Insuring Bankers' Bonuses
Here's what we know so far about the plans for the US banking system that Tim Geithner will unveil next week.
- The heart of the scheme will, most likely, be an insurance arrangement, in which the government (part Treasury and mostly Fed) insures a big part of large banks' portfolio of toxic assets against further loss. The devil is in the pricing of this insurance and how transparent that is - and we will put out more on this shortly - but the clear signal so far is that this will be a veiled major recapitalization of banks at taxpayer expense.
- As announced yesterday, the government will set restrictions on the pay of executives in banks that participate. But note that, under these rules, bonuses are not restricted. Instead, they are just deferred and paid in shares. In other words, if there is cheap recapitalization through government-provided insurance, these executives are getting an incredibly good deal.
Think about it this way. While the macroeconomy goes badly, the government will pay out on the insurance policy and keep the large banks in business. Once the macroeconomy turns around, as of course it will, the banks can pay off the government and pay out massive bonuses.
We are, in effect, insuring incompetents (i.e., the executives who got us into this mess) against both the delayed consequences of previous bungling by themselves and any future missteps they may make.
But even this won't be enough for the top dogs on Wall Street. We predict that banks will start resetting the strike price of previously deferred bonuses, along the lines of what we have already seen from Google. Watch carefully and track what happens in your comments here.
What we really need is a simple, transparent recapitalization of the banking system. More complicated proposals are opaque and less likely to work. And once people see through the illusions, there will be great disappointment and much resentment.
As long as the same executives that caused the problem are still in control of these banks it will be business as usual. They have a business model, a mindset where the number one concern is; 'how can I enrich myself to the fullest'. Any autopsy on this economic tsunami will show you how they acted in their own self interest and not the company's.
So, you either get rid of these executives or find a way to change their mindset.
February 5, 2009 10:42 AM | Reply | Permalink
As long as the same executives that caused the problem are still in control of these banks it will be business as usual.
Note that the current executives in control of the major banks are not generally the ones that caused the problem. My candidates for the hall of shame would include:
AIG, Martin Sullivan
Bear Stearns, Jimmy Cayne
Citigroup, Chuck Prince
Countrywide, Angelo Mozilo
GMAC - Res Cap, Bruce Paradis
Golden West, Herbert and Marion Sandler
Indymac, Michael Perry
Lehman, Dick Fuld
Merrill Lynch, Stan O'Neal
Wachovia, Ken Thompson
Washington Mutual, Kerry Killinger
Note that in most cases these people have already cashed in big and escaped scot free. The list of sleaze-bag mortgage wholesalers and mortgage backed security outfits could be extended to hundreds.
February 5, 2009 12:12 PM | Reply | Permalink
Merrill,
thanks for the info, but I wonder if the new execs have the same mindset. The sharks Reagan put in the water have been growing in numbers ever since and today they seem to permeate the business community.
February 5, 2009 1:28 PM | Reply | Permalink
AIG - After Sullivan, there was Willumstad for 3 months, who was replaced by Liddy. Liddy, formerly with Allstate, was brought in Sept 2008 to salvage the company.
Bank of America - Lewis screwed himself with the Countrywide acquisition, although that was arranged by the government to some extent. His real miscalculation was the Merrill Lynch acquisition. He should have let Citgroup have Merrill, in which case both would have failed and the government would have nationalized Citi/Merrill by now.
Citigroup - Vikram Pandit replaced Prince in December 2007. He came to Citi in July 2007, and hasn't had the traction needed to turn Citi around.
Goldman Sachs - Blankfein has kept Goldman out of trouble, and it is the most successful of the old investment banks. He probably didn't need the TARP money, and Goldman has said that they would like to pay it back.
JP Morgan Chase - Dimon was far more risk averse than his peers, but had a little more sub-prime than he should have. He succumbed to two "arranged marriages" with Bear Stearns and Washington Mutual, where the Fed, Treaury, and FDIC marry failed institutions with stronger ones. He should have stuck to the $2 billion price tag for Bear, although upping the price laid off some added risk on the government. Too soon to tell on the WaMu deal.
Morgan Stanley - John Mack has survived with government help.
Wells Fargo - John Stumpf runs what is probably the best managed of the US retail/commerical banks. The Wachovia acquisition needs to be watche, but Wells knows the CA mortgage business and can probably manage through the bad assets of Wachovia (formerly First Union, which acquired the Golden West mess).
There aren't any other banks big enough to matter -- its a long way down from Wells to the next biggest bank.
Most of the current executives are either "survivors" who didn't engage in the risky sub-prime, Alt-A, pay option ARM, etc business, or they are "turnaround" executives brought in to clean up the messes.
February 5, 2009 2:25 PM | Reply | Permalink
Merrill,
again, thanks for the info, this will cause me to adjust some of my comments.
This site is almost as much of a learning experience as C-SPAN is. :-)
February 5, 2009 3:44 PM | Reply | Permalink
thanks for the good summary round-up, most helpful!
February 5, 2009 4:06 PM | Reply | Permalink
"...how can I enrich myself to the fullest" with the HELP of Congress (now that Blago is out, what under-the-radar greedy bastard in the Senate and the House can I turn to???).
the facts are in history: http://video.google.com/videoplay?docid=-515319560256183936 or visit their web site: www.themoneymasters.com ...but too lazy or don't have the time nor inclination, here is an excerpt from the money masters web site:
Monetary Reform Act - A Summary: This proposed law would require banks to increase their reserves on deposits from the current 10%, to 100%, over a one-year period. This would abolish fractional reserve banking (i.e., money creation by private banks) which depends upon fractional (i.e., partial) reserve lending. To provide the funds for this reserve increase, the US Treasury Department would be authorized to issue new United States Notes (and/or US Note accounts) sufficient in quantity to pay off the entire national debt (and replace all Federal Reserve Notes).
The funds required to pay off the national debt are always closely equivalent to the amount of money the banks have created by engaging in fractional lending because the Fed creates 10% of the money the government needs to finance deficit spending (and uses that newly created money to buy US bonds on the open market), then the banks create the other 90% as loans (as is explained on our FAQ page). Thus the national debt closely tracks the combined total of US Treasury debt held by the Fed (10%) and the amount of money created by private banks (90%). Because this two-part action (increasing bank reserves to 100% and paying off the entire national debt) adds no net increase to the money supply (the two actions cancel each other in net effect on the money supply), it would cause neither inflation nor deflation, but would result in monetary stability and the end of the boom-bust pattern of US economic activity caused by our current, inherently unstable system.
Thus our entire national debt would be extinguished – thereby dramatically reducing or entirely eliminating the US budget deficit and the need for taxes to pay the $400+ billion interest per year on the national debt - and our economic system would be stabilized, while ending the terrible injustice of private banks being allowed to create over 90% of our money as loans on which they charge us interest. Wealth would cease to be concentrated in fewer and fewer hands as a result of private bank money creation. Thereafter, apart from a regular 3% annual increase (roughly matching population growth), only Congress would have the power to authorize changes in the US money supply - for public use -not private banks increasing only private bankers' wealth.
February 5, 2009 11:07 AM | Reply | Permalink
FRB doesn't create money, it allows money to do work.
Starting off on the wrong foot that way left me unable to follow the rest of the excerpt.
February 5, 2009 12:42 PM | Reply | Permalink
from my post inspired by Rep. Miller's excellent post today
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