Around The Web: Wall Street Rules

When it comes to the big money, we’re still playing by Wall Street rules.
For example, California pension officials are paying their investment advisors hefty bonuses  even though the funds suffered whopping losses in the real estate crash, an investigation by Associated Press found.

The pension fund faces unfunded liabilities of billions of dollars, though there are sharp differences about the exact amount.

While the rest of the state suffers layoffs, cutbacks and furloughs, life is good for the crew at CALPERS. Fifteen employees were paid more than $200,000 – two more than two years earlier. Though the fund lost nearly $60 billion, all the funds investment managers got bonuses of more than $10,000, and several got more than $100,000.
CALPERS’ generosity extended beyond its investment advisers; the agency also gave its public affairs officer nearly $19,000 in bonuses for two straight years, and a human resources executive who got nearly $16,000 for those years.
Officials at CALPERS offer a variety of explanations: they say the bonuses cover 5 years to encourage their advisers to think long term, not short term. As a result, some of the managers’ funds that saw the steepest short-term declines got the largest bonuses. They have to pay the big bonuses despite the losses because they’re contractually obligated. They insist they have to pay the bonuses because if they don’t, their investment advisers will go to work at hedge funds.

Sound familiar? These are the same explanations we got from the big, bailed out banks who insisted that they had to hand over huge bonuses even though had to go on the dole.
CALPERS’ bonus system seems guaranteed to give its investment advisers lavish bonuses. When times are tough, the bonuses are a little less lavish. But none of the investment experts are actually accountable or will lose out for plunging the state’s pension in too deep into an unsustainable real estate bubble.

California’s pension system is hardly alone in making sure that those who manage its money are rewarded handsomely whether they win or lose.

In Massachusetts, the executive director of the state employees pension fund quit earlier this year while the Legislature contemplated a pay cap. Michael Travelgini, was paid a base salary of $322,000. In 2008, even though the fund’s investments lost money, they did better than other states, so he was given a $64,000 bonus.

Travelgini said the state’s investment managers weren’t paid enough. He’s going through the revolving door to work at a hedge fund that does business with the state, though he won’t solicit the state for a year.

These compensation issues are a strong reminder for the rest of us the lingering issues of the bubble culture. The people who run the pension systems seem to have been infected by the culture of Wall Street and forgotten whose money they’re managing. It will take a powerful disinfectant to remind them.

Around the Web / Executive Pay / Martin Column - 09/27/2010

Around The Web: Nothing Natural About Financial Disaster

Maybe this is the one that will finally cause people to take to the streets.

The crack investigative journalists at Pro Publica and NPR’s Planet Money have uncovered the latest evidence of how the big bankers schemed to keep their bonuses and fees coming by creating a phony market for their mortgage-backed securities, which were tumbling in value as the housing market tanked in 2006.

The Pro Publica/NPR investigation shows how the bankers from Merrill-Lynch, Citigroup and other “too big to fail” financial institutions undermined a system of independent managers who were supposed to be evaluating the value of the securities. The banks simply browbeat the managers into buying their products rather than face losing the banks’ business.

Meanwhile, the bankers continued to make money off every deal, even though the rest of us paid a high price for their continued trafficking in complicated financial trash.

Then when the entire business unraveled in the financial collapsed, these bankers got a federal rescue and a return to profitability.

Pro Publica acknowledges it’s complex material, so they’ve accompanied their investigation with a cartoon and graphs to make it easier to understand.

My WheresOurMoney colleague Harvey Rosenfield wrote recently about the falseness of the claim that either Hurricane Katrina or the financial collapse were primarily natural disasters. The NPR/ProPublica investigation is yet more evidence that the bankers’ irresponsible self-dealing turned a downturn in the housing market into full-blown catastrophes.

Writing on his blog Rortybomb, Mike Konczai hones in on the stark contrast in the fate of the bankers and many of the rest of us:  “Remember that by keeping the demand artificially high for the housing market in the post-2005, these banks created its own supply of crap mortgages. These mortgages inflated and then crashed local housing prices. Meanwhile the biggest banks got tossed a lifeline and homeowners can’t even short sale their home much less have a bankruptcy judge that can set their mortgage to the market price with a large penalty. And everyone lines up to tell those people what ‘losers’ they are, how `irresponsible’ they’ve been for being pulled into becoming the artificial supply for artificially created demand of housing debt. What sad times we are living in.”

Meanwhile the SEC is supposedly investigating the self-dealing. We’re still waiting for the tougher new SEC that the Obama administration promised. In the latest indication that we may have to wait a while longer, a federal judge has rejected the agency’s proposed $75 million settlement with Citibank over charges that the bank misled its own shareholders about the shrinking value of its mortgage-backed securities. The SEC said the bank misled investors in conference calls by saying its subprime exposure was $13 billion, when it was actually more than $50 billion. Among the pointed questions the judge asked: Why should the shareholders have to pay for the misdeeds of the bank executives, and why didn’t the SEC go after more of the executives?

The judge’s questions about accountability mirror the uneasy questions a lot of us have about this administration’s reluctance to take on the bankers whose behavior led to ruin for the country while they profited.

Around the Web / Derivatives / Executive Pay / Martin Column / Outrage / Securities and Exchange Commission (SEC) / Too Big To Fail / Uncategorized - 08/31/2010

Around the Web: Landmark or Pit Stop?

I understand why people feel the need to tout the historical significance of the financial reform package that passed the conference committee. The president needs it politically and those who support him want to give him credit for getting anything at all in the face of the onslaught of bank lobbyists. Lots of folks worked very hard against tremendous odds to get something passed.

But I think a more sober analysis shows that what’s been achieved is pretty modest. It hands over many crucial details to the same regulators who oversaw our financial debacle.

Summing up, Bloomberg reports: “Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis, analysts said.”

Zach Carter characterizes it as a good first step. The Roosevelt Institute’s Robert Johnson writes: “This first round was not the whole fight. It was the wake-up call and the beginning of the fight. Rest up and get ready. There is so much more to do.”

The question is when we’ll get the chance to take the additional steps that are needed. The public is skeptical that the new rules will prevent another crisis, according to this AP poll. The Big Picture’s Barry Ritholtz grades the various aspects of the reform effort. Overall grade? C-. Top marks go to the new minimum mortgage underwriting standards. But legislators get failing grades for leaving four critical issues on the table: “to big to fail banks,” bank leverage, credit rating agencies and corporate pay.

Ritholtz saves some of his harshest evaluation for the proposal to house the new consumer protection agency inside the Federal Reserve, which he finds “beyond idiotic.”

Around the Web / Executive Pay / Financial Reform Legislation / Martin Column - 06/25/2010

One Would Hope

The head of President Obama’s Security and Exchange Commission went before Congress Wednesday to wring her hands about how the Lehman fiasco “raises serious concerns” about the effectiveness of post-Enron reforms.

“One would hope,” SEC chair Mary Schapiro told a congressional committee wanly, that the post-Enron Sarbanes-Oxley Act “would have prevented this kind of conduct.”

Eight years after Congress passed reforms that were supposed to prevent another Enron or WorldCom scandal, the Lehman mess reminds us how the government regulators and the accountants that are supposed to be vigilant watchdogs against destructive, deceptive bookkeeping continue to fail. They have remained in cahoots to ensure that the financial titans can ignore the rules and then evade the consequences for their bad and even fraudulent decisions.

According to the bankruptcy trustee’s scathing but sober 2,200 page report, Lehman used a financial maneuver known as Repo 105s, manipulating their financial reports disguise its bad debt from investors and the public as the company’s condition worsened before it finally went bankrupt, triggering the worst economic collapse since the Depression. The Repo 105 transactions secretly moved billions of dollars of debts off of Lehman’s books.

One would hope that President Obama and the Democrats would finally recognize  in the Lehman debacle that while Wall Street chieftains like Lehman CEO Richard Fuld may indeed be masters of a universe, it’s an alternate universe far from our own.

In that alternate universe, the bankruptcy trustee’s report detailing his company’s accounting shenanigans actually absolves Fuld of responsibility for his company’s demise. He told the New York Post the report showed he did nothing illegal.

After all, Fuld was CEO, way too busy to be bothered with details like how his company was hiding $50 billion worth of bad debt. In Fuld’s alternative universe, the Sarbanes-Oxley requirement that CEO’s sign off on the accuracy of their company’s financial statements didn’t apply to him.

In that alternate universe, when a court-appointed bankruptcy states that Fuld “was at least grossly negligent,” that amounts to getting a seal of approval.

Though Fuld’s company declared bankruptcy, his own fortunes did not suffer in any sense that someone forced to live in this universe, rather than that alternative one, would recognize as suffering. Between 2000 and 2008, he took home $484 million. He left with a $22 million retirement package. In fairness to Fuld, that’s a paltry sum by Wall Street standards for the head of a failed firm. By comparison, Merrill Lynch’s Richard Prince was paid $166 million before he left.

Also in fairness to Fuld, he was not the only one whose conduct was criticized in the Lehman report. But in Fuld’s alternate universe, when the trustee found that Lehman’s accounting firm, Ernst & Young, failed to show professional standards of care, that amounts to an award for public service.

In that alternate universe, the little people are just incapable of understanding why it’s better for Lehman to have concealed its debt to make the firm look healthier while it was in fact going down the toilet in 2008.

And taking a big chunk of our economy with it.

While I and most others who are not Richard Fuld find grounds for at least a thorough  criminal investigation rather than vindication in the Lehman trustee’s temperate prose, Fuld does have one point.

Everything that Lehman did to cook its books was done under the noses of federal regulators. So, Fuld insists that everything Lehman did was hunky-dory.

One would hope that the president and the Democrats would recognize that back here in the universe the rest of us live in, millions are suffering because of the deceit, arrogance and cluelessness of the bankers who seem to have escaped the meltdown with their wealth and power intact.

One would hope that if President Obama and the Democrats were serious about real reform, they would be making the Lehman report Exhibit One in an effort to discredit the financial lobbyists and their pals in Congress who are foiling efforts at sensible, robust regulation.

One would hope that the president and the Democrats would be determined to correct the mistakes of the past and not repeat them. One would hope the Lehman report would cure, once and for all, the president and the Democrats’ stunning lack of curiosity about how the financial industry blew up the universe we all live in. One would hope that the president and the Democrats wouldn’t find it acceptable to live in a universe where its masters aren’t accountable for their actions, but the rest of us are.

Executive Pay / Lehman / Martin Column / Securities and Exchange Commission (SEC) - 03/19/2010

Around the Web: Rewarding Fed Failure

Bottom line on the new Chris Dodd reform proposal: much watered down from his earlier proposal and maybe even weaker than the weak House bill.

Here’s the summary from A New Way Forward: “The bill contains no real solution to too-big-to-fail, no real enforcement guarantees, the bad guys are off the hook, the financial system will continue to be as big and dangerous and full of risk taxpayers will likely own. Dodd made a few good steps forward and major steps backwards”. The rest of their analysis is here.

From the Atlantic Wire, a solid roundup of assessments. The takeaway: Too many concessions to the big banks, and it is still faces many obstacles to passage. And who exactly besides Chris Dodd and Wall Street thinks it’s a great idea to house consumer protection within the Federal Reserve? Only last year, Reuters reminds us, Dodd was labeling the Fed “an abymsal failure."

But Elizabeth Warren, the congressional bailout monitor who has campaigned aggressively for strong reform, including an independent agency to protect financial consumers, offered a lukewam endorsement of Dodd’s plan.

I’ll give Alan Sherter the last word. When Dodd says that he doesn’t have the votes for an independent financial consumer protection agency, what he really means is that “lawmakers have more to gain by advocating the interests of banks than those of consumers.”

Around the Web / Consumer Financial Protection Agency / Derivatives / Executive Pay - 03/15/2010

Obama Strikes Out

That didn’t take long.

Just a couple of days after the New York Times reported that Wall Street was unhappy with the return on its massive investment in the Democratic Party; President Obama softens his rhetoric on the big bankers. He told Business Week he didn’t “begrudge” bailed-out too big to fail bankers their bonuses, benignly comparing them to all the top baseball players who earn fat salaries yet don’t make it to the World Series.

“That’s part of the free-market system,” Obama opined.

Obama knows some of the bankers personally, he tells Business Week, and finds them “savvy businessmen.”

Before the bankers complained publicly about their lack of return on campaign contributions to Obama and the Democrats, the president had recently been trying out a tougher stance: suggesting “too big to fail” banks, their risky behavior and the fat bonuses that fuel it should be reined in.

President Obama has been consistently inconsistent in the fight over financial reform. He’ll make strong proposals one day (judicial cram-downs to help homeowners in foreclosure, for example) and then leave them to die without his support in Congress under withering assault by bank lobbyists. He’ll blast the bankers’ bonuses one day and cozy up to them the next. It was less than a month ago that the president labeled the bonuses “obscene” and pledged to tax them.

By contrast, the bankers have been relentless and shrewd in their fight to delay, confuse, stymie and water down attempts at reform. They have fought in the back rooms, in the media and the floors of Congress, using checkbooks and rhetoric.

The president is spot on, however, when he refers to the remaining big bankers as savvy. After they wrecked the economy, they didn’t waste the financial crisis. They’ve come back bigger and stronger than ever, with fewer competitors, with a firm grasp on a steady pipeline of cash from the federal treasury.

For a more clear-eyed view of the bankers, what they’ve been up to and what they have to do, we have Elizabeth Warren, the Harvard Law professor and congressionally appointed bailout monitor. “This generation of Wall Street CEOs could be the ones to forfeit America’s trust,” she wrote Monday in the Wall Street Journal [no link]. “When the history of the Great Recession is written, they can be singled out as the bonus babies who were so short-sighted that they put the economy at risk and contributed to the destruction of their own companies. Or they can acknowledge how Americans’ trust has been lost and take the first steps to earn it back.”

With his wish-washy approach, the president is in his own real danger of losing America’s trust as a champion of reform. Making lame comparisons between ruthless bank CEOS and clueless overpaid athletes doesn’t help the president’s credibility any.

Even the analysts on ESPN Sports Center know that.

Contact the president yourself and let him know what you think of the bailed-out bankers’ bonuses.

Executive Pay / Martin Column / Too Big To Fail / Uncategorized - 02/10/2010

"Apology Accepted, Captain Needa"

It’s not about “sorry” anymore.

Even before the Wall Street titans were sworn in last week, it appeared as if the goal of the Financial Crisis Inquiry Commission’s chair, Californian Phil Angelides, was to wring an apology from the men whose companies led the nation into an economic abyss. Whereas most Americans, let me venture, would like to wring their necks.

About twenty-five years ago, I wrote about “inseki jishoku,” the Japanese tradition of accepting responsibility for one’s actions and resigning one’s position as penitence. “These social balancing mechanisms are powerfully ingrained within the Japanese culture. In business activity, they create by necessity a ‘state of intimacy’ among management and employees,” William Ouchi, a management expert, told me at the time. I suggested that there would be less corporate crime in this country if American CEOs embraced a similar approach. 

That never happened.

So what would be the point of a symbolic apology from the titans of the Money Industry – assuming they would be willing to offer one (they tried hard not to, in the event)?

No amount of apology is going to salve the grievous wound in the American psyche as the banks’ profits and bonuses break records.

Like most Americans, I am having a hard time getting my head around how these companies can claim to be earning a “profit” and their executives billions of dollars in extra compensation after American taxpayers were forced to pitch in trillions of dollars to keep the companies afloat.

The truth is that they were able to get away with it because no one in Washington ever imposed any kind of quid pro quo for the bailout.

No cap on the exorbitant interest rates we now pay to borrow our own money from the credit card companies, for example.

No relief for people trying to keep up with their mortgages and pay the rest of the bills.

If symbolism is what this is all about, I say we’ve moved beyond the “apology” stage. How about sending some of these people to jail for twenty years? Or is it "legal" to destroy an economy and cost Americans their life savings and jobs? I had hoped the Angelides investigation would be the beginning of an intensive investigation that, like the Watergate hearings, would lead to holding people criminally accountable for their actions. Not so far, at least.

As I watched the politicians and the leaders of Goldman Sachs, Chase and Bank of America sashay around an apology at the witness table, it reminded me of a scene from the Empire Strikes Back. Han Solo and the Millenium Falcon have just managed to elude Darth Vader’s entire fleet of starships. Informed that Vader wants an update on the search, Captain Needa replies, “I shall assume full responsibility for losing them, and apologize to Lord Vader.”  Vader, using the Force, strangles him. “Apology accepted, Captain Needa.”

Executive Pay / Financial Crisis Inquiry Commission / Harvey Column - 01/18/2010

Our "jackass" moment

September 21, 2009

One thing we can all agree on about our president: He chooses his words v-e-r-y carefully.

So I wondered about his choice of language and timing when, on the same day he traveled to Wall Street to deliver the bankers a gentle scolding, he got caught on videotape labeling the rapper Kanye West a “jackass” for his behavior on a televised awards show.

You don’t mess with the president: Kanye West got himself right onto Jay Leno’s couch to perform an apology.

Executive Pay / Martin Column / President Barack Obama - 09/21/2009

Administration still won't rein in lavish pay schemes

Imagine if you could report the value of your work on your tax return, rather than your actual income. At the end of the year, you’d issue yourself a W2 or a 1099 based on a comparison of how other people who did the same kind of work valued their efforts. The lower the worth you put on your work, the lower your taxes. Let’s just say the IRS wouldn’t be too happy with a system that encouraged low-balling.

Wall Street bankers were able to arrange an equally self-serving compensation system for themselves - and they got away with it.

Executive Pay / Harvey Column - 09/20/2009