
times when Fed Chairmen have to exercise leadership and, yes,
occasionally raise their voices and intimidate bank executives in the
name of the greater public good. AIG was such as test and Chairman
Bernanke failed, in our view.
Posted by: Michael Pomerleano | December 12 3:14am | Report this comment | Options
- @ Yevgeny Frenkel >> >> "A Tobin tax will DECREASE liquidity in financial markets and will INCREASE volatility. "
Interesting supposition... any feedback on this oldish study appreciated...
"Tobin tax and market depth", G. Ehrensteina, F. Westerhoﬀb and D. Stauﬀera, Institute for Theoretical Physics, Cologne University and the Department of Economics, University of Osnabruck, November, 2003
Since the mid 1980s, the daily turnover in ﬁnancial markets has increased sharply. Moreover, the trading volume increasingly reﬂects very short-term and speculative transactions.
In foreign exchange markets, for example, operations of intraday traders account for 75 percent of the market volume (Bank for International Settlements 2002).
In comparison, only 15 percent of the trading volume is on account of non-ﬁnancial customers, with international trade transactions representing merely 1 percent of the total. The fast and hectic trading leads to complex ﬁnancial market dynamics.
According to Cont (2001) and Lux and Ausloos (2002), the behavior of ﬁnancial prices may be characterized by ﬁve universal features:
1. the evolution of the prices shows little pair correlations between successive daily changes,
2. severe bubbles and crashes occasionally emerge,
3. the prices ﬂuctuate strongly,
4, the distribution of log price changes possesses fat tails, and
5. periods of low volatility alternate with periods of high volatility.
Any other academic work you can point to on the topic greatly appreciated.
I found the comments of Hal Scott, Harvard Law School professor about the legal framework for derivatives contracts particularly interesting when he was queried about swaps trading exiting the US... He implies that the Euro legal and regulatory framework doesn't have the same certainty as the US which creates a disincentive to transfer trading and settlement to the EU. http://www.clipsyn...ideo/playlist/1778
Do you think the big banks would move their trading desks to Dubai, Moscow or Zurich?
Singapore and Honk Kong already have reasonable trading activity but could you centralize trading away from NY or London? Which bank would make the first move? ...
I wonder what they Chinese think of a Tobin tax?
As to the decreased liquidity in the last two years is there any correlation to the constrained balance sheets of the major dealers? (ABCP conduits, SIVs, ARS, swaps collateral) Did this lead to reduced capital to commit to market making?
Posted by: Cate Long | December 12 3:50am | Report this comment | Options
- @Cate Long : mine is a humble observation of a practitioner
i dont know which banks will move but i can give you a list of customers who have moved to zurich and most of these customers are larger volume generators than many global banks. And banks tend to follow customers. Also, can you tell me which bank doesn't have a fully functioning trading desk in Honk Kong? Gillian Tett has a very insightfull article on this issue in today's paper.
But in any case, you totally miss my point. The US Government is the biggest customer of banks because they use banks to underwrite and distribute their debt. Taxes have a tendency to be passed onto customers and the US government will not be an exception. Geitner opposes a Tobin tax not because his ideology has anything to do with it but because he realizes what it would cost in terms of servicing the debt. 50 basis point of a yield differential is not a lot for a physicist or a law professor, but as far as the US Treasury is concerned it is an addition of $60bn/year given the size of our outstanding debt.
Posted by: Yevgeny Frenkel | December 12 5:33am | Report this comment | Options
- @Cate Long: Singapore and Honk Kong already have reasonable trading activity but could you centralize trading away from NY or London? Which bank would make the first move? ...
As per letter on page 10 of today's FT from Mr. Lybeck the 1st major UK bank to move its chairman to Honk Kong is HSBC..... You see.... FT is a very informative paper :)
Posted by: Yevgeny Frenkel | December 12 6:41am | Report this comment | Options
- @Frenkel: Sorry to disappoint you but if Wikipedia is right "Hong Kong served as the bank¹s headquarters until 1992 when it was forced to move to London as a condition of completing the acquisition of Midland Bank. "
Posted by: bezroun | December 12 6:52am | Report this comment | Options
- Unfortunately, it's only when the horses have run away that people are scrambling to lock the stables.
And unfortunately also, it's easier to sacrifice scapegoats, that to recognize at the real causes.
The bonuses were indecent indeed and they still are. But bonuses are only the symptoms of the illness, the real disease are the US monetary and fiscal policy run by the helicopter Fed and its reckless governments.
As these policies continue no wonder why we continue to see the symptoms. Why should morphine cure a cancer?
Posted by: ERIC BERLOTY | December 12 8:03am | Report this comment | Options
- The best way to structure it would be to reclassify all compensation greater than $100k per person and all contractor payments greater than $500/day equivalent as non-deductible corporate expenses. In effect this removes a 35% corporate tax deduction. This should apply to compensation paid in the US as well as overseas. The US has already done this in the past on compensation over $1 mio.
However, rather than a tax, I would rather see regulators sharply limit the size of the compensation pools as % of revenues.....particularly revenues coming from central-bank subsidised carry trades. Those carry trade revenues, which are a huge percentage of bank profits this year, should only be used to
1) build loan loss reserves (which at most banks are rising at slower pace than loan losses),
2) build capital/retained earnings and 3) pay dividends to shareholders.
Really the only reason for attacking compensation is to ensure that the carry trade revenues intended to rebuild capital and allow for aggressive loan losses are actually used for that purpose rather than to enrich employees. Regulators have the power to demand higher capital and loan loss builds, and once regulators are satisfied, shareholders have the power to demand dividends before record bonus pools are paid. Regulators and shareholders have been too passive.
The bonus tax is just a populist election ploy by politicians. It will make the banking system worse off. Regulatory action, as I've suggested, would divert funds from employee comp to capital, reserves and shareholders. This political action instead will divert funds from capital, reserves and shareholders (as employee comp will only fall slightly) in order to help politicians get re-elected.
Posted by: Legal Tender | December 12 8:57am | Report this comment | Options
- The issue of a windfall banker's bonus tax should be seen in the wider context of social and economic policy.
I strongly suspect that a significant portion of the last 20 years of economic growth in the developed world, particularly the US and the UK, was built on a house of cards (credit cards, mortgage loans), that was not sustainable in the long-term because it was mostly consumer consumption driven as opposed to investment related.
Even worse, much of the fruits of this "synthetic" growth was captured by a very small sliver of the population, i.e. financial intermediation workers and corporate managers. Most of these wealth transfers happened thanks to systemic institutional and social corruption underpinned by free-market ideologies that helped much in doing away with any notions of social fairness and general morality, notions that are essential to the long-term success of societies.
It is about time that we bring back these notions to the core of the set of principles upon which modern societies are built upon and find a new balance between selfish individual greed and social responsibility.
Taxing the windfall gains accrued to the top 1% of the population over the last 20 years would be a good start.
Posted by: atb | December 12 11:09am | Report this comment | Options
- @MICHAEL POMELEARNO Interesting posting. To the questions of competency and possible abuse of power by the Fed we should also question whether Bernanke's views on monetary policy fit in with the shifting views of economists and (yes) the public. While I am not arguing that the Fed should be held hostage to public opinion and Congress, as IRA very informatively reminds us, the Fed is Congress creation and hence ultimately should be accountable to it. I think the point raised in that note is extremely important and goes much deeper than issues of monetary policy or Fed independence: it raises the question about whether the Fed's extraordinary powers are consistent with the US Constitution. I would strongly support a full and open discussion within society of this issue.
@CATE LONG. Good postings. Think the windfall tax on bankers bonuses should be seen in the larger context of social fairness and morality. Yet again, the UK is showing the proper way in how to tackle this issues. A good paper is
Unfortunately the US, even under an Obama administration, keeps acting in a reactionary and completely unenlightened manner. To the questions of Bernanke's decisions made through the crisis, we should also add Geithner's and bring his actions taken then under full Congressional investigation.
Posted by: atb | December 12 11:50am | Report this comment | Options
- Besides the fact that I doubt that the US could pass such legislation, there is little more to a windfall tax than a short-sighted public act of revenge against "bankers". Everybody else has played the game - it takes two to overborrow / overlend, after all. Also, those situated between the lenders and the borrowers (retailers, manufacturers) have easily turned a blind eye to the solvency of their customers - re. the rescue action needed for GM.
Let everybody keep their exaggerated bonuses this year, as it will only strenghten the case for what is really needed. All forms of income have to be taxed within the same framework so as to avoid what will otherwise be a tax experts' paradise, trying to find ever more sophisticated loopholes. A (banking) sector-specific tax is also not desirable, given the extra sway such a sector would enjoy through its contribution to the public purse. Higher levels of taxation in top income categories would be desirable to curb excessive levels of executive pay - but only if the resulting tax revenues are not immeditately handed back to them through public expenditure. So Barak Obama still has a health care project he needs to fund...
Posted by: Rolf Dockhorn | December 12 12:54pm | Report this comment | Options
October 14, 2009
Its time for the quarterly hand-wringing amongst the populace regarding the over-sized bonuses at Goldman Sachs. This Q, its a mere $23B.
The focus on the bonuses of top performing traders and investment bankers is misplaced. There are many, many things to be upset about regarding the financial sector - but bonuses are not one of them. [BR: Or, at least not the most important thing to be enraged over]
We live in a capitalist system, where there are going to be winners and losers. Its not fair, but it is how it is. You can complain about it, but it is all but pointless. Feel free to pursue a millionaire's tax of 1% (or 10%) on everyone who earns more than $1m - a super top tier - to pay for health care reform or whatever you want. (Best of luck with that!)
Every few years, we lament overpaid athletes, musicians, movie stars. Bruce Springsteen is going to make $100 million+ this year on tour. While you can complain about it, ask yourself how many people can fill 50,000 seat arenas 200 night a year at $100 a pop. Lebron James, Peyton Manning, and others justify their salaries by generating massive revenue and profits for their employers.
So too it is with Goldman Sachs and others.
The traders who throw off the most profits, the bankers that generate the most lucrative deals are worth tens of millions to their "team owners." That is how it is, and it is unlikely to ever change.
What should you be upset about?
• Paying people in year one for risks that last years or decades;
• The "privatized gains, socialized losses" of the current system;
• Dramatically reduced competition in the Banking sector;
• The idea that "Too Big To Fail" is now an official policy of the United States;
• The "gifting" of $100s of billions of dollars to mismanaged banks that should have been allowed to fail in a controlled fashion;
• Bank lobbyists preventing any sort of credible regulation from passing;
• Goldman Sachs wresting $19 billion from AIG;
• The absurd and poorly thought out $750 billion TARP plan;
• The suspension of mark-to-market allowing banks to hide losses and not accurately disclose their bad assets;
• The outsized influence Banks have on Congress and Goldman Sachs has within the Executive branch.
There are plenty of things to be upset about these days. Top performers earning huge paydays at the biggest firms is not one of them . . .
Looking at Wall Street Pay (August 1st, 2009)
Why Financial Reform Died: "Banks Run Congress" (October 12th, 2009)
What's Wrong With Billionaire Fund Managers? (April 16th, 2008)
Single Best Investment in History = 258,449% (October 12th, 2009)
Derivatives Lobby Corrupts Congress (October 12th, 2009)
Total Campaign Contributions/Lobbying by TARP Recipients (October 12th, 2009)
Top Hedge Fund Earners (March 25th, 2009)
I am so tired of the absolute nonsensical and foolish approach in regards to Banker Bonuses taken by both the Obama administration as well as the bankers themselves. Here's what is really going on and what should should be going on if we lived in a world that was dependent on telling the truth, prudent financial management, reduction of systemic risk, and if a cure to our banking system malady is genuinely being sought.
If one accepts the postulation that the primary core of our banking system problem is the fact that many our our banks, including the group of 19 tagged as "Too Big to Fail", have severe capital shortfalls, then one is forced to accept the fact that the solution to the problem requires a rebuilding of capital on the balance sheet. Gee, that's fairly complex, isn't it?
Here's the deal in a nutshell:
1. Banks have significant capital shortfalls that are being masked by FASB FAS 157 modifications that allow marking of assets to bank "models" versus a mark to market. Got a pile of CDOs or RMBS paper worth 30 cents on the dollar? No problem, mark it at 90 cents and watch the profits roll in. The egregious matter here is that both banks and U.S. Regulators continue to tout the high capital ratios of the group of 19 yet conveniently fail to mention that FASB 157 is the primary reason for this illusion. Do you guys think that these assets are going to magically run back up to par in the future? Do you guys think that a lot of this garbage is going to cash flow?
2. While on the subject of capital shortfalls, FASB FAS 166/167 provisions became effective November 2009 (after being postponed from November 2008, interestingly) for Q1 2010. ZH readers are aware that this requires that banks bring off balance sheet assets back on to the balance sheet and it is unlikely that this tsunami of garbage paper is worth anywhere near 100 cents on the dollar. With bank profits quite handsome for Q4, and capital accounts woefully inadequate, it would be prudent to allocate this profit to capital accounts to reserve for losses on this incoming pile of fecal matter, but, no, let's just kick the can down the road further. The FDIC has decided to give a pass to the banks for one and one half years to begin the process of allocating capital in regards these assets. Read it yourself: http://www.fdic.gov/news/news/press/2009/pr09230.html
3. With multiple billions of profit earned (engineered?) in Q4 2009, the bankers have decided to abandon prudent balance sheet management and put the vast majority of these profits in their pockets. This is the ultimate in piggishness as well as a dereliction of fiduciary responsibility to properly manage a balance sheet on the behalf of the bank's owners and bondholders. Then again, I'm not so sure that bank equity owners and bondholders are the smartest group in the world, as their investment rests on the good "graces" of the Obama administration regulatory ineptness and the Federal Reserve Bank, an organization with a track record that leaves much to be desired. Caveat Emptor.
4. U.S. Regulators have decided that they simply are not going to require the profits to be allocated to capital accounts for loan loss provisioning either. The citizenry of the USA have loaned and given (via Fed balance sheet purchases and who else knows what) the banks trillions of assistance because of these capital shortfalls and now that some money from profits is available for balance sheet reconstruction, our regulators have simply put their fingers in their ears and started yelling "La, La, La, La, I can't hear you". This is a total and epic failure of the banking regulatory authorities in the U.S.
5. The Obama administration, now that the bankers are going to pocket the money, has decided to tax some of this money to fund stimulus version X.0, "X" being a number somewhere between the current number of stimulus items and the eventual Minsky moment. The point of the matter is that Obama's wall street endeared team (it's not political kids, it's the same group that ran the show under Bush, Clinton and many other Presidents) has, once again, failed in its responsibility to ensure proper bank capital standards and, once again, has left the door open for systemic risk. Helluva job, guys and gals!
Here's the simple answer folks.
The bankers should have taken every nickel of profit and allocated it to capital accounts to provision for loan losses: past, present, and future. The regulators should force every nickel on to the balance sheet irrespective of the menagerie of FASB FAS 157. The government should not be taking this needed capital from the banking system. If we follow this path for a few years, maybe we'll have a chance to avoid a complete zombification of our banking system.
I cannot believe after what we have been through since the lessons of Bear Stearns and Lehman that we are simply not fixing a not so complex matter.
By Satyajit Das, derivatives expert and author of Traders, Guns, and Money.
Tom Wolfe writing in Bonfire of the Vanities created the term – 'Masters of the Universe': "He considered himself part of the new era and the new breed, a Wall Street egalitarian, a Master of the Universe, who was only a respecter of performance." Wall Street bond trader Sherman McCoy, the original Master of the Universe, came to personify the avariciousness and self-aggrandisement of financiers.
Human history is a sequence of "ations" – civilisation, industrialisation, urbanisation, globalisation interspersed with actual or threatened "annihilation". The most recent "ation" is "financialisation" – the conversion of everything into monetary form (also known as another "ation" – "monetisation").
New paper economies emerged directly from the demise of the gold standard that removed restrictions on the ability to create money, especially debt. Finance inexorably displaced industry with trading and speculation becoming major activities as financial engineering replaced real engineering. In an earlier age, Heinrich Heine, the German poet, too had identified the change: "Money is the God of our time…." The rise of financiers is intimately linked to this financialisation of the global economy.
Financial innovations such as securitisation (the packaging up and sale of loans) and derivatives (effectively risk insurance) enabled banks to extend more credit. Banks could literally by increasing throughput, making more loans and selling them off to eager investors, magically increase returns to their investors. Bankers had invented a 'money machine'.
Bank also began to trade more actively with their shareholders money, following the advice of Fear of Flying author Erica Jong: "If you don't risk anything then you risk even more".
All of this, of course, meant increased earnings for the bank and its star performers. As people who work in financial institutions know, it is primarily an enterprise that is run for the employees with an afterthought for shareholders.
Sherman McCoy could with a single phone call make $50,000 and, even better, a share of that was his and his alone. At the height of the boom, top hedge fund and private managers could make more in 10 minutes than the average worker earned in an entire year. In 2007, James Simons of Renaissance Technologies earned $1.5 billion and David Rubinstein of The Carlyle Group earned $260 million in the ethereal "economic stratosphere." In Australia, Macquarie Bank employees rejoiced in the sobriquet – the 'Millionaires factory".
The ability to earn high rewards only becomes a problem where the promise of a share of profits encourages excessive risk taking and a focus on short-term earnings. It also becomes a problem where the basic measure of performance is ambiguous and can be systematically manipulated. Unfortunately, 'earnings' proved to be the result of wildly inaccurate models, accounting tricks and risks that had not been accurately captured.
Finance is also problematic when it comes to dominate the economy. In the U.S.A., financial services' share of total corporate profits increased from 10% in the early 1980s to 40% in 2007. The combined stock market value of these firms grew from 6% to 23% over the same period.
It is now conventional wisdom to accept the central role of financial services. Gordon Brown, the Chancellor of the Exchequer under Tony Blair and then Prime Minister, harboured secret dreams of a Scandinavian-style social welfare state with low taxes funded by the growth of the City. In 2007, he told bankers: "What you have achieved for the financial services we … now aspire to achieve for the whole of the British economy." Alistair Darling, Gordon Brown successor as Chancellor, was no less loquacious describing financial services as "absolutely critical" to the economy.
The golden age seemed to come to an end with the GFC. Initially, the world viewed the destruction of storied financial institutions in Global Financial Crisis as an entertaining blood sport.
Some bankers lost their jobs by the thousands. Others lived with the psychological fear of firing by text message.
In New York, bankers confessed it was hard to live on less than $500,000 – after all, the children's private school fees, the maid, the Pilates lessons etc all cost money. They economised by buying cheaper cuts of meat. In London, families deferred moves to more expensive suburbs. The latest Gordon Ramsay restaurant was no longer a must have.
The effects of belt-tightening were seen in a fall in bookings at luxury hotels, holiday resorts and sales of super yachts – some of the plutocrats were down to their last billion. Once rich hedge fund managers were back in court trying to renegotiate the terms of their divorce pleading 'poverty'.
For some women, the aphrodisiac quality of a young unattached male purring "I'm an investment banker" in a certain type of bar lost its allure. Some professions – personal trainers, dog walkers, personal dressers, children's party organisers – were in danger of extinction.
There was a sense of Schadenfreude as the Masters of the Universe received their comeuppance. Unfortunately, the "financial" crisis quickly spread to the "real" economy – jobs, consumption, and investment- becoming everybody's problem. "Too large to fail" financial institutions had to be bailed out by governments, that is the ordinary taxpayer. In a perverse piece of income redistribution, the less fortunate now were subsidising the masters of universe because it was in their best interest.
Commentators briefly dared hope that the power and influences of finance and financiers would be reduced. Finance would revert to being a facilitator rather than the central driver of the economy.
The Economist wrote: "Over the past 35 years it has seemed as if everyone in finance has wanted to be someone else. Hedge funds and private equity wanted to be as cool as a dot.com. Goldman Sachs wanted to be as smart as a hedge fund. The other investment banks wanted to be as profitable as Goldman Sachs. America's retail banks wanted to be as cutting-edge as investment banks. And European banks wanted to be as aggressive as American banks. They all ended up wishing they could be back precisely where they started."
Unfortunately, those hopes are misplaced. Low or zero interest rates, heavily managed markets, reduced competition and state underwriting of solvency has helped surviving banks prosper.
Bank risk levels have increased to and in some cases beyond pre-crisis levels. The higher levels of risk taking reflect increasing comfort in central bank support of financial institution's liquidity and their ability and willingness to intervene to limit price risks.
In 2008 in Canary Wharf, the financial district in London's docklands, I meet two affable recruiters from the English Teachers Union who explained that there was "a bit of financial crisis". Well-educated and highly motivated bankers who were losing their jobs by the thousands might like to consider a new career teaching. I questioned the adjustment in salaries that the change in careers would necessitate. One recruiter's responded: "If you haven't got a job then it's not relevant is it? It was never real money and it wasn't going to ever last was it?"
Over the last 30 years, talent has increasingly been lured from productive profession into finance and the speculative economy. The rewards available mean that the brain drain into these professions is unlikely to stop. The excesses of the financial economy are also unlikely to be easily tamed.
The Masters of the Universe that survived the carnage are back to their old tricks. The 'fight for talent' means that bonuses and remuneration guarantees for new employees are all back in vogue.
Government attempts to deal with the problems of the financial system, especially in the U.S.A., Great Britain and other countries, illustrate Mancur Olson's thesis – small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying. The resulting policies benefit the coalitions and its members but large costs borne by the rest of population.
The "finance government complex" (dubbed "Government Sachs" by its critics) and financiers have proved exquisite masters of the game of privatisation of profits and socialisation of losses. Many countries now practice Chinese socialism with Western characteristics.
A year after the collapse of Lehman, the near collapse of AIG and the grande mal seizure in financial markets, the Masters of the Universe are still firmly in charge. As Giuseppe di Lampedusa, author of The Leopard knew: "everything must change so that everything can stay the same."
• DownSouth says:
October 4, 2009 at 6:47 am
Masters of the Universe they may still be, but they should relish the moment, for their days are surely numbered.
When one assesses what the Masters of the Universe have wrought, one cannot help but be reminded of this passage from A Tale of Two Cities:
Far and wide, lay a ruined country, yielding nothing but desolation. Every green leaf, every blade of grass and blade of grain, was as shriveled and poor as the miserable people. Everything was bowed down, dejected, oppressed, and broken. Habitations, fences, domesticated animals, men, women, children, and the soil that bore them-all worn out.
Monseigneur (often a most worth individual gentleman) was a national blessing, gave a chivalrous tone to things, was a polite example of luxurious and shining life, and a great deal more to equal purpose; nevertheless, Monseigneur as a class had, somehow or other, brought things to this.
And, writing of the French Revolution, Dickens warned: "Crush humanity out of shape once more, under similar hammers, and it will twist itself into the same tortured forms."
It boggles the mind how these people who hold themselves out as being so intelligent, so brilliant and so ingenious can be so blind as to where all their cleverness leads. Perhaps it was Shaw who summed the lot of them up best:
Your friends are not religious: they are only pew-renters. They are not moral: they are only conventional. They are not virtuous: they are only cowardly. They are not even vicious: they are only 'frail.' They are not artistic: they are only lascivious. They are not prosperous: they are only rich; not courageous: only quarrelsome; not masterful, only domineering…
Even as they are being led off to the guillotine, they will surely still be in denial that it was their greed, their corruption and their complete and utter incompetence that brought them to this point. No one said it better than Dickens:
It was too much the way…to talk of this terrible Revolution as if it were the one only harvest ever known under the skies that had not be sown-as if nothing had ever been done, or omitted to be done, that had led to it-as if observers of the wretched millions in France, and of the misused and perverted resources that should have made them prosperous, had not seen it inevitable coming, years before, and had not in plain words recorded what they saw.
• craazyman says:
October 4, 2009 at 7:48 am
That word crawls miserably around discourse of this topic like a cockroach around a kitchen.
Talent is not a narrow, shallow and morally bankrupt intelligence that performs calculations and reads a computer screen while financially raping the world.
A "skill" maybe. Like the skill required to evaluate and trade slaves or to compose chemical formulas that make cigarettes more and more addictive or to lobby politicians so they'll approve public funds to bail out your industry's mistakes.
Skills that should be personally embarrasing to put on public display. Skills that should trigger profound personal moral crises. Let us call this stuff what it is. It will clarify the foundations of the dialogue.
• DownSouth says:
October 4, 2009 at 8:57 am
"The beginning of wisdom is calling things by their right names."–Confucius
By the way, your comment on this thread yesterday was absolutely superb:
•Shower time " Front to Back Books says:
October 4, 2009 at 8:43 am
[...] Das hits a line shot up the middle. here.As Giuseppe di Lampedusa, author of The Leopard knew: "everything must change so that everything [...]
10 December 2009
On 10 December 2009 the Treasury published a discussion document on possible international options to reduce the cost to taxpayers of financial sector failures. Risk, reward and responsibility: the financial sector and society is a contribution to the international debate on the future of the global financial sector.
The document highlights the importance of the financial sector to the UK economy alongside the risks it poses to society. Whilst some risk-taking is inherent in financial sector operations, the recent financial crisis has shown the high cost to taxpayers when risk-taking becomes excessive. The document considers ways in which the financial sector might contribute to the potential costs of any residual risks it poses to taxpayers and to broader social objectives.
Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers : Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism : The Iron Law of Oligarchy : Libertarian Philosophy
War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda : SE quotes : Language Design and Programming Quotes : Random IT-related quotes : Somerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose Bierce : Bernard Shaw : Mark Twain Quotes
Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 : Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law
Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds : Larry Wall : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOS : Programming Languages History : PL/1 : Simula 67 : C : History of GCC development : Scripting Languages : Perl history : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history
The Peter Principle : Parkinson Law : 1984 : The Mythical Man-Month : How to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite
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The Last but not Least Technology is dominated by two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt. Ph.D
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