Posts filed under 'Integrity and Responsibility'
From the terrible Algerian slaughter, and its terrible silence, comes this small tale, told by an officer of the special forces who broke with “Le Pouvoir” of his own country and sought asylum in France. It is the autumn of 1994, deep into the season of killing. An old and simple Algerian woman, accompanied by two of her children, comes to the army barracks, to the very building where the torturers did their grim work, in search of her husband and her son. The two men were there; they had already endured three days of torture. The woman was quite certain where the men were being held. It was the same place, she told the astonished young Algerian officer, where the French held and tortured their prisoners during the “war of liberation” decades earlier. Her husband had been an old mujahid, a soldier in the holy war, and had known imprisonment under the French–and now again, during this most recent time of horror and sorrow. The old woman was never to see her husband and her son again. They perished in the ordeal of the new Algeria.
Continue reading “The Furrows of Algeria”
February 27th, 2010
“I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.” James P. Bergin, NY Fed, in an email to his Fed colleagues
‘Though it is hard to divine much understanding from the unredacted filing, it has become clear that Goldman had more involvement than previously believed: In addition to the credit default swaps it bought from AIG, the filing shows that Goldman Sachs also originated many of the underlying assets that AIG and the New York Fed bought back from Société Générale.
The American people have the right to know how their tax dollars were spent and who benefited most from this back-door bailout,” said Kurt Bardella, spokesman for Issa. “Now that it’s public, let’s see if the sky really does fall as the New York Fed said it would to justify its coverup.”
Other lawmakers believed that the New York Fed was trying to hide its ties to Goldman Sachs.’ AIG Reveals the Story – CNN
“Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.
We’re talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system — apart from the matter of AIG’s bailout — deserves further congressional scrutiny…
By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.
This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank…
New York Fed staff and outside lawyers from Davis Polk & Wardell edited AIG communications to investors and intervened with the Securities and Exchange Commission to shield details about the buyout transactions, according to a report by Issa.
That the New York Fed, a quasi-governmental body, was able to push around the SEC, an executive-branch agency, deserves a congressional hearing all by itself.” Secret Banking Cabal Emerges From AIG Shadows – Reilly – Bloomberg
Hat Tip to : Jesse
January 31st, 2010
Let’s hope he doesn’t end up the same way:
“Could it all be a bad dream, or a nightmare? Is it my imagination, or have we lost our minds? It’s surreal; it’s just not believable. A grand absurdity; a great deception, a delusion of momentous proportions; based on preposterous notions; and on ideas whose time should never have come; simplicity grossly distorted and complicated; insanity passed off as logic; grandiose schemes built on falsehoods with the morality of Ponzi and Madoff; evil described as virtue; ignorance pawned off as wisdom; destruction and impoverishment in the name of humanitarianism; violence, the tool of change; preventive wars used as the road to peace; tolerance delivered by government guns; reactionary views in the guise of progress; an empire replacing the Republic; slavery sold as liberty; excellence and virtue traded for mediocracy; socialism to save capitalism; a government out of control, unrestrained by the Constitution, the rule of law, or morality; bickering over petty politics as we collapse into chaos; the philosophy that destroys us is not even defined.
We have broken from reality–a psychotic Nation. Ignorance with a pretense of knowledge replacing wisdom. Money does not grow on trees, nor does prosperity come from a government printing press or escalating deficits.
We’re now in the midst of unlimited spending of the people’s money, exorbitant taxation, deficits of trillions of dollars–spent on a failed welfare/warfare state; an epidemic of cronyism; unlimited supplies of paper money equated with wealth.
A central bank that deliberately destroys the value of the currency in secrecy, without restraint, without nary a whimper. Yet, cheered on by the pseudo-capitalists of Wall Street, the military industrial complex, and Detroit.
We police our world empire with troops on 700 bases and in 130 countries around the world. A dangerous war now spreads throughout the Middle East and Central Asia. Thousands of innocent people being killed, as we become known as the torturers of the 21st century.
We assume that by keeping the already-known torture pictures from the public’s eye, we will be remembered only as a generous and good people. If our enemies want to attack us only because we are free and rich, proof of torture would be irrelevant.
The sad part of all this is that we have forgotten what made America great, good, and prosperous. We need to quickly refresh our memories and once again reinvigorate our love, understanding, and confidence in liberty. The status quo cannot be maintained, considering the current conditions. Violence and lost liberty will result without some revolutionary thinking.
We must escape from the madness of crowds now gathering. The good news is the reversal is achievable through peaceful and intellectual means and, fortunately, the number of those who care are growing exponentially.
Of course, it could all be a bad dream, a nightmare, and that I’m seriously mistaken, overreacting, and that my worries are unfounded. I hope so. But just in case, we ought to prepare ourselves for revolutionary changes in the not-too-distant future.”
January 18th, 2010
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| Flagging: a US sailor stands on the flight deck of the aircraft carrier USS George Washington |
If a week is a long time in politics, a decade is starting to look like an age in geopolitics. Comparing the America that began the 21st century with the America of today is to witness a country that has in some ways quite radically altered its view of itself and its relationship to the world.
In short, the metallic rust of decline has crept into the American soul. “You could argue that the first decade of the 21st century was the last decade of the American century,” says David Rothkopf, a former Clinton administration official and student of US foreign policy. “We are now entering the multipolar century.”
January 16th, 2010
Amidst all the craziness of l’affaire d’Tigre there are some important questions being raised about the linkage between power, wealth, and faithfulness.
The Wealth Report at The Wall Street Journal asks, “Is it harder to stay faithful with large wealth?”
The initial sociological findings don’t seem to correlate wealth with adultery, at least at any higher rates than the general population of males (interestingly enough, a 2007 survey led to the conclusion, “When it comes to infidelity, money has a bigger impact on women than men.”).
Jesus gives us an apt axiom: “Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much.”
And so there’s the corollary question of whether dishonesty in one area of life should lead us to question whether there is dishonesty in other areas. Tiger Woods’ apparent and alleged marital infidelities might make us wonder about his emotional control, for instance. Does his robot-like and highly-controlled exterior hide deeper emotional turmoil, as his outbursts on the golf course (both positive and negative) suggest?
And should we wonder whether Tiger would cheat on the golf course? If he’s willing to cheat on his wife, would he cheat at golf? Or does his great love and respect for golf, the ultimate gentleman’s sport, exclude that possibility? And if so, what does that say about his love and respect for his wife?
On the one hand it is clear that one need not be prosperous to be adulterous, greedy, or dishonest. But wealth can sometimes help to insulate us from the common consequences of these sins, and perhaps make facilitate their commission, while at the same time potentially exacerbating the fallout if and when it does come during this life.
Update: A timely word on the economic implications of recent events from SNL, “The PGA Tour: No Tiger, no problem!”
December 20th, 2009
Public trust has economic consequences, by Howard Davies, Commentary, Project Syndicate: Public trust in financial institutions, and in the authorities that are supposed to regulate them, was an early casualty of the financial crisis. That is hardly surprising, as previously revered firms revealed that they did not fully understand the very instruments they dealt in or the risks they assumed. … But … if this loss of trust persists, it could be costly for us all.
As Ralph Waldo Emerson remarked, “Our distrust is very expensive.” The Nobel laureate Kenneth Arrow made the point in economic terms almost 40 years ago: “It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.”
Indeed, much economic research has demonstrated a powerful relationship between the level of trust in a community and its aggregate economic performance. Without mutual trust, economic activity is severely constrained. …
So if it is true that trust in financial institutions – and in the governments that oversee them – has been damaged by the crisis, we should care a lot, and we should be devising responses which seek to rebuild that trust. …
In the United States,… a … systematic, independent survey promoted by economists at the University of Chicago Booth School of Business … did show a sharp fall in trust in late 2008 and early 2009, following the collapse of Lehman Brothers.
That fall in confidence affected banks, the stock market, and the government and its regulators. Furthermore, the survey showed that … if your trust in the market and in the way it is regulated fell sharply, you were less likely to deposit money in banks or invest in stocks.
So falling trust had real economic consequences. Fortunately, the latest survey, published in July this year, shows that trust in banks and bankers has begun to recover, and quite sharply. This has been positive for the stock market.
There is also a little more confidence in the government’s response and in financial regulation than there was at the end of last year. The latter point, which no doubt reflects the Obama administration’s attempts to reform the dysfunctional system it inherited, is particularly important, as the sharpest declines in investment intentions were among those who had lost confidence in the government’s ability to regulate.
It would seem that rebuilding confidence in the Federal Reserve and the Securities and Exchange Commission is economically more important than rebuilding trust in Citibank or AIG. Continuing disputes in Congress about the precise details of reform could, therefore, have an economic cost if a perception that the system will not be overhauled gains ground. …
Researchers at the European University Institute in Florence and UCLA recently demonstrated that there is a relationship between trust and individuals’ income. …
The data show, intriguingly, that … if you diverge markedly from society’s average level of trust, you are likely to lose out, either because you are so distrustful of others that you miss out on opportunities for investment and mutually beneficial exchange, or because you are so trusting that you leave yourself open to being cheated and abused. …
Maybe we should trust each other more – but not too much.
October 17th, 2009
An Inside Look at How Goldman Sachs Lobbies the Senate, by Matt Taibbi: …Later on this week I have a story coming out in Rolling Stone that looks at the history of the Bear Stearns and Lehman Brothers collapses. The story ends up being more about naked short-selling and the role it played in those incidents than I had originally planned…, but it turns out that there’s no way to talk about Bear and Lehman without going into the weeds of naked short-selling…
It’s the conspicuousness … that is the issue here, and the degree to which the SEC and the other financial regulators have proven themselves completely incapable of addressing the issue seriously, constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned regulatory actions. There probably isn’t a better example of “regulatory capture” … than this issue.
In that vein, starting tomorrow, the SEC is holding a public “round table” on the naked short-selling issue. What’s interesting about this round table is that virtually none of the invited speakers represent shareholders or companies that might be targets of naked short-selling, or indeed any activists of any kind in favor of tougher rules against the practice. Instead, all of the invitees are either banks, financial firms, or companies that sell stuff to the first two groups.
In particular, there are very few panelists — in fact only one, from what I understand — who are in favor of a simple reform called “pre-borrowing.” Pre-borrowing is what it sounds like; it forces short-sellers to actually possess shares before they sell them.
It’s been proven to work, as last summer the SEC, concerned about predatory naked short-selling of big companies in the wake of the Bear Stearns wipeout, instituted a temporary pre-borrow requirement…
The lack of pre-borrow voices invited to this panel is analogous to the Max Baucus health care round table last spring, when no single-payer advocates were invited. So who will get to speak? Two guys from Goldman Sachs, plus reps from Citigroup, Citadel (a hedge fund that has done the occasional short sale, to put it gently), Credit Suisse, NYSE Euronext, and so on.
In advance of this panel and in advance of proposed changes to the financial regulatory system, these players have been stepping up their lobbying efforts… Goldman Sachs in particular has been making its presence felt.
Last Friday I got a call from a Senate staffer who said that Goldman had just been in his boss’s office, lobbying against restrictions on naked short-selling. The aide said Goldman had passed out a fact sheet about the issue that was so ridiculous that one of the other staffers immediately thought to send it to me. When I went to actually get the document, though, the aide had had a change of heart.
Which was weird, and I thought the matter had ended there. But the exact same situation then repeated itself with another congressional staffer, who then actually passed me Goldman’s fact sheet.
Now, the mere fact that two different congressional aides were so disgusted by Goldman’s performance that they both called me on the same day — and I don’t have a relationship with either of these people — tells you how nauseated they were.
I would later hear that Senate aides between themselves had discussed Goldman’s lobbying efforts and concluded that it was one of the most shameless performances they’d ever seen from any group of lobbyists, and that the “fact sheet” … was, to quote one person familiar with the situation, “disgraceful” and “hilarious.” …
October 3rd, 2009
A great deal has been made in recent weeks about Ronald Reagan’s critique of nationalized or socialized health care from 1961: We can go back a bit further, though, and take a look at an intriguing piece from 1848, a dialogue on socialism and the French Revolution and the relationship of socialism to democracy, which includes Alexis de Tocqueville’s critique of socialism in general…
August 22nd, 2009
Sponsored by IBM
Author, Jeremy Hope explains how the CFO can set the bar for ethical behavior, transparency, and effective risk management. He explains how organizations use innovative practices to create sustainable improvement in financial and operational performance. The finance teams in the companies highlighted have eliminated many of the barriers preventing the transition from business-as-usual to create—as Mr. Hope says—a more adaptive, lean, and ethical organization.
August 6th, 2009
Income inequality can rise and fall for all sorts of reasons. Twenty-somethings just starting out and retired seventy-somethings both earn a lot less on average than peak-earning fifty-somethings. As the age profile of the population shifts, income inequality figures shift, too. So what? Consider another example. A generous immigration policy can widen the income gap in this country while at the same time reducing world poverty. That’s good, if you ask me.
Income inequality can also rise as a side-effect of injustice in our socio-economic system. But injustice should be rooted out because it is wrong, not because it widens the income gap as a side effect. If, just to take a wildly hypothetical example, the government has unjustly dumped loads of taxpayer money on Goldman Sachs, such a narrow allocation of public funds for private use should concern us for its own sake – not because Goldman’s bountiful bonuses are likely to exacerbate income inequality.
A good hard jog and an oncoming heart attack may produce the same racing heartbeat. But the distinction matters. A mathematical abstraction like national income inequality is a similarly ambiguous symptom. We can slash the level of income inequality in an instant by slapping even higher taxes on big earners. Or we can slash the level of income inequality by falling into recession. But neither remedy addresses the real problem, which is persisting poverty, not income inequality.
The corruption of a political system in which crises are used to pay off the governing party’s allies is also a real problem. The current silence about inequality – from news editors, pundits and politicians alike – would be golden if only it were based on a grasp of the limited utility of income statistics in guiding us toward more effective and humane public policy. But that is not the case. Instead, it appears that the commentators who fretted over income inequality so publicly for so long have simply stopped worrying about it. Inequality, it seems, only matters when a Republican is in the White House.
Does Income Inequality Really Still Matter? – Will Wilkinson, The Week
July 31st, 2009
Homeowners are turning to the “strategic default” — walking away from a mortgage even when there are funds available to keep paying. “Increasingly, the determination of when to default is not guided by the moral question: Is this the right thing to do? It is guided by the pragmatic concern: Am I too far underwater on my mortgage?” writes Kelsey VanOverloop. Read more »
July 25th, 2009
t’s a game of far more than two halves: more tactical than cricket, more stomach-churning than boxing and more complex than bridge. Throughout a magnificent summer of sport, one competition has lasted longer than any other, and generated the most heated debate. Its goal? To guess when the recession will end.
Every week, it seems, has brought new economic indicators, good or bad. Indeed, the whole thing has recently descended into farce: first, economists were tripping over themselves to declare that we were heading for a “V-shaped” recovery, in which we soared out of the downturn at speed. Then they realised that the economy had contracted in the first three months of the year at the fastest rate since, most probably, the 1930s (the quarterly figures don’t go back that far), and started talking about “double dips”.
When Recovery Comes, It Won’t Feel Like It – Ed Conway, Daily Telegraph
July 9th, 2009
More than half the investors who go through a Wall Street arbitration get nothing at all, and those who do win get about half what they claim to have lost. Once they are in a hearing room, investors typically face a panel of three judges that includes someone from the very industry that got them into the mess in the first place — Wall Street.
Kangaroo Courts for Investors Continue – Susan Antilla, Bloomberg
June 26th, 2009
The weekend G8 communiqué, coming after four months of stabilisation in most financial markets, seemed to mark the official end of the financial crisis. If so, what lessons should be learnt for economic and financial policies in the months ahead? The history of the crisis in the next few paragraphs may not be the standard version presented by most commentators and economists, yet recent events suggest it to be a plausible account of what went wrong.
The blunders that produced last autumn’s financial crisis had nothing to do with the supposedly inflationary monetary policies of Alan Greenspan, or the fiscal profligacy of Gordon Brown, or with Mervyn King’s lack of practical market experience, or Hu Jintao’s mercantilist approach to currencies and exports. All these and many other factors contributed to the vulnerability of the world economy, but none of them would have been enough to cause its near-collapse last autumn. For that we can blame the unforced errors of a man almost forgotten since he slipped quietly out of office at the beginning of this year: Henry Paulson, the former US Treasury Secretary and ex-chairman of Goldman Sachs.
To understand how a localised financial problem in one segment of the US mortgage market turned into a near-collapse of the global financial system we need to recall Mr Paulson’s astonishing misuse of mark-to-market accounting standards to expropriate the shareholders of Fannie Mae and then to bankrupt Lehman Brothers. What made matters even worse was his inability to understand the systemic consequences of what he was doing. Anyone who doubts the importance of individuals in economic history should recall that the single worst day of last autumn’s entire financial crisis, as measured by the widening of risk spreads on interbank credit, was September 23. That was the day Mr Paulson appeared before the Senate Finance Committee to explain what he wanted to do with the $700 billion he had requested from Congress. This was the moment when everyone realised the world’s most powerful economic official did not know what he was doing.
Once the key role of personalities and financial policies is recognised, it is hardly surprising that things began to improve almost as soon as Mr Paulson was replaced by a competent Treasury Secretary, Tim Geithner. A collapse of share prices on Wall Street triggered by the Lehman bankruptcy in September ended the very day after President Obama responded to attacks on Mr Geithner’s personal probity by offering his unqualified support. A week later, the suicidal mark-to-market accounting regulations were dismantled. And it is no coincidence that the financial crisis, at least in America and Britain, effectively ended that week. From that point onwards, the US Government found itself collecting tens of billions of dollars in repayments from supposedly insolvent banks. Far from being forced to nationalise almost every bank and running out of money with which to refinance toxic assets, as predicted by panic-mongering Nobel Laureate economists, the US Treasury now finds itself almost embarrassed by the hundreds of billions of dollars it has budgeted for supporting a banking system that no longer needs state support.
Paulson Caused the Financial Crisis – Anatole Kaletsky, Times of London
June 17th, 2009
June 15 (Bloomberg) — Everyone knows money buys influence. The entire lobbying industry is based on that premise.
Businesses hire teams of people to represent their “interests” to members of Congress. Lawmakers listen, and should they find those interests compelling enough to warrant, say, a tax credit or the insertion of another loophole in the already holey tax code, said lawmakers may find themselves richly rewarded.
Knowing a quid-pro-quo exists and quantifying the value of political connections are two different matters. For example, earlier this month Barney Frank, the powerful Democratic chairman of the House Financial Services Committee, persuaded General Motors Corp. Chief Executive Fritz Henderson to delay the closing of a GM parts distribution center in Norton, Massachusetts, which is in Frank’s district. (Frank also intervened to secure a $12 million cash injection from the Treasury’s Troubled Asset Relief Program for OneUnited, a troubled Massachusetts bank.)
It sure looks as if the government’s stake in GM helped to persuade Henderson of the importance of saving the 80 jobs at the Norton center. Is there a way to determine how much it was worth to him?
Academics have tried to put a price tag on political connections, but often the ties between business and politicians are unknown or too hard to uncover. In many countries, information on lobbying and political contributions isn’t available to the public the way it is in the U.S.
Sudden Death Syndrome
Vanderbilt University economics professors David C. Parsley and Mara Faccio use a new approach to quantify political influence. In “Sudden Deaths: Taking Stock of Geographic Ties,” a paper that will appear in the June issue of the Journal of Financial and Quantitative Analysis, the authors put a price on how much local politicians help their local constituencies.
Specifically, they examine the stock price reactions following the sudden death of a local politician.
Parsley and Faccio begin with the premise that politicians favor local enterprises for obvious reasons: They need votes to get re-elected, they have family and friends in the district, they care about local jobs, etc.
Using geographic location as the framework for their analysis, the economists then use an unanticipated event — the sudden death of a politician — to tease out the effect on companies based in the same town. (Because the stock market incorporates all available information, only an unexpected event can be used to measure the reaction.)
‘Statistically Robust’
What they found from their worldwide study of 8,191 companies and 122 sudden deaths since 1973 was a 1.7 percent decline in geographically connected firms, meaning those companies headquartered in the town in which the politician was born or lived.
That didn’t sound like a lot to me, so I called Parsley with some questions.
“Political connections do have an impact, they are measurable, and it’s not just isolated cases,” he said. “By looking at sudden deaths, we get an idea of what the market thinks the connection is worth. Now it’s worthless because the person is dead.”
Is a 1.7 percent decline in the stock prices of those companies relative to the overall market “statistically robust,” as economists like to say?
“We haven’t been able to make it go away even though we tried different specifications and controlled for everything we could think of,” he said.
Zimbabwe Is Last
Parsley said the effect was greater if the politician sat or chaired an important committee. In those cases — if the geographically connected company was a bank, and the politician was chairman of the Senate Banking Committee — sudden death produced an average 4 percent decline in the stock price relative to the overall market.
Not surprisingly, there was wide variation across countries, with sudden death leading to an average 4 percent decline in politically connected companies in the U.S. and 10 percent in Zimbabwe. Connections matter a lot more to publicly traded family-owned businesses, which has implications for the overall economy.
“To the extent that politicians favor inefficient (family) firms by allocating resources to them, long-term economic growth will also be reduced,” according to the paper.
In addition, the authors found that politically connected firms “suffer a statistically significant decline in sales growth” and access to credit between the year prior to the sudden death and the year after.
Health Care Initiative
Is there a message in all this?
“Stock prices should be unpredictable; nobody can predict them,” Parsley said. “Yet we have a model that can predict stock returns.”
He’s not suggesting we commit murder most foul and trade off it. It is possible, based on the results of the study, to stay on top of the obituaries, short some politically connected companies and walk away with a profit.
I started to think about the broader implications, now that many of the nation’s largest companies, including banks, insurance companies and auto manufacturers, are connected not only to their local politician but to the federal government, up to and including the president. What happens if Barney departs for that great domed chamber in the sky?
Given the impact of sudden-death syndrome on a company’s stock price, we might want to mandate and underwrite more health and wellness programs for our elected representatives.
(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)
June 17th, 2009
It’s starting to look like the spring awakening in bank stocks may not be enough to save the CEOs of America’s biggest troubled banks, Citigroup’s Vikram Pandit and Bank of America’s Ken Lewis.
A top banking regulator is agitating for Pandit’s removal, according to a report Friday in the Wall Street Journal. The clash between Pandit and Sheila Bair, the head of the Federal Insurance Deposit Corp., comes just a month after restive shareholders at Charlotte-based BofA (BAC, Fortune 500) stripped CEO Lewis of his chairmanship.
The FDIC told CNN it had no comment on the story. Citi (C, Fortune 500) says it stands behind Pandit, who took over as CEO at the end of 2007 and has spent much of his tenure trying to clean up the messes left by his predecessors Chuck Prince and Sandy Weill.
In a statement to CNN Friday, Citi chairman Dick Parsons said the company was “confident in our management.”
BofA has similarly endorsed Lewis, and the three-month-long rally in bank stocks has quieted talk of wholesale government takeovers of these firms.
But given the massive investor losses at these banks and the failure of their top managers to anticipate the industry’s meltdown last year, few would shed a tear at either executive’s departure.
“These companies are sort of the poster children for the excesses that created this crisis,” said Eric Jackson, an activist investor and managing member of Ironfire Capital in Naples, Fla. “I think it’s appropriate for the regulators to push for substantial changes in management and on the boards.” Jackson’s firm does not own shares of either bank.
Citi and BofA have been the two biggest bank recipients of federal aid since the financial crisis erupted last fall. Together they have taken some $500 billion in federal aid, the lion’s share of which has come in the form of federal guarantees of their troubled assets.
Recently, both firms have shown some signs that they have broken out of what earlier this year looked like terminal decline.
Shares of Citi have tripled since Pandit surprised Wall Street by saying Citi was on track for its first quarterly profit since mid-2007. BofA’s stock price has quadrupled during the same time frame.
Both banks went on to report better-than-expected first-quarter results in April. Those surprises further boosted the shares even as many observers warned the numbers were padded by one-time gains and legal but incredible accounting maneuvers, such as profits tied to the declining value of the banks’ own debt.
The hopes of a banking sector recovery only intensified after regulatory stress tests showed banks didn’t need that much more money. The findings helped spur a surge of capital raising from the private sector that has bolstered the balance sheets of many big institutions.
Citigroup’s Vikram Pandit Is On the Hot Seat – Colin Barr, Fortune
June 10th, 2009
Stanford University economics professor and former Treasury Undersecretary John B. Taylor has shown how the proposed additional U.S. government debt could cause 100 percent inflation over the next few years, which means most people will see their real standard of living fall as prices double. Long-term interest rates on U.S. government debt have jumped a colossal 81 percent (annualized) in just the last five months and seem slated to go higher as markets see the increased risk of future inflation.
To ameliorate some of the inflation, immature political minds (and even a few immature economists) argue for a massive tax increase to pay for all of the new debt. Mr. Taylor estimates the tax increase would have to be about 60 percent, which, of course, would kill incentives to work, save and invest and would result in a stagnant economy, or worse, massive unemployment.
For centuries in the United States, and even before under English common law, bond holders were secure in the knowledge that in a business failure they would be first in line to collect from the sale of the assets. Suddenly, the immature actors in the Obama administration have overturned well-established bankruptcy law and put a politically favored union ahead of the bond holders in the case of Chrysler and General Motors Corp.
Immaturity In Economic Power – Richard Rahn, Washington Times
June 6th, 2009
June 2 (Bloomberg) — Imagine a novel of more than a thousand pages, published half a century ago. The author doesn’t have a talk-radio show and has been dead for 27 years.
As for the storyline, it is beyond dated: Humorless executives fight with humorless public officials over an industry that is, today, almost irrelevant to the U.S. economy – - railroads. The prose itself is a disconcerting mixture of philosophy, industrial policy, and bodice-ripping: “The wind blew her hair to blend with his. She knew why he had wanted to walk through the mountains tonight.”
In short, you would think “Atlas Shrugged” might be long forgotten.
Instead, Ayn Rand’s novel is remembered more than ever. This year the book is selling at a faster rate than last year. Last year, sales were about 200,000, higher than any year before that, including 1957, when the book was published.
Some assumed the libertarian philosopher would fall from view when the Berlin Wall fell. Or that at least there would be a sense of mission accomplished. One Rand fan, former Federal Reserve Chairman Alan Greenspan, wrote in his memoir that he regretted Rand hadn’t lived until 1989 or 1990. She’d missed the collapse of communism that she had so often predicted.
But “Atlas Shrugged” is becoming a political “Harry Potter” because Rand shone a spotlight on a problem that still exists: Not pre-1989 Soviet communism, but 2009-style state capitalism. Rand depicted government and companies colluding in the name of economic rescue at the expense of the entrepreneur. That entrepreneur is like the titan Atlas who carries the rest of the world on his shoulders — until he doesn’t.
Back Ache
You get the feeling plenty of Atlases are shrugging these days, in part because their tax burden is getting heavier. It’s interesting to compare sales of “Atlas Shrugged,” provided by the Ayn Rand Institute, to Internal Revenue Service distribution tables.
In 1986, a year when “Atlas Shrugged” sold between 60,000 and 80,000 copies, the top 1 percent of earners paid 26 percent of the income tax. By 2000, that 1 percent was paying 37 percent, and “Atlas Shrugged” sales were at 120,000. By 2006, the top 1 percent carried 40 percent of the burden.
Yet President Barack Obama has made it clear he would like to see the rich pay a greater share. Anyone irked at that prospect can find consolation in Rand’s fantasy, in which the most valued professionals evaporate from the work place because of such demands.
Sounding Weird
The hard-money monologue of Rand’s copper king, Francisco d’Anconia, used to sound weird. Who even thought about gold in the early 1990s? Now, D’Anconia’s lecture on the unreliable dollar sounds like it could have been scripted by Zhou Xiaochuan, or some other furious Chinese central banker:
“Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, ‘Account overdrawn.’”
Other “Atlas Shrugged” characters are likewise relevant: Orren Boyle of Associated Steel, one of the corrupt businessmen, is so skilled at anticipating what government will do that he could have taught Jeff Immelt a few tricks. Wesley Mouch, the Washington fringe-character-turned-politician who unexpectedly makes his way to center stage, recalls Timothy Geithner at Treasury in his early days.
Game of Pretend
Rand knew that government tends to drive the most- productive economic figures away even as it pretends to utilize them. Today’s shortage of primary care doctors serves as an example. Various administrations, Democratic and Republican, have tried to nudge more medical students into primary care. Young doctors simply haven’t complied. That is in part because of the higher compensation of specialties. But it is also because the great charm of being a primary care doctor — autonomy to work in a range of areas — has been removed.
Rand foresaw this: “Let them discover the kind of doctors that their system will now produce,” says one of her characters. “It is not safe to place their lives in the hands of a man whose life they have throttled.”
Long before managed-care existed, Rand was describing doctors’ frustration with it.
Most compelling is Rand’s understanding of how politicians’ lack of imagination can kill economies. Of all American governors, Arnold Schwarzenegger of California is the one who most resembles Rand’s outsized characters.
Missing Gene
Yet Schwarzenegger seems to be missing the Rand gene. His policies are all pain and no growth. As the Randerati have been quick to note, California’s uncompetitive treatment of film production is driving Hollywood out of California. Yet Schwarzenegger moved disappointingly late to sign legislation that would even begin to address that problem.
Rand’s persistent heroine Dagny Taggart lectures a public official, but substitute Schwarzenegger for the official and the dialogue still makes sense:
Dagny: “Start decontrolling.”
Schwarzenegger: “Huh?”
Dagny: “Start lifting taxes and removing controls.”
Schwarzenegger: “Oh no, no, no, that’s out of the question.”
Dagny: “Out of whose question?”
In short, it’s time for all of us in policy land to tip our collective hat — though she detested collective anythings — to Ayn Rand. Politics today is proving dramatic enough to change even literary tastes.
(Amity Shlaes, senior fellow at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)
Rand’s Atlas Is Shrugging With a Growing Load – Amity Shlaes, Bloomberg
June 4th, 2009
With the economy floundering, Wall Street in disgrace, and American capitalism facing its most serious ideological challenge in one, two, or three generations (you can take your pick), it’s a good moment to remember Lenin. While the bearded Bolshevik’s grasp of economics was never the best and his stock picks remain a mystery, he would have grasped the politics of our present situation all too well. The old butcher would not have found anything especially surprising about the rise of Barack Obama, the nature of his supporters, or the evolution of his policies. He would have simply asked his usual question: Kto/kogo (“Who/whom”). The answer would tell him almost everything he needed to know. Lenin regarded politics as binary–a zero sum game with winners, losers, and nothing in between. For him it was a bare-knuckled brawl that ultimately could be reduced to that single brutal question: who was on top and who was not. Who was giving orders to whom. Hope and Change, nyet so much.
Of course, it would be foolish to deny the role that things like idealism, sanctimony, fashion, hysteria, exhaustion, restlessness, changing demographics, Hurricane Katrina, an unpopular war, George W. Bush, and mounting economic alarm played in shaping last November’s Democratic triumph. Nevertheless if we peer through the smug, self-congratulatory smog that enveloped the Obama campaign, the outlines of a harder-edged narrative can be discerned, a narrative that bolsters the idea that Lenin’s cynical maxim has held up better than the state he created.
So, who in 2008 was Who, and who Whom?
Millionaires’ Brawl:A Power Struggle – Andrew Stuttaford, Weekly Standard
June 2nd, 2009
This recession is now the worst since at least 1958, which is as far back as the index of coincident indicators stretches back.
The Conference Board reported today that the index, which is intended to measure how the economy is doing on an overall basis, slipped a little in April. The decline was smaller than in previous months, and two of the four indicators edged up, which could be taken as a sign that the economy is at least getting worse at a slower pace.
As I noted last month, the index was nearing the 5.6 percent decline that it experienced in the 1973-1975 recession. Now it is down 5.7 percent.
One way to put that into perspective is that the decline so far in this recession is more than the maximum falls combined in the two previous recessions, in the early 1990s and then in 2001.
“..the decline so far in this recession is more than the maximum falls combined in the two previous receptions, in the early 1990s and then in 2001.” (Floyd Norris)
May 27th, 2009
http://jessescrossroadscafe.blogspot.com/
Bernanke’s wager is on a virtual free lunch by printing money.
“Fed chair Ben Bernanke has long argued that central banks can bring down long-term borrowing rates by purchasing bonds “at essentially no cost”. His frequent writings rarely ask whether foreigner investors – from a different cultural universe – will tolerate such conduct. Mr Bernanke is betting that under a floating currency regime there is no risk of repeating the disaster of October 1931, when the Fed had to raise rates twice to stem foreign gold withdrawals, with catastrophic consequences.”
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May 25th, 2009
An important question at Custerstock:
Are activist investors to blame for horrible corporate balance sheets? (Clusterstock)
On Squawk Box this morning, DealBook maven Andrew Ross Sorkin made some comments about the role investor activism played in getting companies to lever up their balance sheets during the boom times.
That this happened is indisputable, as conservative boards and executives were constantly getting pilloried for taking on too-little debt, paying out too low of a dividend or not executing stock buybacks rapidly enough.
The converse to this idea is that more entrenched, conservative boards, impervious to investor activists would’ve been more likely to resist the temptation of leverage. (If there’s any academic literature on this question, please let us know.)
Perhaps the most striking thing, though, is not just that companies and investors levered up during the boom times (that’s obvious, people always think that they’ll last forever) but that calls for more buybacks and debt were occurring very late into 2007, early 2008. We remember going to media industry banking-sponsored in early 2008, when it seemed pretty obvious that the writing should be on the wall, and yet investors would barrage management with requests for more buybacks. As we wrote, elsewhere, companies frequently complied.
Too bad more boards didn’t have the spine to stick with common sense.
May 25th, 2009
It was surely a surprise when the WSJ hired Thomas Frank to write an opinion column. Anyone who has read either of his bestsellers, What’s The Matter With Kansas? or The Wrecking Crew understands that his view of American politics just doesn’t fit in with the other editorial page writers there. I, for one, am very happy he is writing there and his column today should be required reading for every citizen who cares about the future of this country.
Why Congress Won’t Investigate Wall Street
Republicans and Democrats would find themselves in the hot seat.
The famous Pecora Commission of 1933 and 1934 was one of the most successful congressional investigations of all time, an instance when oversight worked exactly as it should. The subject was the massively corrupt investment practices of the 1920s. In the course of its investigation, the Senate Banking Committee, which brought on as its counsel a former New York assistant district attorney named Ferdinand Pecora, heard testimony from the lords of finance that cemented public suspicion of Wall Street. Along the way, the investigations formed the rationale for the Glass-Steagall Act, the Securities Exchange Act, and other financial regulations of the Roosevelt era.
A new round of regulation is clearly in order these days, and a Pecora-style investigation seems like a good way to jolt the Obama administration into action. After all, the financial revelations of today bear a striking resemblance to those of 1933. In his own account of his investigation, Pecora described bond issues that were almost certainly worthless, but which 1920s bankers sold to uncomprehending investors anyway. He told of the bonuses which the bankers thereby won for themselves. He also told of the lucrative gifts banks gave to lawmakers from both political parties. And then he told of the banking industry’s indignation at being made to account for itself. It regarded the outraged public, in Pecora’s shorthand, as a “howling mob.”
The idea of a new Pecora investigation is catching on, particularly, but not exclusively, on the left.
It’s probably not going to happen, though, in the comprehensive way that it should. The reason is that understanding our problems, this time around, would require our political leaders to examine themselves.
The crisis today is not solely one of bank misbehavior. This is also about the failure of the regulators — the Wall Street policemen who dozed peacefully as the crime of the century went off beneath the window.
We have all heard the official explanation for this failure, that “the structure of our regulatory system is unnecessarily complex and fragmented,” in the soothing words of Treasury Secretary Tim Geithner. But no proper Pecora would be satisfied with such piffle. The system was not only complex, it was compromised and corrupted and thoroughly rotten even in the spots where its mandate was simple.
After all, we have for decades been on a national crusade to slash red tape and stifle regulators. Over the years, federal agencies have been defunded, their workers have grown dispirited, their managers, drawn in many cases from antiregulatory organizations, have seemed to care far more about industry than the public.
Consider in this connection the 2003 photograph, rapidly becoming an icon of the Bush years, in which James Gilleran, then the director of the Office of Thrift Supervision (it regulates savings and loan associations) can be seen in the company of several jolly bank industry lobbyists, holding a chainsaw to a pile of rule books. The picture not only tells us more about our current fix than would a thousand pages about overlapping jurisdictions; it also reminds us why we may never solve the problem of regulatory failure. To do so, we would have to examine the apparent subversion of the regulatory system by the last administration. And that topic is supposedly off limits, since going there would open the door to endless partisan feuding.
But it’s not only Republicans who would feel the sting of embarrassment. Launching Pecora II would automatically raise this question: Whatever happened to the reforms put in place after the first go-round?
Now a different picture comes to mind. It’s Bill Clinton in November of 1999, surrounded by legislators of both parties, giving a shout-out to his brilliant Treasury Secretary Larry Summers, and signing the measure that overturned Glass-Steagall’s separation of investment from commercial banking. Mr. Clinton is confident about what he is doing. He knows the lessons of history, he talks glibly about “the new information-age global economy” that was the idol of deep thinkers everywhere in those days. “[T]he Glass-Steagall law is no longer appropriate to the economy in which we live,” he says. “It worked pretty well for the industrial economy, which was highly organized, much more centralized, and much more nationalized than the one in which we operate today. But the world is very different.”
It turns out the world hadn’t changed much after all. But the Democratic Party sure had. And while today’s chastened Democrats might be ready to reregulate the banks, they are no more willing to scrutinize the bad ideas of the Clinton years than Republicans are the bad ideas of the Bush years.
“We may now need to be reminded what Wall Street was like before Uncle Sam stationed a policeman at its corner,” Pecora wrote in 1939, “lest, in time to come, some attempt be made to abolish that post.”
Well, the time did come. The attempt was made. And we could use that reminder today.
The odds are against us but if Congress won’t do the right thing here, it is incumbent on all of us in the blogoshpere to keep raising awareness of every policy inconsistency and hypocrisy we see. Sooner or later, public opinion will catch up to the truth.
April 30th, 2009
How Sudden Failures Happen Gradually
08:53 PM Thursday April 09, 2009
By Susan Cramm
The book Mistakes Were Made (But Not by Me) discusses the psychological need feel competent — even when evidence to the contrary abounds. The AIG debacle revealed a classic illustration of this in the denial of responsibility by ex-CEO Maurice Greenberg. He said, “I don’t feel any responsibility at all…how can I be responsible for something that happened when I’m not there?”
Let’s get real. Mr. Greenberg worked at AIG for 38 years and left less than 4 years ago. He hired the people currently in charge and “was behind the expansion push that included creating the financial productions unit that nearly sand the firm after he left in 2005.” With due respect to the octogenarian, is this any way for a grown up to behave?
Everyone knows that things fail gradually, then all at once. The seeds of AIG’s destruction were surely planted, watered and tilled by Mr. Greenberg and his fellow leader-gardeners.
Everyone makes mistakes. Grownups take responsibility, even if they didn’t have a clue that their upsides would be somebody else’s downsides. There’s only one form of mistake that is unforgivable — that’s when leaders know what’s right and do what’s wrong.
Let me give you an example from the world of IT. My last post discussed a “clean up as you go” approach to fight the natural forces of entropy that creep in to our systems, confounding leaders in their quest to change their organization to capitalize on marketplace opportunities and competitive realities.
Last week, while chatting with a very talented IT leader, I heard a tale of “mess up as you go.” He proposed cleaning up some critical enterprise data as part of an upcoming project. It involved creating a master record of data that currently resides in multiple places, attached to applications supporting various silos. This is a no-brainer. Something you do because it’s the right thing to do; additional effort that will bring no accolades. Something you do not for yourself, but for your grandchildren.
And yet, surprisingly, his boss was laissez-faire in her response.
There are only three reasons why people don’t do what they should: they don’t have time to, they don’t know how to, or they don’t want to. It wasn’t that she disagreed with the recommendation or was concerned about the additional costs or time. She just didn’t care — she didn’t want to do it because it wasn’t important to her.
She may have been distracted or reflecting the short term, feel-good, me-centered leadership that causes individuals, families, companies, economies, and government to fail gradually, then all at once. Regardless, it’s a mistake happening in real time — completely avoidable and without accountability.
Our individual, seemingly small actions create the building blocks of tomorrow and leaders have a profound responsibility to leave their world a little better than they found it. Fundamentally, this requires the personal integrity and courage to think deeply about the ramifications of today’s actions and admit mistakes.
What are you doing today to create the positive legacy you want to leave behind?
April 14th, 2009
