With the blockbuster financial reform bill moving toward the floor, a Presidential 60 Minutes 
interview and major discussion with the bankers its time to re-visit the Industry, its status, performance and management. Not least of the triggers is JPM's presentation at last week's GS Financial Services Conference but let's set the stage with Hoofy and Boo giving us their take on the public spiritedness of the Industry, as exemplified by the GS "Goldfellas". It shouldn't take long for you to figure out the movie they're riffing off of, not least because Blankfein does look a bit like Joe Pesci. But the real thing to keep in mind why is a Finance site/service like Minyanville taking this shot at GS and the Industry in general?
While you ponder that question allow us to observe that this post is not just its own thing, i.e. a FinInd update but also ties to the last several on the state of the Markets/Economy and Business Performance. On the former, in case we weren't clear, we'd summarize as: 1) there was a small run toward the dollar as the sovereign debt thing scared folks which drove up the markets confirming everything we've said, 2) some dozen different commentators from Paul Krugman to Rubini to John Mauldin to Mark Thoma have ALL come out to talk, in one form or another, about the "Mother of All Jobless Recoveries". If you'll recall our estimate is that we need 46 million jobs to recover a state of prosperity but are going to be lucky to get 20 million. In other words we're looking at doldrums decade of poor job growth, slow economic growth and constrained profits and earnings. Which then leads to the critical question of what companies are prepared or preparing for a very tough environment thru efficiency improvements, strategic changes in operational effectiveness and creating new value thru real Innovation? Our answer was that most of them are heads-down and hoping just to get by while everything returns to normal. That the banks are still not lending, still have toxic balance sheets and aren't talking about new products and services is critically important.
Consider J.P. Morgan (JPM): Exemplar and/or Exception?
One of the few that have been well-managed is Dimon's JPM. The graphic is drawn from last week's presentation and aside from its content what we found interesting was that the lines-of-business he discusses are pretty much, allowing for some compression and poetic license, right in line with the enterprise models of the generic Financial/Industry model we've been using so much to assess the Industry and particular firms. If you're interested the entire presentation is downloadable here.
Rather than just point you to the several business model/management performance charts we took all the accumulated and posted essays analyzing the Industry over the last several years and created a Finance Industry business performance collection. If you're an investor, a customer, concerned about the health of the Industry and its impact on the Economy or an employee this might be useful stuff to download, read, think about and decide. Finance Industry Futures: Credit, Leverage, Malfeasance and Broken Business Models, FFII: Crisis, Adaptation Failures, Alternatives and Recommendations and FFIII: Facing the Firestorm of Re-regulation. Posting those all up also saves us from having to revisit old arguments that are long, complicated and would suffer a bit from needing to be compressed here.
We're more concerned that you can use all this stuff as a jumping off point for your own conclusions rather than that you find our arguments faultless. But at least there's a relatively massive amount of analytical machinery for you to re-use. We'll also point out that our analysis lines up pretty darn well, if we say so ourselves, with Dimon's. Not bad company for an amateur - so maybe we're not completely out of the ballpark.
The Political Factors: the Fat Cat Outrage Tsunami
One of the truly amazing things to us, especially given all the flashing yellow and read warning signs, is how completely tone deaf the Industry has been to the political backlash just simmering away out there. Ignoring Blankfein's "God's Work" statement as a Freudian slip of the ego the President warned them last Winter and Spring, again in his speech to the Street in Sept. and recently. Yesterday's interview was yet another warning shot as well. There is a mammoth Tsunami still building as last week's bonus discussions, pay decision, House Bill passage, windfall tax discussions and recent SEC compensation rulings shows. Let's put that another way, borrowing the President's phrasing: "he's the only thing standing between them and the pitchforks". They've been fighting a valiant rearguard action to slowdown, delay and water-down the evolving legislation but it's moving massively forward thru the Sausage Factory.
It is a fundamental management responsibility to act in a socially responsible manner. Which means 1) doing no harm, 2) acting collectively to redress and correct those harms that are industry wide that no single firm can afford to tackle without disadvantage and 3) contributing to rectifying general social problems where needed and feasible. The Industry's business case rests on the argument that they are vitally important for the efficient and effective allocation of capital. But a careful review of the data from the last three decades raises some telling counter-arguments:
1) Industry dysfunctions came within a gnat's eyelash of almost collapsing Western Civilization (almost literally).
2) Risk-preferred, bonus-driven and short-term decision-making wiped out a decade's worth of paper profits in the Industry (translated: they need adult supervision having proven for their own and our sakes that self-responsibility doesn't work).
3) Total debt in this country, including Consumer, Business and Financial, skyrocketed beginning in the 80s, exponentiated in the 90's and bubbled in the 00's. Saddling the economy with an enormous burden and driving Savings and Investment down.
4) Economic growth was highest when Savings and Investment were highest. Debt escalation displaced that and we'll need to crawl back there, sadly thru forced de-leveraging and balance-sheet re-building and most likely after struggling thru the Doldrums Decade.
5) It's been since the 80's that the Industry as a whole was innovating and creating value for its customers. In the last two decades innovation has largely been restricted to financial engineering for internal purposes that contributed to the dysfunctional burdens.
Again this is all visible in readily available data thru a little analysis. As is the tsunamic growth of the political backlash. Rather than try to extract a few points we'll point you again to some essay collections published online as whitepapers and downloadable. One of the points of this whole post BtW is that in the current circumstances the political ecology is as critical a business performance factor as ROA, customer service or product development. Especially for this industry. Anyway you might want to also look at: FFIII: Facing the Firestorm of Re-regulation,Financial Reform, Industry Puschbak and Political Sausage-making, and Profit, Performance & Social Responsibility.
Dharmic Denials: Alternative Approaches to Coping
We're going to let Hoofy and Boo have the last word here, partly because this clip is also very funny IOHO and partly because of all the hidden messages.
After you've had your chucles and cries the real point is that chanting is NOT going to make any of this go away any time soon. If you're any kind of stakeholder the business performance assessments discussions need to give you serious pause for reflection. After three decades of "performance" that turned out to be based on leveraged Beta and not true value-creation what's the Industry's strategic outlook?
There's lots of short- and intermediate-term problems that could be with us for quite a while. But what efforts to truly create new products and services do you know about? As they say, where's the value-beef?
Beyond all that the re-regulatory firestorm, which is being feed by obtuseness and tone-deafness (couldn't they at least pretend for a little while that they're sorry and will try and do better?), are 3rd best solutions. First best of course would be for the problems to never come up. Second best would be for a light framework of principles and incentive mechanisms to be used. But, as Ken Rogoff points out (in the readings) along with many others in these circumstances we don't appear to have any choice.
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Banking System Strategic Situation
Banking System "a Long Way from Healthy," Ken Rogoff Says The Obama Administration is going to extend the TARP program into 2010, Treasury Secretary Tim Geithner told Congress Wednesday. But the focus is going to be on aiding consumers vs. financial institutions, amid a sense the banking system is back on its feet after its near-death experience in 2008. "We didn't have a [second] Great Depression, we could have. You have to give them a lot of points for averting that," says Harvard professor Kenneth Rogoff, co-author of This Time Is Different. But that doesn't mean the danger is over. The system is "a long way from healthy," Rogoff says, noting the banks have only profited this year thanks to various and sundry government programs and the Fed's easy money policies. "If I told you, you could borrow almost 30 times what your house is worth at almost zero percent and lend around to anyone you wanted, I'd bet you'd make money too," he says. The big reason banks aren't lending aggressively is they're bracing for a lot more write-downs in the years ahead, as defaults in consumer loans and commercial real estate mount, Rogoff says. In that regard the banks are acting rationally. But Rogoff fears onerous regulations will be the ultimate payment for the massive taxpayer subsidized bailouts the banks received in 2008 - and the moral hazard they engendered. "If bondholders think they can lend to financial institutions at no risk we're going to get into trouble in another 10 years or less if we don't do something," he says. Unfortunately, that "something" probably means tighter regulations, which could contribute to slower growth going forward, he says.
Big Banks Get Bigger A disconcerting chart out of the Congressional Oversight Panel’s new report on the Troubled Asset Relief Program (via Felix Salmon):… The market share of the country’s biggest banks has been growing, despite national condemnations of “too big to fail” and fears of “systemic risk.” This market concentration is largely due to the failure of smaller banks and acquisitions of some failing banks by existing big banks. I wonder what Adam Smith would say. Here’s another interesting (and related) chart from the report, showing annual bank failures since 1970: The number of bank failures peaked two decades ago, while the total assets of failed banks peaked much more recently.
Are we thriftier or have banks just cut up our credit cards? Maybe U.S. consumers aren’t quite so virtuous after all.According to the flow of funds report from the Federal Reserve released last week, U.S. consumers had cut back on their use of credit in the third quarter of 2009. Outstanding credit card bills had dropped by 8.5% from the third quarter of 2008 to just $888 billion. That was the lowest total since the first quarter of 2007. Home mortgage balances fell to $10.8 trillion at the end of the quarter, down 2.2% from the third quarter of 2008 and the lowest total since the second quarter of 2008. (For more on what the flow of funds report had to say about the U.S. economy see my post http://jubakpicks.com/2009/12/10/household-wealth-and-foreclosure-rate-both-rise-what-kind-of-recovery-is-this/ ) But, Floyd Norris of the New York Times pointed out in his Saturday column, those numbers don’t mean that U.S. households have rediscovered the virtues of thrift. It looks like a good part of the drop in debt is a result of banks writing off bad debts and getting stingier with credit. So U.S. consumers may not be saving more because they want to. It looks like they’re spending less because banks aren’t lending. Here’s how this consumer credit crunch works. For example, banks are writing off credit card debt at a record rate with write-offs climbing to an annual rate of 10.2% in the third quarter. In response to this high level of bad debt banks have been reducing credit lines, raising monthly minimums, increasing rates, and getting generally tougher on credit card holders. That’s led to a huge drop in the amount of credit available to consumers on their cards. At the end of September, Norris reported in his column, banks said credit card holders had $3.4 trillion in unused credit lines available for them. That’s down 28% from the peak of $4.7 trillion in unused credit lines in June 2008. Home equity lines show the same trend. Outstanding home equity loans, which let a home owner tap into the equity in a house, were down just 1% from their peak of $667 billion. But unused home equity lines of credit came to just $539 billion, the lowest since the end of 2005 and down 25% from the peak at the end of 2007. Businesses in the United States, especially small businesses, complain that they continue to face a credit crunch because banks have cut back on lending. Consumers, it seems, are facing their own version of a credit crunch. Both versions are a drag on any economic recovery in the United States.
Thoughts on TARP Repayment There seems to be a sense that the banks are rushing to repay the TARP funds so they can pay bonuses. I think it is more likely that are just taking advantage of the opportunity to raise capital.What has made this doable now is the massive support for asset prices by the Government (and taxpayers). This includes the Fed's MBS purchase program, the loose lending by the FHA, the FTHB tax credit, the HAMP, and more. These programs have limited the losses at the financial firms. Maybe this will work - as I noted last year, house prices in low end bubble areas might have bottomed - although prices are clearly still too high in many mid-to-high end bubble areas and eventually will decline (at least in real terms) to more supportable levels. And that probably means more losses for the banks. Also in the article, Dash and Martin write that some financial experts think "If the economy takes a turn for the worse ... these same large banks will return to the government for a new round of aid." I don't think so. I doubt there will be a TARP II. If any of these banks get in trouble again, they will probably be dissolved, management fired, and the shareholders wiped out. Isn't that implicit in paying back the TARP? Isn't that a key component of financial reform?
- Refinance Activity and Interest Rates The Mortgage Bankers Association's (MBA) current forecast for refinance activity in 2010 is $693 billion, and falling further in 2011 to $591 billion. The MBA is currently estimating 2009 refinance originations will be $1,246 billion - so they expect activity to fall almost in half.
- FDIC's Bair takes the "Over"On Saturday I wrote that I'd take the "over" - more bank failures in 2010 than 2009. This is primarily because many FDIC insured banks are overly exposed to Construction & Development (C&D) and Commercial Real Estate (CRE) loans.FDIC Chairwoman Sheila Bair is also taking the "over".
- Fed MBS Purchases: Over 85% Complete The Fed purchased a net total of $16 billion of agency-backed MBS in each of the last three weeks, with the last one through December 2. This purchase brings its total purchases up to $1.058 trillion, and by the end of the first quarter 2010 the Fed will have purchased $1.25 trillion (thus, it is 85% complete)
The value of bankers (and others) Bankers should count themselves lucky that the UK and French governments are only considering a 50 per cent supertax, because their value to society is negative, says a report released today by the New Economics Foundation.To me, the report is a perfectly sensible attempt to describe the externalities - the difference between the private value and the social value - that are embodied in different jobs.But the underlying idea is sound and the implication is clear. It is a perfectly reasonable task of governments to discourage jobs where social value is less than the private value and vice versa. By this logic, if the social value of a job is strongly negative, it should be outlawed.The logic continues that if elite bankers - or any other profession - don’t like the idea of state intervention along these lines, they will be able to find well-remunerated jobs elsewhere in the economy, since we are told they are superstars and are worth every penny they earn. Mervyn King, Bank of England Governor, was speaking along the same lines in 2008, when he commented to Parliament: “Such a high proportion of our talented young people naturally think of the City as the first place to work in. It should not be”.
Industry Reactions and Performance: Cases in Point
Hedge funds tip-toe toward an uncertain future After the worst performance in decades, investors yanked $300 billion of cash over three quarters starting late last year. And more than 2,100 funds were liquidated since the end of 2007, according to Hedge Fund Research Inc. As if the market meltdown weren't enough, the hedge fund industry took a beating over Bernie Madoff's $65 billion Ponzi scheme one year ago, followed by the widening Galleon Group insider-trading case. The upshot is that an industry never comfortable with scrutiny and second-guessing has come under the microscope, with regulators and investors clamoring for change. So what will the post-crash, post-Madoff, post-Galleon hedge fund universe look like? One way or another, the wild west of American capitalism is expected to become just a little more civilized, humbler and almost certainly less lucrative, according to interviews with many industry sources. A return to the golden age of fat fees -- usually 2 percent of assets and 20 percent of profits, though some stars charged much more -- and practically zero oversight is considered extremely unlikely, these sources say. But will hedge funds resume their two-decades long dominance of the U.S. investment scene? That depends on just how tough the Securities and Exchange Commission, the Obama administration and their European counterparts intend to get. In March, Treasury Secretary Timothy Geithner testified about plans to tighten oversight of hedge funds. The betting is mandatory registration with the SEC is inevitable. This is a requirement the industry has long resisted, fearing it would compromise their trading strategies by forcing them to show their hand. Another proposal from U.S. President Barack Obama's administration would make the largest hedge fund advisers -- the ones that could set off a crisis of Long-Term Capital Management proportions -- subject to additional supervision by the Federal Reserve. Although most analysts agree that the era of benign neglect is over, several hedge fund executives expressed doubt that the new regulations, if they come at all, will represent much of a threat.
- Chart of the day, hedonic treadmill edition Here’s my favorite pair of charts from David Kochanek’s latest hedge fund compensation report. The first shows how much people get paid, by job title:and the next shows how happy they are, also by job title.
Can KKR Make Like Berkshire Hathaway? What Kravis and co-founder George Roberts, 66, covet most is Buffett's ability to pounce on deals of all sizes in any economic environment. "He has certain advantages over us," says Kravis. "I would like to see us create those advantages for ourselves." That the storied dealmakers at KKR are acknowledging their shortcomings says much about the state of the leveraged buyout business. There was a time when private equity firms could easily collect money from investors, borrow more from banks, use the cash to buy companies, rejigger their finances, and then sell or take them public for a quick profit. When banks stopped lending in 2007 the dealmaking ground to a halt, and firms were left holding a slew of overleveraged companies they couldn't unload. All told, 543 private-equity-owned companies in the U.S. have gone bankrupt in the past two years, according to Capital IQ (MHP)—including two of KKR's: real estate lender Capmark Financial Group and doormaker Masonite. As a result, KKR's returns have suffered. Kravis and Roberts could try to wait out the rough patch, nursing their wounds and promising investors they'll do better once the deal environment improves. Instead they're reshaping KKR's three-decade-old playbook. The financial crisis has taught the granddaddies of private equity many things. They must be nimbler and quicker. They must move beyond the audacious leveraged buyouts that have come to define private equity in the popular imagination—most famously, their 1989 acquisition of RJR Nabisco. They can't rely solely on debt to pay for their deals. They need, as Kravis puts it, "more control over our destiny." The two have cooked up a four-part plan to make it happen. First, they're building an in-house investment bank to serve KKR's portfolio companies. Second, they're taking KKR public, with shares expected to be on the New York Stock Exchange (NYX) in early 2010, in hopes of one day using the newly minted stock to make acquisitions and invest in the firm. (It listed 30% of KKR in Amsterdam in October.) Third, while Kravis and Roberts certainly aren't abandoning buyouts, they're placing more emphasis on minority stakes and joint ventures with companies in a broader array of sectors. Finally, they're adopting new management techniques to preserve KKR's tight-knit culture as the company expands.
Goldman Sachs Fueled AIG's Gambles Goldman Sachs Group Inc. played a bigger role than has been publicly disclosed in fueling the mortgage bets that nearly felled American Insurance Group Inc. Goldman was one of 16 banks paid off when the U.S. government last year spent billions closing out soured trades that AIG made with the financial firms. A Wall Street Journal analysis of AIG's trades, which were on pools of mortgage debt, shows that Goldman was a key player in many of them, even the ones involving other banks. Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman, according an analysis of ratings-firm reports and an internal AIG document that details several financial firms' roles in the transactions. In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner—AIG, according to the Journal's analysis and people familiar with the trades. The trades yielded Goldman less than $50 million in profits, which were mostly booked from 2004 to 2006, according to a person familiar with the matter. But they piled risks onto AIG's books, which later came to haunt the insurer and Goldman. The trades also gave Goldman a unique window into AIG's exposure to losses on securities linked to mortgages. The special inspector general for the Troubled Asset Relief Program, which recently reviewed the New York Fed's effort to stanch collateral calls last year, said Goldman officials said the company believed it would have been fully protected had AIG been allowed to fail because of collateral it had amassed and the additional insurance it had bought against an AIG default. The auditor, however, questioned that conclusion. The report said Goldman would have had a difficult time selling the collateral and that the firm might have been unable to actually collect on the additional insurance.
Goldman Sachs Trading Shouldn't Be Backed by Taxpayer Money, Volcker Says Goldman Sachs Group Inc., which took $10 billion in U.S. bailout funds last year, shouldn’t get taxpayer support if the firm focuses on trading over banking, according to former Federal Reserve Chairman Paul Volcker. The “safety net” provided by the U.S. government “should not be extended beyond the core commercial-banking business,” Volcker, 82, said in an interview yesterday at Deutsche Bank AG’s Berlin office, where he was attending a conference. “They can do trading and do anything they want, but then they shouldn’t have access to the safety net.” Goldman Sachs, the most profitable investment bank in Wall Street history, has reaped more than 90 percent of its pretax earnings this year from trading and so-called principal investments, which include market bets on securities and stakes in companies. The other 10 percent came from advising clients on takeovers and capital-raising and from asset management, which includes managing hedge funds and buyout funds. When the collapse of smaller rival Lehman Brothers Holdings Inc. triggered a crisis of investor confidence last year, regulators allowed Goldman Sachs and Morgan Stanley, another competitor, to convert into bank holding companies. That put the New York-based firms under the Fed’s purview and gave them access to cheap funding. The two firms received federal guarantees on new debt issues, as did commercial banks and some companies with financing businesses, such as General Electric Co.
Jamie Dimon’s Year of Living Not-So-Dangerously In May, Jamie Dimon, the head of JPMorgan Chase, told his shareholders that the bank just had probably “our finest year ever.” Despite being close to the epicenter of the worst financial crisis since the Great Depression, Mr. Dimon’s bank was able to make a great deal of money, obtain government support when needed, and reduce that support level quickly when the overall situation stabilized — thus freeing the bank of constraints on its pay packages (and other activities). It looks as if the full year 2009 may turn out even better than Mr. Dimon expected in May. Speaking at the Goldman Sachs U.S. Financial Services Conference on Tuesday, Jamie Dimon presented JPMorgan Chase’s third-quarter results (year-to-date). His slides are informative, but if you want to pick up the nuances in his message, listen to the Webcast (you have to register, but it’s free). Mr. Dimon’s remarks were informative at two levels: how JPMorgan Chase operates, moving forward; and how that reflects the likely outlook for the United States economy. According to Mr. Dimon, JPMorgan Chase has six “standalone pieces”: investment bank, retail financial services, card services, commercial banking, Treasury and security services, and asset management (page 3 of his slides). These businesses help each other, although Mr. Dimon was studiously vague about exactly how. In fact, there is nothing concrete about synergies or economies of scope in the slides. In his oral presentation, Mr. Dimon made some high-level remarks about “business flows and fees” but the exact meaning is unclear. As Mr. Dimon talks through the various businesses and their prospects, he treats them very much as independent businesses — all dealing with distinct parts of our collective need for very different types of financial services. Investment banking is performing very well, presumably mostly because of trading activities (the details are not clear, but JPMorgan Chase has a very high market share in O.T.C. derivatives). The retail bank has become the No. 1 provider of auto loans in the United States, while mortgages and credit cards are doing “really poorly.” Credit losses over all are higher than expected, given the unemployment rate — consumers are not in good shape and the rising losses on prime mortgages (p.14) imply further trouble ahead. Unemployment may fall in the second quarter of 2010, but — in Mr. Dimon’s view — it’s too early to say that the overall credit situation has done more than stabilize. Over all, we are left with a big bank that is getting bigger. It has been (relatively) well run by Mr. Dimon, but there are no assurances for the future. Given that the “resolution authority” is at this point a mythical beast — with no potential effect on the problem of “too big to fail” — we should worry a great deal. We could set a hard size cap on banks like JPMorgan Chase (e.g., on assets relative to gross domestic product), which could force them to find ways to spin off businesses — and return to the much smaller and more manageable size of the early 1990s. There is no evidence this would be disruptive or cause any economic difficulties. But for political reasons, this won’t happen any time soon. The size and power of banks like JPMorgan Chase are put to good use on Capitol Hill. Huge financial collapses do not emerge unheralded from periods of economic stagnation. They are preceded by great booms, including rapid expansions of “successful” banks.
Deal Makers Target Consumer Goods A new wave of deal making is occurring in the consumer aisle. In recent weeks, a closely-held chip-maker, a juice-maker and a hair- and skin-care company have been offered for sale, as a persistent decline in consumer-spending shakes up the companies whose products line grocery and drugstore shelves. Among the deals brewing, consumer-products giant Procter & Gamble Co. is close to an agreement to buy Sara Lee Corp.'s European air-freshener business, which includes the Ambi Pur brand, after fending off a challenge from S.C. Johnson & Son Inc., according to people familiar with the matter. A deal is likely to be signed in the next few days, they said. While the price isn't clear, those people have said in the past that the business could fetch about $700 million. Neither company would comment. The sale of the Sara Lee operation would bring Sara Lee a step closer to its nearly year-long goal of divesting its international household and personal-care products businesses. Sara Lee had hoped to sell the operations as one, but has been forced to sell them in pieces instead.
A Look at 10 Years of Deal Making It is like walking through the tombstones on a battlefield. All that hope left in ruins. Sprint -Nextel. Boston Scientific-Guidant. Wachovia-Golden West. Credit Suisse-DLJ. Alcatel-Lucent. These are just a few of the biggest corporate mergers of the past 10 years, a decade of deal making without peer in world history. Since Jan. 1, 2000, companies have inked 316,657 M&A transactions across the globe, roughly 87 a day. They were valued at a combined $25.2 trillion, according to research firm Dealogic—nearly half the world's annual gross domestic product. Deal making has largely gone on hiatus since Lehman Brothers Holdings Inc.'s bankruptcy last fall. But it is poised to return in full during 2010, as economically battered companies look to cut costs via mergers. Chief executives and shareholders preparing for the new decade would do well to look at the deals of the past 10 years. I have spent the past week doing just that, trying to determine what big public-company deal is the decade's most successful. The deciding factor: deals that actually fulfill their original strategic goals while returning value to shareholders. (Read a full list at blogs.wsj.com/deals) It is shocking to realize just how few of them lived up to expectations. It wasn't just the disastrous AOL-Time Warner combination, which has held the crown of ignominy since January 2000. Of the 25 largest corporate mergers, just nine companies had stock prices higher than on the date of their big deal announcements. That is a crude measure when considering the 2008 stock-market panic and all the other vagaries that go into share price. Nor can one discount that many companies would have been worse off not doing a deal, even if they're not in a good place today. Yet it is hard to avoid the failure that permeates the decade. Overextended Bank of America has four transactions among the top 100. Private-equity buyers hold 15 spots on the list, and nine of their deals now are in some form of financial distress. Don't forget Tyco Ltd., JDS Uniphase, HSBC Holdings PLC, Verisign Inc., Viacom Inc. and Sears Roebuck & Co., all of which made overpriced or disastrous acquisitions in what came to be known as the Decade of the Deal. Over a 28-year-period, megamergers—the largest 1% of all transactions—destroyed on average 3% of the short-term stock returns of acquirers, according to a new study from a trio of researchers.
Windfall Profits and Taxes
Bankers had cashed in before the music stopped In 2000-07, the top five executives at Bear and Lehman pocketed cash bonuses exceeding $300m and $150m respectively (adjusted to 2009 dollars). Although the financial results on which bonus payments were based were sharply reversed in 2008, pay arrangements allowed executives to keep past bonuses. Furthermore, executives regularly took large amounts of money off the table by unloading shares and options. Overall, in 2000-08 the top-five teams at Bear and Lehman cashed out close to $2bn in this way: about $1.1bn at Bear and $850m at Lehman. Indeed, the teams sold more shares during the years preceding the firms’ collapse than they held when the music stopped in 2008.Altogether, equity sales and bonuses over that period provided the top five at the two banks with cash of about $1.4bn and $1bn respectively (an average of almost $250m each). These cash proceeds considerably exceed the value of the executives’ holdings at the beginning of 2000 (which we estimate to be in the order of a respective $800m and $600m). Our analysis undermines the claims that executives’ losses on shares during the collapses establish that they did not have incentives to take excessive risks. The fact that the executives did not sell all the shares they could prior to the meltdown does indicate that they did not anticipate collapse in the near future. But repeatedly cashing in large amounts of performance-based compensation based on short-term results did provide perverse incentives – incentives to improve short-term results even at the cost of an excessive rise in the risk of large losses at some (uncertain) point in the future. To be sure, executives’ risk-taking might have been driven by a failure to recognise risks or by excessive optimism, and thus would have taken place even in the absence of these incentives. But given the structure of executive pay, the possibility that risk-taking was influenced by these incentives should be taken seriously. The need to reform pay structures is not, as many have claimed, simply a politically convenient sideshow. Even if the type of incentives given to executives of Bear and Lehman – and others with similar pay structures – were not the cause of risk-taking in the past, they could be in future. Financial institutions, and the regulators overseeing them, should give the necessary priority to redesigning bonuses and equity-based compensation to avoid rewarding executives for short-term results that are subsequently reversed.
A Windfall Profits Tax for Goldman Sachs? People are angry at Goldman Sachs. They have become so angry that these people have become blind to the real issues surrounding Goldman’s coming supersized bonus announcements. The real issues are twofold. First, how much are Goldman’s profits and bonus payments related to the benefits provided by the federal government during the financial crisis? Second, how should this compensation, if and when paid, be structured to prevent future undue risk-taking? In this mix is the specter of a windfall profits tax on Goldman Sachs and others in the banking industry to claw back any excess benefit these institutions have received. The crux of the first issue depends upon the amount of Goldman’s profits attributable to assistance provided by the federal government. And Goldman has clearly benefited. Goldman and others are taking advantage of this opening to restore themselves and the financial system to health. The banking industry’s profits should diminish as other new players seek to occupy this open space. But make no doubt, for the time being a good measure of Goldman’s profits are derived from a benefit that Goldman and other financial institutions have obtained from the efforts of the federal government. This benefit fits the circumstances for the imposition of a windfall tax. A windfall tax is best suited when the gain is unexpected, like winning the lottery. Taxing it is appropriate since the payees do not expect a windfall and so taxing the amount does not distort their future economic actions. This alone would justify a tax.But there is another justified reason for a tax on Goldman Sachs. A portion of Goldman’s profits are really the government’s profits. Allowing Goldman to keep this money is simply allowing the investment bank to keep money earned from the efforts of the federal government. This would be a simple wealth transfer from the American taxpayer to the partners of Goldman Sachs. Don’t be fooled by any billion-dollar donation Goldman may announce — the benefits it has received far exceed this number.
Windfalls Show That Bonus Tax Makes Sense(WSJ) A windfall tax is blunt, arbitrary and something supporters of free markets usually instinctively avoid. Even so, following news that Goldman Sachs Group has already set aside a $16.7 billion bonus pool for 2009, the case for windfall taxes on banks that pay giant bonuses is becoming unanswerable. This year's bank profits are windfalls in the purest sense. They aren't the due rewards for exceptional skill but gifts from taxpayers. Many banks are earning huge, risk-free profits borrowing from central banks at ultralow interest rates and lending back to governments at much-higher rates. If this giant, hidden subsidy was being used to support new lending, fair enough. Instead, it looks destined for bankers' pockets. Government action is logical. There are two legitimate policy objectives: to encourage banks to build capital to support new lending; and to help cut fiscal deficits run up during the crisis. Ideally, governments should act together to avoid damaging competitiveness.
Tax the windfall banking bonuses First, all the institutions making exceptional profits do so because they are beneficiaries of unlimited state insurance for themselves and their counterparties. Second, the profits being made today are in large part the fruit of the free money provided by the central bank, an arm of the state. Third, the case for generous subventions is to restore the financial system – and so the economy – to health. It is not to enrich bankers, particularly not those engaged in the sorts of trading activities that destroyed the financial system in the first place. Fourth, ordinary people can accept that risk takers receive huge rewards. But such rewards for those who have been rescued by the state and bear substantial responsibility for the crisis are surely intolerable. What makes them yet more so is that the crisis has devastated the prospects of tens, if not hundreds, of millions of innocents all over the globe. The public finances will be devastated for decades: taxes will be higher and public spending lower. Meanwhile, bankers are about to reap huge rewards. This damages the legitimacy of the market economy. Fifth, it is hard to argue in favour of exceptional interventions to bail out the financial sector at times of crisis, and also against exceptional interventions to recoup costs when the crisis is past. “Windfall” support should be matched by windfall taxes. Finally, these are genuine windfalls. They are, as George Soros has said, “hidden gifts” from the state. What the state gives, the state is entitled to take back, if it is not used for the state’s purposes.
Thumbs Up For the U.K. Bonus Tax Where London has led, will others follow? The U.K. government's decision to introduce a windfall tax on bank bonuses is a justifiable response to the sector's failure to exercise self-restraint throughout the crisis. That the U.K. has found a way to tax payouts that provides an incentive to conserve capital is smart—and provides a template for other countries grappling with this issue.
Wall Street Bonus Culture Ready to Rest in Peace: David Pauly Condolences to Wall Street’s finest. The huge cash bonuses they have longed for and savored are history. Goldman Sachs Group Inc., the profit king of the securities business, has made sure of that. Goldman last week said its 30 top executives will get their traditional year-end bonuses in stock instead of cash -- and the shares have serious restrictions. Recipients won’t be able to sell the stock for five years, though it vests in three. And they might lose the shares if Goldman determines later that the executives earned them by taking heedless risks. Goldman shareholders now will also be allowed to vote on the company’s pay, though their yes or no won’t be binding on management. Bonuses per se aren’t dead. Goldman and rivals Morgan Stanley and JPMorgan Chase & Co. will dish out $29.7 billion in 2009 bonuses, analysts estimate. Some of that should be in cash, and the stock handed out will, with luck, be worth a nice sum years from now. But the time-honored bonus culture featuring large cash payments needed to end. Even a Goldman Sachs director admitted that the day before the firm’s new bonus arrangement was announced. William George, who is also a professor at Harvard Business School, said the practice “has got to move on,” and that compensation needs to be closely tied to long-term performance. Instead of 60 percent of investment firm pay coming from year-end handouts, more will be in salary. And there may be less of that too, because of the pressure on banks from the government and myriad critics to become sounder institutions by raising capital and taking fewer risks. That will reduce profit and the ability to pay. The bonus era seemed over a year ago, when Wall Street eliminated the payouts after those horrendous losses on mortgage-related securities. Then this year, Goldman began earmarking a percentage of its 2009 profit, which has been large, for bonuses. For the first nine months of this year, the amount was $16.7 billion. There were outcries from Washington to Walla Walla from folks who thought Goldman, as a recipient of government bailout money, should have been more circumspect.
Bank’s Reactions vs. Administration Policy & Pressures
Banks: We'll 'step up now' Facing White House pressure to increase lending, bank CEOs plan to tell President Barack Obama in a meeting on Monday that they are ready to “step up” and take additional steps to promote economic recovery, industry officials tell POLITICO. “Every CEO that’s participating is ready to a) listen and b) step up,” said an industry executive familiar with plans for the meeting. “Everybody’s goal is to come out of the meeting with actionable, constructive and measurable things that the industry can do to spur recovery.” Obama will take a measured tone with the bankers, telling them he wants to have a candid and constructive conversation and doesn’t want to vilify anyone, according to administration officials. But the president will tell the banks that they have a special responsibility to help spur recovery because of the extraordinary bailout assistance they received last year. The president will acknowledge the industry concern that regulators are overcorrecting and have become overzealous. And he’ll call for a dialogue about the issue. Still, Obama wants the CEOs to send a signal to loan officers that they’ll not be rewarded for turning down loans. The president will say that lending is critical to the recovery and that he hears story after story about creditworthy borrowers who haven’t missed a payment but have been cut off. “There’s a very strong understanding that we have to work constructively on financial regulatory reform that will provide markets with certainty,” the executive said. “The industry is perceived as recalcitrant because it has raised issues with particular details of reform. However, as a general matter, all of the firms at the table recognize that reforms are necessary to prevent future crises, reestablish confidence in the system and provide certainty. Markets crave certainty.” Rob Nichols, president and COO of the Financial Services Forum, said: “We are in agreement with the administration that we need reform and modernization of the U.S financial supervisory framework. We are committed to the important task of creating an efficient and flexible 21st century regulatory architecture that ensures the safety and soundness of financial institutions, and protects the interests of investors, depositors, and customers. A safe, sound, and efficient financial sector is critical to the health of the U.S. economy, our recovery prospects, and job creation.” The industry executive said the message of the meeting appears to be “half woodshed and half help us move forward.”
- Obama Applies Pressure of Shame to Wall Street Banks Beating on Wall Street makes political sense these days. The public is furious that big banks and Wall Street firms are once again making pots of money while Main Street suffers through 10% unemployment. With year-end bonuses soon to be handed out to financial executives, Obama and the White House need to be seen to be on the side of the little guy. So expect a healthy dose of political posturing before, during and after the President's meeting with top bankers Monday.
Whose side is Obama on? What really sticks in our craw, however, is that while most of the country is hunkered down, Wall Street continues to feast on a bounty of trading profits. You'd expect that a new liberal Democratic president would find a way to give voice to this populist outrage and constructively channel this public anger. But too often, the response from the administration has been to try to convince us that there's little we can do, or should do, to ensure that the economic harvest is more equitably distributed. Now, the White House and congressional leaders find themselves scrambling to get ahead of a growing political backlash that threatens to upend their carefully calibrated agenda, not to mention their political fortunes.
Getting Tough With Wells Is the Obama administration willing to stand up to the megabanks? One way to judge its mettle is to watch how the Treasury handles Wells Fargo's exit from the Troubled Asset Relief Program. Wells's attitude toward the TARP has always been hard to follow. The bank's executives objected to the government's $25 billion preferred stock investment last year. Yet it almost certainly needed that extra cushion to absorb last year's purchase of Wachovia. Now, the bank says it doesn't want to hurt the interests of existing shareholders when paying off TARP. In other words, when making the taxpayer whole, Wells wants to use capital generated by profits rather than a big stock offering like Bank of America's last week. Waiting for enough profits to pay off the investment is risky. Wells could become the only large bank with a government stake if Citigroup pays off its investment. What's more, the Treasury may not want to wait much longer for its money and could pressure Wells to issue stock. What really matters, though, is how much capital Wells ends up with once TARP is repaid. The focus is on Wells's Tier 1 common ratio, a metric that assesses a bank's buffer for losses as a percentage of assets. That ratio at Wells is now 5.18%, far below most peers. If the Treasury takes a tough line, it might demand that Wells hoist the ratio significantly as it exits from TARP, which is what BofA did with its offering last week. Wells would need a hefty $34 billion of new capital to get to BofA's 8.5%, estimates John McDonald at Bernstein Research. Granted, there are reasons why the Treasury may allow a lower level for Wells. First, its financial results have been far stronger than BofA's through the crisis. And regulators may look at that track record and trust Wells to generate capital with profits. Yet regulators might argue that Wells's past performance isn't the only issue. Treasury could point out that J.P. Morgan Chase's track record also has been good, and yet it left TARP with a high Tier 1 common ratio. Admittedly, unlike J.P. Morgan, Wells doesn't have large investment-banking operations, which typically require high capital levels. However, in calculating the ratio, the riskiness of a bank's assets is taken into account. Theoretically, then, J.P. Morgan's Tier 1 common ratio is directly comparable with Wells's number despite the differences in their business mix. Of course, the risk-adjustment process may understate risk at J.P. Morgan's investment bank. But it may also understate the risks of many of Wells's big exposures, like its $124 billion of home-equity loans. The Treasury has reason to take a stand.
Estimated TARP Cost Is Cut by $200 Billion The Obama administration, buoyed by a resurgent Wall Street, plans to cut the projected long-term cost of the Troubled Asset Relief Program by more than $200 billion, in a move that could smooth the way for the introduction of a new jobs program. The White House and leaders in Congress are debating whether to use any of the remaining TARP funds for other domestic efforts, such as a jobs bill. Congress authorized $700 billion for the program during the height of the financial crisis. The Treasury now estimates that over the next 10 years TARP will cost $141 billion at most, down from the $341 billion the White House projected in August. The reduction stems in large part from faster-than-expected repayments by some of the nation's largest banks, as well as less spending on programs to help shore up the financial sector. The government's efforts appear to have helped stabilize the financial sector, and banks have already repaid the Treasury about $70 billion. Bank of America Corp. has said it will return its $45 billion investment as early as this week, and the government now expects total repayments to reach as much as $175 billion by the end of next year. Altogether, it invested $204 billion in 690 firms. The Treasury has also collected more than $10 billion in interest and dividend payments from firms in which it has invested.
Citigroup to repay $20 billion in bailout money Citigroup Inc. said Monday it is repaying $20 billion in bailout money it received from the Treasury Department, freeing the banking giant from the close scrutiny and pay restrictions that came with the rescue program. The government will also sell its stake in the company. The New York-based bank was among the hardest hit by the credit crisis and rising loan defaults and got one of the largest bailouts of any banks during the financial crisis. The government gave it $45 billion in loans and agreed to protect losses on nearly $300 billion in risky investments. Wells Fargo & Co. remains the last national bank that has yet to pay back its bailout money. Citi is selling $20.5 billion in stock and debt to repay the government. It only has to pay back $20 billion because the remaining $25 billion was converted into a 34 percent ownership stake in the bank earlier this year. The government plans to sell that entire stake — which has risen in value by more than 20 percent — during the next year. The loss-sharing agreement will also end as part of the plan. The Treasury Department is in line to earn about $13 billion in profit on its support for Citigroup depending on how much it makes selling the stock, said a Treasury official, who spoke on condition of anonymity in advance of President Barack Obama's meeting with bank officials. After repaying the funds, Citi will no longer be subject to pay restrictions and other conditions of the bailout program. However, the repayment comes at a heavy cost. Raising the new capital will significantly dilute current shareholders' stake in the company. By approving the repayment, the government is essentially saying Citi is on strong enough financial footing to stand on its own. It's a far cry from concerns at the beginning of the year when some analysts were saying Citi could fail completely and be taken over by the government. While the government believes in the strength of Citi, the bank is still facing losses and trying to streamline operations to maintain profitability that has been tenuous throughout the year, even as other big banks recovered.
Another View: Redefining How to Repay TARP Unfortunately, there is no clear rule or standard for how to repay the government for its TARP investments. The time has come to set clear standards on repayment conditions — something only the Treasury and financial regulators can provide. This is a leadership moment that cannot be lost. TARP was created to address a financial crisis of the highest order by supplying capital to the banks vital to the American economy. Last fall, we all watched with horror as bank shares plummeted, credit froze and firms proved unable to raise the capital needed to protect against mounting losses. The government had no choice but to act and become the investor of last resort. Through October 2009, one year into the program, about 700 banks have received over $204 billion in capital.
Not Losing is the New Winning for Bank Lobbyists The backlash against bailouts and bonuses is making it harder for Wall Street to get its way as lawmakers redesign the framework for financial oversight. The biggest banks may be forced to submit to a new regulator for mortgages, credit cards and other consumer products; put $150 billion into a fund the government will use if they collapse; and pay more to insure deposits. Still, the firms that helped precipitate the worst financial crisis in 70 years have so far sidestepped proposals that would have split investment and commercial banking, capped pay or seriously hurt their ability to make money. "The industry is not losing as badly as it thought it might," said Oliver Ireland, a former associate general counsel at the Federal Reserve and now a partner at law firm Morrison & Foerster in Washington. "The fact that someone had a worse proposal on the table and it doesn't happen — it's hard to view that as a win. It's not as big a loss."
Reactions and Assessments
The Public's New Fear of Finance Too many of the leaders of the world's largest banks, brokerage houses and other financial powerhouses don't get it. They don't understand why the public is so angry at them and their paychecks. They cannot comprehend why elected politicians who used to court them are now so hostile. They don't see that they are widely seen as the ones who drove the world economy frighteningly close to the abyss of a second Great Depression. "You have not come anywhere close to responding with necessary vigor to the crisis we have had," Paul Volcker, the former U.S. Federal Reserve chairman, told financiers this week at The Wall Street Journal's Future of Finance conference outside London. Politicians, exquisitely sensitive to public sentiment, are warning them: "You have to pass the next-door neighbor test," Alistair Darling, Britain's finance minister, told some of the City of London's best-paid financiers at the conference. "You have to be able to look at your next-door neighbor and justify what you are doing." And many of them cannot. They cannot even explain what they do. They promise better "risk management," but to many of their neighbors the past few years were all risk, no management. Some veteran bankers agree. "There is something wrong with the huge proprietary trading risks being taken [by banks] at taxpayer risk," says Deryck Maughan, formerly of Salomon Brothers and Citigroup. Bankers admit that the world proved far more complicated and dangerous than they imagined. Many acknowledge the need for better guardrails on the superhighway of finance. The thoughtful among them offer reasonable suggestions for improving the management of their businesses and reorganizing and strengthening global financial regulation. What they don't see is the new fear of finance. To many people, the question is more fundamental: Is big finance about making the economy more productive and improving prospects for our children? Or is it just enriching those who work in the casino in which banks place ever bigger bets, pocketing the profits in good times and sticking the taxpayers with losses in bad times?
- Banker Ethics Surprise, surprise: Americans don’t think bankers are very ethical.
The Corporatocracy Systematically Destroying the American Middle Class The biggest scam of the century is making a full conclusion with this deep recession. What made America the envy of the entire world, a strong and vibrant middle class, is being quickly dismantled so the new order of corporate raiders can siphon off life support from the productive economy. Nothing highlights this grand robbery more so than the current situation of our country. For eight straight months foreclosure filings have hit 300,000 or more yet banks on Wall Street are gearing up for record yearend bonuses for a job well done. The average American is seeing the culmination of 40 years of systematic leeching by the corporatocracy that culminated in the largest transfer of wealth in modern history. A bloodless coup that cemented the true nature of our current economic system. People wonder why I focus so much on the middle class of America. This is what has been the fundamental difference between our country and other economic systems. A vibrant middle class that provided adequate housing, a decent education, and a road to sustainable wealth. This was built on the backs of a productive economy. But over the last 40 years we have seen much of the true wealth shift to Wall Street and the financial sector and that has largely eroded the value of what it means to be middle class. The new system is designed for the few and by the few. The new financial regulation being touted as the most sweeping since the Great Depression is woefully weak. Yet this is merely a reflection of the power of the corporatocracy. We really have the best government money can buy.
A Reformist Manifesto But even given this—given that commentators and politicians alike have been writing fulsome obituaries for financial reform since before the first draft sprang aborning from the pen of some Congressional aide—one can still ask why should we not aspire to more? Why should we not try to map out the right answer to our problems first? The simple answer, the clear answer? Then, after we have gotten our bearings, we can debate and argue until the cows come home about the details, the practicalities, and the unintended consequences we want to forestall. Right now, all this debate—if it is taking place at all—is being conducted in the back halls, offices, and lobbies of Capitol Hill, out of public view, by the self-interested financial parties we seek to regulate and the craven legislators who hold themselves in thrall to them. This is no way to reform our financial system, much less run a representative democracy. So let me slap some markers on the table, in the interest of public service. These are concrete ideas which have occurred to me over the course of listening, reading, and participating in the debate over regulatory reform over the last many months. I claim no originality for these ideas, and I cheerfully admit that most if not all have already been put forth by thinkers and writers who are cleverer, better educated, and more eloquent than me. If I can claim credit for anything here, it is in laying out the best of these ideas in the most extreme form. Let us set the perimeter of the debate, and the dimensions of the playing field, before we start arguing over the color of the contending teams' jerseys.
‘Wake up, gentlemen’, world’s top bankers warned by former Fed chairman Volcker One of the most senior figures in the financial world surprised a conference of high-level bankers yesterday when he criticised them for failing to grasp the magnitude of the financial crisis and belittled their suggested reforms. Paul Volcker, a former chairman of the US Federal Reserve, berated the bankers for their failure to acknowledge a problem with personal rewards and questioned their claims for financial innovation. On the subject of pay, he said: “Has there been one financial leader to say this is really excessive? Wake up, gentlemen. Your response, I can only say, has been inadequate.” As bankers demanded that new regulation should not stifle innovation, a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS). “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama’s Economic Recovery Advisory Board.
Colleges Turn the Economic Crisis Into a Lesson Plan Steven Fraser, a professor of American studies at Columbia University, has taught the cultural history of Wall Street for years, usually bringing his students up to the 1990s. But this fall, with the financial crisis providing an irresistible new coda to the course, he extended the timeline to include the drama, intrigue and pain of the past two years. “The class is struck by the similarities between today and the darker periods of Wall Street’s past, for example in the Gilded Age — the meltdown, the bonuses, the reckless speculation, the impact of Wall Street’s behavior on the rest of society,” he said. “We compare the confidence man of 1840 to the confidence man of today.” The financial crisis has brought upheaval to many corners of American life, but on college campuses around the country the turmoil is being embraced as a valuable teaching tool. Academics say they cannot recall a time when so much of the curriculum has had to be revised so quickly to reflect the sweeping developments in the economy. Business schools and economics departments are at the forefront of the overhaul, unveiling new courses and revamping existing ones. But professors of political science, sociology, American history and even English literature are also reworking lectures and syllabuses to include material on the crisis and its aftermath. For students, taking a class that probes the gyrations of the economy — even through the prism of Marx — forces them to keep up with current events. “It makes it easier to talk with authority on the issues,” said Dana Bell, a junior at Vassar, referring to Professor Plotkin’s course on power and public policy. “You’ve got to stay awake in this class, or you’ll be caught off guard.” Although students may be energized by the relevance and immediacy of the subject, Dr. Plotkin detects a growing cynicism as well. “Last fall there was tremendous optimism and hope that directions would change in American politics in significant ways,” he said. “But now there’s much more discouragement among students who sense that whether it’s Obama, Bush, Clinton or anyone else, the institutions — and the interests wrapped around those institutions — create an enormous degree of inertia and resistance to change.”
Re-regulation Politics
Debating Wall Street regulations not easy for Dems House debate over a vast rewrite of Wall Street regulations kicks off in a charged partisan atmosphere, with plenty of pressure from big bank and business lobbies determined to change it. At the same time, moderate and liberal Democrats are displaying their muscle, winning concessions before a single House vote and laying the groundwork for some contentious votes as lawmakers work their way through 30 or more amendments to the regulatory overhaul. A final vote is tentatively set for Friday. Democratic leaders scrambled Wednesday after party centrists rebelled and threatened to delay the bill if the House was not allowed to vote on their proposed amendments. At issue were changes they sought to ease regulatory provisions on consumer protections and complex derivatives trades. The impasse broke, but only after top Democrats spent more than an hour with high-level Treasury Department officials in Speaker Nancy Pelosi's offices crafting a compromise. And last week, members of the Congressional Black Caucus signaled they would withdraw support for the bill if minority communities hard hit by the recession didn't get economic assistance. The bill now contains $3 billion they sought to help unemployed homeowners avoid foreclosure and $1 billion for neighborhood assistance. The broader legislation hits big banks hardest, a response to public anger at the notion that some institutions had grown too big to fail and pushed the nation's financial system to the brink of collapse. It would create a Financial Services Oversight Council to monitor the financial system and watch for future threats. Large, interconnected firms would have to put more money into their reserves. They would have to feed a $150 billion fund to cover the costs of dismantling a failing competitor. And even if healthy, they could be forced to downsize if they are deemed a grave threat to the economy. If the bill's villains are the largest banks, it casts consumers as victims and provides for a new federal agency with regulatory and enforcement powers to oversee the public's dealings with lenders. The bill would remove consumer regulations from current banking regulators and place them in a new Consumer Finance Protection Agency with powers to oversee the public's dealings with lenders. Derivatives, complicated financial instruments, would be traded in more regulated exchanges and hedge funds would have to be registered. The House debate comes more than a year after the downfall of Wall Street banking house Lehman Brothers Holdings Inc. panicked the financial markets and forced an unprecedented intervention by the federal government. The Senate is expected to consider a bill next year.
Firms Face New Curbs on Pay Authorities on both sides of the Atlantic are moving to enact tough curbs on pay, in an indication that governments are taking increasingly aggressive steps to rein in compensation after the financial crisis. In the U.S., the Treasury Department's pay czar, Kenneth Feinberg, is poised to enact tougher-than-expected rules for employees at companies that received large amounts of government assistance. The U.K. on Wednesday slapped banks with a 50% tax on portions of bonuses they pay to individuals, in perhaps the most aggressive move yet by a government. Mr. Feinberg has already capped salaries of top employees under his review. Now, according to government and company officials, he's going after the next tier and is expected to impose $500,000 salary caps on hundreds of employees at the companies.
Bankers Lose to Congressmen Among Americans Furious Over Pay Wall Street firms are recovering. Their standing with the American public isn’t. Executives at financial firms, coming off two years of failures, bailouts and writedowns, are less popular than Congress, lawyers and insurance companies. As they prepare to give out year-end bonuses, they risk another wave of public fury, according to a Bloomberg National Poll. Two-thirds of Americans say they have an unfavorable view of financial executives. More than half say big financial companies are only out to enrich themselves and also say they shouldn’t have received government aid. And most Americans don’t want to see bankers collecting fat checks at the end of the year if their companies were bailed out by taxpayers.“The fact that they’re even in existence should be bonus enough,” says Cassie Swihart, a 58-year-old retired registered nurse from Warsaw, Indiana, who responded to the poll of 1,000 U.S. adults. Brown is also among the 64 percent of people who said bailing out banks was a bad idea. To avoid future rescues, just over half of respondents said banks should be subject to stricter regulation. A minority, 31 percent, would allow troubled banks to fail and an even smaller number, 10 percent, favor breaking up big banks.
House Passes Broad Wall Street Regulatory Overhaul year after Wall Street failures plunged the nation into recession, the House on Friday passed the most ambitious restructuring of financial regulation since the New Deal. The sprawling legislation gives the government new powers to break up companies that threaten the economy, creates a new agency to oversee consumer banking transactions and shines a light into shadow financial markets that have escaped the oversight of regulators. The vote was a party-line 223-202. No Republicans voted for the bill; 27 Democrats voted against it. While a victory for the Obama administration, the legislation dilutes some of the president's recommendations, carving out exceptions to some of its toughest provision. The burden now shifts to the Senate, which is not expected to act on its version of a regulatory overhaul until early next year. The legislation would govern the simplest payday loan and the most complicated high-finance trades. In its breadth, the measure seeks to impose restrictions on every house of finance, from two-teller neighborhood thrifts to huge interconnected conglomerates. Democratic leaders had to fend off a last-minute attempt to kill a proposed consumer agency, a central element of the legislation and one the features pushed by President Barack Obama. The agency would strip consumer protection powers from current banking regulators, and big banks and the U.S. Chamber of Commerce vigorously opposed the idea.
individually, to recover from a brush with near-death. It should be even clearer from out earlier discussions that our present troubles are the accumulated result of the last three decades of not-so-benign neglect, wishful thinking and refusal to face facts. Equally clear should be the notion that this next decade will a challenging one with no financial leverage to bubble us out of our troubles. We're going to have fix this old fashioned way - by earning it. There are two fundamental directions we need to pursue. One is making the enterprise perform as it ought, the subject of the last post (Dealing With the Brave New World: Resilience vs. Sclerosis). 
