When Will We Start Reforming Wall Street?
The financial firms keep tumbling. Add Lehman Brothers to the dead and Merrill Lynch to the zombie takeover list. Still, the Wall Street crew are relying ever more on the generosity of taxpayers to save their hides.
This is coming from the Fed, which is extending ever larger loans at below market interest rates, and accepting ever worse collateral in exchange. According to the Wall Street Journal, the Fed will now be accepting shares of stock as collateral.
We don't want the financial system to collapse, but can we get something out of the Wall Street boys in exchange for the government handouts?
My favorite is that we limit the total compensation (as in pay, bonuses, perks, stock options etc.) for any executive at any financial firm that gets the special Fed deals to $2 million a year. We know that shareholders lack the ability to effectively rein in CEO pay. There is nowhere that this problem is more serious than on Wall Street, where these folks often get pay packages that can run into the tens of millions of dollars.
So, we have a chance now to impose the discipline that the shareholders cannot. It is totally a market mechanism. If Merill, Goldman, Morgan etc, don't want the deal, don't take it -- it's that simple.
This is important. If we can check the exorbitant pay of the Wall Street crew then we can rein in executive pay more generally, not just in the corporate world, but in government, universities, and even private charities.
Let's not let this golden opportunity go to waste. Let's demand something in return for the Wall Street welfare.
If Paulson and Bernancke do another bailout like they did with Bear Stearns it's time for rebellion. The Federal Government should not be bailing out investment houses, they are not commercial banks and have very little regulation. Let Lehmann go into backruptcy and clean out all the management including Fuld.
While I like the idea of controlling CEO pay, I don't like giving them access to the public trough when their greed gets ahead of common sense. The auto corporations aren't too far behind looking for loan guarantees because of their poor management. Why have Toyota and Honda understood that small cars are the future and Detroit has not?
September 15, 2008 12:37 AM | Reply | Permalink
Controlling CEO pay, and make it susceptible to being pulled back (every penny) if company goes bankrupt, even after the CEO (or other Top 10 Senior Exec.) retires.
ALSO, control DEBT. Gov't must insist that Households reign in debt, then pass & abide by Debt limits, then Debt Reductions over the next 10 years. Otherwise, we'll all be making widgets in sweatshops 14 hours/day for the Chinese to consume.
F that.
September 15, 2008 1:06 AM | Reply | Permalink
. . . the Fed will now be accepting shares of stock as collateral.
Oh, what fun!
1) Wall Street bank borrows money from Fed and uses it to short some particular stock and drives the share price down.
2) Then, bank covers its shorts and borrows more money from the Fed to go long in that stock
3) Producing a short squeeze which causes the share price of the stock the bank owns to zoom up in price
4) At which point using the now high priced stock the bank trades it to the Fed for good old USTs.
Don't you just love it!
September 15, 2008 2:40 AM | Reply | Permalink
I don't care much what the CEO pay is. The problem with bailing out banks is that the homeowners are left in the same bind as before. So instead of bailing out the bank, I think the Fed should bail out the bank's borrowers. Instead of this Divine Right of Capital whereby all privileges flow to the banker, let the common man refinance from the government at sub market rates.
The government has to eat the bad debts either way, so why not prevent the next Great Depression in a way that lets homeowners keep their homes?
September 15, 2008 2:47 AM | Reply | Permalink
That might solve the problem the financial system has with RMBSs, but what about the problems it has with ABSs, CMBSs, CMOs, CDOs, CBOs, and CLOs -- not to mention CDOs-squared?
September 15, 2008 3:06 AM | Reply | Permalink
Or for that matter the problems the banks (that is, the financial system) have with derivatives, construction and development loans, commercial real estate loans, and consumer debt (credit cards, car loans, HELOCs, etc) which hasn't been securitized.
What's to be done about those?
September 15, 2008 4:58 AM | Reply | Permalink
"Financial storm definitely passed."
- Bernard Baruch, cablegram to Winston Churchill, November 15, 1929
September 15, 2008 11:18 AM | Reply | Permalink
c4,
Bush and McCain are telling us that those who caused the problem are going to reform the situation they created that casued the problem that needs to be reformed.....by them.
Christ its surreal.
Wait till I stop laughing before you reply.
September 15, 2008 2:05 PM | Reply | Permalink
When? Let me see. It's been fifty years or so that reforms of our financial system have been under way.
Oh! You mean those reforms.
Ones which actually install oversight, truly regulates and places firm limits upon the kinds of things the institutions which control the nations finances are allowed to do.
Those reforms.
Fuggeddaboutit!!!
A prerequisite is government reform, which truly and absolutely isolates the oval office and congress from Wall Street.
I say the same thing I have said in the past.
These are corporations, not citizens!
Their intersts are most commonly in direct conflict with that of citizens and thus should not categorically be classed as citizens for the purpose of representation. They have influenced the presidency and congress in ways that have subverted not only our economy but our nation in general. They are global companies and conduct themseleves in a global marketplace. Their conduct of business is global and does not reflect what may or may not be beneficial for the citizens of this country. The mere fact they are U.S. companies has no bearing on the way they conduct their business.
To put it plainly, it is illogical, stupid and dishonest to propose these corporations have anything but their bottom line as their sole interest. Were you to examine their overall portfolios I'm sure it would reveal assets under management that are global in scope which negates any assumption of nationalism. They exist as pure capitalistic entities.
These things are obvious but again, Fuggeddaboutit!!!
This is one change that ain't gonna happen.
September 15, 2008 7:14 AM | Reply | Permalink
Not only that, but all these deals are being brokered by cabinet level appointees and Fed Reserve appointees with commercial entities. I don't not want to see the financial system collapse--but where is the taxpayer representation on this? What authority does Congress have? These decisions are being rammed down our throats.
How about the proposition that before the taxpayer assumes commercial risk, said commercial entity must agree to follow certain requirements with respect to risk mitigation and risk management? There is something truy transcendent going on here. THEY ARE JUST MAKING SHIT UP AS THEY GO ALONG. I heard on the radio no bailout for Lehman Bros because they heard so many complaints on the bailout of Bear Stears. Oh so now the complaint line to the White House determines fiscal policy? This stinks! There is something Rotten in the District of Columbia!
Where is the public Outrage? "Oh don't bother us with these complicated things--we love Sarah! Just do whatever you're gonna do and leave us out of it." Is that it? What Bizzaro World did I wake up in?
September 15, 2008 8:33 AM | Reply | Permalink
We're paying for the Reagan Doctrine of Deregulation.
"Get government out of the way" doesn't sound too good now, does it?
"Government is the problem" sure doesn't ring true.
How about; "Hello, I'm from the Government, I'm here to help you." The boys in the Corporate boardrooms used to sneer at that, now they openly solicit government for help.
Reagan put the Gordon Geckos in the water and the public is paying for it.
So vote for McCain/Palin and "Get Government off our backs!"
September 15, 2008 8:33 AM | Reply | Permalink
How about we have registered Republicans bail them out.
Oh, and libertarians, too.
September 15, 2008 8:59 AM | Reply | Permalink
You gave me my first laugh.
Then the fact that "equity" can now be used as collateral took away my smile.
September 15, 2008 10:21 AM | Reply | Permalink
Dean,
in answer to your question;
"When Will We Start Reforming Wall Street?"
When we destroy the Reagan record by dispelling the fantasy they have created about it and show how his deregulation mantra was simply the repeal of all the laws put into place by FDR after the crash of 29 which worked so well to keep this from happening again... until Reagan got elected.
September 15, 2008 9:14 AM | Reply | Permalink
This deregulation canard has been a burr under my saddle for 25 years, now. Would you deregulate a nuclear reactor? Would you deregulate the flight yoke of an airplane? Would you deregulate the launch mechanism of an ICBM? Would you deregulate the license requirements for physicians? Would do deregulate the process of molten steel extrusion? Would you deregulate the health standards for the preparation of food in commercial restaurants? Would you deregulate the immigration requirements?
This whole notion that 'freedom' regulates itself leads to chaos and strange attractors--as well the current financial crisis demonstrates. Lehman Bros actually showed a little bit of fiscal responsibility in taking on some painful steps--Bear Stearns was wild and out of control, but interdependent with many foreign banks and institutions--the collapse of Bear Stearns would have rocked the world. They are gambling that Leham Bros will only rock the market. That is a risky gamble for Paulson to make for us as a nation. I don't remember giving him permission to make that decision for me. How about you?
September 15, 2008 9:33 AM | Reply | Permalink
. . . the collapse of Bear Stearns would have rocked the world.
Who's world?
Not mine; not yours; and not the financial world!
Note: Bear Stearns always had sufficient funds to stand behind all its customer accounts and counterparty obligations. And that's all that counts to the financial world. Yes; shareholder equity would have been wiped out and its lenders would have taken a haircut in a bankruptcy but no one other than Bernanke's and Greithner's cronies -- the lenders to Bear Stearns -- would have cared in the least.
Don't believe every little thing you read in the MSM.
September 15, 2008 10:17 AM | Reply | Permalink
I don't know anything about your world. You don't know anything about mine. The takeover of Bear Stearns rocked my world. The collapse of Lehman is rocking my world. But Bear Stearns was structured differently than Lehman Bros, and ultimately, they were too Chinese to fail. If you think the financial world has not already been rocked--then I think we live in two different worlds.
September 15, 2008 11:07 AM | Reply | Permalink
We do indeed live in "two different worlds."
I live in the real world while you appear to reside in a world constructed for you by enthusiastic alarmists and theatrical dramatists whose principal interest is selling newspapers.
September 15, 2008 11:48 AM | Reply | Permalink
You extrapolate this hypothesis based upon what evidence? I do not think I shall be recommending you for any research grants any time soon. But you do seem skilled at myth making and polemics. Your reality testing skills are still an open question, however.
September 15, 2008 12:56 PM | Reply | Permalink
It's not easy, c4Logic, interpreting the news when you don't understand how the world works.
For example, I suspect that if you read Paul Krugman and he says that the Bear Stearns bailout was necessary in order to prevent substantial damage to the financial system, you think that that's his actual opinion.
But consider the constraints Krugman, as an important public voice, is operating under.
1) He can't criticize the Fed's actions for fear of undermining the market's confidence, precipitating the very condition to be avoided, and winding up being criticized himself as having acted irresponsibly.
2) For his own standing in the community he must appear "reliable" which means saying whatever the important people are saying (see, J.M.Keynes)
3) Finally, he's a long time friend of the Fed Chairman, and one doesn't criticize friends in public.
Those are some of Krugman's constraints; other economic pundits have theirs as well.
Unless you're Will Rogers, don't believe everything you read in the papers.
September 15, 2008 3:26 PM | Reply | Permalink
I always buy two or three copies of the NYT just to make sure the copy I'm reading is accurate (I think that's a Wittgenstein joke on a deeper subject)
September 15, 2008 5:38 PM | Reply | Permalink
Plus, the BS equity to debt ratio was 1 to 33.
That is a lot of debt--most of it Chinese.
September 15, 2008 11:20 AM | Reply | Permalink
Moody's, S&P, and Fitch all downgraded Bear before the Fed felt it had to step in, forcing the firm to put up additional collateral to meet the requirements of a credit-default swap triggered by the downgrades--collateral it didn't have. Bear notionally held $13 trillion in derivatives contracts, and even if credit-default swaps were only a small fraction of that, any sort of credit event would have been a significant event. 13 trillion ain't chopped liver.
September 15, 2008 1:22 PM | Reply | Permalink
Actually, $13 trillion of notional "value" was, as against total outstanding OTC derivatives ($516 trillion as of June 2007), a drop in the bucket -- chopped liver to use your expression.
There was never any question but that Bear had sufficient capital to make good on its derivative book once the trades were netted.
The only reason Bear took the Fed sponsored J.P.Morgan deal was to protect its shareholders who wound up with around $10/share and would have gotten nothing in bankruptcy. The Fed was there not to protect the financial system but to protect Bear Stearns bondholders who would have suffered a haircut had Bear filed for bankruptcy.
September 15, 2008 3:09 PM | Reply | Permalink
Ellen says:
"($516 trillion as of June 2007),"
There is no such number
September 15, 2008 8:24 PM | Reply | Permalink
The Bear Stearns bondholders being--The Chinese.
September 16, 2008 12:18 PM | Reply | Permalink
This is a YOYO economy, no?
Investment banks? The taxpayers say: YOYO. With a smile, even.
September 15, 2008 9:54 AM | Reply | Permalink
On this topic I recently read, and recommend, Robert Kuttner's excellent '07 book The Squandering of America. The capture of the political process by Wall Street and the domination of its priorities in our economic policies is a prominent theme. Kuttner, known to many here as co-founder in 1990 and co-editor today of The American Prospect, formerly worked as a staff person for the Senate Banking Committee and wrote for many years for Business Week.
September 15, 2008 11:46 AM | Reply | Permalink
One of the basic problems we have on Wall Street is that the Anti-Trust laws are kaput. We used to have an Anti-trust division of the Justice Dept that actually went after the big corporate trusts.
As far as I can tell, it's just gone.
September 15, 2008 3:27 PM | Reply | Permalink
Cheney been sitting on it in his bunker.
Yes, his ass is that fat.
September 15, 2008 7:55 PM | Reply | Permalink
@ Wade Boggs I think the top executives of Lehman will be subject to their saleries and bonuses being confiscated by the bankruptcy court. They are insiders and any money paid to them during the last year or two might be subject to be taken back as a "preference".
September 15, 2008 10:44 PM | Reply | Permalink
Our children and grandchildren have already been saddled with an unpayable debt. The train has left the station. Do the math. The law of compound interest will not let this continual increase of debt continue. The eventual solution will be the same solution that has manifested many times in the past to various debt ridden economies: That economy always collapses and the debt, in one way or another, is repudiated. Our children and grandchildren will not repay the debt. They will not subject themselves to a life of economic slavery.
September 15, 2008 11:15 PM | Reply | Permalink