Ben was so right
Vincent Farrell, Jr. is Chief Investment Officer of Soleil Securities, a New York based investment management company. Over his long career on Wall Street, he has worked for numerous distinguished firms. Mr. Farrell graduated from Princeton University in 1969 and received his M.B.A. from the Iona College Graduate School of Business in 1972.
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On his “60 Minutes” interview last week, Ben Bernanke was asked what kept him up at night. Interestingly he didn’t say Citi, or deflation, or the TARP and TALF plans. What keeps him up is the fear “that we don’t have the political will. That we don’t have the commitment to solve this problem.” Congress should have reflected on his wise words this past week. Prodded by President Obama’s statement that “I don’t want to quell anger. I think people are right to be angry. I’m angry”, Senator Grassley went around the bend and offered that AIG employees should commit suicide. Death threats were delivered to AIG employees, and Congress unmercifully attacked a $1 a year man who came out of retirement at his country’s urging to try to help solve the financial crisis by heading up the beleaguered AIG. I don’t see much political will or commitment to solve this problem. I see the villagers gathering in the town square with torches getting ready to head off to burn the castle where the evil Dr. Frankenstein lives. And with as much level-headed leadership as howling mobs usually have.
It’s not likely to get a lot better this week as the House Financial Services Committee has a hearing scheduled for Tuesday featuring Ben and Treasury Secretary Geithner. Its sole focus is what did the two men know about the AIG bonuses and when did they know it. Gee, the House already passed a bill taxing bonuses at 90%. Do they want to fire up more rage so they can go to 100%? Actually, if you live in high tax areas like NY City, when you add in State, City and FICA taxes the tab would be 102.5% of the bonus. Makes you want to stay late and get the job done.
“Politicians acting in haste rarely act wisely, least of all when guided by rage” commented the Financial Times over the weekend. The paper calmly, but effectively, editorialized that to use “the tyrannical principle that Congress can use the tax code to void contracts that the executive branch has consented to, after the fact with retroactive force…is Constitutionally dubious…and an abdication of responsibility.” Those FT guys really know how to use the King’s English, don’t they?
Sunday’s NY Times was not going to be outdone by their brethren across the pond. The headline in the paper was that the Obama Administration is going to call for increased oversight of executive pay at “all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation.” The other thing likely to be announced this week (and may already have been by the time you read this) is a three pronged approach to rid the financial system of toxic assets. It would encompass a: 1) an entity backed by the FDIC to buy and warehouse loans; 2) an expansion of the TALF to buy older asset backed paper and not just newly issued stuff; and 3) the long awaited private/public partnership to buy mortgage backed paper and other troubled assets on banks’ balance sheets.
Beyond the problem of how to price this stuff that we have been wrestling with since the idea was first formed, the other, and bigger issue, is who will step up from the private sector to play with the bully that changes the rules after the fact? This should be an interesting week. But suppose the market takes all of this uncertainty and manages to deal with it? A market that can do such a thing is a market that could be rewarding.
As we have said before- stay tuned.
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March 23rd, 2009 at 8:50 am
I’m playing the worlds smallest violin right now for them. Why isn’t getting to keep their job motivation enough to keep working?
And changing the rules after the fact? The rules changed when they asked for government money.
March 23rd, 2009 at 9:42 am
This reminds me of a passage of Lowenstein’s bio on Buffet. Buffet had just purchased a company–can’t recall which, maybe Berkshire–and the CEO informs him that the executive team will remain at Buffet’s pleasure until he brings in his own team. Buffet tells him that the current team will remain and continue doing what it has been doing. Why would he buy a company with an executive team that does not enjoy his full confidence? What else is a company other than its human talent?
The problem here is the fed threw money at executive teams that don’t enjoy the confidence of anyone. These people aren’t stupid–crooked, yes–but not stupid. Even if they had the best of intentions and chose to employ their immense talents toward a remedy, this problem is so large as to be lightyears beyond their poor powers to add or detract. And, the fed ain’t got balls enough to take matters into its own hands. St. Obama’s personality is enough to win elections, but to govern…? So, here we sit, watching kibuki theater between Washington and Wall Street, waiting for the convoluted and inevitable collapse that will provide all parties with plausible deniability. Sure, I screwed up, but, if the other guy had…
March 23rd, 2009 at 10:08 am
I can’t think of much done in the last two decades that wasn’t constitutionally dubious, so crying that whatever shreds remain aren’t protecting people is disingenuous. Constitutional protections for Wall Street fat cats but not the rabble? They should all be rounded up on “material witness” warrants and subjected to touchless torture for two years in a military brig without charge like the citizen Jose Padilla was, THEN talk about the constitution as they might have a greater appreciation.
Contracts and compensation? Just ask Detroit. Those evil overpaid autoworkers that they demanded the labor CONTRACTS be reopened, and that the execs (unlike the NY bankers) not use the corporate jets.
Tell me why it is the height of genius to allow hedge funds to buy a MBS at $0.20 on the dollar, but not allow the mortgagee to buy out the mortgage IN THE SAME MBS at $0.30?
“and Congress unmercifully attacked a $1 a year man who came out of retirement at his country’s urging to try to help solve the financial crisis by heading up the beleaguered AIG”. Let him resign. Today if possible. His only function that I can discern is to funnel the bailout funds to his old firm of Goldman Sachs and their friends where I expect him to be placed on the board or get some other job where he will get millions for doing nothing going forward. And to try to deflect or coverup what is actually going on.
And it wasn’t as “his country’s urging”. Only at the urging of the Wall Street – US Treasury axis of evil. The country’s representatives on the committee expressed the country’s contempt of this whole process.
This abomination of an executive branch non-bankruptcy bankruptcy is the outrage. AIG should be in the hands of receivers or a bankruptcy court. They should dump the lot of the upper management and begin liquidation like the FDIC would do of a bank or what is happening NOW at Lehman. Maybe it should be a long term RTC type structure, but the knaves and thieves who looted first the American investors then the American taxpayers should be on the unemployment lines if not in prison.
March 23rd, 2009 at 10:41 am
Well, if those same idiots who are getting their un-deserved bonuses taxed want to go home and whine and not fix the problems they created, let them. There are probably plenty of aggressive, young turks below their level, who probably had to do a lot of the grunt paperwork and know something about fixing the problems just because of proximity to the above defined idiots and their antics. I think this attention to the retention problem is a lot of pure BS diversion being shouted out by members of that same executive club.
March 23rd, 2009 at 12:34 pm
Congress and the American people are just trying to preserve capitalism. Seems like wall street has destroyed it creating all this Croni-capitalism, and lemon-capitalism.
Howard dean said it this morning… Paying for failure is not capitalism
March 23rd, 2009 at 12:52 pm
We need to look at the facts objectively, not in anger as the politicians want us to. And we also have to keep things in perspective.
First we need to look at the bonuses. They are clearly deserved in AIG divisions that made profits and used bonuses as part of the compensation contracts. Given that a bankruptcy would not effect these employees because a bankruptcy of the London based, AIG Financial Products division or their AIG parent would still keep them solvent there is no argument about the effect of the taxpayer bailout.
Of course, most of the outrage is about bonuses in the AIG Financial Products division, which was responsible for the collapse. But even there, the argument that bonuses should be rescinded or taken back by Congress cannot really be made. For one, most of the employees are based in London and there is no way for Congress to write laws that regulate English activities, particularly when those laws violate the Constitution of the United States to begin with. There is also the time line, which makes it hard for the government to argue that it did not know what was going on. When the AIG Financial Products division blew up the management enticed employees who wanted to leave by promising them bonuses. When the Treasury and Fed officials decided to bail out AIG’s counterparties by ‘saving’ AIG, they knew that employees were retained because of promises of bonuses. In many cases the employees were indispensable because many of the contracts were non-standard and only people who understood them well enough could have unwound them as efficiently as possible. And we must keep in mind that absent those employees, the losses would have been even larger.
The real tragedy is not that these employees are receiving $150 million in bonuses paid for by the taxpayer but that the Fed and Treasury are using taxpayer funds to keep the market from liquidating inefficient companies that made bad decisions. And before it is argued that they have to do that in order to keep the system from melting down let us remember that the systemic risk was created by previous interventions that permitted companies that made bad decisions from being liquidated. Without the previous interventions we would not have seen Citi and Bank of America around to make bad bets on subprime mortgages, ABS or CDO paper, etc. It was only because the Fed stepped in to bail the large players out in the past that they were around to act in such a careless manner in the 1990s and 2000s. And without the GSEs’ expanding balance sheets the housing bubble would never had reached the size that it did before reality forced it to pop. So let us spare ourselves the emotional response and start to look at what is really important.
March 23rd, 2009 at 6:41 pm
Vince,
Thank you for dropping in. I noted with interest too, that what Ben said he feared most was “that we don’t have the political will…to solve the problem.”
Now, that is a very curious line of thought, depending on the interpretation of political will. We all have a different idea of what will solve the problem. And we all define the “problem differently.
Regulators, lawmakers, and banksters all have one definition of what will solve the problem. For these groups of folks, getting bad banks to lend again is the goal. Therefore propping up and preserving the bad banks and insurance companies through taxpayer subsidies is how to get financial intermediaries lending again. For them, the goal is to force their political will onto millions of unwilling of Americans who do not want to finance this protection racket.
For many middle and upper class Americans, the focal point is on getting the financial system working again by cutting out the GANGRENE that are these bad banks and insurance companies. Shit-can the management that created the gangrene to set in, improve the capital ratios of these failed institutions by having the unsecured creditors, the bank bondholders take a 40% hit. These are two very necessary steps. Because our regulators, adminstration and lawmakers suffering from regulatory capture do not have the political will to take these two very necessary steps, here we sit in a stalemate. Instead of acting in accord with being elected public servants, they serve the private interests of the TBTF banksters and insurance scam artists.
As Richard Bernstein eloquently summed up the latest bank bailout plan 97% subsidized by taxpayers today, it won’t work even if there is political will forced upon mainstream Americans: “The history of bubbles shows quite well that financial sector consolidation is inevitable. Financial stocks will be attractive when the government tries to speed up that inevitable process. However, to the contrary, the government continues to attempt to stymie that inevitable consolidation.”
And as for the FT comments that Congress is abusing the tax code “to void contracts the executive branch consented to with retroactive force being constitutionally dubious.” I would like to point out that prior to 1913, there was no federal tax code. It got quietly slipped in and from what I recall was later justified as a temporary to support WWI (I could be slightly off on the precise details). The temporary tax was never removed. And it is not at all uncertain that the executive branch ever endorsed any tax as being in accord with the constitution.
More to the point, however, is that whenever a national crisis arises, what is constitutional gets trampled over for what is politically expedient. The best example was FDR’s Gold Confiscation Act and 40% devaluation of the US dollar overnight. Americans holding US dollars instead of gold were 40% poorer overnight.
And most germane when discussing abuses of law, we need consider first and foremost that for the past 40 years or more bank lobbyists have been fighting tooth and nail to see to it that regulations for the banking industry were made null and void. The banksters saw to it their own regulations were suppressed so they could go on a reckless lending spree under the guise that they were capable of “self-regulation. Please, it is quite tiresome to listen to the banksters and apologists for the banksters trying to uphold the sanctity of contracts and the rule of law after they spent more than a generation seeing to the suppression of law and banking regulations.
Has no one but me noticed the sudden shift in the banking industry? They spent decades suppressing laws, but now suddenly find Jesus and try to uphold sanctity of contracts and rules of laws when it is political convenient for them to do so. This is worse than hypocrisy, because these banksters have long ago abrogated their rights by their criminality.
Now as far as this weeks latest version of the bank-bailout plan unveiled by Geithner this morning it will be well received by the banksters in spite of their whining about the big bad govt being a bully who can’t be trusted. That noise has made my skin crawl this past weekend. The bailout plan is 97% subsidized by taxpayers. The criminally minded banksters, their institutional clients and hedge funds will be chomping at the bit to game this “welfare-for-the-super-rich” program.
So the clog gets unclogged, but only through artificial price-fixing, which is illegal until lawmakers legalize it. And since no one will believe the marks, there will be no restoration of confidence in the financial system. So, you fix the clog but the crisis of confidence remains. The marks on the balance sheets will either be fraudulent or obtained through theft from taxpayers. Either way, it pisses off most Americans.
This remains a very hot, controversial and emotional topic.
March 24th, 2009 at 2:50 am
Torch-and-pitchform crowds are certainly a suboptimal solution.
However, when the castle’s owners keep playing with their toy rockets that have set fire to many houses in the village, one understands the wish – and even the necessity – of burning the motherfuckers down.
March 25th, 2009 at 5:23 am
re “…who will step up from the private sector to play with the bully that changes the rules after the fact.”
This is the very same “bully” that is paying hundreds of billions to keep these so-called financial institutions afloat in the first place. Without the “bully,” AIG, BofA/MER, Citi, Fifth Third would be in Chapter 11 morphing into Chapter 7 (RBS and Lloyds across the pond would be as well due to another “bully”), and GS ($10bn direct TARP + another $13bn from AIG), JPM, and WFC would be close to it. The bully here is the set of Welfare Queens on a Wall Street that, according to its own rules which it devised itself, should not exist.
March 25th, 2009 at 6:28 pm
If anyone is deluded into thinking that the issue of AIG bonus payments is all that important, I have a bridge for sale.
The amount quoted regularly in the press, $165 million, is a rounding error compared to the $8.5 TRILLION committed to the various bailout schemes.