Castle on the Fuschlsee
Not all banks are the same. A handful of banks — such as the one that invited me to speak in Austria this autumn– were not happy to see the multibillion-dollar bailouts, the hue and cry of the public and the resumption of the indefensible bonuses on Wall Street that have, again, given banks a bad name.
I had never been to Salzburg before, so I was heartened to see another American there who had not been either: Sheila Bair, the outgoing head of the Federal Deposit Insurance Corporation, the federal agency that insures bank deposits and unwinds the banks that fail. Bair has been very busy these past few years.
Bair was the only other female speaker in a sea of bank governors, finance ministers and consultants from a wide range of European nations. What united the group, however, was a sense of urgency in examining the origins of the global debt crisis and its possible solutions. A prominent boutique bank in central and eastern Europe, Erste Group, held a series of panel discussions at a private castle in the Alps on Lake Fuschlsee with provocative titles such as “Who needs banks?” (The answer, according to the moderator, was that we would like more “normal banks, banks that take our deposits and don’t try to gamble with them.”)
Ms. Bair offered her own pearls of wisdom in a keynote speech sizing up the banking system and the current state of the world’s financial affairs from the perspective of a Washington insider:
– On the highly popular banking credo of profits will be privatized; losses will be socialized: “There is still an issue with Wall Street’s perception of too big to fail,” Bair says. “The problem is, too big to fail is not over until Wall Street thinks it’s over. I have argued that the ratings agencies should not be rating banks more highly than they deserve, based on the expectation they will be bailed out. It is unfair for the taxpayers to have to put their money at risk again.”
– On bank bonuses: “We have got to do something about these huge bonuses…We are still seeing huge political movements based on the anger generated from this. We do need some tough love to address this.”
– On the fight over the U.S. debt ceiling (our nation, by the way, now owes over $54.5 trillion): “I am not going to defend our politicians…it was appalling, unnecessary and self-imposed,” Bair says, adding: “I am not going to defend it and I feel somewhat helpless about it. It’s a very sad situation.”
– On U.S. politicians primarily being driven by “short-term interests” and “the idea of driving decisions based on keeping your job” (her words): “It’s not like you get into public service for the money, so if you’re not doing the public good, it’s like, why are you doing this?'” Bair, who has worked for George Bush senior and Bob Dole — both military men — offered her suggestion for a better type of leader: those who have gone to war. “If you are willing to go to war for your country, then you’re not just willing to lose your job, you’re willing to sacrifice everything.”
– The prognosis for global growth and stability…very poor. “The U.S. economy is moving at stall speed,” she says. “People just don’t wish to come to grips with reality,” which makes it difficult to tackle the outstanding problems. The small-business sector, in particular — the main source of U.S. job growth — is “really hurting,” she adds, because it is unable to secure affordable funding from banks.
– On the “interconnectedness” of global financial institutions: “We need to be asking the tough questions of banks: what is happening inside your bank? What is your board doing? Who are you connected with and who is connected to you? If we bail out an institution, we need to know who we’re helping and, if we don’t, who are we hurting? I often couldn’t get any good answers to these questions.”
– More on this: “With Citigroup, we had no idea what was going on,” Bair says. “We couldn’t even identify what was inside the bank and outside the bank, which legal entities were housing various businesses. We did not know who they were tied to legally, which is astonishing to me…And we are now seeing lots of pushback to financial reform in the U.S. and we need to be more aggressive about addressing this.”
– Euro bonds as a silver bullet: Bair approves of the concept, noting that while many European nations share a common currency, they have broadly different debt profiles. Bundling them together into one shared debt load could help stabilize countries like Greece, although it would chafe healthier countries like Germany and France. On the bright side, the entry of a euro bond would force the U.S. to keep its own debt competitive, she says. “We joke in Washington that the U.S. Treasury bond is the best-looking horse in the glue factory.”
Leah,
All in all a good piece on Blair, albeit a slightly incomplete understanding of the causes. Washington’s policies created the party. Wall Street merely showed up, drank all the booze and behaved badly. Bonuses for activity that only exacerbates moral hazard, such as sprialling bonuses for higher (toxic) mortgage volume at Fannie Mae and Freddie Mac, which ultimately caused the crisis, is highly troubling and borderline criminal collusion between the execs of Fannie and Freddie and their bought-and-paid-for puppets, Dodd, Frank and Obama. Just take a look at Franklin Raines’ or Jamie Gorlick’s bonuses. Even though Gorlick had no previous training nor experience in finance, she was appointed Vice Chairman of Federal National Mortgage Association (Fannie Mae) from 1997 to 2003. She served alongside former Clinton Administration official Franklin Raines. During that period, Fannie Mae developed a $10 billion accounting scandal.
On March 25, 2002, Business Week interviewed Gorelick about the health of Fannie Mae. Gorelick is quoted as saying, “We believe we are managed safely. We are very pleased that Moody’s gave us an A-minus in the area of bank financial strength – without a reference to the government in any way. Fannie Mae is among the handful of top-quality institutions.” One year later, Government Regulators “accused Fannie Mae of improper accounting to the tune of $9 billion in unrecorded losses”.
In an additional scandal concerning falsified financial transactions that helped the company meet earnings targets for 1998, a “manipulation” that triggered multimillion-dollar bonuses for top executives, Gorelick received $779,625. From 1998 to 2002 Gorelick received a total of $26,466,834.00 in income as vice chairman of Fannie Mae while it was going down the tubes. The OWS crowd should be protesting in front of her house and in front of Fannie and Freddie offices in Washington DC rather than on Wall Street. Rep. Richard Baker (R-LA) and Sen. John McCain and Sen. Elizabeth Dole sponsored and brought several pieces of legislation in 2003 aimed at auditing the GSEs, curtailing their spending sprees and prevent them from buying more and more toxic mortgages. George W, Bush strongly supported the legislation and promised to sign it. Unfortunately, the heavily-lobbied contribution whores Dodd and Frank blocked it in the Senate and House and it was never even tabled for debate. If you want to do some investigative reporting, here is a great place to start: http://money.cnn.com/magazines/moneymag/moneymag_archive/2003/09/01/348649/index.htm
When bank lending regulations were relaxed to achieve the utopian liberal dream of providing a few people the equal opportunity of homeownership, as they were under Jimmy Carter with the CRA, a growing default problem began to simmer up and many banks, savings and loans and insurance companies failed. The RTC was formed with taxpayer money to bail out the savings and loans and the S&L assets were sold to Clinton administration insiders for pennies on the dollar. When the CRA program was broadly expanded as it was under Clinton and lending rules were thrown out the window as the plan expanded to include millions of homebuyers, a ,assive national and global disaster was created as sovereigns and banks who purchased the toxic debt and derivatives began to take losses and fail. Add to to this the severe overleveraging of the Greek, Italian, Portugese, Irish, and Spanish economies and their devastating effects on the counterparty banks and we have a real mess. Fortunately, the dollar is still a world reserve currency and The Federal Reserve can print sufficient money to keep order among the global banks and prevent against a severe deflation. Sticking the landing perfectly, however, without creating more price bubbles and busts will be quite another story.
Hey Bruce…I am worried about the sticking and landing myself (maybe you have some advice for readers on where to park their money for the worst of the storm)? I have to say, I don’t dicker with the government’s weighty contribution to the mess; like Bair, I do not defend it and, frankly, have been harder on the regulators and legislators than anyone in my writings. But I would also posit that privileged party guests — especially those who hold the marionette strings to the world’s markets — should behave a little better. Just ‘cuz there’s booze, doesn’t mean you have to get punch-drunk. And most of the offenders weren’t innocently attending garden parties — they were addicts looking for madhouses in which to imbibe the hard stuff.
Bankers and brokers have no responsibility to constituents other than their partners, clients or shareholders. Our legislators, on the other hand, have plenty of responsibility and little or no business tinkering with mortgage markets or lending rules any more than they should regulate pantyhose distribution. It is unfair and perhaps even naively myopic to skewer bankers and brokers on one hand for doing their jobs by lining up and placing bets with private client money while refusing to recognize and place blame squarely on legislative mistakes that clearly created the crisis. Of course the bankers should fail, not be bailed out with taxpayer money when they do it badly, but bailouts are further evidence of bad representation. You cannot bifurcate the issue by vilifying the bankers for doing their jobs while simply and completely ignoring the dereliction of duty by certain, mostly Democrat lawmakers without exposing a certain bias.
I agree wholeheartedly that the government has too often created market distortions where it should let the market work things out naturally (while simultaneously failing to apply decent safeguards and regulation in neutral fashion — MF Global being the latest to get the “teacher’s pet” treatment).
If bankers and brokers want to hide behind the “fiduciary duty” smokescreen as the reason for being held to no standard whatsoever — not even to their clients — I say, fine. But they cannot cry when they are treated like children who might do anything at any moment. I don’t blame them for wanting no rules and no responsibilities. Who does? But you can’t always get what you want, as the Rolling Stones say. Banks claiming “there’s nothing we care about more than our clients” is old hat. The gig is up. It only goes so far when, at the same time, the banks are being sued by the government for betting against the advice they give their own clients. So much for the sacredness of fiduciary duty.
That is not exactly correct. When a bank is forced by the nature of a trade to accept counterparty risk, it is compelled to either hedge or lay off the risk, or perhaps lose unnecessarily. If a client wishes to make a risky trade and that trade forces the bank to take a long or short position, and no third party will assume the risk, the bank is compelled to hedge it. If the client loses money it is not the fault of the bank or even a conflict. A lender trades against borrowers by definition. That’s business. If banks couldn’t hedge counterparty risk there would be no banking except depository lending.
Not sure how many readers of this blog understand the difference between a “market maker,” which has limited duty to the customer for the reasons you just explained, and a “placement agent,” which has more responsibility to the customer to disclose the details of the products it creates and markets…but I assume this is something you know very well. Goldman, for example, was sued for withholding information to customers about a product it created as a placement agent, specifically underwriting market instruments designed to lose value and then profiting off it. (Hence, the fortunes of the good Mr. Paulson.) I have heard the arguments and I understand the history. And I remain thoroughly unconvinced that it is a defensible practice. No shortage of bankers and traders have privately told me they agree.
Agency vs. Principal trades are required to be disclosed. As you correctly state, when a firm acts as both agent and principal, the legality becomes murky. None of this would have happened when Goldman or Lehman were private partnerships and partner capital was at stake. Perhaps the only regulation we need is the requirement that all investment banks must be private.
Oh…and a mandate to keep government tinkerers out of.the economy, healthcare, education and welfare, areas where they have always proven to fail miserably or to favor their cronies.
I can respect that, an investment bank should be private. Now, any decent theories on where our retirement money might best avoid being inflated or woofed away by our deep thinkers in Washington?
US dividend-paying equities and technology stocks are the place to be now, with a little gold and commodities mixed in. After just under a year of being neutrally positioned here and underweight foreign and emerging markets, I am overweighting US large and small cap companies.
For commodities exposure, what do you favor: indexes, ETFs or equities?
Re commodities exposure—the strange thing in recent months is that equities and commodidites generally have been in close correlation–thus also indexes. Everything swinging on political utterances.
In a less strange environment if I really want to swing on the price of oil—I use the pure-play oilsands. This is pure economics on margin. the production cost is say 50/bbl–used to be 35–but for arguments sake say 50 now–whereas everywhere else its anywhere from 8-20—maybe more in the newest OCS deep drill stuff–but thats mostly gas——so if price goes from say 75 to 95 WTI base—-the basket gives the olsands a much larger percentage margin—so for a domestic oil equity driven with 25/bbl cost the earnings are gross margin at 50/bbl –and increase to 95 ups the margin to 70 or 40% runup with a big move——but the oilsands goes from gross margin of 25 to gross margin of 50–so lots more volatile—
if you watch oilsands even when markets were relar=tively stable it was not unusual to see daily movements of 4-5% –1% at lunch—-wheras COP or lower 48 crude producers–whats left–move 2% –of course its white knuckles a lot of the time–recently though nothing predictable –like that–everything moves as if fed is buying in to maintain a band of trading–volumes down
now gold silver different———–im scared of ETFs——-after VENs pulled gold out of supposed reserve accts the price went from 1750 to 1950 in a few days —to me this screamed the holders were out covering what was supposedly on hand–i think this is economic evidence that the ETFs are like Corzine–promises–stuff not there–so there should be a risk of a yawning spread between real physical gold or silver you can touch and ETFs———i think people are now afraid of gold ETFs—I will not hold anything that is not actual coin–that i can go pick up if i want-tested it
im ultra defensive now–i used to look for risk–eg my oil trades–no more—im afraid to hold more than a couple days–except coins–europe s going to disintegrate–its just when–and US is going to run printing presses and inflation will make the 99 go to 99.7
the debt per person in US is 60K/person–Greece only 50K—and its really bad—-US GDP is pumped by financial phantom income—like Swiss and UK—but thats why there is concentration to point its dangerous–im bumping into crowds of mixed vets old and young along with college kids–iv lived thru vietnam era–but never saw such widespread disgust for all institutions–sons as well as fathers and vets of all ages worst of all——-im in midwest now—-much much diferent than when i went to dc a few years ago–and much much diferent than in dc of course—everything is really shaky
The Obama administration is floundering again on the newest purported “program” to help homeowners that were wrongfully foreclosed. Like HAMP. The new program rolled out by Office of Comptroller of Currency (“OCC”) on November 1, 2011, purportedly would allow injured persons to file Claims for economic damages. The protected classes include vets on active duty, persons engaged in HAMP negotiations and persons foreclosed using robosigner created DOCX.
The vets are the most egregious cases—but the OCC guardians will not even send a form to an attorney doing pro-bono for a vet–ie me. This is a shameful sham. The OCC is operating like a defensive line on a pro-football team to prevent people from obtaining the forms. The deadline for filing is April 30, 2012. Substantial detail must be accumulated to demonstrate the qualification and damages. per PROPUBLICA “Calling the 800 number to obtain the form proved to be as enjoyable as the loan modification process. The first employee didn’t know much, and was just an initial screener. Apparently if you can’t identify a loan number and servicer to determine whether you fall into the two year eligible time frame, they will not send a package. They try to encourage you to wait until you get a letter, which they claim will be sometime before December 31, 2011. If you insist, they take your information and represent that a package will be out in 7-10 business day. Waiting. In the interim, here is a brief analysis of the form obtained by http://www.propublica.org attached here.” We need real cooperation from govt on this not a sack the quarterback approach.
laimant qualifies, and that damages are quantified. I attach a PROPUBLICA COMMENT–its not just me encountering resistance.
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Greetings from Japan. I am practicing my English and arrived to this blog just to say how much I respect reading it everytime you post. Can you please e-mail me the next time you post. My email is Ambrosius@reviewtable.gov . Thank you