Banker bonuses

[Dinner]

As I said they reopen and conduct business as usual.

[Arrian]

The government, whether headed by Bush or Obama, appears terrified of nationalizing anything. They'll try to avoid it as long as possible, and then back into it. Probably badly. I don't understand why the Dems are so reluctant. Perhaps Che is right...

As for the bonuses... it's pretty basic. You come to Uncle Sammy hat in hand, no bonus for you. That should be SOP.

-Arrian

[Cort Haus]

It will be the latter though. Gordon knows for a certainty that he doesn't stand a chance in the next elections and yet he still doesn't have the balls (not to mention the fact that he is partly the problem and this is likely to be exposed if he really goes after the (b)wankers).

Yep. Gordon is going to come out of this smelling of poo.

Buy Gold.

I read a piece in The Times advising this. How does one go about it?

[chequita guevara]

Well, you can either buy gold commodities, or you simply buy physical gold from a jeweler or coin broker.

[Ben Kenobi]

getting nationalized with this shareholders completely wiped out.

Why screw the othe 49 percent for the actions of the 51 and the majority, controlling shareholders?

I'd agree with your plan, only wipe out the shares of the folks who were running the businesses, and compensate the other shareholders.

[notyoueither]

.

[chequita guevara]

Why screw the othe 49 percent for the actions of the 51 and the majority, controlling shareholders?

Yeah, cuz that was how the decisions were made.

[chequita guevara]

[chequita guevara]

"Quite a spectacle" - Doug Henwood on the Latest Stimulus Package Vote

by Doug Henwood
from LBO News for Doug Henwood

Quite a spectacle in Congress on Wednesday, wasn’t it? Watching the assembled CEOs of our biggest banks testifying really put all our pathologies on display. On one side of the table, the bankers looked like dim and evasive hacks—it was easy to see how they drove their vehicles into the ditch. But on the other side of the table, many of the Congresspeople looked like preening and devious hacks. Where were they while the bankers were driving the vehicles into the ditch? And what really do they presume to do about all this? Nationalize the banks? Ha. More on that delightful topic in a bit.

On Wednesday night, The Nation’s estimable Washington editor, Christopher Hayes (who is “married to…an attorney in the office of the White House counsel”), was on Keith Olbermann’s show, trying to parse the testimony. Hayes and Olbermann came to the conclusion that the bankers live in a bubble, are tone deaf, and have no sense of PR. While that’s true, I think the story is simpler than that. They just don’t care what the public thinks. The entire ethic of Wall Street can be boiled down to this: make as much money as possible as quickly as possible, and hang the consequences. Step on whomever and whatever you have to, just stuff your pockets, and move on.

Olbermann played an excerpt from a conference call featuring James Gorman, co-president of Morgan Stanley, describing how the firm planned to handle its merger with Smith Barney, the brokerage unit that the deeply troubled Citigroup is unloading. Here’s Gorman (edited by me) describing some big cash payments they’ll be distributing to Morgan Stanley and Smith Barney’s top brokers:

Some decisions we have made. Number one, there will be a retention award. Please do not call it a bonus. It is not a bonus. It is an award. And it recognizes the importance of keeping our team in place as we go through this integration. Decision number two. The award will be based on ’08 full-year production. I think I can hear you clapping from here in New York. You should be clapping because frankly that is a very generous and thoughtful decision that we have made…. ‘09 is a very difficult year…we understand that. Clearly it would have been cheaper to do it off ’09, but we think it’s the right thing to do and we’ve made that decision.

The audio, by the way, was obtained by Sam Stein of the Huffington Post, who also got that wonderful clip of Home Depot founder Bernie Marcus railing against unions that I played the other week. Olbermann and Hayes attributed Gorman’s use of “retention award” to that same tone deafness. I think it’s cynicism. I think he was having fun, and it wouldn’t surprise me if his audience chuckled.

As I’ve been saying here, it looks like the Obama administration will do everything they can to avoid nationalizing the banks. In his interview with ABC News, Obama demonstrated that he understands quite well the differences between the Japanese and Swedish approaches. I wish I could play the audio, but ABC edited the interview heavily for broadcast, and most of this passage appears only in the transcript.

There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what’s called “The Lost Decade.” They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn’t see any growth whatsoever.

Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense. And we also have different traditions in this country.

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.

And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.

Now it’s admittedly refreshing to have a president who can talk like this after one who couldn’t. But how much of a departure from Bush’s political philosphy is this really? He admits that the Swedish approach worked better, but then explains that we just can’t do it that way here. It’s un-American, you see. And to make that argument, he mobilizes a lot of nonsense.

Yes, Sweden “had like five banks,” but our major, system-threatening problems come from not that many more institutions. The little guys can be taken care of the usual way, like forced mergers with aid from the FDIC or outright takeovers by the same. Which, by the way, is a kind of nationalization, and something entirely routine, even here in the super-special USA.

He really gets to the heart of it, though, when he gets to the “different cultures” claim. Sweden is a social democracy, and the U.S. isn’t. And so we just have to do things the American way. But our way of doing things is the problem. Several decades of letting financiers do their thing and then bailing them out when they got in trouble have finally put us in a serious crisis. Obama simply cannot get his mind around the fact that our whole economic model is in trouble. So the only way he can imagine getting out of that trouble is by applying the same medicine that got us into trouble. There’s something oddly Hegelian about this: “the hand which inflicts the wound is also the hand that heals it.” But Obama isn’t talking about moving to a higher level of consciousness. Quite the contrary: it looks more like he just wants to go back to the old way of doing things.

Let’s think about what needs to be done. The U.S. needs to consume less, borrow less, equalize the distribution of income so that those of modest means aren’t driven to manic borrowing from those with too much money to spare, and invest in things with a long-term economic and social payoff. A serious economic recovery package would embody that. And some of the original plan did that. But in order to get Republican votes, Obama et al added tax cuts, cut clean energy investment, reduced aid to state governments, and cut back on infrastructure spending.

Yes, of course Congressional realities dictated this in part. But these compromises were also a function of the fact that Obama et al didn’t really have a coherent story about what the stimpak was supposed to do. (Larry Summers once did, but he’s been less vocal on such topics since the inauguration.) But to make that argument—and there’s no doubt that Obama could make it effectively if he wanted to—he’d have to challenge a lot of prevailing economic wisdom. The conventional left-liberal explanation for this is weakness or timidity. But the margins of the last election and the approval ratings in the polls right now do not suggest political weakness. George W Bush came out of the 2004 election, which he won by a narrow margin, declaring himself in possession of a lot of political capital, and not shy about using it. No, it’s not really weakness or timidity. I think the Sweden vs. Japan quote from Obama shows that he’s really a market guy at heart, and has no interest in challenging the orthodoxy—and there’s no radical popular or intellectual movement to force him into doing it. And so the American economy will suffer the consequences of his received faith.

There’s an old story about Tony Blair (which I first heard from a commenter on this site), that great apostle of the Third Way. An old-style Labour MP is said to have complained to Blair about all the right-wing things he had to say to get elected. Blair’s response: “It’s much worse than that. I really believe it.” The same for Obama, I’m afraid. The combination of an economy stuck in the mud and an aroused populace could change that. But not yet.

[Zkribbler]

I read a piece in The Times advising this. How does one go about [buying gold]?

Buying it is one thing. Then, how do you store it? Big bags of gold under you matress??

BTW: I looked into this back in the 70's. At that time, you could buy gold through various Swiss banks, and they'd store the gold for you...for a slight fee, of course.

[The Mad Monk]

It wouldn't have to be big. A friend of mine had an uncle who had about a hundred thousand dollars worth of gold back in the eighties. He melted it into a bar about the size and shape of a brick, painted it red and used it as a doorstop in his kitchen.

It wasn't until a couple years after he died that the family realized what the bar was.

[KrazyHorse]

Nationalize the insolvent banks and wipe out the shareholders.

The problem is that nobody's sure which banks are insolvent and which aren't.

Also, Dan: while I appreciate the lust for bankers' blood, I would have thought that you would restrain your populist impulses enough to see that weakening the link between bank executives' incentives and those of the banks they run is not really ideal.

Mankiw's blog today links to a good article for an overview of how dumb the compensation limits in the bill are.

The major points are:

1) This disincentivizes bankers from taking TARP money, or incentivizes them to give it back even if the bank they run needs the money

2) The limitation of incentive-based pay as a fraction of total compensation is just weird (and obviously limits strength of incentives)

3) The requirement that all incentives be in the form of restricted stock makes bankers MORE eager to gamble federal money (since their stock is junior to federal money), and also weakens incentives for those executives who are responsible only for subsections of the bank's operations

If you want to punish bankers then chop off their right hands or something. Don't do something this blatantly stupid.

[DanS]

We've spent entirely too little time meting out punishment. 5% preferreds are not punishment.

In lieu of the guillotine, what would be your approach? The Swiss approach has some flair -- they've confiscated the passports of their bankers.

[Felch]

Is there a good reason not to just let the insolvent banks fail? I mean, it would be catastrophic, sure. But that's why I've got a couple guns and plenty of ammunition.

The rule with capitalism (and yes Che, there are rules in capitalism) is that if you fail, you fail and nobody rewards you for it. The banks failed to lend appropriately, they deserve to go under. Why not let them file for bankruptcy protection? New banks will take the place of the old ones.

[VetLegion]

My approach would be to just fire them all and appoint somebody cheaper. Economists who would work for say $100 000 a year. Anyone who thinks being a CEO of a bank is rocket science is delusional. It's not like they need incentives in order to perform well. If they all decided to quit in protest the banking system would be no worse off than it is.