Let’s play Russian Roulette. My rules.
I’m betting $1,000 the chamber will be empty. You hold the gun to your head and pull the trigger. Click. You owe me $1,000. Next round, same rules, you hold the gun to your head and fire. Click. Now you’re down $2,000, but why complain? You’re still alive, aren’t you? Isn’t that worth $2,000?
Next round, you’re not so lucky. Since there doesn’t seem to be anyone left to collect the bet I just lost, I take my $2,000 and go looking for the next patsy.
If my rules seem unfair, at least they’re founded on well-established precedents. Big hedge funds and investment banks have figured out how to make billions on heads-I-win, tails-you-lose games of high risks and very high but entirely one-sided rewards.
It’s a sweet deal. They take your investment money – along with that of other investors like pension funds – and make huge bets on derivatives at, say, thirty to one leverage. So two billion dollars acts like 60 billion, and a 20% gain in a currency arbitrage or a commodities play or credit default swaps earns $12 billion – of which they keep 20% on top of the big fees they charge you each year just to invest in the fund.
Or they get it wrong … blow $12 billion, and the hedge fund goes bust.
Leverage works both ways. You and the pension plan retirees may see your entire investment go up in smoke. The hedge fund manager loses maybe his desk and his fax machine, but he’s still got the billions he’s “earned” in prior quarters and years, so he skips away, somewhat chastened but ready to set up his next magic show.
Oh, and that $12 billion dollar meltdown?
There’s always the chance that it could trigger a cascade of failures in other funds and big investment banks like Bear Stearns. Then the Fed has to bail out the losers to save the system – until the day comes when the next big crisis metastasizes beyond the Fed’s powers of salvation, and the whole financial system and possibly the economy crashes, as in the 1930s.
But if the Fed does succeed, guess who pays whatever it costs? You and those pension plan participants and the rest of us taxpayers. First you lose your money, then you pay to save the people who lost the money you entrusted to them.
Call it Hedge Fund Roulette. Or Big Banker Bingo.
It’s an addictive form of gambling in which the winners always keep their winnings, but when they lose, they don’t pay.
The public pays – and for what? For the privilege of living in the presence of such brilliance? True, investment banks sometimes do contribute to the health of the economy, but not when their main energies are being devoted to bundling up worthless loans into worthless securities and rating those securities AAA to sell them off to the ignorant, the gullible, the inattentive, and the daft.
Of course people have a right to risk their own money. Some may even be trusted to risk other people’s money, in their role (and under the strictures of fiduciary responsibility) as managers of mutual funds, pension funds, public or private trusts.
But I’m not allowed to bet your house on the horses.
Why should anyone be given a license to risk the entire financial system or the economy as a whole in a scheme for personal profit?
The largely unregulated shadow banking system risks a global financial collapse or a depression that could inflict untold misery on hundreds of millions of people for many years to come. Even if all goes well, they’ve risked your wellbeing and mine for their own personal gain. If they win, they win big. If they lose, they don’t pay – you do.
It’s now clear that this is the game a great many financiers have been allowed to play. As Wall Streeters, they know that for huge gains, you have to take huge risks. Imagine how much you can make if you risk the whole country!
Presumably, that’s why there’s talk about reform, but look who’s talking. Key players in financial system reform include Senator Richard Shelby — a mega-landlord, real estate developer, and title insurance magnate in Alabama – and Treasury Secretary Henry Paulson, former chairman of Goldman Sachs, who doesn’t want to place limits on leverage or on the extremes in risk-based executive pay and bonuses that made him rich. What meager changes Paulson recommends are tantamount to requiring boldface type on the restroom signs:
“Employees must wash hands of all responsibility.”
To deal with the looming specter of Credit Default Swaps imploding like subprime mortgages, one proposal is to centralize the clearing of these transactions through the Chicago-based Clearing Corporation. Chief operating officer of the Clearing Corporation is Kevin McClear.
The move is favored by Mr. McClear and by two of his board members, Dudley Do-Right and Mr. Goodwrench.
In the 1960s the CEO of an average Fortune 100 company made about 60 times as much money as his average employee. His pre-evasion income tax rate was 91% until 1964, when it was reduced to 77%.
By 2001, I thought the end times must be at hand because the CEO was now making 600 times as much as the average employee, and we were back to the extremes in wealth concentration that the U.S. had last seen during the gilded age of the robber barons.
It took Teddy Roosevelt, trust-busting, two world wars, the Great Depression, the rise of the labor movement, 90% tax brackets, and the G.I. bill to tame those excesses. But there it was again in 2000 – ostentatious avarice, back in fashion.
And where are we now?
Jenny Anderson in the Wednesday edition of the New York Times reports on the incomes of the top 25 hedge fund managers. Three of them are at or above the $3 billion level, led by John Paulson at $3.7 billion. When I was a kid, the U. S. defense budget was less than that.
The median American household now has an income of $60,500.
That means the leading hedge fund manager’s income now equals the median family income SQUARED.
The highest earners have gone from making 60 times a typical household income in the 1960s (which was bad enough) to 600 times a normal income in 2001 to 60,000 times the median household income in 2008. One person makes more than everybody in Providence, RI combined, or Brownsville, TX, or Worcester, MA, or Huntsville, AL. One person makes much more than everyone in Dayton, O, Tallahassee, FL, or Salem, OR.
Actually, it’s even worse than that. The average family has to pay income taxes on their wages. The hedge fund manager enjoys a tax loophole that allows him to count most of his income as capital gains and pay only 15% of it in taxes – or whatever paltry fraction of 15% his all-star team of lawyers and accountants decides to let the government have as a token ceremonial civic and public relations gesture.
Does the gentleman work 60,000 times as hard as you do? Is he 60,000 times smarter or more earnest or more virtuous than you are? Are his children 60,000 times more deserving of the advantages money can bestow?
Just for the record, God makes $350,000 a year and doesn’t take a tax deduction for charitable contributions.
We could talk about Bear Stearns, whose stock went from $170 to $2, but let’s not.
Student Loan Sharking.
According to the Chronicle of Higher Education, it costs the federal government $2.64 for each dollar it provides or guarantees in a college loan. Hmm.
If I kept lending you money, for whatever reason, and it was costing me $2,640 every time I lent you $1,000, I think I might just give you the money. That would save me $1,640 even if you never paid any of it back.
Why does it cost so much?
In a separate news item, the U.S. Department of Education announced that 15 banks that lend money to students have all qualified to receive a subsidized rate of 9.5% on their money.
At a time when the government is paying only 3.4% interest on a 10-year treasury bond, charging 9.5% on a student loan is usury.
Which is what banks usury do.
Stump the Times
Jeff Leeds writes about Starbucks in Monday’s NYT business section – where the writers are supposed to be highly numerate, whether or not they’re literate.
The story exposes a deep, dark mystery.
Starbucks says it sold 4.4 million CDs last year. But critics of the company’s music business say the average company-owned store sells an average of only two CDs a day. Starbucks denied that claim but refused to give Leeds the real figure.
That stymied the writer, who grumbled and plodded onward. Elsewhere in the article, he mentions that there are 6,800 company-owned stores.
It’s hard, being an investigative reporter, trying to penetrate the veil of corporate secrecy. What are you supposed to do? – divide 4.4 million by 6800 to get annual sales per store, then divide that by 365 to find out that Starbucks sells 1.77 CDs a day per store? All the long division that’s fit to print.
One more double espresso, and Leeds may be able to stay awake for an entire story.
Whacky Wiki
Elsewhere in the business section, writer Noam Cohen juggles numbers like a stage magician in an article about the real and (mostly) imaginary problems of Jimmy Wales and Wikipedia. Cohen’s bid for the Nobel in mathematics comes when he takes a complex metaphorical abstraction and reduces it to hard-nosed quantification.
The abstraction: “Until recently…Wikipedia was run more like a store-front community center than a digital age powerhouse.”
Quantifying the store-front center: “What was a nine-person operation – a top 10 Web site had a paid staff of less than 10….” Got that? Nine is less than ten.
Measuring the magnitude of the digital-age powerhouse: “… has just recently grown to a 15-person operation.”
Should have had a chart.
We hold these truths to be self-evident:
Pigs like the smell of pigs. E Coli are determined to take over the digestive tract. And insiders think insiders should run everything.
Insider and one-time superdelegate Geraldine Ferraro (a Clinton campaigner) thinks that Democratic insiders should be able to pick the party’s nominee. That, in fact, is the subhead of her Op-Ed piece in Monday’s New York Times.
Superdelegates, she says, “were created to lead, not to follow. They were, and are, expected to determine what is best for our party and best for the country. I would hope that is why many superdelegates have already chosen a candidate to support.”
Well, that’s one reason, Geraldine. Another reason is money. The Center for Responsive Politics just issued a report on campaign contributions made to superdelegates (most of whom are sitting congressmen) by the Clinton and Obama campaigns. Their conclusion:
“Campaign contributions have been a generally reliable predictor of whose side a superdelegate will take.”
Is that your idea of leadership, Geraldine? To follow the money? Weren’t you once censured on campaign finances by the House Ethics Committee?
Geraldine also thinks the superdelegates should decide to seat the “delegates” from the non-elections in Florida and Michigan. Presumably, for the right price they very well might do that.
That would make Harold Ickes happy. He’s the Clinton campaign strategist who said last week in a conference call with reporters that superdelegates are more in touch with the issues important to voters than the voters are. Amazing. Then why hold primaries?
Just who are these supernatural beings who always know what’s best and who know the voters’ minds better than the voters themselves?
Could they possibly be the same Democratic congress people who have spent the last seven years kowtowing to George Bush, cowering in the corners and giving him every ugly, ignorant, arrogant, unconstitutional perversion of government power his tantrums demand?
Is it their all-knowing wisdom that has kept on playing patsy to Bush even after 70% of the voters in America had come to realize that this man and his administration are a comprehensive disaster?
These are our super-leaders, who can’t win a fight or defend a principle even when they have control of Congress and the president’s approval rating is 28%?
Go back where you came from, Geraldine.
You are part and parcel of the dirty laundry that Obama is promising to change and that Democratic voters are rejecting by overwhelming margins.
Notes from Mike Geraci on who the real freeloaders are in the illegal immigrant equation.
I’ve heard estimates of from 10 million to 30 million illegal immigrants in the country. To be conservative, let’s use 12 million. If one half of them work and earn the minimum wage (of $8.00/hr in Calif.), that’s 6 million earning an average of $320 per week each. (Some earn much more and some states have a lower minimum wage).
The current Social Security and Medicare cost is 7.65% times two (employee and employer) or 15.3%. With a wage of $320 X 15.3%, that comes to $48.96 per week per illegal going to the Feds. Multiply that times 6 million working and the total is $293,760,000 per week to the federal government.
Multiply that times 52 weeks and it comes to over $15 billion.
From the perspective of our duly elected representatives in Washington, since these are illegals, and therefore probably working under fake SS numbers, they don’t receive benefits. So this is free money for Congress to spend on special interest groups to buy votes. Since Congress has made so many irresponsible commitments, it’s impossible to pass up this newfound source of revenue.
Fence? What fence? Secure borders? Si. Bueno.
A Republican’s version of economic stimulus is to take a fat wad of bills out of the right-hand pants pocket and shove it into the left-hand pants pocket while drooling.
(If you recognize that last paragraph as a polite euphemism for autoerotic economic stimulation, please don’t tell anybody.)
George Bush’s idea of a rescue package is for Daddy and his friends to save him from military service, bankruptcy, or jail. After all, he’s not some undeserving welfare cheater is he? Is he?
So it’s no surprise that the Republican idea of a stimulus and rescue package would do little to stimulate the economy and nothing to rescue the folks who most need help.
What is surprising is how timidly the congressional Democrats caved in to this twisted distortion of what they had promised to do. No increase in food stamps (Both Bernanke and the Congressional Budget Office liked that idea – real help, and real stimulus). No extension of unemployment insurance. No help for people facing foreclosure or unable to pay skyrocketing fuel and heating bills. No aid for strapped state governments to save people’s jobs and create new ones. No job-creating acceleration of public works projects, desperately needed with or without a recession to repair our decrepit bridges, electrical grids, water and sewer systems.
Just trifling rebates, and most of that to people who don’t really need it and won’t spend any more because of it.
It’s small and bitter consolation, but the result may well be a truly miserable recession which, by November, will stimulate voters to throw Republicans out of office by the reeking, oinking carload.
Headline from the Sunday Times:
The Two Paths to Wealth: Earn More, Spend Less
See, that’s why college graduates earn higher incomes. They can grasp powerful but subtle concepts beyond the reach of the commoner.
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Bonuses in the News
Stanley O’Neal steps down as head of Merrill Lynch after leading the company to an $8.4 billion writedown in the fourth quarter and a rumored $15 billion loss still to come. He leaves with a severance package worth $161 million. (Had they spent that to send him packing a year ago, it might have been worth it – to head off the $23 billion mistake.)
Timing, as someone said, is the difference between salad and garbage.
Charles O. Prince III steps down as head of Citigroup after losing $64 billion in the company’s market value. He gets $68 million plus a cash bonus of $12 million and an office, car, and driver for the next five years – no, not a Tata Nano.
And Angelo Mozillo, who wrecked Countrywide Mortgages (and a fair percentage of its home buyer customers and its stockholders) gets to leave with $110 million or so after Bank of America acquired Countrywide’s so-called assets for pennies on the dollar (which is like buying the Iraq war on the cheap because nobody else wants it).
The victims lose their homes. The perpetrators walk away with enough money to save at least 15,000 people from foreclosure (my calculations), but you can bet that’s not what they’ll do with it.
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Why do corporate execs get such lavish pay packages?
Are they much smarter than CEOs of the past? Do they work longer hours?
No, but they hire compensation consultants like Towers Perrin, Marsh & McLennan, Hewitt, or Mercer. If the execs take a shine to the consultants, there are many more millions in consulting contracts — for training, marketing, management, logistics, cost control, etc. So the consultants recommend princely compensation packages to directors on the company’s board. The board can’t be faulted for approving such mighty advice, the executives get fabulously rich, and the consultants get tons of additional business. Everybody wins. Except the shareholders. And the rest of us.
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Robert M. Lawless is a professor of law at the University of Illinois law school. He might have changed his name to Lawful, but that rhymes with awful.
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Abstinence makes the heart grow fonder.
The verdict is in on the federal programs now burning up $176 million a year to reduce teen pregnancies by preaching abstinence.
It doesn’t work. Teenage pregnancies are up.
And word on the street is that God said he hates the program and everyone who pushes it – which they do not only in the U.S. but also in other countries, as a condition of foreign aid. If they use condoms, we bomb them.
A new study showed that while President Bush was bragging in 2006 about the decline in teenage pregnancies, they were actually rising by 3% a year after declining during the 1990s, before Bush.
Robert Rector of the Heritage Foundation disputed the findings and said that blaming Abstinence-only programs was “stupid.” Actually, it’s Mr. Rector who is stupid; but that’s understandable because at the Heritage Foundation you’re paid to be stupid.
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Politicians make lousy economists…
Investment analyst John Mauldin dubs Senators Shumer and Graham as “bipartisan economic illiterates.” The two have been urging the U.S. to insist that China raise the value of the yuan by 30% to reduce our trade deficit. Mauldin points out, first, that the Chinese are already raising the yuan’s value – gradually, to preserve their own banking system – and, meanwhile, the dollar is sliding downwards. By the time a new congress takes office, the 30% will have been achieved without any help from the tough-talking senators.
But that won’t lower the trade deficit. The Canadian dollar has risen much more than 30%, and our trade deficit with Canada has hardly budged.
The only thing that can lower the trade deficit is for U.S. consumers to save more and spend less. Not an appealing solution for a politician, but it may happen anyway if we’re heading into a recession.
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…And so do economists
Alan Greenspan kept lowering rates and flooding the financial system with liquidity, creating the housing bubble, then refused to tighten restrictions on home loans – denying until the bitter end that there was a housing bubble.
If, as a result, Ben Bernanke has to keep lowering the Fed funds rate to save the economy, then another flood of liquidity will set the stage for an outbreak of inflation and/or the next bubble.
I give up. Just tell me where the next bubble will be, and I’ll invest in it.
CNBC has some bright and interesting people; but, with a couple of exceptions, they and their typical guests are prisoners of the Wall Street ethos. They are like railroad firemen reflexively shoveling coal as fast as they can into the boiler of a runaway freight train – a plausible metaphor for 21st century capitalism.
Aside from the skew this gives to their economics, it tends also to warp their perspective. Thursday morning they were discussing a Clinton-era initiative of the early 1990s to expand the possibilities of home ownership in America. A noble and worthy purpose, they lamented, but one which sowed the seeds of today’s collapse in the housing markets.
Breathtaking.
Of course Clinton-era policies could be abused. All policies can be abused. But it was not government that abused the principles of sound credit. Abusers did.
Blaming that on government policy is like blaming the Brinks robbery on government requirements for banks to hold loan reserves.
Nothing in government policy urged no-doc, low-doc, or NINJA loans. Fraudulent mortgage brokers and banks failing to do proper (or any) credit checks gamed the system. Cynical investment bankers bundled these travesties into securitized tranches and seduced fee-loving rating agencies to obtain the eucharistic blessing of AAA ratings. It’s been one of those amazing times when the voracious predators worked themselves into such a feeding frenzy that they devoured each other.
There is one thing the government could realistically have done. It could have prevented some of these excesses with vigilant regulation – which is exactly what the Wall Street Bible and the priestly cult of CNBC hate most.
In Friday’s Times, Floyd Norris observes, “As the mortgage mess grows, we are learning more and more about just how sloppy things were in the mortgage-issuing business as loans were churned out, carved into securities, and sold off.”
He notes that a few judges are now blocking foreclosure proceedings because the would-be repossessors can’t even prove they own the mortgages they’re trying to foreclose on.
And now, he writes, the banks are begging the accounting rule makers to allow them to ignore a standard that has been on the books for almost 15 years — a rule requiring them to report their losses — enacted to correct the deceptive bloating of balance sheets that fueled the Savings & Loan debacle of the late 1980s. Exempt them from that requirement and they can bamboozle their stockholders as well as their borrowers.
But don’t look for this story to emerge from the hosts and guests of CNBC. They’re Wall Streeters. Fish don’t oppose water, and Wall Streeters don’t find fault with banks.
Some outa-towners musta done it.
Government is only one of their scapegoats. They also blame “irresponsible” home buyers – the folks who were talked into believing they could at long last afford to own their own homes.
Of course some of the borrowers were speculators, buying second and third homes and flipping them to sell at higher prices until they got caught when the market topped and the buyers evaporated.
But let’s stick to the typical case where working people are shown the yellow brick road to home ownership by mortgage brokers and bankers looking for the highest possible volume of loans, quality be damned, because they had no intention of adding these loans to their books – they would bundle them off for resale through the investment banks.
Many of them engorged their profits in the process by pushing completely unsuitable high-rate, high-fee loans that they knew could never be repaid but were gloriously lucrative to the banks, lending companies, and commissioned mortgage brokers. The borrowers who now stand to lose their homes will have spent their last dollar fattening up the lenders and brokers with unconscionable fees that go on and on, even after the mortgages slide into default.
And the homeowners are to blame for bursting the housing bubble?
As Norris points out, the banks are now claiming they just don’t have adequate staff or computer systems to comply with accounting rules, but somehow home buyers were supposed to be able to figure it all out on their fingers?
Have you ever met a homeowner who has actually read all the documents he or she signed at a mortgage closing? And if they had, could anyone have translated all that legalistic gibberish well enough to see the pitfalls, the penalties, and the overcharges being shoved down their throats?
Many if not most of the borrowers deserve a reprieve.
And many of the banks and bankers deserve to be foreclosed.
Oh, weep for Adonais, he is dead! Pain, pain, pain, forever pain! See? It took two great poets to summon the proper grief for the death of service in American business. Oh, the humanity! (That last one wasn’t a poet; it was Herb Morrison, a radio journalist reporting on the crash of the Hindenburg.)
But perhaps I exaggerate. It was only a local banker. Holly opened an account for her ceramics business, which (on the spur of the moment, filling out a form in the bank) she named Holly Pots. So checkbooks and things began arriving addressed to Holly Pots.
But there was more: Bart, the banker who signed up the account, said he wanted to see Holly’s place of business. Not to inspect it – she wasn’t trying to borrow any money – just because he was fascinated and because the bank cares about its customers. So an appointment was made for 9 a.m. Wednesday.
The administrative, creative, pot-throwing, glazing, manufacturing, and shipping operations of Holly Pots and its staff of one are housed in a 12 foot by 15 foot, second floor corner space in a 19th century firehouse on Pittsburgh’s North Side. Other potters, artists, and sculptors rent similar spaces there. But Holly’s is prime real estate because it contains the pole the firemen once used to slide down to the first floor when the bell rang.
Wednesday at 9 a.m. proved to be a propitious time for a visiting banker, because a glaze firing was scheduled that day for the big kiln in the Firehouse, carrying the hopes and fears of three different potters – who can curse in three different languages – through the perils of 2350 degrees Fahrenheit and whatever could possibly go wrong in firing a kiln. It takes hours. Everyone was alerted to the banker’s imminent arrival and prepared to treat him as if had never been guilty of banking in his life.
But Bart the Banker bailed out. He never called. He never showed. Imagine! A mighty river of money – literally hundreds of dollars will flow through that account, generating dozens of dollars in fees and incalculable prestige – and no banker.
The long-awaited confluence of art with capitalism, thwarted. A sad day for banking. A sad day for America. But the potters were happy – nothing blew up.
