Thursday, January 28, 2010

Change we need

Change we really need. -- Change Congressional leadership of both parties

Why can't we get new leaders in Congress? The antiquated seniority system by which Congressional leadership is chosen stands in the way of change. Reid and Pelosi along with their Republican counterparts are certainly not about change. They are standing in the way of any attempts for bi-partisanship building. Let's face it, they hate each other.

Let's get new leadership in Congress and maybe something can get done for the good of the country.


Thursday, January 21, 2010

Missed it?

Why do I only see these article in the Financial Times ( of London), as headline articles, and not in US newspapers:

Today it was reported that the Obama administration made $4 Billions dollars on the sale of warrants in banks with groups led by Goldman Sachs paying over the market rate.

Yesterday it was reported that "The Federal Reserve is sitting on billions of dollars of paper profits from its controversial effort to unwind credit default swaps AIG provide to banks like Goldman Sachs".

If it was reported, I guess I ( and most of the rest of the country ) missed it. It certainly didn't make the headlines.

Don't get me wrong, I think the unregulated CDS market really was the "weapon of mass destruction " that help bring us down; but good news is good news and shouldn't be hidden from the American public.


Wednesday, January 20, 2010

Inconvenient Truths

Let's sum up my prior posts and try to make some sense of this whole thing with the Banks. By Banks, I mean large commercial banks like JP Morgan Chase, Citi, Wells Fargo, Bank of America and US Bank; you know the guys the government wants to tax to get back the TARP money lost by GM, Chrysler and AIG. I have referenced my prior post if you want to check back.

1. We now know that the Banks did NOT make subprime loans. Neither did Investment Banks. Those loans were made by unregulated or loosely regulated companies that are now all out of business. See Bernanke and Me and Who Dropped the ball? Posts.

2. The Banks did NOT sell those loans to Wall St. Same guys who made the loans did and they are now gone.

3. The Banks, along with Investment Banks, did engage in the issuance of securities that were backed by those mortgages; HOWEVER, it was the Banks and Investment Banks who actually BOUGHT those "toxic assets" based on ratings of AA and AAA, and thereafter LOST billions of dollars on them when the housing market crashed. The Banks were encouraged to buy them by government regulations. See discussion of Recourse Rule from Basel I

4. Quite clearly executive compensation ( which I too believe is way too high) had nothing to do with causing the whole financial crisis. The Banks have become the "whipping boy " for politicians and pundits who either don't know ( most politicians) or choose to ignore(some pundits like NTY) the facts. Further punishing them can only punish ourselves. See Bonus Madness post

5. Now we can't tax the housing industry.

6. The guys who made and sold the subprime loans are out of business, so we can't tax them.

7. Most of the guys who securitized the mortgages are also out of business-- Lehman Brothers, Bear Stearns, Merrill Lynch, Wachovia, Washington Mutual and Countrywide -- all gone or taken over at a fraction of their one- time value.

8. So let's tax the Banks and the Investment Banks who suffered all those losses to the point that the government had to step in and support them with loans, which have all been PAID BACK with interest and warrants.

9. In fact (hold on to your hats) an argument can be made that the Banks were actually victims in this crisis. While victims is too strong of a word, as I have learned in my reading, the Banks bought the mortgage backed securities at the "urging" of the government. Since they were rated AA or AAA ( Recourse Rule in Basel I)they were given favorable treatment by the regulators for purposes of capital and leverage. Oops !! When the "shit hit the fan" on subprime loans, the housing market crashed and the value of those "safe" securities plunged. The Banks lost Billions, at least on paper. So began the downward spiral That's what the Morgan Stanley guy so graphically and inartfully was tying to say when he said" we ate our own cooking and it choked us". See "Skin in the Game" post.

The Obama administration, The New York Times, among many others, feel the Banks and Investment Banks should be taxed, and taxed some more, because they caused this terrible crisis we are all suffering through. I know it feels good.

My problem is that they have assumed their conclusion. They are correct if their conclusion is correct. However, they assume that the actions of the Banks( the ones they want to tax) caused this crisis. As set out above, that's far from clear. I believe, as does Ben Bernanke and Shelia Bair , that the crisis was caused by SUBPRIME LENDING and the failure of regulators to enforce EXISTING regulations.

The crisis went viral because of the UNREGULATED Credit Default Swap market. As an aside Credit Default Swaps were illegal until the Clinton administration ( with Republican help) made them legal and did not allow them to be regulated. Recall as well that AIG isn't a Bank.

Too bad we can't tax the government.

Let's all remember that "saving" the banking system actually saved the economy, including most importantly main street, from an even deeper recession. Image if the Fed and the government had not taken the action it did. See Are You Happy Now? post.

While we definitely need regulatory reform that improves (not impairs) the banking system, it won't be accomplished by taxing big Banks and taxing won't create jobs.

By the way, as this goes to press, Bank of America and Citicorp announced Billion Dollar losses. Where are the wind fall profits to tax?


Friday, January 15, 2010

Who dropped the ball?

The head of the FDIC, Shelia Baird said in her congressional testimony yesterday that "much of the crisis may have been prevented" had the Fed dealt with subprime mortgages seven years before it did. As you know, that it is my view as well, and as you recall Fed Chairman Bernanke said the same things a few days ago. Of course he didn't blame the failure to take action to rein in subprime mortgages on the Fed. Not sure who he blamed.

This "exchange" by regulators may be even more instructive than their joint determination that subprime lending was the spark that set off the financial crisis which in turn has lead to the real recession we find ourselves still in.

In baseball we call that the Old Alphonse Gaston Act. Meaning each outfielder thought the other outfielder was going to catch the ball, but neither did. It sounds like Bair and Bernanke ( and Schiller) agreed on the cause, they just thought the other (or someone else) was supposed to "catch the ball". If regulatory reform is needed maybe we should start there.


Thursday, January 14, 2010

Bonus Madness

It appears that I need to clarify my own views to my "audience" on the issue of compensation. I have always believed that traders, investment bankers and top executives have become wildly overpaid ( this does not include regular real commercial bankers).

On the other hand, I don't believe their compensation was the root cause of this crisis. Take a look at my early posts and the ensuing comments. The collapse was caused by the bursting of the housing bubble which happened as a result the failure of government to enforce existing regulations applicable to subprime mortgages and unregulated credit default swaps.

Nevertheless, it is my view that the extremely high levels of senior executive compensation has been harmful, and particularly destructive for my industry, the law, as equally "smart" lawyers attempt to keep up with their business clients. The things law firms have done to keep up with their business counterparts have done great harm to what once was a learned and collegial profession. The practice of law now is more just like another bottom line business. I blame high corporate compensation to a large degree ( not just in banking-- look at CEO and other senior exec comp). We felt we had to keep up.

Regular bankers never used to be very highly paid. They did fine, but it was never considered a high paying job. Rather being a banker was thought to be a stable job with good but not great pay, with good retirement benefits and tenure. Interesting how that has gotten completely turned around.

Investment bankers were the guys who got the big bucks, but back then at least they owned their firms as true partners. Therefore they were risking their own capital and if they reaped the benefits, at least they took the risk/losses as well. Needless to say they were a lot more careful.

How did this all change? First investment banks went public, so they were now in large part risking "other peoples money". In addition since they were no longer partners and couldn't earn profits, they got paid extremely high bonuses from gross profits ( before the net profits were finally given to the shareholders). If they lost money, no matter; that hit the shareholders ( which often included themselves - but they still got their compensation in all events). There is a great article by Michael Lewis in November 2008 where he interviewed the former head of Salomon Brothers who made that very point.

Second, as I said, regular commercial bankers never made that much money. Recall how modestly profitable the core business of banking is. However when Glass Steagall ended ( and even before, using good lawyers), commercial banks got into investment banking. They too starting paying themselves mega bucks just like investment bankers did.

Of course, this all begs the questions as to why any of them are entitled to such out sized compensation. It's all very incestuous with boards and consultants and the like, but my guess is it's the shareholders who, as always, were asleep at the switch. Remember who would get all that bonus money if it doesn't go to the executives--- to the shareholders or to build up capital. However , I read somewhere that shareholders who had widely diversified portfolios wanted the bankers to take big risks so they could make big profits ( even after paying out big bonuses) and felt that as long as they were diversified they could absorb whatever losses might arise. Of course that was before the Great Recession.

Can we turn the clock back? Do we want to?


Tuesday, January 12, 2010

Happy Now?

Here's a future news story that should make the American public, pundits and politicians happy:

"Banks announce record losses today and cancellation of all bonuses.

The Dow Jones plunged to below 4,000 with resulting massive losses in all 401(k)s, employee pension funds and other pubic investment vehicles.

Housing prices dropped another 40% with complete shutdown of lending by weaken banks.

Jobless rate approaches 20%."

At last the public, pundits and politicians are happy because they really socked it to Wall St and those Bankers. Boy does that feel good.


Friday, January 8, 2010

Show Trials

What really bothers me about treating these terrorists as criminals, rather than enemy combatants, is that it debases our legal system and sets us up for ridicule. It is clear to me from comments made by the Attorney General and progressive members of Congress, who prefer the criminal law approach, that this process will be correctly viewed as "show trials" and as such does more harm to our system than dealing with this as war.

When asked about what would happened if Sheik Khalid Muhammad were found not guilty,or if the case was dismissed because their rights were violated, Eric Holder responded by saying "Don't worry we have lots of other things to charge them with, they'll never be let go". That sounds like this is going to be a show trial to me and does us no honor.

A progressive NYC Congressman said "Let's try them and then we'll kill them". That too sounds like something from what we hoped was the distant past ( or different geographic location) and certainly doesn't uphold our legal principles.

Just recently the conviction of the so called 19th 9/11 hijacker was upheld on appeal. What would have happened if it wasn't upheld? Does anyone think we would have let him go.

Let's do away with this charade ( which actually does hurt us in the short run when they have the right to remain silent, etc) and recognize this for what it is--war. As such we have the Geneva Convention, but I as wrote previously, a third way is needed. I'm not so sure Military Tribunals are the answer either, but the answer sure isn't treating them are ordinary criminals and giving them show trials that the world will readily see through as such.

Also let's remember the basic philosophy of our criminal justice system. We believe that it is worse ( meaning harmful to society) to convict an innocent person than to let a guilty person go free. That's why the standard is guilty beyond a reasonable doubt, and we have strict rules regarding admissibility of evidence, impartial jury of one's peers and the right to remain silent.

Does that overriding principle apply to foreign (or domestic) enemy combatants? Sure they need to have the right to counsel and a hearing, but mostly to ascertain that we have captured the right guy and not someone who was mistakenly picked up or was out and out framed. Applying our rules of evidence and other procedures, and our very strict standards for conviction, just doesn't work; unless the trial becomes a "show trial" complete with a "hanging judge and jury".

I'd like to hear your views.


Tuesday, January 5, 2010

Bernanke and Me

In New York Times' front page article, January 4, 2010, captioned "Lax Oversight Caused Crisis", Fed Chairman Bernanke is quoted as saying "Borrower's chose, and were extended , mortgages that they could not be expected to service in the longer term." Bernanke concluded that poor underwriting ( think NINJA/no docs loans ) and lax regulatory supervision ( the rules were there , just not applied ) was the cause of the housing bubble that lead to the financial panic which in turn lead to the real recession we are suffering through.

Likewise according to the Financial Times the same day, Bernanke said "exotic new mortgages and lending to borrowers who could not hope to repay their loans were the chief causes of the sharp increase in home prices that ran from the late 1990's until 2006 and whose collapse hurt millions of Americans."

With all due modesty , I believe that was what I said in my first posting about subprime loans being the spark that set off the conflagration. Of course we could both be wrong.

Now if he will just tell us why that was allowed to happened. Why didn't the government crack down on this kind of irresponsible lending? My theory is that it was more than just greed, although greed certainly played a part.


Monday, January 4, 2010

Prescription Drug Ads and Your Doctor

Drug ads and prescriptions drugs. How is this allowed? Only doctors can prescribe these drugs in the first place, so why are these ads directed to the general public, instead of the doctors?

If your doctor thought you needed it, they would prescribe it. I know what they are trying to do and I think it is wrong. They are trying to have the patients put pressure on their doctor to take their drugs.

They say "ask your doctor" , of course, they are the only ones who can prescribe medications! Talk about someone "getting in between you and your doctor". These are medical decisions and not a proper subject for general advertising.

Let me hear it from you doctors out there.