The key problem in the financial industry is not the institutions, it is the people. The people in the financial industry are mercenaries. They owe no allegiance to their employer, to their shareholders, to their clients or to their peers. They are in it for themselves. The problem they work on, every hour of every day, is how to maximize their personal financial reward.BONUS!
[The fix] lies with two principles...
Fiduciary Duty – Make it a key legal obligation for EVERYONE involved in a transaction to have a fiduciary duty to their client. Make it incumbent on them to represent to the client that they have done their homework, they have disclosed everything and that they believe this to be a good transaction for the client.
Clawbacks – Create a system where if the banker (the person not the institution) does not responsibly discharge his fiduciary duty then any and all compensation earned on that and all related transactions will be forfeited. You might even want to put some or all of the compensation into escrow for a while (a few years) to make enforcement easier and the message clearer.
Often, policy-makers talk of improved corporate governance to stop senior managers and CEOs from ‘ripping off’ shareholders. But for firms relying on the protection of taxpayers, the conflict of interest is not fundamentally between bank managers and shareholders because the manager wants to earn too much or wants to build an empire or to own a private jet.posted by TheophileEscargot at 4:50 AM on May 5, 2010 [3 favorites]
Instead, the conflict is between, on one side, managers and shareholders and, on the other side, taxpayers. Both managers and shareholders (and even holders of corporate debt) take advantage of the protection of the state to take excessive risks, since it is the taxpayer who ends up paying. Therefore proposals to improve transparency and corporate governance are completely useless for solving these problems.
I don't believe that anybody is above the law. On the other hand I also have a belief that we need to look forward as opposed to looking backwards. --Barack Obamaposted by DU at 4:59 AM on May 5, 2010
We can blame Goldman Sachs and Wall Street for what collapsed in 2008, but the next one is on the guys writing this stuff. For all the time spent wagging the finger saying "shame-shame" there are measures that could be taking place right now. Brainstorming, and ideas for the next shift in economic paradigms.You don't really seem to be paying attention to what's going on. The same guys are the ones writing the new laws, or at least they're spending a ton of money lobbying to get the new laws written so as not to damage their position. They have a ton of "regulatory capture". We have solutions, but the problem is getting them passed in congress when these companies have so much control over everything.
We got it. K? Thank you for picking this apart and figuring out what went kablooey, but 2009 is over and it's time for fixing this mess rather than rubbing someone's nose in it.
GS is that guy in high school who knocked up those four girls and wouldn't throw in for the respective abortions. You can continue to tell him what a creep he is, but he's still going to say "Yeah, whatever. I still got laid and I'm probably gonna get my dick sucked tonight. What's it to me and what's it to you?"I don't even understand how that metaphor applies. It's more like GS more like a Frat Boy who runs around date raping women but never gets in trouble because he's the Dean's nephew and his dad is best buds with the local DA. You can't just say "Well, he's always been an asshole and there's nothing you can do about it" Because, um, he's still out there raping chicks.
Fiduciary Duty – Make it a key legal obligation for EVERYONE involved in a transaction to have a fiduciary duty to their client. Make it incumbent on them to represent to the client that they have done their homework, they have disclosed everything and that they believe this to be a good transaction for the client.But the transactions that have received the most criticism here were proprietary trades, I thought -- no client.
Hmm. The abacus stuff certainly had a client, and the rise of CDO's and the related sub-prime/real estate bubble was driven by a desire to find new securities to sell products?Isn't the fundamental complaint about Abacus that Goldman screwed the buyers of the products? Some guy you sell stuff to isn't a client--that's a customer. Nobody has fiduciary duties to customers, if only because any time you sell any product to anyone, you and the customers have divergent views of whether it's better to have the thing or the cash.
…this whole fucking economy is built on fraud and lies and garbage. So when Lehman collapsed, every single player panicked, going, 'If Lehman was nothing but a Ponzi scheme—and I know what I’m running is a Ponzi scheme—holy shit, that means everyone else is running a Ponzi scheme too! Run for the exits!' No one trusted anyone else, everyone pulled out, and the entire global economy collapsed just like that. And that meant your parents, my parents, every teacher, every fireman, every person in the country going into retirement, every price on every asset—wiped out.Bring. It. On.
As yet another act in the world economic drama concludes, and another troop of actors prepares to take the stage, the basic point of the play is being lost. As speculative manias overtake other countries and/or other assets, and as instances of fecklessness and fraud feed the public demand for vengeance, we are overlooking the fact that we are living through the most massive redistribution of wealth rich societies such as ours have seen since the Gilded Age at the end of the 19th Century. The massive debts of private capital are being socialized. States are taking on society’s debts at a rate not seen since the Second World War. They are creating public debt to pay off or at least absorb the debts arising from asset crashes, bank and brokerage failures and near-failures, and massive unemployment triggered by recession. Banks and other financial institutions could not carry their own debt, so now the government is carrying it for them, either directly or by providing them with new credit at no cost with which they can become profitable again. The banks and other brokerage institutions have effectively cleaned up their balance sheets with newly created public debt, while the U.S. and European central banks have laundered their bad debts.The particular mix of free markets and socialism that we're pursuing at the far moment is far worse than either. We're taking the WORST features from both systems, the instability of free markets and the fiscal problems of socialism.
Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours. We get up at 5am & work till 10pm or later. We’re used to not getting up to pee when we have a position. We don’t take an hour or more for a lunch break. We don’t demand a union. We don’t retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we’ll eat that.Short of a storm-the-bastille, reign-of-terror French Revolution Part Deux
For years teachers and other unionized labor have had us fooled. We were too busy working to notice. Do you really think that we are incapable of teaching 3rd graders and doing landscaping? We’re going to take your cushy jobs with tenure and 4 months off a year and whine just like you that we are so-o-o-o underpaid for building the youth of America. Say goodbye to your overtime and double time and a half. I’ll be hitting grounders to the high school baseball team for $5k extra a summer, thank you very much.
So now that we’re going to be making $85k a year without upside, Joe Mainstreet is going to have his revenge, right? Wrong! Guess what: we’re going to stop buying the new 80k car, we aren’t going to leave the 35 percent tip at our business dinners anymore. No more free rides on our backs. We’re going to landscape our own back yards, wash our cars with a garden hose in our driveways. Our money was your money. You spent it. When our money dries up, so does yours.
The difference is, you lived off of it, we rejoiced in it. The Obama administration and the Democratic National Committee might get their way and knock us off the top of the pyramid, but it’s really going to hurt like hell for them when our fat a**es land directly on the middle class of America and knock them to the bottom.
I went to McKinsey for reasons that were only slightly different than those of the typical Ivy League undergrad; after getting a Ph.D. in history, I discovered that I was unlikely to get a good academic job and was pretty much unqualified for anything else, and McKinsey was one of the few places that would hire me into a “good” job with no discernible qualifications (other than academic pedigree). Now that I’m at Yale Law School, where maybe 15% of students (my wild guess) come in wanting to be corporate lawyers but 75% end up at corporate law firms...oh and on local banks/credit unions, i find the growing movement for publicly-owned banks intriguing (bank simple, yodlee & p2p lending ;) consider...
As the decades pass and you realize that no, you’re not going to save the world, the money becomes a more and more important part of the justification. And when you have kids, you’re stuck; it’s much easier to deprive yourself of money (and what it buys) than to deprive your children of money. More importantly, you internalize the rationalizations for the work you are doing.
But nations had no choice but to bail out their banks, did they? Well, actually... the central banks and their owners – the private commercial banks – have been running the printing presses for hundreds of years.anyway, i've mentioned it before, but if it looks like the fed and central banks are making it up as they go along, it's because they are...
Of course, as I pointed out Tuesday, Bernanke is pushing to eliminate all reserve requirements in the U.S. If Bernanke has his way, American banks won’t even have to borrow from the Fed or other banks after the fact to have reserves. Instead, they can just enter into as many loans as they want and create endless money out of thin air (within Basel I and Basel II’s capital requirements – but since governments are backstopping their giant banks by overtly and covertly throwing bailout money, guarantees and various insider opportunities at them, capital requirements are somewhat meaningless).
The system is no longer based on assets (and remember that the giant banks have repeatedly become insolvent) It is based on creating new debts, and then backfilling from there.
It is – in fact – a monopoly system. Specifically, only private banks and their wholly-owned central banks can run printing presses. Governments and people do not have access to the printing presses (with some limited exceptions, like North Dakota), and thus have to pay the monopolists to run them (in the form of interest on the loans).
At the very least, the system must be changed so that it is not – by definition – perched atop a mountain of debt, and the monetary base must be maintained by an authority that is accountable to the people.
We’re at a weird point in history, and the Tea Party is a symptom of it. Now, if you’ll allow me to get all Clay Shirky on your ass, we are in a point in history when institutions that appeared solid are dissolving. The internet has thrashed the old information asymmetry, the monopoly on data that institutions used to have back when the boomers were young and new models aren't appearing fast enough. And of the models that do arise, not one is going to dominate. It'll be, for good or bad, a world of choice.Supercapitalism: The Transformation of Business, Democracy, and Everyday Life
The costs of organizing people has fallen through the floor, so large institutions, while still extant, are going to have to shrink and take up new policies of transparency in order to survive. We’re going through a cycle of demystification, so it makes sense that folks are clinging to symbols... One downside to all the constant tidal pressure of innovation that is our postmodern condition is it becomes very easy to cling to outmoded ideologies (I mean ideology in the broadest sense here, not just politics, but modes of life). When the world you knew is upended, all you can depend on is your grievances.
This is aiming to be something like The Affluent Society or The New Industrial State for modern times; it does a pretty good job. Basically, his argument is that Galbraith was more or less right about how the economy worked during the post-WWII golden age of capitalism: large, autonomous, oligopolistic firms more interested in continued steady growth, exploiting economies of scale, than anything else. JKG's mistake was in thinking this regime would continue. Reich sees Galbraithian capitalism as being upset not so much through deliberate political action in the 1980s as through new technologies in the 1970s, especially improvements in logistics, communications and information technology, which made it possible and efficient to replace the vertically-integrated firm with global supply networks, and to replace investment financed out of retained earnings with global financial markets. (As Reich points out in some detail, all of the key technologies, from container shipping through microelectronics and the Internet, were devised by the military-industrial-university complex to fight the Cold War; sowing the dragon's teeth, as it were.) Deregulation, to Reich's way of thinking, was more a consequence than a cause — the legal superstructure accommodating changes in the forces of production, though he doesn't use such language. The result, he says, is a system more responsive to consumer demand and to investors, but where most of the population sees no gains from economic growth, inequality sores, countervailing power evaporates, security is steadily eroded, and the primary check on the political influence of corporations is the opposing commercial interests of other corporations...that is all :P
The way the system is set up, he says, the people running corporations simply have no choice but to do whatever they can to maximize profit in the short term; if they won't, they will shortly be replace by those who will. Calls for corporate social responsibility, still less trying to shame or pressure individual corporations, therefore misses the point. The goal, rather, has to be to change the laws under which all corporations must act, ultimately, to neuter corporations politically, and creating a non-corporate social safety net.
...The dilemma various states and international institutions now face is that this process of financialisation has allowed these profiteers to become so embedded in our economies that they can't be allowed to fail and it's idle and disingenuous - or profoundly misinformed - to call for that unless you truly are calling for a revolutionary change - and not one that would restore the fiction of the free market.
One of its basic principles that was set up in the 1970s was that state power should protect financial institutions at all costs. This is the principle that was worked out in the New York City crisis in the mid-1970s, and was first defined internationally when Mexico threatened to go bankrupt in 1982. That would have destroyed the New York investment banks, so the US Treasury and the IMF combined to bail Mexico out. But in so doing they mandated austerity for the Mexican population. In other words, they protected the banks and destroyed the people – and this has been the standard practice in the IMF ever since. The current bailout is the same old story, one more time, except bigger.
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Throughout the history of capitalism, the general rate of growth has been close to 2.5 per cent per annum, compound basis. That would mean that in 2030 you’d need to find profitable outlets for $3 trillion dollars. That’s a very tall order. I think there has been a serious problem, particularly since 1970, about how to absorb greater and greater amounts of surplus into real production. Less and less of it is going into real production, and more and more into speculation on asset values, which accounts for the increasing frequency and depth of the financial crises we’ve been having; they are all crises of asset value...
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Thanks for those links, great post. I cannot stress enough how great people like Bill Black and Taibbi have been throughout this whole mess. Their reporting and commentary has been brutally honest and welcome sunlight on an otherwise obscure industry.
Our entire government has been captured and held hostage by these goons in high finance. Sadly, this will continue until we push back...HARD.
posted by tgrundke at 4:44 AM on May 5, 2010 [1 favorite]