Hopes Dim

April 4, 2009 3:25 PM

Obama administration seeks to avoid restrictions, including limits on pay "They are basically trying to launder the money to avoid complying with the plain language of the law," said David Zaring, a former Justice Department attorney who defended the government from lawsuits involving related legal issues. "They are trying to create a loophole to ignore Congress, and I think the courts will think that it's ridiculous."

Meanwhile, Obama economic adviser Larry Summers disclosed today that he received almost $8 million from Wall Street last year.

It all has Glen Greenwald very upset:

... Obama -- adopting the same approach that seems to drive him in most other areas -- has taken one step after the next to gut and render irrelevant the very compensation limits he publicly pretended to champion (thereafter dishonestly blaming Chris Dodd for doing so and virtually destroying Dodd's political career). And the winners -- as always -- are the same Wall St. firms that caused the crisis in the first place while enriching and otherwise co-opting the very individuals Obama chose to be his top financial officials.

Worse still, what is happening here is an exact analog to what is happening in the realm of Bush war crimes -- the Obama administration's first priority is to protect the wrongdoers and criminals by ensuring that the criminality remains secret.

posted by Kirth Gerson (77 comments total)

It would be news if Greenwald wasn't upset.

(No slam on Greenwald, obviously there are a lot of things in the world which are worth getting upset about.)
posted by delmoi at 3:29 PM on April 4, 2009 [1 favorite]

Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.

If this is in fact the rationale for the strategy - and I'd like to see some more reporting before I jump on the outrage bandwagon - then this is nothing short of deliberate abuse of the constitutional structure of government. Congress has the power of the purse, and we ought to particularly wary of allowing anything less than a floor vote to determine how a gigantic bailout/stimulus package will be spent.

Also, I'm liking Glen Greenwald more and more. I'm certain he and I don't see eye-to-eye on many things politically, but his summary of Obama's general approach to compromises is spot-on and echoes what others have said in less specific ways. Not the worst of political strategies, but a hell of a way to proceed when you were elected on promises of hope/change/transparency/etc.
posted by Inspector.Gadget at 3:31 PM on April 4, 2009 [1 favorite]

A Treasury spokesman defended the approach. "These programs are designed to both comply with the law and ensure taxpayers' funds are used most effectively to bring about economic recovery," spokesman Andrew Williams said.

Hollow compliance with the law is the last refuge of the scoundrel government.
posted by Inspector.Gadget at 3:33 PM on April 4, 2009

It's tough to decide priorities in our battered economy: give billions to already-wealthy embezzlers, or use the threat of bankruptcy to dismantle labor unions? Can we really do both? Yes, we can?
posted by Blazecock Pileon at 3:36 PM on April 4, 2009 [7 favorites]

(thereafter dishonestly blaming Chris Dodd for doing so and virtually destroying Dodd's political career)

Dodd kind of fucked up his response to this. He eventually tried to blame "those in the treasury" or whatever, but I don't think he named names. But it was already too late. And he tried to deny that he was responsible, although it was his staff that actually put the language in the bill, after talking with staffers at the treasury.

If he had come out and said "Tim Geithner requested this" he would have been a lot better off.

Larry Summers at al obviously think if they can make their financial chicanery complicated enough, it will become impossible to report on, or peoples eyes will gloss over. They think the American people will think "oh, they put in pay cuts, that's good!" and not notice that AIG is paying out counterparties at par. I mean "counterparties!?" "par?!" what does that mean? By obfuscating their payouts, they are hoping that journalists won't take the time to explain it.

Either that, or they simply don't even see the problem with what they're doing and view regulation as a senseless hassle that just needs to be circumvented to get the job done.

Are they right? I hope not.
posted by delmoi at 3:36 PM on April 4, 2009

Brave man!
posted by grobstein at 3:46 PM on April 4, 2009

If Obama disappoints will America adopt a changed mindset? Realizing no white knight is coming to us is more necessary than new leaders and fresh policy put together.
posted by Glibpaxman at 4:10 PM on April 4, 2009 [2 favorites]

Although many of these companies could survive without government help, they might lack money to ramp up lending, which officials consider critical to turning the economy around.

If lending is the key issue, why isn't the state doing it directly rather than sending the money blindly down private ratholes where they apparently have little control and no real idea how it's being used?
posted by weston at 4:20 PM on April 4, 2009 [2 favorites]

Patrick Kennedy to Introduce Bill to Repeal Gramm-Leach … Maybe
posted by homunculus at 4:25 PM on April 4, 2009

Estimated US taxpayer cost for bailout jumps
US watchdog calls for bank executives to be sacked
Servicers to Play Important Role in Toxic Asset Plan
Obama Bank Policy Signals $1 Trillion in Writedowns
A PPIP of a Plan or Just a Big Light Show?
De Soto: 'We must find the financial WMDs'
Why Creditors Should Suffer, Too
The Bailout Goes Global
posted by ornate insect at 4:39 PM on April 4, 2009 [1 favorite]

Shit. I never expected Obama to be perfect. I knew he would make mistakes. But I wanted them to be well-intentioned honest mistakes, not deliberate abuse of the legal and financial system.
posted by orange swan at 4:51 PM on April 4, 2009 [11 favorites]

If lending is the key issue, why isn't the state doing it directly rather than sending the money blindly down private ratholes where they apparently have little control and no real idea how it's being used?

That's not our culture!

(also, the treasury or fed or someone did start buying commercial paper, and they started acting as a secondary market for small business loans)
posted by delmoi at 4:53 PM on April 4, 2009 [1 favorite]

YE$ WE CAN.
posted by ZenMasterThis at 5:45 PM on April 4, 2009

Bonus pay is, and always was, a red herring. If anyone thinks that bonuses are even in the top 10 problems our financial system has right now, you're nuts. Our financial system is undercapitalized by $2,000,000,000,000-$3,000,000,000,000. Individual bonuses of $5,000,000 are a microscopic drop in the bucket compared to potential taxpayer losses in the next 2-3 years.

The bonus issue is just a way to stir up populist rage, and both sides (nationalize vs. let banks fail) are using it well. The only catch is putting the tiger back in its cage once it's let loose; angry, pitchfork-wielding denizens are a tricky bunch and can turn on you at a moment's notice. I think Obama dug his own grave when he railed against bonuses because he incited an uncontrollable furor that'll be tough to control when the second leg of bank bailouts hits us this Fall or next Spring.

Banks are severely undercapitalized right now, and nationalizing them only brings that $2 trillion undercapitalization amount onto the taxpayer immediately, as opposed to down the road. You don't want nationalization; you want shareholders, bondholders, and counterparties to take haircuts. The same way you don't want government ownership of all the underwater mortgages in America. You want banks to negotiate with homeowners to bring down the outstanding amount.
posted by SeizeTheDay at 5:58 PM on April 4, 2009 [10 favorites]

Maybe congress should go back to the table and craft a self-flagellation stimulus package, where the funds can only be used to buy whips for financial execs to use on themselves, or for having Mea Culpa tattooed on their forehead. Or what Weston said.
posted by BrotherCaine at 6:02 PM on April 4, 2009

Bonus pay is, and always was, a red herring. If anyone thinks that bonuses are even in the top 10 problems our financial system has right now, you're nuts. Our financial system is undercapitalized by $2,000,000,000,000-$3,000,000,000,000. Individual bonuses of $5,000,000 are a microscopic drop in the bucket compared to potential taxpayer losses in the next 2-3 years

If by "microscopic" you mean "33%", that's how much Merrill Lynch paid out in bonuses compared to what they got in TARP funds.

Seriously. Merrill may be an outlier, but these bonuses are in no way "microscopic" they are huge, even compared the size of the bailouts.

Furthermore, there's a basic issue of fairness. Why on earth should wallstreeters be getting paid millions of dollars a piece from people making $40/50/60k when those same wallstreeters caused the financial insecurity in the first place.

And beyond fairness, there is a rational reason to be wary of these bonuses. If these guys get paid whether they succeed or fail, they have no incentive to succeed. And they have a huge incentive to make bets that are as risky as possible. If the bets pay off, they'll make huge amounts of money. If they don't, the taxpayer will bail them out and they'll keep their bonuses.

There's also the "tunneling" issue. How we do know these guys are actually even doing anything to try to fix the economy, as opposed to trying to take as much wealth for themselves as possible? We don't. And in fact, that they are paying themselves huge bonuses is an indication that they are doing exactly that.

It's a huge problem. They don't need to be making that much money, and in fact they shouldn't be. Wall street doesn't create wealth, it only moves it around. The more they skim off the top for themselves, the worse the 'real' economy will be.
posted by delmoi at 6:27 PM on April 4, 2009 [24 favorites]

SeizeTheDay, I think your perspective is worthwhile, but I'm skeptical about two things:

1) Individual bonuses of $5,000,000 are a microscopic drop in the bucket It's true, but aren't they part of the cultural problem that created the bigger problem? How can letting anyone keep the expectation that they're somehow still entitled to compensation outside of two standard deviations from the national norm after these kinds of failures do anything other than perpetuate the problem?

2) you want shareholders, bondholders, and counterparties to take haircuts...banks to negotiate with homeowners to bring down the outstanding amount. How do we manage this without taking the kind of control that comes with nationalization if not nationalization outright? My understanding is that nobody wants to take the haircut, so nobody's even showing their cards voluntarily, much less actually negotiating downward. It seems that there's no mechanism encouraging them to do the things you've described.

I'll readily admit my knowledge here is shallow, and I'd love to be corrected, but this is how things seem to me at the moment.
posted by weston at 6:36 PM on April 4, 2009 [1 favorite]

I'm afraid I have to disagree as to what I want. I want to see the executives responsible for this completely cleaned out, then thrown in prison. I know I won't see that. But the last thing I want to see is them getting rewarded for all this. I don't care if it's bonuses, salary, book deals, whatever. I have to say that I also disagree that the bonus pay is a red herring. These people were all perfectly willing to scuttle their companies (and the U.S. economy) tomorrow as long as they got their juicy paychecks today. The government, led by Goldman Sachs execs is funneling money to the same criminals who got us into this mess, and business is continuing as usual.

Finally, I have to disagree about the undesirability of populist rage. It was populist rage (and fear of populist rage) that brought about civil rights for minorities and women, the new deal, and just about every other decent governmental change this country has seen. Banks didn't become undercapitalized magically, they did so because the financial sector and the government are both massively corrupt. Many of the people most responsible have been placed in charge of fixing things, and their solution is to continue funneling money to their friends. It's time to get angry.
posted by Humanzee at 6:39 PM on April 4, 2009 [7 favorites]

I believe I repeat myself when I say that if our leaders want to restore my confidence in the system, they'd take the motherfuckers who created this mess out into a back alley and put a goddamn bullet through the back of their heads.

I say we take a scorched-earth policy toward them. Destroy them, salt their earth, and take everything they ever had. I'm talking wrath of God vengence. Eliminate their bloodline from the face of the earth.

Then I might believe that the system is safe again.

OTOH, I'm a bit grouchy today. On a normal day, I might be satisfied with just drowning the rat bastards who are at the root of this fraudulent mess, and leaving the rest of their families and friends out of it.
posted by five fresh fish at 7:08 PM on April 4, 2009 [4 favorites]

If by "microscopic" you mean "33%", that's how much Merrill Lynch paid out in bonuses compared to what they got in TARP funds.

1) TARP was meant to be a stopgap measure to help undercapitalized banks, and as time goes on, will prove only to be a downpayment on the losses banks will face. At least $2 trillion for the US system alone. And undercapitalized = banks don't have enough capital to take the upcoming losses on mortgages, securities, credit cards, commercial loans, etc. and still be solvent (positive net worth). TARP was also used because it would help banks look healthy in the eyes of regulators (who use capital ratios) and to prevent a total collapse of confidence in the banking industry. The last thing anyone wants is for everyone to pull out their money all at once; TARP was a measure to "pretty-up" the banks to prevent more bank runs.

2) 33% is a randomly picked percentage that doesn't mean anything. You can't compare the annual compensation with TARP money. It's like comparing trees with emeralds. They serve completely different purposes and the only thing they have in common is that they're green.

weston:

but aren't they part of the cultural problem that created the bigger problem?

Yes, and you can fix the problem later, but right now we (the US government and its citizens) desperately need private investors and banks to work together to prevent the taxpayer from taking that $2 trillion hit. In the event that well paid bank employees leave the banks before this mess is cleaned up, I assure you that they'll end up on the private investor side and bilk the US govt. for what it's worth. Bank employees right now WANT the banks to succeed. They work for the banks, and no one else. If you turn on them, they will join the other side and force taxpayers to keep taking hits. Again, compensation is a problem and I fully admit and understand that. But populist America wants to throw out the pilots when no one else onboard can fly the plane, all because a few greedy players took advantage of the system. It's the nuanced view that will win out here. (And sometimes that means a few bad guys will win. It sucks, but trotting out the "holier than art thou" canard is the wrong move.)

It seems that there's no mechanism encouraging them to do the things you've described.

That's true, and the government has made decisions to make this even more difficult. (An example is the FDIC guaranteeing newly issued bank bonds until 2012.) My personal view is that it's too late, we've already made the same mistakes as Japan, and we're in for at least 5-7 years of stagnation (I'm still not sure if it's deflation or inflation, though). No one is incentivized to take the pain. Counterparties would prefer bankruptcy. Bondholders and shareholders would prefer zombie banks. The US government would prefer that none of this ever happened so that politicians could continue to remain completely unaccountable and remain in their Beltway lala land.

But while I am pessimistic on the future, I also believe that focusing on the real issues is critical. Compensation is not in the top 10, and the sooner the American public starts to read a book or two instead of just shouting loudly their ill-informed opinions, the better. And before anyone asks, here are a few: 1) Banks need to be broken up, but how? 2) Investment banks and commercial banks need to be split again. 3) Fannie and Freddie need to be liquidated and Federal Home Loan Banks need to be completely overhauled. 4) The global banking system is too interconnected (banks are each others' counterparties) and hold the entire world hostage. 5) The Federal Reserve needs to be accountable to someone (Congress, President, Supreme Court?). (And that's just a random sampling, not a top five list.)
posted by SeizeTheDay at 7:09 PM on April 4, 2009 [2 favorites]

6) Banks write their own capital rules. 7) Securitization (Originate and Distribute) has proven to be a Dutch Tulip that only works when markets are going up. 8) Derivatives artificially inflate both the money supply and velocity of money. (Again, just random issues that are far, far more important to global finance than bonuses.)
posted by SeizeTheDay at 7:31 PM on April 4, 2009

2) 33% is a randomly picked percentage that doesn't mean anything. You can't compare the annual compensation with TARP money. It's like comparing trees with emeralds. They serve completely different purposes and the only thing they have in common is that they're green.

Are you retarded? They got $10 billion from the treasury in 2008 because that's supposedly how much money they needed in order to survive. Then they turned around and paid their employees $3.6 billion in bonuses. $10 billion in $3.6 billion out. That's $3.6 billion that could have gone towards keeping the company solvent, that's $3.6 billion that the taxpayers could have saved. If TARP hadn't existed, these guys wouldn't have gotten a penny. The cash may "serve" different purposes, but money is all fungible, and to claim otherwise is entirely disingenuous.

By the way, you keep saying that it's just a drop in the bucket, but it's not. It's a fairly substantial percentage. An individual bonus of $5 million may not be a big deal, but multiply that by the thousands of people getting that kind of cash, and we're talking about billions of dollars. $18 billion in 2008 and $37 billion in 2007.
posted by delmoi at 7:47 PM on April 4, 2009 [4 favorites]

They got $10 billion from the treasury in 2008 because that's supposedly how much money they needed in order to survive.

The only retarded person here is the one who's completely ignorant of banking regulations and balance sheets.

According to Merrill's 10-Q filed for the period ended Sept. 26, 2008, Merrill had $36.4 billion in CASH on their balance sheet. They had far more liquidity (cash equivalent securities) than that, but let's just use that for simplicity's sake. TARP was a CAPITAL injection. TARP CAPITAL is used to bolster the bank's shareholder equity, and thus its CAPITAL RATIO. While Merrill was not formally regulated by the Fed or OCC at the time of its sale to BofA, counterparties view Merrill's CAPITAL RATIO as a measure of the bank's health. If counterparties view Merrill as undercapitalized, they force collateral calls, which force a Lehman-esque situation. The amount of cash on hand (well in excess of the aforementioned $36 billion) has NOTHING to do with TARP. Bonuses are paid with cash on hand. Bonuses and TARP are COMPLETELY unrelated.

You and I are done. Take this as the last time I ever respond to you.
posted by SeizeTheDay at 7:58 PM on April 4, 2009 [1 favorite]

Why on earth should wallstreeters be getting paid millions...when those same wallstreeters caused the financial insecurity in the first place.

I know that is a common viewpoint, but what I've read has been along the lines of "a perfect storm" with numerous factors contributing to the problem. Is there a reputable economist or finance expert that lays the blame for the recession solely at the feet of Wall Street? Links please?

Thanks, and /derail.
posted by txvtchick at 8:13 PM on April 4, 2009

Free Larry Summers - New Republic last week gave a bit of background on the new head of the National Economic Council. (No mention of the 8 million).
posted by acro at 8:33 PM on April 4, 2009

Because congress in the past decade has had such huge balls when it comes to standing up to the president.
Obama isn't doing this per se (certainly he's doing it, but), it's how the government 'works.'
The work all along had to be done by people to dismantle all this crap. That's what we're supposed to be doing. Unless he's going to do far more damage to the system by seizing power and unilaterally changing the law, changes in legislation are going to have to come from congress and so from people electing reps to congress.
Howzabout a real campaign refinance deal? Say no more than $300,000 spent on any campaign no matter the source? Equal time, all that. Something to change the system.
Obama - even if he were the greatest statesman to hold office - is still part of the system.

But people keep doing the white knight thing yeah. I saw a clip from SNL where someone (Dan Ackroyd I think) did a Jimmy Carter impression. It was a call in show and Carter was handling all sorts of things. I think it was when he was doing his peace deal in the middle east. Anyway, someone called in having a bad acid trip and Carter talked them down ("what you've taken is Orange sunshine"). So there was the same vibe like he could do anything. Then came Reagan - same deal.
So yeah, the focus has to be on the system, not the man or people doing the job.
I was no Bush fan, but clearly the lasting changes made in the office of President and how the system works, all that, are far more damaging than him chewing with his mouth open, walking around being an asshole.
Same deal here - I think Obama's great. You still have the same system though. So it doesn't much matter how swell a guy he is.
posted by Smedleyman at 8:39 PM on April 4, 2009

According to Merrill's 10-Q filed for the period ended Sept. 26, 2008, Merrill had $36.4 billion in CASH

This does not matter. They were effectively bankrupt either way, and in order to avoid having to file for bankruptcy like Lehman did, which they without question would have had to do, they were sold in a rushed deal to BoA for $50 billion (a deal BoA in all likelihood now regrets) on Sunday September 14, 2008.

And TARP money that BoA received was used, among other things, "to close its acquisition of Merrill." That Merrill went on to give out $3.8 billion in bonuses may or may not be a side issue, but it's not totally irrelevant.

It helps to know these things, and if TARP, TALF, PPIP, and the rest of the ongoing Paulson/Geithner plan are to be at all effective, there must be accountability and transparency. Furthermore, the same executives whose corrupt culture of speculative Wall Street excess caused the crisis should not be rewarded for their mistakes.

Obviously the bonuses are not the root problem here, but they are one of many indications that the root problems themselves are not being dealt with.
posted by ornate insect at 8:43 PM on April 4, 2009

Let me play Obama apologist for a moment here. They are stuck between a rock and a hard place -- they need to get financial institutes on-board with the stimulus package, but these institutes won't do that if there are too many restrictions in the form of pay-cuts, bonuses, etc. Not every bank is in the same mess: the ones that are completely screwed have no choice and must adhere to whatever baggage comes with the bailout; those that were more conservative with their investments and have credit to hand out probably won't be as willing. So, the administration has to deal with both cases to make any real impact.

As much as I'd like to believe that those in the financial industry are well intentioned and want to see us succeed, they are at the top of the money food chain for a reason (namely, ruthless desire for more short-term wealth). I honestly don't know how you would pragmatically get credit flowing when these are the people you have to deal with, so I can sympathize with their decision. Of course, this doesn't mean I'm happy with it at all...
posted by spiderskull at 8:45 PM on April 4, 2009

$1 trillion dollars.

Free Larry Summers - New Republic last week gave a bit of background on the new head of the National Economic Council. (No mention of the 8 million).

Heh, that article is what they call a beat sweetener. There's a reason they didn't mention the $5.2 million 'part time' job with a hedge fund.

By the way, I'm starting this fucking meme, right here, right now: Larry summers should from hereon out be called Larry "the Chin" Summers.
posted by delmoi at 10:05 PM on April 4, 2009 [1 favorite]

Let me play Obama apologist for a moment here. They are stuck between a rock and a hard place -- they need to get financial institutes on-board with the stimulus package, but these institutes won't do that if there are too many restrictions in the form of pay-cuts, bonuses, etc.

The banks don't necessarily have anything to do with the stimulus package. The republicans are actually trying to sow confusion about the relationship to the stimulus and the bailouts, so they can attack the entire recovery pacakge, so it's important to keep them separate.

As far as getting these companies "on board" I don't know. I think it would be possible to circumvent them.
posted by delmoi at 10:11 PM on April 4, 2009

spiderskull: they need to get financial institutes on-board with the stimulus package, but these institutes won't do that if there are too many restrictions in the form of pay-cuts, bonuses, etc.

They need these stimulus packages to survive, right? The words we are looking for are 'Comply with our terms or we give your stimulus package to your competitor.'
posted by Mitrovarr at 11:43 PM on April 4, 2009 [1 favorite]

delmoi -- Yeah, I'm being lazy about it. To my knowledge, though, they are two slightly different means to the same end. I am prone to being wrong about these things, though.

Mitrovarr -- I think that's the ideal situation. The problem is that there are banks sitting pretty on money that could be lent out, and there's no real motivation to do anything about it. If the bill allocates money for their complacent competitors, it's likely they'll do the exact same thing. What really needs to happen is incentive for lending to e.g. small businesses that need to make payroll or invest in upgraded machinery, more labor, etc. Right now, there's little reason to do that (partly because the interest rate is so low that it's just not worth it).
posted by spiderskull at 12:33 AM on April 5, 2009

As far as getting these companies "on board" I don't know.

It seems that bankers often need to be reminded that they too are subject to the law. Here's a polite way of doing that.



In other news, Congress backs off AIG crackdown.
posted by justsomebodythatyouusedtoknow at 1:14 AM on April 5, 2009

Former bank regulator William K. Black on Bill Moyers Journal (Transcript)

BILL MOYERS: Who's covering up?

WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.

These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.

posted by Kirth Gerson at 1:34 AM on April 5, 2009 [2 favorites]

With the possible exception of Obama himself, every player in this drama is more or less identical. So long as this boy's club is primarily concerned with making sure few-to-none of its members are made to feel responsible or uncomfortable, a remedy is no probable or, for that matter, possible.
posted by Legomancer at 4:21 AM on April 5, 2009

Saying "populist" is just a way of ignoring something.
posted by krilli at 5:25 AM on April 5, 2009

Two intractable problems, as I see it:

1) As smart and capable a guy as Obama is, like most of us, he's probably really out of his depth when it comes to some of this more sophisticated finance stuff. (Remember, he only relatively recently saw his own net worth go into millionaire territory, and that was through book sales, not investment or financial wizardry. He's not some rich guy who's spent his whole life getting to know the intricacies of the financial markets.) So that forces him to rely heavily on the opinions of those people in Washington who are regarded as experts in finance. Unfortunately, those are by and large the same people who created this mess. But who else is qualified? I hear a lot of people criticizing the Geithner appointment, for example, but I never hear anyone offering a credible recommendation for someone else to fill the post. You can't put an economist like Krugman into the position, for example, because as qualified as he may be as an economist, he doesn't necessarily have enough experience with the mechanics of the finance system to do the job. Finance =/= Economics.

2) The financial sector has effectively used regulatory capture to put the entire nation on the hook for its reckless behavior. While I don't agree with too much in SeizeTheDay's analysis, I do think it's correct to say that if we can't keep the financial sector working with us at least in the short-term to untangle the mess they've helped make, we will find ourselves on the hook for losses so massive they plunge the country into a severe economic collapse. Not just a deep, short term downturn, but a complete collapse. So, yes, these institutions are basically holding the nation hostage, but at the moment, they've got a very real, loaded gun to our heads, so what are we supposed to do about it?
posted by saulgoodman at 9:26 AM on April 5, 2009 [1 favorite]

Also, I wish I could read the first article you linked, but it's expired on MSNBC, and the Washington Post doesn't seem to have it either. It might have been nice if the FPP hadn't made such sweeping generalizations (i.e. "Obama Administration seeks to avoid...")... What specific elements within the administration are working to circumvent the restrictions?

While I think the treatment Geithner has been getting has been unfair and too often based on guilt-by-association, I have no sympathy for Summers at all. That guy's definitely part of the club. If there should be a push to remove anyone, it should be a move to get rid of Summers. He shares in a significant portion of the blame for pushing all the deregulation under the Clinton administration that got us here.
posted by saulgoodman at 9:50 AM on April 5, 2009

London Bank Bonuses Drop 62%, More Than New York, Survey Shows

Obviously this study is biased because it only includes firms that choose to disclose compensation (and it's only one year's worth of data, so it's not a trend), but financial institutions can/will react to market conditions and compensate accordingly. If year after year bankers are losing money, you can bet that they 1) go out of business and/or 2) cut pay drastically.
posted by SeizeTheDay at 9:52 AM on April 5, 2009

Oh, and here's a response from Geithner to the charges the administration is trying to sidestep the pay limits:

Geithner denies White House sidestepping CEO pay limits

Basically he says the reports are just not true.

As much political pressure as Wall Street has been trying to put on congress to oust Geithner, I just can't believe he's another Wall Street crony.
posted by saulgoodman at 9:56 AM on April 5, 2009

The words we are looking for are 'Comply with our terms or we give your stimulus package to your competitor.'

Simpler: "Comply with our terms if you want to engage in or affect interstate commerce."

Which doesn't mean that would necessarily be remotely smart.
posted by ROU_Xenophobe at 10:08 AM on April 5, 2009

You can't put an economist like Krugman into the position, for example, because as qualified as he may be as an economist, he doesn't necessarily have enough experience with the mechanics of the finance system to do the job. Finance =/= Economics.

Ousting Geithner may not be the right thing to do, and Krugman has said personally that he's not sure he'd be good for the job because of his administrative temperament. But I'd question the idea that an economist couldn't work in the job.

I'd think Finance:Economics::Engineering:Physics. A physicist might not be immediately ready to drop into any field of engineering, but a good one could almost certainly ramp up into specific engineering problems pretty quickly, and quite potentially oversee a group of engineers working on problems he might not grasp all the details of.

It just seems really unlikely to me that the technical parts of finance are so different from or more particularly difficult than the technical parts of econ.
posted by weston at 10:47 AM on April 5, 2009

Here's the FPP story at the Washington Post:
Administration Seeks an Out On Bailout Rules for Firms

Maybe a passing moderator could substitute that link for the deceased MSNBC one.
posted by Kirth Gerson at 11:12 AM on April 5, 2009

Finance:Economics::Engineering:Physics

Well, not really. Economics is important for people making big plays on trends, and obviously it's important for figuring out how to regulate the economy. But I don't think it's needed for doing small scale stuff, at least during 'normal' times. You don't need to know about global capital flows in order to buy bonds. If you want to do exotic derivatives, it's probably a good idea to use economics to figure out what your risk models will be.
posted by delmoi at 1:28 PM on April 5, 2009

Finance is more like gambling than anything else, and it turns out that it's gambling with other peoples money. The irony is that Las Vegas is at least regulated; the same cannot be said of much of Wall Street and the global shadow-banking system.
posted by ornate insect at 1:38 PM on April 5, 2009

just a few random thoughts:

1) what surprises me about l'affaire summers is that it was disclosed by the white house -- yes, on friday at 5 -- but i wonder if it's not, say, volcker playing hardball...

2) 'originate to distribute' has been transmuted to 'originate and put to the gov't/taxpayer'... which, incidentally, could be like the sellout-to-google startup business model (that hasn't worked out so well in any event, but still) if it wasn't so ridden with corrupting conflicts [and, when i think about it more, that's all it ever really was to begin with -- an appeal to a gatekeeper (of questionable authority) and on and on with the presumption that what's within the gate is worth 'keeping']

3) it's been said before, none-too-subtle, but it strikes me that finance and economics has turned into a clerical establishment -- the modern-day functional equivalent of religion* (or 'the book') during the agrarian age -- they're not called technocratic elite 'high priests' for nothing; whether it's a shaman leading the tribe to water, a bishop promising salvation (and populist legitimacy to 'the sword') or a high-paid consultant's powerpoint on the path to prosperity and success, it's what everyone (earnestly, fervently? to varying degrees) believes in... what? you're not for water, salvation and success? heretic!

like witness the tension between what got us here (GPT)

...the US must remain among the world’s leaders in banking and finance. It is a matter of national security – as is the even more urgent matter of raising the industry’s safety standards. The technologies of risk management that began with the work of Harry Markowitz are here to stay – option pricing, dynamic hedging, risk arbitrage, auction design and all the rest. Risk managers must be reined in, however, tethered, harnessed, contained, made to serve the public purpose, after having so grandly betrayed it. “Masters of the universe” no longer: financial engineering is the general purpose technology that dares not speak its name.

and where it can lead us (or not, coordination problems again ;)

...I didn't really wrap my mind around the possibility that all this money out there might not get results. The fundamental unpredictability of technology means exactly that--we could summon up all this capital, and not get the big innovation. The big potential innovations such as biotech didn't take off in the post-2000 era, as was expected. As a result, that big pot of hungry money had no outlet except for housing. The innovations didn't happen...

which brings us to "What Use is Economic Theory?"

...economics should not be compared to physics but to engineering. Or, alternatively, not to biology but to medicine. That is, economics is inherently a "policy science" where the value of an economic theory should be judged according to its contribution to economic policy...

and, i think, the need "to think much more methodically about human sharing, about the relationship between human interest and human morality and human society..."

---
*like what stood out for me in simon johnson's essay was this:

Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system.

how do you put a belief system on trial? revolution?
posted by kliuless at 1:45 PM on April 5, 2009

how do you put a belief system on trial?

The core of said belief system is the myth of the "free" and self-regulating market, and boy does that ideological canard die hard.
posted by ornate insect at 2:06 PM on April 5, 2009

When people like Thain, Greenberg, Mozilla, etceteras are collectively paid billions of dollars for having worked hard to utterly destroy the world markets, money has no meaningful value. It is clearly a con's game.
posted by five fresh fish at 2:37 PM on April 5, 2009

We modernised ourselves into this ice age
posted by homunculus at 3:09 PM on April 5, 2009

...the US must remain among the world’s leaders in banking and finance. It is a matter of national security

Well, that's the solution to the conundrum SeizeTheDay summarizes with "populist America wants to throw out the pilots when no one else onboard can fly the plane." If it's a matter of national security -- if we are fighting World Economic War III facing financial WMDs gone awry -- we don't need to throw them out of the plane, we just draft them. That way, they can't go to work for the other side without going AWOL, and we can pay them Armed Forces compensation... and they become part of a proud patriotic tradition and get to save the country whose economic ethos they clearly love dearly!

Win-win all around, wouldn't you say?
posted by weston at 4:02 PM on April 5, 2009

Well, not really. Economics is important for people making big plays on trends, and obviously it's important for figuring out how to regulate the economy. But I don't think it's needed for doing small scale stuff, at least during 'normal' times.

Finance is more like gambling than anything else

Hmm.

So what's the technical core of finance if it's not economics?

Or are we saying that finance as a profession doesn't have a particularly technical core in the same way you might say engineering does?
posted by weston at 4:07 PM on April 5, 2009

Well, the technical core of global, unregulated finance (i.e. derivatives, hedge funds, etc) is to create exotic financial mechanisms (CDOs, CDSs, etc) to generate money for investors. That such types of speculative gambling posed a serious systemic risk to the global economy (a risk we're still figuring out) is the non-technical core of the problem.
posted by ornate insect at 4:23 PM on April 5, 2009

Or are we saying that finance as a profession doesn't have a particularly technical core in the same way you might say engineering does?

Finance is about creating products and managing transactions. It's about the use and development of products and services that move capital around with the intent of maximizing earnings on capital investments and creating a free flow of capital for industrial innovation and growth. (Well, of course, it's also about making gobs of money for people working in the finance industry.)

Finance makes up its own rules. There's no economic concept remotely equivalent to an exotic synthetic Collateralized Debt Obligation. From an economic perspective, that's just another widget bought and sold on the markets, and its value is determined by the operation of the same economic forces that determine the value of other goods and services.

So finance isn't applied economics in the way that engineering is applied physics any more than commercial retail is applied economics. Finance is just another market with its own regulatory systems, products and services. Given just how complicated the financial sector has become in the last few decades, it's not necessarily true than an economist would be any better equipped, out of the gate, to deal with complex finance issues than anyone with a strong academic background in some technical field.
posted by saulgoodman at 5:13 PM on April 5, 2009

I don't think it's so much that "thay" gambled on insanely stupid financial instruments, it's that "they" did it with money that I think I can rightfully describe as "mine." It's meagre, but it's of real significance to me. They hurt that.
posted by five fresh fish at 5:29 PM on April 5, 2009

SeizeTheDay wrote:

2) 33% is a randomly picked percentage that doesn't mean anything. You can't compare the annual compensation with TARP money. It's like comparing trees with emeralds. They serve completely different purposes and the only thing they have in common is that they're green.

and then went on to claim "banking regulations" or more precisely capital requirements justify this statement.

I have over a decade of experience doing financial modeling in the capital markets - though I haven't done it in ten years, much of it is still quite fresh.

Perhaps you don't realize quite how ridiculous your statement is to an average person. Let's apply the eye-squint test.

"During a period when Merrill Lynch was losing money at an astonishing rate, they received $10 billion from the government and paid out $3.6 billion in bonuses - but there is no connection."

I'm sure this seems reasonable to you. Let me assure you that to most reasonable people, it seems extremely unreasonable.

Let's look at your "capitalization" argument. Bringing in $xx billion in "CASH" is a very weird step - I'm not sure why you think it's relevant in the slightest? I might carry thousands in my pocket but be broke to the tune of millions, for example.

Legally, "capitalization" is "what the shareholders would get if the bank were liquidated" which is just "assets" ("CASH" or not) minus "liabilities".

At some point in time these bonus payments became liabilities - there was a point in time when the bonuses "were legally committed to being paid". At that point the capitalization of the firm dropped by $3.6 billion.

Try as you like, you cannot escape the fact that the commitment to pay these bonuses, whenever that happened, was an act that created a liability of $3.6 billion, with no corresponding asset on the books - and this happened during the period where the company was losing money hand-over-fist.

This action would immediately affect the capitalization - whenever it took place, the capitalization took a $3.6 billion hit.

The only remaining question is when this happened with respect to the bailout - but given the huge magnitude of the losses, there are only two possibilities: at that time, either management was so completely out of touch that they simply had no idea if they were making or losing money, while is criminally negligent behaviour and should automatically render these agreements null and void - particularly since the lion's share of the bonuses were being paid to precisely the upper management that was making both the fiscal and bonus decisions - or, more realistically, that they knew they were underwater and sinking fast and knew that the bonuses would only be paid if there were a bailout - DUH! - which means that saying out that these bonuses were bankrolled with bailout money an indisputable fact.
posted by lupus_yonderboy at 5:38 PM on April 5, 2009

lupus_yonderboy:

Here, here and here I discuss my disgust with the Merrill deal, the unfairness of the bailout, and the complete irrelevance the BofA bailout deal had with the initial TARP payments. I stand by the assertion that initial TARP infusions had nothing to do with bonus payments, while I agree with most that the Merrill deal was a terrible burden on taxpayers.

To your point, that: they knew they were underwater and sinking fast and knew that the bonuses would only be paid if there were a bailout , I agree that the guarantee of certain BofA assets that was announced in January was a bailout, and was a raw deal for US Taxpayers. But the original TARP equity infusion had nothing to do with the bonus payments. The later $100 billion toxic asset guarantee, on the other hand, is a whole other story altogether. There's a huge difference, and that distinction needs to be made very clear. Goldman Sachs, Morgan Stanley, Wells Fargo, Bank of New York, and hundreds of other banks which received equity infusions (which ARE NOT bailouts) from TARP did not receive the same kind of toxic asset guarantee (which IS a bailout). Merrill/BofA's chicanery painted TARP into a very negative light, and one that isn't fair to cast onto other institutions.

So were bonuses bankrolled by bailout money? Yes. Were those bonuses related to TARP equity infusions? No. YOU may not think that distinction is important. Pitchfork-wielding Americans may not view that as important. But capping bonuses hurts those banks who haven't needed asset guarantees, and puts them in a position where they'll refuse to cooperate with the US government (threatening to take down the ship). Which is why the entire scandal is a red herring, and one that obfuscates real problems I mention above.
posted by SeizeTheDay at 6:58 PM on April 5, 2009

But capping bonuses hurts those banks who haven't needed asset guarantees.

NO, capping bonuses helps everyone except a tiny, tiny number of ultra-rich people.
In your world, these pathetic losers are massively valuable - everyone else sees that the 40% of the US economy in 2008 that was sucked up by "financial services" didn't actually "make" anything that year.

The fact is that if the markets were efficient, it would be impossible for these parasites to consistently extract the staggering sums of money that they do from them.

The markets are nothing like efficient and that's because some small fraction of the population systematically manipulate them to extract money from government, from pensions and from small investors while providing little or no actual value - because they both set the rules and collect the profits.

If banks had their top compensation capped at $500K for every single worker there, I predict you'd see much better banks with much less insane risk taking.
posted by lupus_yonderboy at 8:45 PM on April 5, 2009 [1 favorite]

You wanna rant, go right ahead. But don't give me your bullshit "I used to work in the business" street cred and then proceed to call the entire financial services industry a bunch of "pathetic losers". You're wasting my time and your breath with this crap.
posted by SeizeTheDay at 9:03 PM on April 5, 2009

Count me with the people lupus_yonderboy describes. I don't really give a rat's ass for the justifications and fancy wordplay you care to use to defend what they did. I think the transitive property of basic arithmetic is perfectly adequate to describe what they did: they looted my pocket to pay for their bonuses. Fuck them: I want them in jail and their ill-gotten gains taken back. They invented fanciful financial instruments that have destroyed entire economies, they should pay the price.
posted by five fresh fish at 9:20 PM on April 5, 2009 [2 favorites]

You wanna rant, go right ahead. But don't give me your bullshit

Well, if it's bullshit, it's bullshit from someone in a better-than-average position to know.

And the financial services sector is, as of right now, "a bunch of pathetic losers," losers who gambled big with little real forethought and lost in a way that's thrown the entire world into a state of economic turmoil. There are few ways to more literally meet the definition of "pathetic loser" than to screw up at your job so badly you end up burning the whole store down.

Actually, they're worse than losers, because they still show absolutely no signs of contrition or even a willingness to acknowledge the full scope of their failures. As of this point, they've more than negated whatever economic value they might have once delivered, so they're economic parasites. It would be a truly dysfunctional market that wasn't allowed to demand major changes from an industry beset by glaring systemic failures on this scale.
posted by saulgoodman at 9:35 PM on April 5, 2009 [2 favorites]

URG, on MUCH later preview.

"capping bonuses helps NO ONE except..."

Arg, what a gaffe not to miss. No time for anything else....
posted by lupus_yonderboy at 10:44 PM on April 5, 2009

...losers who gambled big with little real forethought and lost...

Except that they, personally, do not seem to have lost - they all made truckloads of money. They're complaining because they are having some trouble collecting those last wheelbarrows-full that they think they deserve. The Obama Administration appears to be exerting itself to help them get those bucks, while Congress, in its usual spastic fashion, is trying to stop that.
posted by Kirth Gerson at 3:43 AM on April 6, 2009

Well, not according to the Geithner response to the Washington Post, Kirth Gerson. He specifically denies the reports as published by the Post and it looks like they've since retracted (or at least buried) the story, which tends to support the claim that the reports were based on bad second-hand information. Except for the summers stuff, I think it's dirty pool meant to erode support for the administration among its natural base.
posted by saulgoodman at 6:29 AM on April 6, 2009

The Post has not retracted or buried the story; it's still right here. While none of the Treasury or other administration figures quoted in the story are named, the other people quoted are. That would be consistent with the Administration trying to get around the restrictions on the quiet. It might also be consistent with 'dirty pool' journalism, but that's not something the Post is know for, is it? You can choose to believe Geithner if you want. I don't see a lot of reason to.
posted by Kirth Gerson at 7:26 AM on April 6, 2009

It might also be consistent with 'dirty pool' journalism, but that's not something the Post is know for, is it?

Seriously? You don't remember all the bad information, gossip and innuendo coming from politically motivated sources that managed to make its way into the Post during the run-up to the Iraq war? The Post was easily as unreliable as the NY Times then, if not more so. There isn't a single major news outlet that isn't susceptible to passing along politically motivated slander and disinformation.

And I do, with some reservations, trust Geithner. In my opinion, he's acted in good faith to deliver on exactly what he's proposed to do--not that there haven't been elements inside and outside the administration working as vigorously as they can to foil his efforts.

Geithner said he would seek greater authority to regulate hedge funds and the derivatives markets and he actually did. Not to mention he was smart enough to realize that any effective regulatory framework would have to be international in scope to prevent the bad actors from just relocating to other, less regulated markets.

Geithner frequently drew criticism for not taking immediate control of AIG when the extent of the problems there first came to light, but in fact, he had no legal authority to take those steps at the time. And when he later went to congress to request that authority, he was accused of making an "unprecedented power grab" by Republican lawmakers (never mind that the accusations were complete bullshit, since I think Nixon's famous unilateral move in 1971 to take America off the gold standard and to fix all wages and prices for 90 days pretty much takes the cake as unprecedented expansions of executive power go).
posted by saulgoodman at 8:05 AM on April 6, 2009

My mistake about the article on the Post having been taken down. The expired link to the story on MSNBC includes a link to the article on the Post's site, but that link only leads to the Post's homepage, where I didn't see any mention of the article and assumed it had been taken down. Thanks for the correct Post link.
posted by saulgoodman at 8:07 AM on April 6, 2009

And whether it's apropos of anything or not, here's what the former Justice Department attorney who the "money laundering" quote is attributed to had to say on his blog about the inspector general report that found politicization in DOJ hiring practices:

"...maybe those in charge felt that there had been years of invidious ideological discrimination that by golly would be rectified by reforming the hiring process in 2002."

You can judge for yourself whether or not his comments on that matter reflect any particular preexisting ideological commitments.

And then of course, there's his work for the justice department, where as all the outlets running this story put it, he worked "defend[ing] the government from lawsuits involving related legal issues." Or as he summarizes it more succinctly in his own professional resume, he worked most recently in the following capacity:

"Trial Attorney, Civil Division, Federal Programs Branch. Litigated cases on behalf of United States and its agencies. Defended constitutionality of Telecommunications Act of 1996 and Child Online Protection Act in district court. Represented Department of Defense in lawsuit originating from “Filegate” controversy."

...Which I guess is somehow like defending the government from lawsuits related to the Treasury Department's efforts to mitigate the financial crisis. Only in the sense that it isn't at all.
posted by saulgoodman at 10:08 AM on April 6, 2009

Reducing the government's economic strategy and its implementation or lack thereof to the relative merits of one person (in this case Geithner) is misleading. The real problem here is not whether one trusts or distrusts Geithner; it's whether the judgment behind the entire plan itself is sound, workable, and meaningful, or whether the plan itself fails (as I think it does) to adequately address the underlying structural problems in the financial sector (that led to the crisis in the first place). Time will tell.
posted by ornate insect at 10:51 AM on April 6, 2009

The Geithner-Summers Plan is Even Worse Than We Thought
posted by ornate insect at 10:57 AM on April 6, 2009

George Soros: US Recovery Is Far Off, Banks Are 'Basically Insolvent'
posted by homunculus at 10:37 AM on April 7, 2009

Why Can’t Obama’s Economic Team Explain Itself?
posted by homunculus at 12:05 PM on April 7, 2009

So according to Soros (from homunculus' first link):

"What's more, the Treasury's Public-Private Investment Fund is going to work..."

Hurrah! Soros says our boys are actually getting it right, this thing might work, etc.--oh, but wait, then he goes on:

"...but it won't be enough to recapitalize the banks in a way that they are able to or willing to provide credit."

Okay. So he predicts a long credit crunch. Fine. That's a natural correction to a period of excess credit. Nothing especially failure-y about that.

Then Soros adds:

The stress tests being conducted by Treasury could be a precursor to a more successful recapitalization of the banks, he added.

So it might work out even better than the more pessimistic prediction he made at first. More good.

Oh, but wait. ornate insect's link argues the whole stress test thing is just a sham! So I guess we're back to Soros' more pessimistic outcome.

But hey, it still sounds like crisis averted, with things starting to turn around again by sometime in 2010--even according to Soros' less optimistic projections. Isn't that enough for now? Can't we at least find some comfort in the fact Great Depression II has seemingly been averted?
posted by saulgoodman at 9:29 PM on April 7, 2009

Matt Taibbi: The Official End of Obama’s Honeymoon
posted by homunculus at 1:50 PM on April 10, 2009

Former lobbyist in the White House? It's okay if they say it's okay

During the campaign, Obama said many times that lobbyists would not run his White House, and the campaign delighted in tweaking rival John McCain for the former lobbyists who worked on McCain's campaign.

Obama's ethics proposals specifically spelled out that former lobbyists would not be allowed to "work on regulations or contracts directly and substantially related to their prior employer for two years." On his first full day in office, Obama signed an executive order to that effect.

But the order has a loophole — a "waiver" clause that allows former lobbyists to serve. That waiver clause has been used at least three times, and in some cases, the administration allows former lobbyists to serve without a waiver.

After examining the administration's actions for the past two months, we have concluded that Obama has broken this promise.

posted by Kirth Gerson at 4:36 PM on April 10, 2009

Wall Street is a Nigerian scam, Obama tells Summers
posted by homunculus at 9:32 PM on April 14, 2009

Oh, that's good:

“Why are we joining their leverage game? Aren't we encouraging Wall Street in their shitty ways that fucked us all in the ass, including my beautiful fucking agenda that could make me a transformative president like Reagan, except I could end up a bigger asshole than Carter if I let Wall Street butt-fuck me like they've anally probed everyone else?”

“As your top economist, I wouldn't put it like that, Mr President.”

I wonder if they really have discussions like that.
posted by Kirth Gerson at 1:17 AM on April 15, 2009

Simon Johnson on Larry Summers’ New Model.
posted by homunculus at 1:44 PM on April 27, 2009