* Municipalities and other governments send their money to financial institutions to hold taxpayer money, where it can earn interest before public agencies spend it (the process operates like a CD would).
* Many financial institutions who got these funds, to hold in trust, paid government "advisors" to steer deposits their way. Court documents show that payoffs ranged from $4,500 to $475,000 per deal.
* After the financial institutions got the money (cheaply) they then lent it out at higher rates (or used it to gamble on derivatives), and then paid off the financial advisors for their efforts.
* Damaging state and municipal pensions?
* Contributing to state mandated furlough programs?
* Massive layoffs?
* Prolonging unemployment?
* The number of houses that are underwater?
* Working against homeowner mortgage negotiations?
* Pissing off middle America by giving undeserved bonuses?
Dear Chairman Bair,
America can no longer afford to have a banking system that serves the ends of its executives rather than those of taxpayers and communities who have been saddled with cost of reckless profit-seeking. The FDIC proposal to tie deposit insurance premiums to the incentives in executive compensation programs would be an important step forward towards making sure that bank managers operate in a way that reflects the value of the extensive government support and safety nets they enjoy. Bank officers should not be encouraged, as they are now, to take “heads I win, tails you lose” bets with deposits.
There is no question that the annual accounting/bonus cycle is badly out of line with the time horizon of many of the wagers that financial institutions take. Unfortunately, the belief that using stock options or restricted shares as an important part of compensation would lead to responsible behavior has proven wildly false. Both Bear Stearns and Lehman had substantial equity ownership at both the executive level and among the rank and file. By contrast, when Wall Street was dominated by private partnerships, so the management group was jointly and severally liable for losses, the sort of profligate risk-taking that took place in the run-up to the global financial crisis was virtually unheard of.
Unfortunately, all compensation arrangements at public companies are inherently, “heads I win, tails you lose.” No matter how badly a corporate team performs, its pay is immune from clawback, except in the case of fraudulent conveyance in bankruptcy, and even then, the “lookback” period is usually shortly before the failure of the firm. By contrast, it often takes years to reap the bitter harvest of bonus-flattering decisions.
It may be that the only way to cope with the agency problems inherent to risk-taking in a public firms is to make pay arrangements more symmetrical, as in to find ways to recover compensation from executives and senior business unit managers who managed and led programs and products that were ultimately destructive to their companies. The better the arrangements of the old private partnerships can be approximated (admittedly a tall order) the better.
In addition, I would encourage you to think hard about the perverse incentives posed by acquisitions. One of the striking developments in the US banking industry over the last 20 years is an increase in concentration, particularly among the largest players, which has played directly into our current “too big to fail” policy problem. The usual rationale given in greater efficiency, that is, that bigger banking is cheaper. Yet every academic study I am aware of has found the reverse: that once a minimum threshold is reached (there is some disagreement as to where that lies), banks in the US exhibit a slightly negative cost curve, which means the bigger the bank (measured in assets) the higher its cost ratios. Thus the dramatic expense cutting that occurs in the wake of acquisitions could have been done by each of the merged institutions, separately.
Another reason to be skeptical of bank acquisitions is the poor track record of mergers generally. Virtually every academic study ever done has found most mergers “fail” as in they deliver negative outcomes to stockholders.
So why do deals continue? First, there is a large constituency that promotes them because they are particularly lucrative, in particular, investments bankers (who collect M&A and financing fees) and management consultants. A host of other “helpers” such as lawyers and accountants also reaps fat fees from deals.
But the biggest incentive is again flawed executive compensation. Bank CEO pay is highly correlated with the size of the institution, measured by total assets. And the senior team of the acquired bank is effectively bought off via golden parachutes.
I strongly encourage the FDIC to remove the incentive for executives to bulk up their banks solely to pay themselves more. One way might be to require that executive bonuses be set in relationship to the pre-acquisition peer group for a substantial initial period (at least three years, better yet five) and be benchmarked against the new peer group of bigger banks only if the merged entity had met certain operational performance targets.
I also asked readers of my blog, Naked Capitalism, to offer their comments on the proposal that you, Vice Chairman Martin Gruenberg, and Thomas Curry are supporting. They are glad that the FDIC is serous about bank reform and are keen to see meaningful measures implemented to curb executive-serving, public-endangering compensation structures. I am attaching their remarks.
Sincerely,
Yves Smith
1. Excessive risk taking with short-term profit time horizons, and little to no liability for the CEO.
2. Paying CEOs with stock options that allow cash-outs with no loss price incentives, no matter how poorly the firm is doing.
3. No salary/bonus clawback provisions (like a retroactive tax) for executives who made short-term dumb decisions that collapsed firms after they left.
4. Unwarranted and inefficient mergers that benefit only a select few professionals at the top.
5. Volume-based compensation schemes which insure that the bigger the institution, the bigger the CEO pay schedule (which helps to drive mergers).
* The derivatives market that got us into this mess is now bigger than it was before last year’s meltdown (around $140 trillion).
* Bonuses and salaries for Wall Street’s biggest players, most of it a product of business and accounting fraud, are still going through the roof.
* Many of these guys are now arrogantly telling the world that they’re largely independent of last year’s economic meltdown, or that the government is to blame for the collapse and the now laggard recovery.
* Some of them feel it’s OK not to plan ahead for a meeting with the President of the United States.
* Forty years ago, our real economy grew better with a financial sector that received only 2% of our nation's profits rather than the 40% it receives today.
* That the financial sector misallocates capital by encouraging financial firms to - as Joseph Schumpeter might have put it - play monopoly rather than loan the funds necessary for building monopolies.
* The financial sector produces and hyper-inflates bubbles that cause severe economic crises (think about the many bailouts over the past 30 years).
* Finance CEOs and those that they help to enrich adopt and spread the myth that they are smarter, harder working, and more innovative than the rest of us (they're not; favorable legislation makes them think they are).
* This Social Darwinistic approach not only contributes to accounting and control fraud, but is cancerous to our nation's moral fabric. Indeed, the CEO’s of our largest financial firms are so powerful that they now pose a critical risk to the financial sector, the real economy, and our democracy
It happened while he and his crew were shooting the climax of the movie, where Michael decides to mark Wall Street as a crime scene, putting up yellow police tape around some of the financial district's towers of power.From the early reviews it appears that there's much in the film that I discuss in my book. It opens October 2. I encourage you to go and watch.
While unfurling the tape in front of a "too big to fail" bank, he became aware of a group of New York's finest approaching him. Moore has a long history of dealing with policemen and security guards trying to shut him down, but in this case he knew he was, however temporarily, defacing private property. And his shooting schedule didn't leave room for a detour to the local jail. So, as the lead officer came closer, Moore tried to deflect him, saying: "Just doing a little comedy here, officer. I'll be gone in a minute, and will clean up before I go."
The officer looked at him for a moment, then leaned in: "Take all the time you need." He nodded to the bank and said, "These guys wiped out a lot of our Police Pension Funds." The officer turned and slowly headed back to his squad car. Moore wanted to put the moment in his film, but realized it could cost the cop his job, and decided to leave it out. "When they've lost the police," he told me, "you know they're in trouble."
Why did we pay Goldman Sachs and all the other banks 100 cents on the dollar for their contracts with AIG, using taxpayer money, while we forced GM and others to take massive payment cuts?These are good questions that I think any member of Congress would be hard-pressed to address. To be sure, we might hear the usual "We need to do something about _________" which would be followed by "blah, blah, blah." And that that would be the end of it.
Why hasn't any of the bonus money paid to the CEOs that built this financial nuclear bomb been clawed back?
... why does the US Congress refuse to outlaw the most anti-competitive structure known to our economy, one summed up as TOO BIG TOO FAIL?
When the state allows the private sector to draw on the public treasury when market break down, it also allows the private sector to act like history's tyrants, who placed their needs above those of the public (p. 244).Much needs to be done (which is why I like this observation from Sonia Sotomayor). Think about it. Together, Bank of America, JP Morgan Chase and Wells Fargo have more than one third of all deposits in the United States. If we throw Citibank and Merrill Lynch into this group these five corporations represent almost two out of every three credit card issuers in the country.
The health of the banks is overstated in other ways, too. Last year’s direct infusions of capital are only one of many government props currently supporting the banks, like favorable loans from the Federal Reserve, debt guarantees and incentive payments to modify bad mortgages. Indeed, one of the reasons the banks are so hot to repay the initial bailout funds is that other supports — which don’t come with pay restrictions — are available.Put another way, we've done nothing to alter the underlying structural problems in the banking system. Yet, we're allowing the banksters to pay us back because they've found it easier to rely on the other supports and guarantees (from the Federal Reserve) that don't come with restrictions or congressional oversight (which is largely toothless anyways).
Clearly, the way the banks see it, last year’s bailouts meant unwanted public scrutiny and salary restraints, so paying the money back frees them from those burdens. That bodes ill for regulatory reform. The compensation they seek to protect was based in large part on the risky practices that brought the system to the point of collapse. It stands to reason then that if colossal pay and bonuses continue, so will recklessness.
Just a little more than two decades ago, the credit-card business was a quiet, slightly boring industry dominated by banks looking for easy revenue. Card issuers made money by collecting annual dues and interest payments from cardholders as well as fees from merchants each time a customer used a card. Then the math whizzes arrived. They emphasized that the biggest profits didn’t come from people who always paid off their bills but rather from less-responsible clients who never paid their entire balance, and thus could be milked through silently skyrocketing interest rates, late fees and other penalties. Since 1995, the percentage of the industry’s income from cardholder fees has more than doubled to 40 percent.The article is really a nice window into the psychology behind the industry, and how they use your purchasing history to determine credit limits and interest rate hikes. There's also some good information for those looking to negotiate with the credit card companies.
The financial industry’s threat is a big problem, for two reasons. 
Worse, the credit card industry – in Nicholas Biddle-like fashion – is now telling the world that they don’t have to maintain credit lines in spite of the fact that the U.S. government and the U.S. taxpayer are the genesis of their life support system. They must protect their shareholders first.Hedge fund managers who made vast profits betting against the nation’s financial titans called the ban unfair, and said the move would only prolong the financial crisis.Here's another good one.
Many players warned that the government’s sweeping actions might have unintended consequences. The ban on short selling raised questions about how certain parts of the capital markets would function.One can only wonder where these guys get the strength to go on ... Seriously, what a bunch of ingrates and whiners.
