I was talking to my friend Michael today and he used a term to describe our mutual fear of a populist revolt against wall street and the financial sector: Financial McCarthyism
It got me thinking about the wisdom (or actually the lack of wisdom) in making wall street and the investors and executives that inhabit it the scapegoats of this financial mess we are in.
Yes, a lot of people in the financial industry made a lot of bad bets, were paid excessive sums for making those bad bets, and are at least partly to blame for the mess we are in.
But there's plenty of blame to go around; the politicians who created the political environment for the housing bubble, the regulators who didn't regulate, the borrowers who didn't think about the ramifications of paying too much and borrowing too much, and I could go on and on.
Not all of us are complicit in the making of this mess but certainly a lot of us are.
And the thing that concerns me is we need our financial system to get us out of this mess.
The people who built the house of cards are the ones who know how to take it down without it collapsing. And by turning them into the scapegoats, taxing their bonuses at 90 percent, and by vilifying them in public, we run the risk that they take their knowledge of how to unwind this mess most cost effectively and go home. Many already have.
I think Obama and his financial team are not stepping up to the plate and showing the right amount of leadership on this one. They are allowing the financial industry to take the lion's share of the blame and are not educating the public on why we need wall street's cooperation in getting us out of the mess.
Don't get me wrong, I'm not arguing that we should pay millions of dollars in guaranteed compensation to each and every wall street executive. But I am arguing for a balanced perspective, rationality, and an effort from our leaders to educate and explain instead of just scapegoating.
What carrot could be provided to motivate the people who built the house to take it down w/o collapsing?And standard management question this raises if we were to look to them to help, “What is different this time from last time”, to ensure they don’t just find some new way to make off with as much as they can? One could claim they have proved their untrustworthiness already.It almost feels like we need a whole new team of financial leaders. I hope Obama and co. are looking into that. Meantime we should all stockpile bars of gold, or something.
Certainly I agree that scapegoating financial executives is a mistake. However, i think the logic of “The people who built the house of cards are the ones who know how to take it down without it collapsing” is unsound and even dangerous. If we believe that, that we are held in thrall to financial engineers who surely know how to exact maximum economic rent for their services. In my experience, the last people you want running a company that has foundered are the people who steered into the rocks in the first place … not simply because they have proven themselves incompetent, but also because they will inevitably fail to go far enough in unwinding their own mistakes. Fresh eyes and less baggage are what is needed.
Exactly, if you hired a structural engineer to build a skyscraper and it collapsed (while mysteriously kickbacks from shady suppliers ended up in his bank account) would you hire the same guy to build it again, becuase “he’s the only one smart enough to build it?” Hell no, so why should do that with “financial” engineers?And besides, the fact that it collapsed proves that they’re NOT ACTUALLY SMART ENOUGH IN THE FIRST PLACE
In deconstructing catastrophic events, the more effective way is not to ask what failed, but what succeeded. IOW, if you’ve already personally made, say, $50-100MM, where’s the “collapse”?
Well a lot of people who were worth $50-100mm a year ago are worth $25-50mmtodayNow that’s still a boatload of money, but very few were spared in thismeltdown
“$50-100mm a year ago are worth $25-50mm today”Sure, but today’s $25-50MM can buy a lot more than what it could a year ago as well.”These are complex instruments”This is very much debatable. The underlying math and model complexity is one thing, but these are in fact extraordinary times where you have enormous leverage over the endpoints of these contracts by the government. Once inevitable default is put squarely on the table, you’d be amazed how simple these instruments become to all counterparties and holders. But this is a long discussion.
Good topics for discussion, both of themSome things have gone down in price as much as everyone’s wealth (stocks andpossibly real estate)But not food or a college eductationAgain, no reason to cry for anyone with that kind of money, but it’s justinteresting to note what has come down along with wealth and what has notYou may be right about these instruments. I am not as close to this issue asyou probably are.
The guys I feel sorry for are the guys who are 75-100 years old who saved their money, invested it wisely and now have had their net worths cut by 50% because of this mess.They have absolutely no opportunity to catch up and it will impact their life styles in a huge way.They have had 15-20 years of investment appreciation stolen from them by some 25-30 year old kids with mousse in their hair.Maybe just one symbolic beheading would be OK?
My heart bleeds for them. Oh hold it, no, it doesn’t.If these people were so damn good why did they drive their companies out of business? Sorry, but if they’re the best Wall Street can offer us, we’re screwed. Bring in new, bright people and give them incentive to turn it around. NOTHING guaranteed… but if they rebuild the companies into successful ones… give them part of that success. But NOTHING, not a cent for the people who screwed up. I’m tired of seeing people get millions for fucking up. No guaranteed bonuses – a bonus is a reward for going over and above your target, not a reward for showing up every day.
Agreed on guaranteed comp. I don’t agree that the people who fucked up should all goI fucked up in 1999. I got a second chance. I learned from my mistakesI am a better investor because of it
Apparently you’ve never signed a contract (like many of those at AIG) that specifically said “you will be paid $1.00 per year until the end of year one, when you will be given a large bonus”.In fact, in the financial industry, a bonus often IS a reward for showing up everyday and doing your job….especially in a company that is being UNWOUND responsibly.
And that’s a bad system andy for a bunch of reasons starting with the word bonus
That train of thought will get absolutely no sympathy from the guy who struggles on 30, 40, or even 100k a year. Typically, if rich” people lose half their money, they’re still rich. And in reality, they are basing that “loss” on hyperinflated values that were false. I am not a finance guy but this so called economic crisis is just sensible revaluation http://ims-seo.blogspot.com…
All true and good points
It’s easy to blame some of the people that profited from this mess and to call them stupid. I learned a long time ago that a lot of smart people figure out how to leverage OPM (other people’s money) for their own wealth creation. Sometimes these smart people find themselves in situations where they have massive incentives to behave in a way that does not benefit the long-term health of their employer. Are these people greedy? Or are they just great opportunists that are taking advantage of their opportunities? I did not feel guilty, stupid or greedy when I took advantage of the dot.com bubble and raised much more money for my startup than we probably deserved. Are these wall street guys really any different? They system and the market MOTIVATED them to behave the way they behaved. I’m not saying they are all angels, but I think many of us would have behaved the same way, given the situation (excluding Madoff and the other criminals).
I used the 1999 period earlier in this comment thread. I agree with this sentiment
I agree. And I agree with Fred’s point. There are so many actors that are responsible for this mess and almost all were acting rationally given the situation and the circumstances. Just like it takes no courage to participate in a bubble when everyone else is, it takes no courage to call “off with their heads” along with the rest of the mob when the bubble collapses.
I’m all for people making choices to maximize their wealth in any environment, and paying the price for the wrong choices. Unfortunately the government decided take the failure out of the equation at least somewhat justifying the Financial McCarthyism that’s happening.My question has always been if you let the banks fail wouldn’t their be opportunities for good banks, or people with capital to take their place. This may be simplistic but if good businesses and individuals that deserve loans are getting frozen out because the banks are poisoned, isn’t that a good time to start a new bank, hired the layed off talent from the old ones at a discount, and make a couple extra points on the loans.Or is the problem that Americans and their business are so over leveraged, and under capitalized there aren’t good candidates getting screwed out of loans, just a ton of risky bets, that want cheap money?
letting the big banks fail would destroy the other banks that haven’t yet failed because they made trillions of dollars in bets with themselves in a complex web of… well… bets.the biggest problem is that the people weren’t using their own capital or even the capital of their bank… they were using play money that now the government has to stand behind… or we all get screwed!
Excuse me – WHO is saying ‘off with their heeds?’This whole idea that the President… or average Americans… are doing anything more than expressing outrage at total incompetence and naked greed is absurd.Speaking of getting out of New York City — try going to countries who REALLY do have class conflict, like, um, EVERYWHERE besides the US. They have riots and stuff. People get killed and stuff. Until you see what actual class conflict looks like, you really have no clue.
Thank you for your thoughtful feedback. I grew up overseas in El Salvador,India and Israel. No one is saying ‘off with their heeds’ unless they’redoing a Mike Myers imitation. I was using the phrase as a metaphor for theoutrage expressed at the financial system when, in reality, most people wereacting rationally given the context and the guilty number far more thancorporate CEOs and include Congress and anyone that took a loan theycouldn’t repay with cash flow.
And I’m pointing out that the “outrage” being inveighed against by Mr. Wilson (and yourself), this terrifying mob mentality that threatens to destroy our wonderful investment banks, mostly consists of irate phone calls to cringing Congresspeople. Wow. So ‘out of control.’ Not a single orderly demonstration, let alone a mob.In fact, Americans are behaving very responsibly in their criticisms for the most part. As a result, I’m getting sick of hearing how horrible it is for the degenerate gamblers at the high-stakes tables to be ‘vilified.’ Nobody appeared to be concerned about the vilification of the auto company CEOs — and nor should they be.Did the heads of the leading financial services firms know that the risks they were taking on could lead to not just their own companies’ downfall, but to massive systemic shocks to the entire system? Of course they did. It’s what they talked about over drinks. They knew. They just decided that risk was worth the benefit of retiring in their late 40s with hundreds of millions of dollars. They were betting that when the bubble burst it would be on somebody else’s watch.Can you say anything similar about mortgage-seeking consumers? or corporate CEOs? Of course not. When they took on their borrowing risks, they did so mostly out of ignorance, actively encouraged by their financial advisors and accountants. And most importantly, unlike the leadership of the big banks and insurance companies, their individual decisions — while collectively tragic — could never be expected to cause the ruin of the entire financial system.
But how is this different than Enron, let’s say? “Sometimes these smart people find themselves in situations where they have massive incentives to behave in a way that does not benefit the long-term health of their employer.”Behaving in a way that you KNOW will eventually harm others (because your entire company will be harmed) is not justifiable simply because you’ll personally make a lot of money along the way.I don’t understand this logic.
“behave in a way <that> THEY KNOW does not benefit the long-term health of their employer.”Lindsay – if you insert “KNOW” into my statement, the actions are unethical at a minimum and more likely criminal, like Skilling and Fastow at Enron and Madoff. A lot of people are being accused of KNOWING this was all going to collapse. I believe a lot of people suspected it was unsustainable (just like the dot.com bubble), but group greed and market momentum distorted their view of reality.
It is that you used the word “incentive” that I understood the behavior to be conscious. Unless you’re implying that they were subconsciously incented, which seems kind of unlikely to me…
incentives were clear, e.g. sell these CDO’s, we (Finco) get great margins, the clients have been getting great returns, so you will get big commissions. The behavior was conscious – e.g., “hey Bob- our other clients are getting 10%+ returns on these new products – want some?” the KNOWLEDGE that was missing was: hey what is the C (Collateral) behind these collateralized debt obligations? what is the risk of default? It’s insured by AIG, how? CDS’s, what are these SPE’s and how do they fit in?, etc., . .who’s the criminal? who’s the greedy pig? the client, the salesman, AIG?
I don’t think there is such a thing as a justified lynch mob so I’m really less interested in the criminal prosecution of all this than I am in preventing it’s repetition.The feds being in bed with the bankers certainly seems like the cause. And Congress being in bed with various types of criminals (bankers, lobbyists, gangsters) is also to blame.If only we could get more decent, ethical people to work in the public sector. But really, where’s the incentive? 🙂
EXACTLY… the compensation structure was out of whack!
These are complex instrumentsIt’s like software engineers who wrote bad and undocumented codeYou need to keep them around to at least help you fix it and get itdocumented
What a great way to teach s/w engineers never to document, Fred!
Many already understand this. Like salespeople who don’t want to use crm tools
OK, as a software developer who’s unwound lots of ugly code, I couldn’t disagree more.In this case, you don’t fix and document their code. It’s garbage. You throw it away and hire someone who knows what they’re doing.And now this analogy fits my opinion of the situation well.
Ok. But you do keep the old system running while you do the rewrite
And you preserve the old system by only keeping around the top key people from that old system. And if they are good they will assist you in transitioning to your brand new system. You however make no efforts towards the rest of the old team. Analogy still applies IMHO.
I’d add that the people you keep around then are purely the ones that you need to keep it running, not necessarily the ones who made the mess. They’re probably too stuck in their habits of mess-making to be retrainable in the short term.And you certainly do not keep the negligent managers who let it become the mess. Which is a lesson I hope we apply richly here.The primary management necessary in financial trading is risk management, and a lot of companies were negligent all the way up the chain. Hopefully that rises to the level of criminal negligence. If not, we need new laws.
I think Kevin Drum expressed this sentiment succinctly enough by quoting the following from Charles de Gaulle, ““The cemeteries of the world are full of indispensable men.”Full article is worth a read:http://www.motherjones.com/…
That’s a great line and a perfect retort to my post
I think its the top ppl that should go (the generals) and the rank and file that should stay
It’s like software engineers who wrote bad and undocumented codeYou need to keep them around to at least help you fix it and get it documentedOr you trash the original code and start over.I’ve done both in my career. Starting over seems to work better in the long run.
You are the second person to make that point Erik and I think I standcorrected on this point
Sorry Fred,You fire hisher ass almost immediately after commandeering his workstation and replace with a competent engineer who can sort through the mess. ((BTW there always is one to be found (engineer thats goodsmartunderstands code and importance of docs) despite your biggest fears that its impossible)) I’ve been through this. The rest of the Engineers left…know you won’t be controlled nor stand for this type of bullshit.Be honest with the people this might inconvenience (end users) and have a clear plan and timeline of solving the problem. In my experience its a way better approach.Build the courage to face the facts (and yes some pain) and get rid of the root cause immediately, despite how vulnerable you feel at the time. Its never as bad as you thought it was going to be…and in fact brings new blood, new thinking and new energy to the team.How can you expect the guy that caused the problem to be passionate about fixing it when documentation and coding wasn’t a strength to beging with?I’ve been through this before. Never ever be held ransom by the person who started the problems in the first place.Flavio
That makes three now. I stand corrected on this one.
You made a point earlier…second chances can be a remarkable opportunity for some who were pure in their intent and just made an honest mistake.However, most often, its *fucking purely* indifference to the effect of their actions driven by personal short term gain.. and I’m fucking sick of it…An honest man can see the difference…with some boldness.. can even make some change.We gotta stop pussy footing around and realize that the middle ground is a dangerous place to be right now.Deep and swift is the course of action despite how distressing it may sound.Most people who deserve to win as a result of their honest actions, will endure…and get a second chance.FlavioFlavio
Sorry for the language…
That’s hard medecine for me to take because as most people who read this blog know, I’m always looking for the middle ground
Great term.It seems to me that the derivatives and lack of transparency around them (what is JP morgan’s exposure?) is a far bigger issue than the mortgage loans themselves, but it is rarely presented that way by MSM because it’s too complicated. Clearly the lack of transparency was a key failure of government oversight which multiplied the “bad loan problem” many times over.At least, that’s my sense of it. Who really knows? Most measures have delayed the daylight IMHO because no one wants to see the ugly truth.
Two quick comments… Senior executives in both the financial and auto industries have exhibited an astounding degree of tone deafness. Every time they have had an opportunity to explain what’s going on they are drowned out by the din of their arrival in private jets, announcements about bonuses, etc. That is not how most people in America live, and people, rightly, have no patience for that when they are wondering how they will send their kids to college, make their next mortgage payment, etc.Second, retention bonuses. Since when haven’t contracts been renegotiated when circumstances change dramatically? Also, I don’t see much of a bidding war for the services of those in question. These days, a retention bonus is getting to keep your job.
I did like when Obama said last night that the wall street execs out to getout of NY and see what’s going on in the real world
They will be doing exactly that, Fred. And since they make up a large portion of the 40,000 people that are paying half of NYC’s taxes….be prepared.
The taxes and CRE funnel is going to make it interesting for NY in the next several years.
Interesting is optimistic
“The people who built the house of cards are the ones who know how to take it down without it collapsing.”I think this statement is unsupportable and not at all necessarily true. Financial executives are not wizards or priests in possession of secret knowledge that nobody else has. There are thousands of people in the country who can fix this. And Wall Street DID get us in this mess more than anyone else. Yes there are ancillary factors….but the Street is most culpable. In the end, they invented the derivatives, the schemes, they fooled the regulators, they gamed the system. I cannot fathom how anyone can argue otherwise.At the root of this is a political system that permitted the regulatory system to get weakened so severely and brought us atrocities like the Commodity Futures Modernization Act. We need to bring back Glass Steagall and true oversight. Our banking system was working fine for several decades before the late 90s.Even better, let’s have total public financing of political campaigns….and we’ll never have bad actors game the political system again.
It looks like Obama does get it. They are now turning to Wall Street for help:From the WSJ: “Obama Dials Down Wall Street Criticism” http://online.wsj.com/artic…
Good idea on his part
One reason I voted for him despite not loving all his policies. He has a pragmatism that Bush never had.
So Wall Street spent billions of dollars lobbying to relax regulations, and politicians accepted their bribes. Somehow that makes it less Wall Street’s fault? The Politicians in D.C. were at best the sidekicks of the wall street looters.The people who built the house of cards are the ones who know how to take it down without it collapsing. Yeah, and the arsonists are the only ones who know how to put out the fire! Honest! But they won’t do it unless you pay them millions of dollars in bonuses, because it’s just so much work and no one but them is smart enough to do it.But really, the house of cards has already collapsed, what we need to do now is build a new house out something a bit more sturdy. And the best way to do that is with new people, people who don’t have have history of building houses of cards and telling you they’re made from granite. Frankly, if you’re not willing to work for less then $250k a year I don’t want you running a system that our society depends on.I have no problem with a few people on wall street making that kind of dough, but they shouldn’t be making that kind of money at companies like Citibank and other large banks that have 60% of our nations assets or whatever.I’d rather have people who want to make decent money and have a nice life and boring but rewarding job and make a quarter million then psychopaths who work 80 hours a week and are addicted to risk and won’t get out of bed for less then $11 million a year.Would you invest in a startup that wanted to pay it’s employees 20% of it’s latest valuation in bonuses a year? You’d think they were a ripoff and you’d be right.
You should read Brad DeLong’s piece saying how SV got compensation right…..and Wall Street got it wrong. Great stuff.”Needed for AIG and the TARP: Silicon Valley Compensation Schemes”http://delong.typepad.com/s…
“The people who built the house of cards are the ones who know how to take it down without it collapsing.”Is there any evidence that they are either willing/capable of doing that? And if they are, do they need more than $250MM in bribes?
We’re all in this together for better or worse. Many were in denial two years ago when some people warned that things were getting out of control, and now are in denial that some paper gains they thought they had are their own responsibility. We are a country in denial and pointing fingers is meaningless in such an environment. Greed must be fought by prudence and not fear or hate. Risk does exist and is good – for it brings return.Nobody put a gun to the head of the Madoff investors to invest in an unregulated money management company, just as nobody stuck a gun to Madoff’s head and told him to hide losses. When things appear to good to be true they usually are. Those who invested in Madoff should have lost their money, just as Madoff should not be able to keep his money and now that capital should flow to those who may be wiser with it. The Invisible Hand is real and will work if you give it a chance. The problem is everyone expects it to massage them (pardon my french) and in an economy where everyone gets a massage there will be no happy endings!
speaking of Madoff and “paper gains” did you know that Madoff’s ponzi scheme was not 50 billion but 64 billion? That’s a big difference but the biggest number to note there is that the amount of money that was invested with Madoff was WAY lower… around 15 billion!So over 75% of their losses were “paper gains”.
RT @fredwilson gotham gal proposes a populist revolt against AIG http://bit.ly/osT3A i am in. anyone else?
I think AIG should be liquidatedI don’t think it should continue to exist as a go forward entityI do think we need to unwind its complex securities and I do think thepeople who know them best are the best people to do that
AIG the underwriters or AIG FP the guys who played the derivatives games?My understanding is the actuarial driven side of AIG is fine, but FP is a mess.Can we save one and dissolve the other? Isn’t saying “AIG should be liquidated” across the board pretty much Financial McCarthyism itself?
Well liquidated means chopped up and sold off in chunksThe chunks being the good businesses
“The people who built the house of cards are the ones who know how to take it down without it collapsing.”damn boss i think that statement is causing a populist revolt against you here at avc.com!as always, the issue is simple. this mess is largely created by government, which effectively has been hijacked by multinational corporations and international bankers. so who’s responsible for fixing government? the american people. but the american people are too immature to do that. if you remind them of their responsibility they will hate you, call you negative, and go back to coddling themselves in propaganda — the most immature and irresponsible response one could possibly have. this includes people of all walks of life, whether it is homeless drug addicts or fancy wall street executives.we live in a lawless country as the constitution has been thrown out the window. first order is to return to the constitution. if it needs to be changed, there is an amendment process, so go through the process and change it. this is all very simple, not rocket science. but it requires maturity and a sense of responsibility, which the american people are severely lacking. frankly we get what we deserve.anybody serious about change needs to get politically active about real issues. the two biggest issues are 9/11 and the federal reserve system, because those two issues affect pretty much everything, from the war machine to the corrupt media to the broken monetary policy.the system has reached a point of unsustainability. it’s going to get worse until it gets fixed.the good news is that the crisis ends when we want it to.
particularly well said
Another fine example of how Obama isn’t up to the task. This on the job learning is going to be the end of us all. 1.20.13 can’t come soon enough.I agree that there is plenty of blame to go around, but it starts with the government setting policies that virtually guaranteed a financial collapse (forcing 50%+ of Freddie Mac and Fannie Mae loans to be ‘sub-prime’). The consumer has their share of blame as well, but the recent strategy of pointing the finger solely at Wall Street is dangerous.There is an underlying strategy to this tactic and it isn’t pretty
Fred – I have been reading you from the start, that’s what – 7 years?… and 90% of the time I agree with your sometimes contrarian positions… But this time… you could not be more wrong. If you want to make a case by telling us that we should feel for the people who have had their mythic wealth reduced from $100M to $25M – really??? When was the last time you had to think twice about getting on a plane First Class with your whole family and going to Tahiti for a Five Star vacation? You can’t remember! 99.9% of the populace cannot even begin to think of this… Not that I fault you AT ALL for your phenomenal success. You are a brilliant, hard working, lucky guy. You deserve what you have built with your own two hands and head. It’s amazing – your eye and ear. Your ability to chronicle these times…all amazing. And I am glad someone can come from humble beginnings and make it like you did. But to tell people who are pissed off about the disastrous results of the incredible greed and excess that has gone on here for the last 25 years, the raping of america and it’s core good – for wanting those who engineered, architected and continue to profit from this debacle to be held accountable – to tell them that they are McCarthyites – that shows you are totally out of touch. Read Paul Krugman today (or yesterday) http://bit.ly/WCxd2 and tell me that he is a McCarthyite. I don’t think so.
Well I don’t agree with KrugmanI’ve stated that on this blog beforeAnd I am not saying we should feel badly for these people. Of course weshouldn’t.I am simply saying that by vilifying them, making it uninteresting to themto work on solving this problem, we are doing ourselves a disserviceThere’s a middle ground here, we can be pissed off and we can be rationaltoo.And Obama should be the guy to make that happen, he’s the guy who promisedto bring us together, to stop the wedge issues, to be the voice of reasonHe’s not living up to that promise in this instance
Don’t you see, Obama needs an enemy. To lead and acquire power, a Prince needs to motivate to population by creating a common enemy. To quote from a great influencer of Obama’s “Pick the Target, Freeze It, Personalize It and Polarize It.” This is right out of the play book of Saul Alinsky. He is one of the founders of modern community organizers.There is a long tradition of picking on Wall Street. John D Rockefeller had Ida Tarbell. Obama has a similar large target. This has nothing to do with the economy. It all has to do with power. Right now Congress is passing the largest tax increase in history (Cap and Trade) and creating all sorts of new spending programs and we are all talking about AIG.
You may well be right if so, its unfortunate
That’s not fair, Dan. Do you honestly think Obama created the furor over the bonuses? The anger is that, while so many of us went to the trough, some are going to suffer — and some who were even greedier than average, will not. Being upset over that is understandable, and yet Fred is also right when he says it smacks of scapegoat-ism .Unfortunately we have to go through this. We don’t learn till we experience. The good news is that it will teach the generations alive now, like it taught my grandparents and great-grandparents, the meaning of value and the cost of waste. It’s an 80-year/4-generation party/hangover cycle that no one can stop.But certainly Fred is right here, that we need to grow up and stop looking for a scapegoat. We have met the enemy and he is us.
Fred, I agree we need competent people to dismantle the house of cards with some semblance of order. However, I think that the equation “motivation = money = bonuses” is way too simplified.As far as I know, academic studies of motivation in business settings only show a strong link between differentiation in compensation and performance “when performance can be objectively assessed and when performance is mostly the result of individual effort rather than the product of interdependent activity”, and especially “when tasks entail little or no interdependence and outcomes are clear.” Examples of such jobs are installing windshields and picking oranges (I am quoting from Pfeffer and Sutton’s “Hard Facts, Dangerous Half-Truths and Total Nonsense”: “Yet when work settings require even modest interdependence and cooperation, as most do, dispersed rewards have consistently negative consequences on organizations.”)It is also entirely intuitive that the extra marginal effort that any banker is going to put in to move from $50m to $100m in compensation will be much less than the one to move from $0.1m to $1m, or from $1m to $10m.I agree with you that managers who are trying to unwind the mess should not be pelted with rotten tomatoes and eggs, because that can be utterly demotivating. On bonuses, though, companies should consider the issue of diminishing marginal returns (and it should primarly be the work of compensation committees – supervised by regulators if and when warranted – and not Congress).
I totally agree and posted my thoughts on bonuses a few days agoSome will see these two posts as contradictory but I am simply trying to point out that we need to walk a fine line here
Some good points, Fred, thanks. With all the talk of “going John Galt” recently, some bankers who get their bonuses taken away might just decide to “shrug.”Why do you think the folks on Wall Street *are* vilified so much? Not *everyone* made bad bets (although many did). Of those who did make bad bets, was everyone really negligent or incompetent? I’m sure some people made honest mistakes. And then I’m sure there are some who should have known better–I’d like to think they have lost their jobs for good, although I’m afraid some of them got saved by the bailout.Come to think of it, there are a lot of people who made *good* bets who are still being vilified, such as the hedge funds who bet on the housing market going down (and may get some of the AIG bailout money), or the East Bridgewater Savings Bank in Massachusetts, which is now being criticized for not lending enough. (!)Some people seem to be driven more by animus towards anyone who is making money than by a fair, objective look at the situation. You are right, the voice of reason should rule.
It’s not animus to people making money… it’s that they want their money if they succeed OR fail. Most people who fail at their jobs are fired, not rewarded with hundreds of thousands or millions of dollars. Again, you take a company on the brink and remake it as a profitable entity? Great, you get money. You drive your company to the brink and lose billions? No money for you.It’s called reality – some of you need to try it out rather than lamenting about a few million not being enough to motivate someone.
Guaranteed bonuses are wrong, periodThat’s a given
Fred, many of these bonuses went to people who were HIRED in 2008 to help unwind the mess, and who agreed to work for $1.00 in 2008 with the promise of large bonuses for not ditching the sinking ship.That’s why they are guaranteed. I’m not saying I like guaranteed bonuses either….but this retroactive robin-hood approach is insane….and Geithner knew it when he wrote “bonuses OK” specifically into the AIG terms.
“I’ll be a good citizen and work for $1… (but you have to guarantee me a $1million bonus).”And you want someone with that logic and those ethics doing this? You know what a guaranteed bonus is called? Salary. You can put it in column B vs column A but that’s what it is. So please, don’t pretend that these people were being self-sacrificing.
I never said they were being self-sacrificing nor did I say that they weredoing it out of obligation or duty to the State. I said that they did thework that they were contracted for and they deserve the compensation thatwas contracted in both their employment agreement and the subsequent bailoutagreements with the U.S. government.
Andy – I agree 100%.You can call it what you want, “bonus”, “deferred compensation”, etc. the bottom line is that they had a signed deal and they should be paid. Geithner knew they were getting paid that money. Why he is playing dumb now is beyond me. He put in the language that ok’d the payments.Now if the gov’t wants to stop it from happening again they can institute a 90% tax (or whatever) on all deals going forward for TARP companies. But do not change the rules after the fact. It sets a very bad precedent.I can’t help but think that this is a well-orchestrated smokescreen from the politicians who were complicit in this all along (Dodd, Frank, etc.). Let the public get fired up about wall street while the pols coast along unscathed.
I agree about dodd and frank. Wimps.
The politicians, the lobbyists, the funders — all hyenas feasting at the corpse of the public and then they turn on each other when confronted.The irony of Dodd and Obama being the largest recipients of political contributions from the AIG-ers is a delicious irony or it is just the same clan of hyenas supporting each other.The lobbyists get the politicians to do what the funders want and the funders fund the politicians who get paid for doing what the lobbyists tell them to do.There is only one guy with no seat at the table. Who?
Me because I refuse to ask for handouts after I give generously to politicians. It sickens me how the system works and I will not play that game
I am fairly friendly with a Congressman who was “districted” out of my District. We continue to stay in touch. He is a Democrat and we disagree on almost every social issue but he is very, very conservative on financial matters. We have a private lunch about 1-2 times per year and we get a chance to visit in great depth. I respect his views and sincerity very much. He has had a laudable career in public service after having been a very successful plaintiff’s lawyer. He can afford to serve in Congress. He is as smart as a whip. He is scrupulously honest, paying for his own lunch and even sending me a check when I pick up the tab. It is sickening to get his view of the corruption of money in Washington. It is so horribly broken that I am in favor of limited election campaigns (time period), public funding, complete prohibition of corporate/lobbyist/PAC/527 funding or we are doomed to become the government of the highest bidder.
I am so with you on this JLM
AgreedThat’s why I wrote the financial mccarthyism post
this question of making good or bad bets is mostly moot for the financial instruments departments of these companies. They were making bets for and against their own holdings! They’d do a Credit Default Swap for some assets and then turn around and do a sweeter deal with a different hedge fund so that they got their gold whether those assets did well or badly… THAT’S what pisses me off so much! They were simply gambling! … and the taxpayer has to cover both sides! (just like we did in Iraq)
Fred,I understand your point, however, I take huge exception at your use of the M word. McCarthy was by no means a populist; he was a manipulator. McCarthy-ism is finding (often fabricating) tenuous connections to an universally despised enemy, in order to settle personal scores and to increase your own power and standing. Note, however, that the enemy (communism) was widely and rightfully despised then, as it is now.What you are referring to as an undesirable development is not mcCarthy-ism, but rather “lynch-mob mentality” and “group guilt”, and I agree that those are things that we need to be careful with.The difference is very important, because, the only way to avoid the “group guilt” mentality is by personification. We have to call out names, point out the real culprits and surgically remove them, prosecute them if needed, and/or disgorge them.Make no mistake, that would trigger even more cries of McCarthy-ism and phony outrage from the powerful and privileged of whom, all of a sudden – God Forbid! account and responsibility is being demanded… By all means, the process has to be fair and precise, because conditions are indeed ripe for settling of personal scores, and other abuses. However, bear in mind the differences, as I believe they are important…
Some other commenters are arguing that obama is playing mccarthy politics with wall street and its allowing him to consolidate powerI don’t share that view but some do
Well, Fred, let’s be clear. When you say that there are other commenters arguing that Obama is playing McCarthy politics, more likely than not, these same people didn’t vote for the guy to begin with, they planted a doom/gloom seed to his presidency before he took office and will repeat the same mantra until we get to the other side of this crisis. They are the proverbial fast ball pitchers who have one pitch. They are not exactly objective or nuanced on ANYTHING Obama.Now, as to the message of plenty of blame to go around versus scapegoating, my analogy is this. Consumers knowingly got on a bus with a bus driver who was more motivated to get to the next stop FAST than to get there SAFELY. While they did not know HOW DANGEROUS the bus ride was, they knowingly took it without seat belts. They are culpable.The government during this period ceased to ensure that the bus was safe, and if anything encouraged the new metrics of speed over safety. They are culpable.Plenty of blame to go around, but it doesn’t change the fact that the business driver who took the bus off the cliff still killed lots of innocent people so in the hierarchy of blame/recrimination, who do you focus on first?To not tap into the culture of antipathy towards dangerous bus drivers, who at least to the outsider appear: A) unremorseful; B) still want their stipulated “performance” bonus; and C) have not exactly been out front with practical, self-sacrificing solutions to this mess is to tell ordinary folk that the lessons of the past eight years is more of the same, which has all sorts of populist risk associated with it.Obama has a very fine line to walk — managing political will, consumer angst, relying on the breakers to be fixers (specious logic on a few levels, as others have noted), economic slow down, bank crisis, auto crisis, no uniformity of opinion on right solution, huge vested interests in protecting status quo.My only point is that the narrative should be less charged with polarizing terms (Financial McCarthyism), lest it obfuscate the real issues; namely, what are the right programs for rescue/bailout, and how to reconcile the rubiks cube of conflicting priorities/interests.If this post instead compared the financial industry to the cigarette industry in knowingly selling cancer causing, poison inducing instruments to consumers, those on the other side of this debate would equally be up in arms. (Just attacking your McCarthy analog). :-)Cheers,Mark– Getting Real: On Doomsday, the Demise of So-Called Experts and the New ArbitrageREAD ME: http://bit.ly/tjd3
Perhaps what is most interesting about your catalog of all things President Obama is the obvious and painful absence of any mention of the fact that we are currently engaged in two or three wars (depends how you are counting the days) and that these wars are the largest single contributors to the structural deficit with which the country is now faced as the foundation upon which the subsequent bailout programs have been heaped.President Obama is a Chicago politician — though perhaps we really did get the only “honest” Chicago politician? lol — and at his very core a liberal elitist. He knows better than you as to what motivates you to work hard, prosper and pay taxes; and, what level of taxation will not provide a disincentive for hard work. Almost everything that was said about him before the election has turned out to be true — in spades.What is troubling is the sheer phoniness of it all.Candidate Obama was all for transparency, accountability, against lobbyists, time to review legislation, opposed to pork/earmarks…well, I could go on forever but you see the direction this is headed?President Obama, well, not so much, eh?Then the AIG mess in a bill which was unable to be read in time for the vote comes a bit, just a bit of self-serving legislation pertaining to bonuses which benefited the very folks who had made Candidate Obama the second highest beneficiary of their campaign largesse.President Obama has proven himself to be a very, very ordinary politician; a very venal individual and a man whose character literally requires a teleprompter to find it.
My bad on missing the war costs as yet another variable for Obama to contend with.However, unlike you I am not willing to paint such a broad stroke on the man, what 60 days into his term.I am sure when the final tape is written, he will prove to neither be the second coming, the devil incarnate nor the ineffectual Carter redux.Only time can define a legacy, and just as we didn’t get into this mess in 60 days it’s way too early to prognosticate the final score.
I would normally be inclined to share your view in giving Pres Obama the benefit of the doubt given only 60 days in office except for his 10 year budget which is a clear road map of where he intends to lead the country and what policies will be the core of his leadership.In addition, this is the time period in which the President has the benefit of the most reflective period of his presidency having had several months to ponder what was going on in anticipation of being inaugurated. He had plenty of time to think about his first moves.It is not him, per se, that troubles me but rather his policies which are all hugely troubling and are simply further proof of the complete hypocrisy of his campaign rhetoric and his actual governance.They are the most ordinary combination of ultra liberal shibboleths trotted out to their appointed points on stage and preened as before — ho hum, another health care plan a la Madame Clinton? Where have we heard that before? Yet another hot date with all things “green” and matching rhetorical flourishes on energy independence but not a word about nuclear power?Both in the micro and the macro, his conduct not only fails to match his promises but it is actually a polar opposite.He’s going to tax the top 1%-ers for the benefit of the middle class?Well, he actually took care of the AIG top 1%-ers at the EXPENSE of the middle class.He’s going to comb through each bill to remove earmarks?Well, he’s going to allow 9000 earmarks in a single bill and he’s not even going to bother reading some bills at all!I do not need to play the entire first half of a basketball game to figure out he dribbles to the left and is going to just chuck it up from half court.These predictive actions are well grounded tendencies in the man’s even limited experience and history. He has his mind made up and he is barely “present” in the real world.He is a plain, ordinary ultra-liberal who is willing to use words as their exact opposite with the complete belief that he can do whatever he desires just now.The “age of savings and investment” is going to result in a doubling and a second doubling of the deficit. What would happen if we were not “saving”? LOLWorse, now, he’s even become boring in his presentation. I long now for the teleprompter.Luckily, even the Congresssional and Senate Democrats will gut his plans.
And maybe he knows that and started the ask well above the want
Great points markI am going to be listening carefully to the president tonight and hope tohear him walk the fine line you arcticulate
Thanks, Fred. Call me an idealist but I believe that Obama is enough of a pragmatist that as long as We the People keep shining a light on specifics, we will get to the right answer sooner than later.Either way, glad that we can count of this site as a healthy battleground to vet out the different perspectives.Cheers.
Not every lynch mob was wrong!Almost every attempt at appeasement has been a failure.Nobody in America is indispensable. Never have been.
Its fair to say that many were complicit, but the financial industry walked away with the cash and for the majority of people who are not millionaires thats quite annoyingAlso, the modern financial industry may not have the solution. The huge banks whose founders have long since died are run by employees who value the interests of shareholders, the community and even their own reputations a long way behind the size of their bonuses.There is a world of difference between these kinds of people and the Steve Jobs, Bill Gates & Richard Bransons who care about their companies and industries. Maybe more banks should have been allowed to go under and replaced by a new wave of smaller banks with real owners who you could trust
I am not sure that statement is true.Goldman has a culture that values the long term success of the firm over short term profitsNow goldman has certainly tarnished its brand in this mess. Thain’s office and the BofA sales certainly tarnished his reputation. And Paulson struggled mightily at treasury. And Blankfein’s 70mm bonus certainly has pissed off many including me and my wife (see the links on my bonus post)But that is a great firm and probably will continue to be and I think some amazing people have learned their craft there
sure there’s populism going on, but if people showed a little bit (not much, just little bit) of “good taste” well, they could easily avoid all the fuzz…the “”they are the ones who can fix it” argument is really not a good one…we should look more at people like this guy, he certainly has some ideas….http://www.economist.com/pe…
I’m all for looking for new talent. We have an investment in our portfolio called covestor that is based on the thesis that the new and unproven investor can beat the established investor. We need a lot more of that kind of thinkingBut one bad apple doesn’t spoil the whole crop to quote michael jackson. And I think that’s what’s going on
This meme that only the “engineers” that built these positions can take them apart is one that has been very popular, expressed again and again in the press and blogosphere. Yet it is an opinion held almost entirely by those who have never dealt with these instruments. While this type of financial enginerring might seem extraordinarily complicated to someone with limited familiarity with it, really folks, this is not like building the space shuttle. And if I recall, when the space shuttle crashed, they did not convene a committee of the engineers who built it to deal with the problem. In the same way, there is no reason to suspect that the financial engineers who built positions inherently prone to disaster are the ones to unravel the problems they didn’t understand in the first place. I agree there is too much emotionalism being thrown at this situation right now. And in that regard I would say that there is too much discussion of the role greed played in creating these problems. The problem–for example, at AIG–was not that the traders were particularly greedier than anyone else, the problem was that they were wrong. Wrong in their assumptions, wrong in their equations and wrong in the positions they created.
I’d like to hear more about the ease or difficulty of unwinding these positions. I read a lot of smart financial bloggers, many who have traded this stuff and that is where my bias comes from
how is paying off 100 cents on the dollar anything approaching a smart unwind?
I didn’t suggest that
In no other industry would the people that screwed on such a scale be allowed to continue. We don’t need people that built up this card of house, we need people who are able to build a solid house that can withstand bad weather.
Fred, I mostly agree with what you say in your blog posts but not on this one.The fact that people who have played undoubtly a BIG part in this mess are still sucking in millions while others who are at the bottom of the food chain so-to-speak have to fear to live in tents soon, shows that these people have no relation anymore to reality and also no scruple. So one has to take hard measures to correct this misbehavior. To allow them to pay bonuses in the first place is of course the real scandal here and just another example of what your former government lacked entirely: integrity.This huge lack of ethical behavior can be found in particular in the financial community though. These guys did not build the house in the first place but played with other people’s money and profited from other people’s entrepreneurship. To make them humble again would be a big step in the direction of fixing the fundamental problem.
http://gawker.com/5181669/o…This is for once a good comment on the Gawker blog I thought:”To summarize, the banks are offering this tremendous bargain: Before they will accept billions from the government, for free, they demand their bonuses remain untouched. If the government doesn’t give into these demands, the bankers claim they will go to — seriously, this is what they claim — hedge funds and private equity groups for the money they need.”
It could happen
And it should happen. When govt funds business, it messes things up
I know a lot of these people. I don’t consider them friends. In fact I am enjoying watching them eat some humble pie.They are not going on spring break this year. They are selling their weelend houses. They are thinking about putting their kids in public school. Don’t cry for them for sure. They got themselves into this mess. But to suggest that they are all stll living high on the hog is just not accurate. NYC is a mess. Hundreds of thouisands of jobs have been lost. Many hedge funds are no more. The pain is being felt.the problem is we are looking at a few people and applying their situation to everyone in the industry. Its not an accurate view
“They are not going on spring break this year. They are selling their weelend houses. They are thinking about putting their kids in public school.”You did not write that with a straight face. Please tell me you didn’t. When people are losing their only houses and their jobs you could NOT have written that and been serious. Oh god, not PUBLIC SCHOOL… the HORROR…
I did write it and I followed it with the statement that we should not cryfor themBut I can tell you that they are not happy about doing any of those thingsand many of the other things they may have to do like sell their apartment,leave the city, find a new careerMy only point is there is pain being feltMaybe pain most people can’t understand or sympathize with but painnonetheless
One can’t divorce economic solutions from political ones in a democracy (or even in an authoritative regime). Wall Street and the entire financial sector has been nothing if not tone-deaf about both reality and perceptions.I think you’ve got this one wrong and that you’re not paying attention to the actual realities. It’s not some faceless crowd out there that are suffering. It’s the folk who teach us, police our streets, put out our fires, manufacture our products, and process our paperwork.Their perceptions matter, and if we don’t start behaving responsibly (and, at least in my view, we’re not), we’re going to get what we probably deserve: coercive regulation and universal opprobrium. I think it’s time to stop whining and start looking to ourselves and our own behavior. In the end, the only thing we can control is what we individually choose to do.A good start would be a lot more transparency from everybody.
Yup. Obama was right to tell wall streeters to get out of their world and go to main street and see what 99pcnt of america is like
The people you suggest “the ones who know how to take it down without it collapsing” is suprising. Since their best ideas collapsed it in the first place. There are a lot of peple in the finance industry that were trying to tell us that those planse were bad in the first place.Go find the contrarians and ask them what to do. They were right when the curret crop of “experts” were wrong. Wrong enough to loose their statsus as experts and be replaced by the finacial professionals who got it right!Take a look at my blog posting about experts.
Betting on the people who got it right in the past few years to get us out might not be right either. A bear gets it right once a decade or two. A bull gets it right more often.I’m not saying the people who messed up are the best investors out there. But I am absolutely positive that more than a few of the investors who got it badly wrong in 2008 will turn out to be amazing investors in their career
I’m of two minds on this oneMostly, I agree with you Fred – the mindless vilification of the people and institutions involved with the financial crisis is simply a witch hunt. Like Claude Rains in Casablanca, we are shocked, shocked to find gambling in the casino! In this case, the shocking, shocking revelation is that human beings are essentially by definition greedy, and that given the chance to enrich themselves — through means that are/were entirely LEGAL — will do so, with abandon.Shocking!And I think this is all part of larger trend towards overheated rhetoric and vilification — a trend that if left unchecked is in danger of destroying the basic foundation liberal democratic concept of “the loyal opposition” — the idea that the motives people who disagree are honest.This unfortunate movement can be seen vividly in the white hot rhetoric of Bush bashing — the idea that President Bush was evil (“Bush lied!”) or that a corrupt cabal calls the shots of American government and foreign policy (Petraeus betrayed us!”), rather than a bunch of basically honest and altruistic but flawed human beings muddling through.Which is all human history amounts to. And which is what happened here.And the solution is better regulation and law enforcement, not a kangaroo court.(Btw, I’m not excusing the misdeeds of those who in fact broke the law. They should be prosecuted to the fullest extent. I’m just saying that being greedy is not itself a crime.)On the other hand…Fred, I can’t agree that the people who created the mess are needed to fix it. I don’t think you would practice that at your firm, or at any portfolio company.And on a more philosophical level, I think this idea is 100% inconsistent with (what I perceive to be) one of your core beliefs and investing theses:Creative destruction.If media and technology and others companies and their managers deserve to be consigned to the dust heap for being part of the unproductive old ways of doing things as society/technology/the markets pass them by, then why shouldn’t the same apply to financial services companies?These CEOs and Directors and managers obviously did not see the way markets and conditions were evolving — they obviously radically “didn’t get it”. So they should go. As always, and as with every other industry, there are plenty of highly skilled ambitious intelligent creative innovative people just chomping at the bit to get a chance to prove themselves.If not now for seachange on Wall St — in institutions, and practices, and people – then when?
I agree 100pcnt with both comments steve. I am not arguing for CEOS to keep their jobs or for banks or firms to be kept alive. Heads should roll and AIG and other firms should be liquidated orderly and put out of businessBut the people on the front lines. The infantry in this battle. The traders who made some of the bad bets are needed to get us out of this mess. At least most of them are
AgreedGenerals should be dismissed. Rank and file should not be punished
That’s a fair criticism. I hadn’t thought of it that way. You’re right that we need the expertise of the very people who’ve built the house of cards in order to figure out how to dismantle it and build something new. To think that a bunch of new people can swoop in and “build new banks” (as Mark Andreesen said on Charlie Rose) is a bit naive.
I totally agree Fred. Each time the market gets rocked it’s our aunts, uncles and parents 401k plans that get destroyed. Many are too close to retirement to do much about it except extend their work lives into their mid-70’s.As many on this board know I’ve been a serious critic of Obama. I never bought into him as a leader. I thought Mccain would be a better leader even though neither are qualified to lead us out of this mess.Obama is now the president and I support him because I don’t have a choice. My economic well-being is tied to his leadership and policies. I am also an entrepreneur and investor.I have always been troubled by Obama’s lack of business acumen. It’s clear that he has learned very little about business since taking the oath of office. I was particularly shocked to hear Warren Buffett, a couple weeks ago on CNBC, say that since winning the presidency, Obama had called him exactly *zero* times. How can he ignore advice from Warren Buffett?That was a complete shock and yet very revealing and scary. This guy needs to lead. Leading means asking for help and making decisions. Leading means knowing what you are good at and what you are not good at. Obama has been a demagogue on the financial crisis.I will ask the same question I asked when he became president. What about his past or his background qualifies him to lead us out of this mess? I’ve asked this question of many people. Their answers are always the same: I don’t care about the past.I am still waiting for the right answer. His record to date has been very very mixed to be kind. I would say that having calls for the resignation of a treasury secretary this early is certainly a unwelcome record to hold.
I think he can do it. He just needs to get whacked in the head a bit. Which is happening. And why can’t Buffet pick up the phone and call Obama and do some of the wacking?
I couldn’t agree more with you! Asking for names of those who received a bonus is straight out of the McCarthy era and it seems like this is just an excuse for some politicians to break out of the cocoon they were in during the Bush administration and have their turn in the spotlight.
Thank you for this post! Finding respectable voices with this kind of sentiment has been extremely difficult lately and its refreshing to read it from someone I respect.While I 100% agree there is plenty of blame to go around, the biggest group that has been virtually unscathed, in my opnion, throughout has been the American public. The freedom that makes this country so great and that we are all so proud of requires a high level of responsibility. In this situation, we as a nation failed miserably across the board in this respect.I will not argue that there is some level of fraud behind the complex securities that are weighing on our economy, but I do not believe it is the majority. Therefore, the lion’s share of these so called “toxic assets” are backed by everyday American’s making bad choices. Was the mortgage broker who used every trick in the book, and disguised the true long term cost of a mortgage wrong? Of course he was. But the fact remains, someone decided to buy what he was selling, and that person is just as wrong and deserves just as much of the blame. People did not take into account how much money they were actually making and let their emotions kick in rather than doing the serious analysis that is required when making a huge purchase like a home or expanding your business into a new huge, state of the art facility. While the average american might currently be focusing their outrage at the wall street bonuses, I am personally outraged at the person who thought they could afford a house that had a carry cost well above their monthly income, or the business that decided to move into new a new swanky office that cost more per month than the revenue they were making. Debt financing was cheap, but that’s not an excuse to abuse it.As to the comment that Obama made regarding bankers needing to get out of New York, I’ll personally take the other side. Perhaps other people need to spend some time in New York. People complain about workers desires to make 250k+, try raising a family in Manhattan on 100k a year. Living in a major metropolitan area is an expensive undertaking and requires a salary to match. I’ve heard the argument a million times, then why don’t those people move? Well, its their home. Think about where you live, would you willing pick up and leave? There are obviously situations happening all over the country where that isn’t a question, but instead the only option, and that is what we need to address. But there is always a local bias in arguments. People associate things with their surroundings and making 250k in a small rural town is probably outrageous, but making 250k in Manhattan gives you an average life.The only way we can get out of this is stop worrying about the anger and the blame and figure out how to get credit flowing again (clearly not to the levels of the past 3 years, but at a better clip than it is now). With that will come business growth and hopefully a return to a better, less overheated economy.
This is obama’s failing. He should be bringing us together in this crisis and explaining to everyone how the other side operates. He needs to do that here
#1 McCarthy was proven correct.#2 Obama’s background is that of agitator. He’ll learn this job quickly, because he’s a smart guy….but the lack of leadership and fanning the flames of populism is to be expected from someone that’s never been a leader and has gotten elected by fanning the flames of populism his entire life.The real question is: Does Obama WANT this crisis to end….or does he see it as a useful tool in creating the kind of fear necessary to drive the masses into the loving arms of the State?
How was McCarthy proven correct?
http://en.wikipedia.org/wik…Identities soon emerged of American,Canadian,Australian , and British spies in service to the Soviet government, including Klaus Fuchs,Alan Nunn May and Donald Maclean, a member of the Cambridge Five spy ring.Others worked in Washington in the State Department, Treasury, Office ofStrategic Services ,and EVEN THE WHITE HOUSEThe decrypts show that the U.S. and other nations were targeted in majorespionage campaigns by the Soviet Union as early as 1942. Among thoseidentified are1) Julius and Ethel Rosenberg;2) Alger Hiss ; 3) Harry Dexter White, the second-highest official in the Treasury Department; 4) Lauchlin Currie a personal aide to Franklin Roosevelt; and 5) Maurice Halperin a section head in the Office of Strategic Services.
McCarthy isn’t vilified because people thought he was wrong. McCarthy is vilified because of the hateful, fear-mongering way he went about his business. That’s why McCarthyism is a term used to describe that behavior in general, not just a fear of Soviet spies.
There is a micro and macro McCarthyism. Micro Mc is obvious- the west was doing the same in the Soviets. Find the spies and prosecute. Find the corrupt bankers and prosecute.There macro McCarthyism was not proven. Many of those who survived went on to make great contributions to culture, business and science.Meanwhile my business needs to manage cash-flow without support of the retail bank…… Why shouldn’t someone else suffer for that!
Venona != McCarthyism
McCarthy was right that there were a LOT of spies within the US Government.It was a HUGE risk, and thank goodness someone like him had the guts tostand up and do the unpopular thing. He was outrageous because he had tobe. He fell on the sword for all of us, and I hate that public schools nowmake a monster out of this patriot.
But there’s a difference between collecting intelligence and political grandstanding in front of the cameras. Which one do you think would better strengthen national defenses?
If everyone is ignoring you, including the President…and refusing tocollect that intel….then you go in front of the cameras and make a LOT OFNOISE.You just better be right.
They weren’t allowed to tell the President. the source of the info.Instead of going in front of the cameras, get a warrant, extradite him/her, and go have a chat.
I was going to ask that too but now we gotta hear andy rant and rave
I sure hope its the former
loving this post andy you are spot on about mccarthy and obama. gotta warn you though you are one step shy from becoming a full blown kookbe careful
My favorite commenters on this blog are one step shy of becoming full blownkooks
If you had invested in a team who through near criminal neglect and greed had squandered the investment and then some and subsequently taken down innocent companies in your portfolio, would you re-invest with them after they’d collapsed simply because they were really smart or knew where the skeletons were buried?The American people invested in the wrong team. That doesn’t mean that those people are bad people, or dumb, it’s a combination of our lack of due diligence, poor structuring of incentives and so on. We need to find new horses to back.And hasn’t the house of cards already collapsed? We’ve had to bring in many fresh new sets of 52 just to keep from slipping into a depression?
I invested in Joe Park, founder and CEO of Kozmo, who did something akin to that.Was I pissed? Yes, but more at me for investing than him in fucking upHe came back to see me last year with a new deal. I welcomed him with open armsFailing and getting back up is the backbone of america. It is what makes us differentWhen I was in europe last year and talked to entrepreneurs over there, this was the number one thing they pointed our that they are envious of
Point well taken.And I don’t know the back story behind the investment in Kozmo, so I’m probably speaking from ignorance, but Joe came back to you 8(?) years later? And I’m sure much wiser and more humble. Would you have re-invested with him 6 months after Kozmo blew up? A year?Picking yourself up is a great feature of American capitalism, but those at the helm the past few years haven’t even had time to dust themselves off, let alone learn and grow from their mistakes.Maybe we need the wizards of Wall St. to sit on the sidelines for a few years, take stock of things before we can trust them again?
Put them in penalty box for a few years, eh?
Yes the penalty box, but it would be Gov’t sponsored so we’d need a cool andconfusing acronym for it, oversight committees to run it, etc etc
Sadly most Americans aren’t capable of seeing the nuances you see. So the populist message is “get the King!”… but we all know how dull the guillotines were by the end of the Revolution, don’t we?
Where’s an example of Obama conducting ‘witch-hunts’ or ‘fanning of flames’ of anti-Wall Street sentiment?
The problem with the vilification of Wall Street as a whole is that perhaps 5% of the employees of AIG, Bear, Lehman etc. were responsible for the current situation. Employees working in investment banking, prime brokerage, equities, research, back office, foreign exchange, commodities etc. had little if any responsibility for the house of cards. Senior management, fixed income trading, securitization were the bad apples and should be treated as such. Perhaps liquidating AIG is the right plan, but in addition to having wiped out thousands of employees’ life savings, you will then be putting them out on the street.
That’s what I was trying to convey
Still don’t know why people are crying over these bonuses.If you’re in private equity and you want to invest in a beaten down company, you can add a bunch of little strings to the money, like, say, renegotiating labor contracts. Think of Cerberus, Chrysler, and the UAW.But now the government and the de facto Department of Public Equity comes in and they *suck* at negotation. They knew about the compensation and they allowed it while working out the details to give AIG it’s Round 4 Money. Now the public has become aware of such tomfoolery, and they’re pissed. And the politicians are feigning rage while neglecting the fact that they had the power to renegotiate contracts before any sort of capital infusion.And we shouldn’t expect any different from AIG. Assuming they’re rational actors, they’re going to try and get the best deal they can, regardless of who’s giving them the money.What is the lesson learned? That the government sucks at negotiation. These are the same people who dole out fat cost-plus defense contracts and buy $500 toilet seats. To expect them to get the taxpayer’s a good deal on a complex buyout is laughable.One of the best deals we got was with WaMu. They were screwed, had their backs up against a wall, and sold off the company at firesale prices at the behest of the FDIC. And they’re so pissed at the deal that they’re suing for billions. So when executives get that angry you know it was a good deal for the taxpayers, and we should try and emulate that strategy as well.
there has been much discussion in these comments about whether or not those who created this “house of cards” are the ones who can dismantle the remaining foundation (i think the house already blew down).however, understand that excessive risk taking comes not *only* from greed. many sought profit, without any deceit. they truly believed what they were doing was creating wealth, without a looming disaster.the decision makers relied heavily on the quantitative-focused employees – who they believed best understood the instruments in question. these employees in turn relied on david li’s copula function (or some variation) to give guidance to their superiors (this is documented well in a recent wired article titled ‘Recipe for Disaster: The Formula That Killed Wall Street”: http://tinyurl.com/chaqm5). the application of this formula to mortgages is questionable, and the decisions that were made from it were clearly wrong.who is to blame in this series of events is not one person, nor one type of person. it was a series of events that occurred, that resulted in a bad outcome (perhaps an understatement).understanding this process, there is nothing that leads me to believe that those who were involved in the erroneous decisions are the ONLY ones to help get us out of it.there are plenty of finance folks (myself included) who didn’t make an erroneous decision, and have the right understanding of how the “toxic” assets work, and how to detoxify them.so let’s focus on making wise decisions, without caveats. if there’s one thing we have no shortage of right now is smart people willing to work hard. some are unemployed, some employed. we can exert some effort finding the right ones.
I think the original post here was pretty much a defense of the perceived villain, which is un-necessary. No defense is adequate and you can’t change the past. As for using the same infrastructure/advisors that created the mess to clean it up, that is typical corporate thinking. It is possible that could work, but it is not NECESSARY to cure the problem. You could throw out the whole old system and install a new one with out collapsing anymore. I also think that Fred’s view is slanted toward the save the rich and they will create jobs for the poor philosophy. The trickle down effect. That seems to be how the world’s economy has worked forever….but I don’t think that history precludes considering other options.
I’m no trickle down fan. Pls don’t put me inb that boat.
wow – this is a staggering perspective. how can you actually argue that the people who built this should bail it? I hate that the government has to (or has decided to) intervene – but its pretty sickening that a ‘contractual obligation’ or a ‘too big to fail’ free pass are the justifications for this continued looting of the system.it amazes me that we continue to hear that we need the intellectual capital that these people possess. that is total bullshit. I have dealt with these people for years in a variety of capacities, and the only capital the vast majority possessed was un-tethered arrogance – feld wrote about this in the context of your asset class (VC) and i responded telling him that if he thought it was bad in VC land – i challenge anyone who was out there with private equity over the last 4 years to identify a stereotype more drunken on its own arrogance. And i was a benefactor of that period as well.Its this arrogance that brought the whole system down – this is what was systemic. Its seen now with ‘threats to take ball and go home’ .Well i can tell you this – all that financial engineering acumen we all learnt in school, and was and is enhanced by the use of technology can be replaced. If it means we fundamentally change our approach to the development and oversight of new products – when then so be it.Ofcourse then i turn on the news and see this clusterfuck we call the government intervening in matters it really has absolutely no idea about, and i call the wife and tell here our little girl (on the way) will be compuschooled on a peaceful carribean hideaway.in the words of begby in trainspotting “its a shiiiite state of affairs to be (insert appropriate adjective here)”
I totally agree about the arrogranceNot so sure that we should throw out the baby with bathwater
Great topic.I think it is pretty clear that the idea of “saving” AIG is just a huge headfake. AIG is being liquidated and the administration is not willing to simply state that fact. The only turd in the punchbowl is the FP division and what its negative net worth truly is. The rest of the stuff sells at a given price and it’s time to get the auctioneer barking.As it relates to the FP boys, it is time to bayonet the wounded, count the bodies and move on.First, virtually all the money going to AIG is simply “conduit” funding going directly to the FP counterparties to pay obligations. The administration is probably evidencing a huge naivete in just not calling in all counterparties, declaring bankruptcy (afraid to damage the business reputation of AIG? hmmm, not so much today, eh?) throwing a big wad of money on the table and cutting deals with all of them. First guy to come to the table gets 60% and a sliding scale thereafter.The above scenario devalues the leadership a bit and does it quickly. My experience in buying troubled businesses tells me to make a quick change in the leadership and maybe the understudies can rise to the ocassion. On Broadway, when the lead calls in stoned, the understudy takes the role cause the show must go on.The AIG show is not going to go on. The skill set to liquidate the exposure is not the same skill set required to “unwind” the contracts as the bankruptcy scenario makes them revokable.We need a bit of context in evaluating the people involved. Who do we need to deal with?Crooked politicians (oops, sorry, that seemed to imply there were some “honest” ones, my bad), lobbyists (the conduit for money to politicians and the champions of legislative initiatives which simply rigged the game), political contributors (who funded their own elected regulators — is there no irony as to Sen Dodd’s and Sen Obama’s AIG largesse?), the SEC, the PCAOB and then the entire investment community with the caveat that the AIG whiz kids are really not investment bankers.We live on a family of curves and we have just dropped down to one of the lower curves — Spring Break in Aruba then/Spring Break in Destin now; Tavern on the Green then/McDonald’s now (ouch) — but you get the idea.Everything is actually going to be OK because we are a Nation of survivors and we can survive even our leaders.Our current leader is probably good intentioned if you buy into the idea that redistribution of wealth is a good idea — I don’t. He will ultimately muddle through but he is long on show and short on substance just now. He can’t help but be.Three truths which are probably are worth remembering:1. While McCarthy arguably escaped charm school a semester early, he was essentially right. His only wrong move was blaming the military. The rest of it he got just about right though he was always a half beat off on the music. You know the kind who never seem to be able to clap just right to the beat.2. Tax cuts do work. The numbers prove it. Pres Bush presided over a 5.5 year expansion of the economy. Kennedy, Reagan, Bush all proved that tax cuts worked.3. Class warfare is a fundamental of all Alinsky thinking. Alinsky is the patron saint of community organizers. President Obama and Sec Clinton are both Alinsky acolytes. If you fail to read Alinsky’s Rules for Radicals, then you cannot understand what is really going on just now. President Obama is exactly the guy he appears to be at all times. He is an Alinsky elitist who dons his work clothes and then goes home to the White House to change and relax after doing the “people’s work”.
Kennedy, Reagan and Bush never had to preside over anything this damning. As a small business owner, I can tell you this – cut my taxes, and I am going to hoard. Believe me, I’m not spending. Because I simply have no idea what the economic environment is going to look like 6 months from now. And I can assure you there are others like me thinking the same way.So yeah, tax cuts work, until they don’t.
Agreed as it relates to Kennedy, Reagan and Bush — this is a much bigger issue so it makes it even more important to try stuff that we know will work, no? I agree with you completely, now is not the time to experiment.I would much prefer you having the money and hoarding it than the government having the money — taken from you — and spending it. You may have to play defense when the banks will not extend credit thereby defending and protecting existing employment. That’s a good thing.As an owner of multiple small and medium companies in my business career, I have much, much, much more confidence in my ability to create jobs than I do in the government’s.And, tell me exactly when tax cuts did not increase Federal revenues? Huh? Cause the record is 100%! But, what the hell, that’s just a fact and not such a neat slogan.
Yeah but not every rich person creates jobs. That’s the fallacy of trickle down economics and the worshiping of tax cuts as the ideal fiscal weapon
The term “trickle down economics” has been demonized in much the same way that you suggest that the AIG bonus recipients have been perhaps unfairly demonized.Without trying to defend or champion any systemic view of economics and what works, let’s just focus on tax cuts by themselves.The impact of tax cuts — and tax cuts can only be given to those who actually pay taxes — on the Federal tax revenue receipts is irrefutable. Take a look at the timing of the actual cuts and the subsequent level of tax receipts and the linkage is obvious. John Kenndy was actually the most eloquent proponent of their use and Reagan, Bush were only followers of his lead.The receipts, the figures, the charts — all speak the exact same language.Federal tax receipts are a reasonable proxy for prosperity and correllate with high levels of consumer confidence. More prosperity, more taxes collected — even at reduced tax rates.PROSPERITY is what creates jobs. When you personally are feeling prosperous, your view of the economy is more confident, your decisions are universally more expansive and your purchasing decisions are unrepressed.Your view is that “…not every rich person creates jobs…”. That may be true in the singular sense of the specific conduct of an individual but it is indicted as a reasonable conclusion when you consider the spending patterns of rich folks. When rich folks spend in a “normal” and unrepressed manner, jobs are created in support of that increased and perhaps increasing level of expenditure.From a macro-economic perspective it is pretty easy to see that. Increasing GDP (higher levels of goods, services and spending thereon) supports a higher level of employment and productivity per worker (GDP/worker) may actually increase.In the current situation, GDP is contracting and the level of employment is contracting because the GDP/worker is constant or decreasing. Very simple parametric math.The government’s solution is to “goose” GDP by increasing spending thereby increasing employment when the GDP/worker productivity parameter is re-applied.Both tax cuts and government intervention seek to increase GDP and to increase employment by applying the average productivity formula (GDP/worker).One we KNOW works and the other is quite speculative. One is an engineered solution and the other is a highly speculative social solution.In the Great Depression and its aftermath, there is ample evidence that such socially “engineered” solutions were attempted and were inconclusive at best and failures at worst.I advocate for things which are dispassionately and arithmetically demonstrated to work rather than things which are “hoped for” to work.The class warfare which has become so prevalent will not really put bread on the table.
I understand the argumentI just don’t buy itClinton raised taxes as the start of his presidency and we enjoyed one ofthe most robust economies in the 1990s of any decade of that centuryI think a balanced budget is more important than lower taxes because thegov’t is not borrowing money that could otherwise be borrowed by privatebusinesses
You may want to doublecheck your facts as to what created the boom of the 1990s. In the 1990s, we had both a Clinton tax increase but more importantly we had a Republican Congressional tax cut. I think you are remembering the effects of the tax cut rather than the effects of the tax increase. Take a look at the facts.Clinton raised taxes in 1993 — when GDP was expanding after the 1990-1 recession. He raised the highest rate to 36% and added a “temporary” 10% surcharge on highest levels resulting in 39.6% rate. Of course, the temporary surcharge never went away. Capital gains rates were 28% and corporate rates were raised to 35%. Tinkered w/ medicare and SS taxation caps.The Republican Congress cut taxes in 1997. Reduced the capital gains rate to 20%, child credit of $500, education tax credits, Roth IRAs, education IRAs and other excise tax changes.In 1995 (two years after the Clinton tax increase), VC funding was $8B. For the four years following the Clinton tax increase, GDP grew at 3.2%, employment grew by 11.6 mm jobs and hourly wages grew a miserable $0.05/hr or 0.8%.In 1998 (one year after the Republican tax cuts), VC funding was $28B and in 1999, only a year later, it was more than $55B — capital gains tax cut impact? For the next three years following the Republican tax cuts, GDP grew at 4.2%, employment grew by 11.5 mm jobs (3 years v 4 years, please note) and real wages grew at 6.5%. The S & P rose by 95%.The comparison speaks for itself. What folks rememember about the 1990s is the last three years when lowered capital gains rates spurred investment, when jobs were being created at an accelerated rate and when real wages really grew and when the stock market surged.It was the tax cuts not the tax increase.Remember Clinton proposed the tax increases and opposed the tax cuts but he signed the tax cuts when they were put on his desk, so in many ways he gets credit for both increased taxes and cuts.Last point — where did the Clinton surpluses really come from? When did they occur? Increased tax revenues and restrained spending. The Clinton surpluses occurred in 1998, 1999, 2000 — after the Republican tax cuts.
The VC boom was driven by the internet boom and telecom reform, not a capgains reductionI made 90% of my compensation in cap gains and I have no idea what tax rateI pay on cap gainsIt’s irrelevant to me. If it was taxed as ordinary income, I wouldn’t care.I’d keep doing what I doI and I don’t think gp carry should be treated as cap gains. It’s a fee,and should be taxed as ordinary income
The magnitude of VC investment is not the keystone of my argument but it is a useful touchstone to indicate that the investment climate was healthy — regardless of what targetting mechanism was at work — and that the country was growing.I suspect that many good things — large and small — happen when the economy is good (e.g. charitable contributions, booming Broadway) which are the result of a good economy rather than the reason for a good economy.Cause and effect are both credible markers of a healthy economy for a keen observer.The late 1990s were a great time in the history of our country — perhaps in great part because no one party controlled both the White House and the Congress at the same time.If I could write the script, I would give the Democrats the White House (they are more fun and create more scandal), the Republicans the Congress and ask only that we have no big shooting wars going on. Oh, I wouldn’t mind a few pirates or a smidgen of overseas terrorism to keep everybody on their toes.Money is only money and at some time you cannot eat another taco — the luckiest people in the world are paid in a different currency. They love what they are doing. In that regard you are very lucky.
I totally agree with your last point. I am very lucky and I recognize that.I also prefer a split government and like a democrat in the white house andrepublicans in control of at least one part of congress (ideally the housesince the senate approves supreme court justices)
“A conspiracy of silence speaks louder than words,” Dr. Winston O’Boogie (aka John Lennon).We are all complicit and guilty for supporting the economic house of cards that celebrated false values and promoted selfishness, cheating, lying, and quick profits at any cost. We are none of us without shame: From those who created the mess to those who profited from it; from those who drove otherwise good companies into the ground to those who tried to prop up failing institutions; from those who grabbed for mortgages on houses they couldn’t afford and lived lifestyles beyond their means to those who dutifully paid their mortgages and credit card bills on time. All complicit.Why? Because we did nothing to question whether building an economic system on exponential growth, cheap oil and credit, shopping, and complex financial instruments was really sustainable. And we worshipped CEOs, made wizards of Wall Streeters, and looked down on the hardworking middle class as losers.But a contract is a contract. They can voluntarily give the money back; that is their choice. If they don’t, we cannot take it from them. That was what we spent the last half of the century fighting against, communism.
Winston O’Boogie! I love it.
Hey Fred,On the subject of who we need to “get us out of this mess” — it seems to me that a large portion of the “financial sector” are people who were very good at the very narrow game of leveraging and re-leveraging; at creating large swathes of imaginary money out of small pools of actual money. I simply don’t have faith in people who were good at that to be good at what we need now. I think that Wall Street’s instinct will be to recreate the game they know under a different guise, which is the last thing our country needs.As Terry Pratchett writes, “You can’t get a leopard to change his shorts.”
Well you are apparently in the majority of the commenters on this blog inthat opinionI am not as certain of that though
Fred,Dan Ariely has an interesting take on this. If you haven’t seen his TED talk I highly recommend it: http://www.ted.com/index.ph…Essentially, the further removed we are from actual hard cash, the more likely it is we will cheat. I agree that lots of people are guilty for participating in this crisis (the guy who sold the mortgage, the homeowner who lied about their income, and on and on). However, the actors we are discussing here were more than removed from hard cash – a) they are dealing in financial instruments b) they are using other peoples money! So the urge/likelihood to cheat is and was high.I’m not an expert by any means, but I simply don’t believe these are the only guys who can unwind these trades. Also, this may be naive, but if our leaders put out a call that we need specific expertise to help unwind these trades ‘for the good of our country’, I think many people will step up and do it for free or for less than $250k. The opportunity to be a hero will appeal to many.Good discussion.Faraz
For some more fodder from the “neuroeconomic” angle, Surowiecki has a great article on why AIG is getting raked over the coals by this populist movement: http://www.newyorker.com/on…
Thanks for that link Kyle
Fred, I’m a pretty reasonable guy, especially after a glass of wine, but I strongly disagree with your viewpoint, particularly “Yes, a lot of people in the financial industry made a lot of bad bets, were paid excessive sums for making those bad bets, and are at least partly to blame for the mess we are in.”Wall Street is 99% to blame for this and the public reaction is warranted.Ratings agencies didn’t do their job? Well, being that they all looked at their career as a stepping stone to the big money jobs on the Street, is that any surprise?Politicians? Regulators? One word answer: LOBBYISTS! Look up the amount of money Wall Street paid to lobbyists. They rigged the system in their favor so they could run wild.Compensation contracts? I personally know people at Merrill Lynch who had NO bonus guarantee and whose bonuses mysteriously doubled when Merrill infamously moved up the compensation date to Dec 2008. That is absolute looting of taxpayer money.To leave these very people in their positions is lunacy. There are plenty of competent people out there who should be hired at a handsome salary to fix the mess with a significant bonus waiting for them in 2013 if they are successful.In the meantime, the current lot on Wall Street should be vilified, crucified and shipped off to faraway places to make sure this never happens again. Because if we don’t do that, it will.
An old, and I think apt, adage has it that one should never allow the fox to guard the hen house. Free markets will always use part of their gains to elicit a gradual loosening of regulation; it does not come in the form of a tsunami, but a gentle erosion that, over time, adds up. Yes, successful foxes possess silver tongues, and will convince you this time will be different. And it is. Until it isn’t. Then the hens get eaten.Lobbyists? Merely agents of the fox. Politicians? Frank, Dodd et al are certainly complicit. The SEC and other regulatory bodies? Also complicit. Is any one group worse than the other?I say again…. Never let the fox guard the hen house, And if you do, don’t expect a different result.
I’m with you on the Merrill bonuses. They are worse than the AIG bonuses.
fred, i would not disagree with you that we need to keep many of the troops around and that scapegoating accomplishes nothing.however, i would love to know what you think of this piece (http://www.rollingstone.com… and of this bit inside of it:”By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.”while i understand that people are selling their weekend homes and considering putting their children in public schools in new york city,* i don’t worry about them running to a hedge fund if they aren’t given their full bonuses. i personally think enough of the “experts” will stick around to help figure out how to deconstruct the house of cards, and that this house of cards isn’t as all-complex as they’d like us to believe.* i live in new york city, and i do know what you’re getting at here. still, this “masters of the universe” example of how times are tough for wall streeters does make my stomach turn.
I hope you are right that they will stick around and do the right thingAnd I don’t think they created all these complex instruments as a form ofjob securityIt’s as warren buffet said in his annual report, “beware geeks with models”
thanks for the reply fred, i wonder where you do find the time to do it all while creating such quality discussions online. (i’ve been reading for ages, but never commented. this piece – and the other comments – finally got me.)and don’t worry, i’m very wary of geeks with models. frankly i think they should stick with librarian types 😉
I love librarians and always have! The secret to my replies are disqus and my quill pen (aka blackberry)
That you are taking heat for this post shows the staggering levels of financial ignorance in the US. How dare you be rational when there are witches to burn!?
Damon,Especially since it looks so good on TV!Anderson Cooper on CNN 360 last night kicked off the whole AIG executive coverage with “Lifestyles of the Rich…”, introducing a CNN piece where their reporter accompanied a bus tour organized by groups with an ax to grind. The bus tour visited the houses of AIG executives complete with speeches and letters dropped in mail-boxes. Ironically, these executives had nothing to do with the actions that got AIG into trouble. They were simply hired to fix the problems last year for the largest shareholders, us. None of this was pointed out in the “story”.The people in the tour were out-numbered by reporters by 2-to-1.The media needs to be held accountable for their role in these matters, just as the politicians do. The same thing occurred in the months before our going to war in Iraq, with little public discussion of roles played by these constituencies.
That is not journalism and is reprehensible. Amazing it is even supported by the station.
There is a certain sad irony to what is happening in Washington.The same political leaders that are indignant about what AIG, et al are doing with the public’s money have had no shame about the pork barrel earmarks they have been padding into every budget to buy votes at home. Isn’t that the public’s money too? Is it somehow less wasteful if they squander it?What makes this even worse is that no one will admit they knew anything about any of this. Everyone is surprised and shocked. We have Chris Dodd saying one day that he wasn’t responsible for the loophole in legislation allowing the AIG bonuses to be paid, then a day later admitting that he did insert it at the request of the treasury. (http://www.youtube.com/watc…. We have Timothy Geithner saying he didn’t know about the bonuses prior to March 10th, then having a video of him surface discussing the specifics of the AIG bonuses during a March 3rd hearing. (http://www.youtube.com/watc…While what happened at AIG is deplorable on many levels, what’s happening in Washington is in some ways worse. Not only are our elected officials squandering the public’s money, they are also squandering the public’s trust. They too are deserving of our moral outrage.
I totally agree. Dodd and Geithner should be standup guys and tell the truthand explain why they did what they did and why it made sense then and why itmakes sense now
“Financial McCarthyism” is a strong term, but there is a lot of rhetoric out of Washington that is having lots of unintentional consequences.Wall Street bankers are about as arrogant as they come, so its hard to feel sorry for them, but financial services is one of America’s leading industries and if we continue to trash and and otherwise take them out back and shoot them we could lose out to the Brits and Asia who are being a bit more measured in their repudiation of a vital sector. Also given this is a “tech” blog, it should be mentioned that the financial services companies are among the biggest spenders on IT and indirectly fund many tech companies.A couple of interesting points. I was reading yesterday about top hotel and travel execs meeting with Obama and senior officials to discuss the backlash on business travel. It stated that companies are literally walking away and losing 100% of their money just for appearances or moving conferences to cities from resorts even though hotels and travel to cities are more expensive.Lou Dobbs made a point last night that JP Morgan Chase was delaying purchase of two gulfstreams, but we should remember that Gulfstream is a US company with 9000 employees and that they are experiencing layoffs and furloughs.
It seems like everyone wants to assign an analogy to this mess, how it was created, how it collapsed, and how it can be fixed. Analogies about fires and buildings and houses of cards and bad software code dodge around one of the biggest issues of this crisis: few people understand exactly why this happened (though understanding of this has increased dramatically) and no one seems to understand exactly the depths and the ramifications of it (myself included). The typical financial relationships and blame games that have been used for years are inadequate, and that’s why the government has to try radical program after radical program to try and right the ship. (did I just use a pithy analogy? oops.)
We are trying to figure it out and blog discussions like this are helping meimmeasurably
I’ll continue to view Wallstreet as a high stakes game with no moral rule. As the World focuses on what “can” be blamed, I suggest wondering who might be the ones who won and what position they’ve taken, and then adjust the thinking for the “fix”.
Perhaps… give them a bonus if they can de-construct the financial mess and help clean it up, but I do not think you can put Humpty Dumpty back together again; to me the way is to prosecute as many of those the Justice Dept. can tag as having a hand in creating the mess, like J. Cassano of AIG, for example – and seize their assets; there are plenty of fraud and related statutes they can be convicted on.
Nice, provocative post, Fred and some great comments.What’s interesting to me is how different the country is responding to populist outrage and scapegoating of the banks. Throughout history, we’ve always played the “blame game”; if our lives aren’t all they could be, we find a scapegoat. The difference is that we usually scapegoat the poor and the weak — it’s why they hung supposed witches in Salem, it’s how Reagan got the country to believe in the (made up) image of the (black) welfare queen driving around in a Cadillac and it’s why the middle class kept voting for candidates whose policies hurt them economically.For the first time in my lifetime, the game has shifted and it’s the big guys who are taking the heat.Well, much of that is well-deserved. While I agree that not everyone in the financial services industry was equally culpable, I’m astounded at how little responsibility anyone owns up to. Yes, borrowers borrowed too much, but I hold the bank much more accountable than the person who refinanced slightly beyond their means.More than anything, what’s driving the populist rage is the arrogance that the banks exhibit. I’ve always worked for small companies where, if the company fails to meet its goals, you don’t earn your bonus. I’ve never had the luxury of saying “I hit my personal goals, so I should be paid”. So, even if the equity traders and bankers had no direct contribution to the toxic assets, they were the beneficiaries of the false profits in the good years and should expect to take a hit when their firm is being bailed out by the feds.Yes, we need the financial markets to be successful in order to turn around the economy. But I think we need to see some heads roll before we are ready to support them. And while we need skills and talent in the financial markets, I don’t believe that it’s a case where “only the bomber knows how to defuse the bomb”. Yes, we need smart and skilled people to help guide us through this mess but we also to mix in some people with a moral compass to guide those changes.And, in the short-term, if some of the “best & brightest” who might have gone to the Street from college or grad school instead focus their efforts on health care, government service or nonprofits, the world will be a better place.
That last point is a good one and I’ve been making it a bit on this blogsince last fallAs for the trader who had a great year but loses his bonus because hisemployer had a terrible year, I feel badly for himThat’s why I think investing should be done in small firms where theinvestors have their own skin in the game and are not sharing the profitswith entirely different lines of business
Now that’s an interesting observation, worthy of more discussion. Michael Lewis basically puts forward the same argument here:http://www.portfolio.com/ne…(and if you haven’t read Liar’s Poker, it’s still quite relevant).He traces back this period of incredible leveraging to Gutfreund’s taking Saloman Brothers public in 1986 (the first major Wall Street firm to do so).>>Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.
Fred,Not sure if you read Simon Johnson. He’s a former chief economist at the IMF, now is at your alma mater, and founded the blog Baseline Scenario. I’ve foiund him to be one of the most important voices in this crisis. He says in every financial crisis he saw at the IMF, the bankers always claimed they were uniquely qualified to get the country out of its mess. He basically called BS on this idea in a recent Times op-ed; you might be interested in it if you haven’t seen it already: http://tinyurl.com/cpevsc
ThanksI’ll take a look
Oh look, the “unabashed capitalist” is not complaining that the financial experts are not be blamed! there were “other” factors involved that got us into this mess.Fred, you and your money manipulator friends got us into this mess buddy. You can’t have it both ways – there’s not such thing as being a filthy capitalist and have an ounce of conscience.Your guile is very disturbing.
He is a sneaky one.
I despise Wall Street apologists as much as I despise Israel appologists. Both despicable and unconscionable.Let’s not forget what Mr Wilson does for living: manipulating money.
I do not manipulate money “new west” whomever you are because you post underbullshit email addresses like all the chicken shit people who spew hate onthis blogI invest it in companies that are started by entrepreneurs who are trying tobuild new technology based businessesThere is no manipulation in what I do and I deeply resent the charge
lol, i’m always up for a good conspiracy but i doubt fred is trying to pull a fast one on anyone herealso to clarify capitalism is free markets and limited government. when government creates unsound monetary policy designed to favor lobbyists, and when government enacts legislation that enables lobbyists to engage in all sorts of economically unsound practices, and when government bails out the folks who made this mess, that’s not capitalism. it’s fascism.big government is the problem. capitalism, aka limited government, is the solution.extremely important to understand the difference if we ever plan on solving the crisis.
“capitalism, aka limited government, is the solution”What a noble concept! are you some kind of a wonder kid?Dude, instead of playing with semantics try to understand why capitalism has failed so miserably just like communism.Fred is trying to protect himself and his ilk. That’s all.
lol, yes in fact i am a wonder kid, or more precisely i’m the messenger here to deliver the Truth that sets you freecan you please educate us all on what the solution is
This is a good start darling:http://www.truthdig.com/rep…Besides, America as we knew it no longer exist. The financial system in the US is corrupted to the core – thanks largely to the “unabashed capitalist” types who have grabbing every opportunity to come up with new schemes.America as an empire no longer exists. From now on, it’s a matter of survival.
i agree 100% that the problem is a moral one, any nation that tolerates a criminal government and especially things like 9/11 being an inside job will get what it deserves. it is not surprising that we are in the mess we are in and are not showing any signs of getting out. elsewhere in this thread i hated on the american people for their immaturity and their servitude towards lies and propaganda rather than seeking the Truth and in getting politically active and demanding justice.i do not think we are actually disagreeing, there are many people that do not understand what capitalism is and thinks our current system is capitalist. it is not, it is fascist. to define terms, fascism is when corporations use government to wage economic warfare; you can think of it like a player (big corporations) buying off the referee (government) so that the rest of us lose. capitalism is simply everyone playing the game fairly. the ref’s job is simply to ensure the game is fair.we do not have capitalism. we have fascism. anytime you have big government in the context of the nation-state system, you have fascism. a cursory review of the past few thousand years of history shows this.if you want to hate on fred for something, hate on him for sitting by idly while government destroys his investment opportunities, thus ruining his career opportunities while also preventing him from investing in entrepreneurs who are pursuing their dreams while also working to create products and services that will enrich society. blaming honest investors for this mess is dangerous because it sets the pretext for government to regulate them even more, which is the truly immoral thing, since in such a scenario government will be unfairly waging economic war against honest business people in the name of enriching the corporations that own government. that is what is truly immoral. honest business people are not immoral and their behavior should be encouraged and rewarded as it enriches all of society.that is why people need to understand the reality of this situation. the world is a mess because we don’t have capitalism. governments everywhere are too big and too invasive, that is the problem.
You sound like those religious people … “Morality is declining because less and less people believe in the REAL God.” — an invisible man in the sky who’s vengeful, destructive and selfish but HE loves you!Same with YOUR concept of capitalism – A made-up fantasy, a utopia that YOU’ve deamed up in your head. What we have in the United States of America is Capitalism. Period. Unadulterated orgy of selfishness, greed and dishonest.Didn’t Fred, the “unabashed capitalist” preached us a few months ago that we need more greed by the way?From practical standpoint, it doesn’t matter how close this system adheres to the theoretical definition of capitalism. Do you really think socialism in Sweden or Canada is 100% true to its tenets?I mildly agree with your definitio of fascism. America is corporate fascist state with the capitalism backing idealogy.
lol, forget it there is no hopejust spend some time thinking of a real solution, like after we get our morals back then what? how should wealth be allocated and production be managed?read some real history books and you’ll see what i mean
I’d promise to read some “real history books” if you stopped fantasizing about something that doesn’t exist, never existed and will never exist.So what books should I read? how about Capitalism and freedom by genocide loving Milton Friedman?I am sure the “unabashed capitalist” Fred reads like a bible.
Didn’t they teach sarcasm in the vocational factory sorry I mean business school you attended?Dude, Milton Friedman should be tried for war crimes and crimes against humanity not revered.Sorry about my assumptions with regards to your critical thinking skills.
should read: should have been tried for war …
I don’t read the bible or Friedman
Kidmercury,To quote Winston Churchill:”The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries. “
I don’t think we’ll get out of this mess without a little greedPeople need to start new businesses (money is a big motivator to those whodo that), people need to get back into real estate, people need to invest inthe stock market again
One can do more good works with a pocketful of money than one can do with a heart full of virtue.In the final analysis, good works require funding just like everything else.If your talent is that you can make money, then you should make money and donate it to good causes. Other folks can work the good causes but only if they can count on you to fund them.Don’t curse your talents, work them!The challenge for an individual is — are you only what you do or are you what you do with what you have?I never got it at 30 or 40 but I began to get it at 45.We are never more powerful than when we stoop to assist someone less fortunate and, if you are superstitous like me — you can fight off the bad juju that way.
Fred, there is a very real possibility that investing in Wall Street and REIT’s are on the same path as investing in GM, Ford, and AIG.
New West Living,To be corrupt to the core, implies the US Financial system is in cahoots and intimately tied to one another, that it has a core. My dry cleaner is part of our financial system. The coffee joint Yelp served up in Fred’s earlier post is part of the financial system. The US financial system is made up of millions of independent entities working together while working apart. That’s what makes it so resilient. Despite today’s challenges, there is still food on the shelves at your local grocery store. The corner restaurant is still serving a great bowl of chili and a gallon of gas cost less than $2.50Greed is not a “capitalist” trait. Greed plays it self out everywhere, in every from of Gov. and financial structure. Capitalism just happens to be the ONLY place it CAN’T be corrupt to the core, as their is NO CORE.As long as it continues to only take an hour to start a business in America, the U.S. will be fine.
I am not trying to protect anything, like I even couldI am simply engaging in a public discussion
I am afraid you are wrong about meI do have a conscience and I show it every day to a lot of peopleMaybe you aren’t looking closely enough
New West Living, you’re way off base here, especially in your personal criticism of Fred.As Americans, we’re all capitalists and have a critical stake in the system regardless of what we do for a living. Name calling and trying to evoke class warfare is precisely what’s wrong with this “issue”.The financial irresponsibility of a few is being used for political purposes to drive a wedge between groups of Americans. That’s very wrong.
Fred,Great thought provoking post. While I agree with you in principle, I have to respectfully disagree with your view that “The people who created the financial mess will be able to unravel the complexity of it and get us out of this mess”.Yes, the financial industry must take a Lion’s share of the blame because normal investors like ourselves did not gamble with other people’s money. A select few companies created these CDO’s and then sold them off to other financial institutions. These institutions did not do their due diligence even though they could not really understand the underlying securities or the risk associated with them and then bet it all. In essence there was a hint of Gordon Geckoism in all of them “Greed for lack of a better word is good”. But in this case, it was amply supplanted with a heavy dose of stupidity.Yes there are some people who got mortgages that they could not afford. But the blame lies more so in the institutions that cobbled them all together and sold them as a huge package to other institutions, knowing fully well that they were selling time bombs.I think you are right in that regulation failed as well. SEC was asleep at the wheel. This is amply evident in the fact that they went after the likes of Martha Stewart and completely missed Madoff and Stanford. Not arguing that they needed to let Martha go, but heck what were their priorities?On another note, I personally oppose this AIG Bonus Tax Bill. because I believe that tax laws passed in haste come back to haunt another generation that was never intended to be the target of such laws in the first place. In case this isn’t ringing a bell, the AMT was passed in 1969 to effectively create a parallel tax system to ensure that 155 US citizens would pay their taxes and not use loopholes to avoid them (YES ONLY 155). But alas it was the most flawed tax law passed in the history of the U.S. The law passed in such haste did not account for basic things such as indexing it to inflation, that now it affects more people than it was ever intended to affect. The AMT is a symbol of inaction by Congress for over 40 years.. I have more details at;http://iverge.blogspot.com/…This financial mess took over 30 years to create starting with de-regulation in the 80’s. Every succeeding administration put more fuel to the original fire and we eventually got into this mess. I think that the current administration having inherited the problem is doing all that it can to resolve the crisis. Some of us may not agree with all the steps that are being taken. I think that we as a nation need to put politics aside for a bit, have a little patience and generate intense focus on the big picture of turning this country around.regards,Deepak
“This financial mess took over 30 years to create starting with de-regulation in the 80’s”Oh NO! are you saying Ronald Freaking Reagon started all this mess?
The AIG bonus tax bill is a very troubling piece of legislation, it remindsme of the patriot act in the way it is being rammed through in a time ofpublic emotion and outrage
I agree with the comparison to the patriot law. However it seems though, the urgency of adopting this AIG bonus tax bill may be dead based on this report http://www.businessinsider…. It may have been that Obama would not want to pass such a controversial law in his first 100 days in office.
Feeling better about Obama today than yesterday
Funny thing — the Congress has already spent more time debating the AIG bonus bill than they spent on the TARP, Stimulus and the Omnibus combined. LOL
Fred,It always impresses me how you can work the crowd and get such feedback. I love the thought provocativeness of your post.After reading the post and most of the comments I’d like to point out a couple of observations.McCarthyism and other foibles hoisted upon society is based on the contagion of fear. To understand this contagion we must realize that the human brain releases a chemical when fear enters the mind and once the anxiety is over then the chemical disappears from the brain.It can literally paralyze the memory and in many cases cause amnesia in a person. In other words when a person, a community, a country, or a world is afraid they can forget something. Providing the anxiety or fear is continued, the “chemical” continues on in the blood stream and hence in the consciousness of a single person or an entire nation.Men and women in power have relied on this contagion of fear for centuries, knowing that the “people” will forget and the cycle repeats itself. This is why I believe our founding fathers were so prescient in emphasizing the role of government should be limited.We can attach blame to others all day long. We can blame Congress, the President, Wall Street, whoever is handy at the moment we are in a state of fear. However, being in that state and forgetting who we are and what we are as individuals, we have only ourselves to blame.The solution, IMHO, is within ourselves. We, as individuals, must remember the Divine Gifts of self reliance and free will that no human being has the power to extinguish. We must remember that each of us has the power to destroy that wretched germ of fear and transform it into the goodness of abundance that is available to all. There is more than enough for everyone in their own way and through their own lives. It’s time for each individual to take back the liberty that government has so wrongly absconded.In closing, I’ll offer this favorite quote of mine from Alexis de Tocqueville:”Democracy and socialism have nothing in common but one word, equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude.”Thanks again Fred for making me think a little.
I’m usually with you Fred on every post, even ones where we disagree because though our opinions may differ they remain reasonable, so as read this I find it all a bit puzzling. If this is a piece about outrage gone amok, then I agree. We can be angry but we can’t let that blind us from taking constructive action. I’m with you 100% there. And yes, we do need a working financial system. Still with you here. Then you write the need to educate the people “on why we need wall street’s cooperation in getting us out of the mess.” I think this is a mistaken notion. I’m going to speak heresy here but we don’t need Wall St. We know the nature of this particular beast too well and it won’t cooperate in the way we think. And more importantly, it found perhaps the most profitable loophole in our global financial system by being …. too big to fail. Put the two together and you have an exploitive scenario where success comes at a great cost, where winning is a hairline away from losing. For that reason, we need to begin anew. Capitalism just shouldn’t be a zero sum game. As a VC, I’m sure you believe we can find more solutions to this problem so we can create an innovative, growth-based economy rather than perpetuate a rent-seeking system. We can. A 21st century economy needs a resilient core that minimizes structural weaknesses and in fact encourages creative destruction a la Schumpeter as a means of keeping the economic gene pool from becoming a cess pool, which is what we have now. This may mean moving away from the centralization of finance on Wall St to a more federated model. In America there are 50 states. In the world there are 200+ countries. In cyberspace, there is as much real estate as we can dream. Marc Andreesen mentioned creating more online banks to pick up the slack in lending. You may say, well, sure but we still need these guys because they carry with them the experience and wisdom from years in the trenches? I’m going to say that the game has changed and their assumptions are obsolete. Chuck Prince, Dick Fuld, Stan O’Neal, et al all strike me as generals fighting the last war, especially if that last war is Custard’s last stand. This is a new battle, a new reality, and we can do without them. We could also use new blood. Take the people that we can trust, the intellectual capital of this world and cut them loose to build a stronger financial core. Doesn’t this sound familiar? Yes, its the startup model that we’ve come to love! Since the mindset to do this requires more entrepreneurial thinking, we should rely less on the talented check-writing abilities of Wall St and tap into the go-getting, can-do attitude that once built up this system.
You don’t have a right system for that. Suppose you cut those go-getting can-do folks to come up with idea? what do you think they’re going to do?They WILL come up with Hedge Fund 2.0 to fill their own pockets.You cannot be conscienious, social responsible individidual while you are working/operating in a capitalist society.Ever heard the term every man for himself? that’s the layman term to describe capitalism.
“You cannot be conscienious, social responsible individidual while you are working/operating in a capitalist society.”Bullshit!The smartest entrepreneurs spend their time trying to make their key employees into millionaires while their employees spend their time trying to make their bosses into “unit holders” — that’s Texas talk for $100MM.When they both succeed, it’s a very beautiful thing!Capitalism is about identifying and meeting market needs — nothing else.
I think we agree more than came across in my postI was not talking about Fuld or Prince or O’Neal or Thain or BlankfeinI as talking about the people who will actually do the unwinding
Econ mess = IraqStep 1 – Treat them like serious leaders, give them a long leash, and generally encourage them as much as possible (like no regulations, ultralow interest rates and leverage requirements, and / or chemical weapons)Step 2 – When they step out of line, turn on a dime and appoint them Public Enemy Number 1Step 3 – Take over by force (make them an “offer they can’t refuse” and / or invade)Step 4 – Alienate anyone on the inside who can help: send the army home with the keys to the ammo dumps, bust down the doors and search their women, or reneg on their retention contracts, cap their comp and retroactively tax them at 90%. Create an exodus of refugees from your newly acquired and very troubled conquest to, say hedge funds who are trading against you.Step 5 – profit ! or… err… muddle through for years of agony.A recent debate over who is to blame: http://www.rgemonitor.com/b…As Niall Ferguson suggests, trying to decide who is to blame between Washington, Wall Street, and borrowers/consumers is like deciding who is more debauched, a john or a hooker.
You may well be right Druce
If Jack Nicholson was an investment banker -You can’t handle the truth! Son, we live in a world that needs deals. And those deals have to be made by men with Bloombergs. Who’s gonna do it? You? You, Senator Dodd? I have a greater responsibility than you can possibly fathom. You weep for AIG bonuses and you curse the banks. You have that luxury. You have the luxury of not knowing what I know: that bonuses, while tragic, probably saved taxpayer dollars. And my existence, while grotesque and incomprehensible to you, saves the global economy…You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want me on that trading desk. You need me on that trading desk.We use words like business model, risk, profit…we use these words as the backbone to a life spent building something. You use ’em as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the economic growth I provide, then questions the manner in which I provide it! I’d rather you just said thank you and went on your way. Otherwise, I suggest you pick up a spreadsheet and build a model. Either way, I don’t give a damn what you think you’re entitled to!
lol this is fantastic!
That was entertaining. Film it and put it on youtube!
was inspired by previous video parody that predates youtube… – will leave that in the public domain for a better Jack Nicholson imitator and better man than me… speaking of which, where is YouTube meister Lindzon in all this? hope his training regimen didn’t impair his Blackberry thumbs.
Howard is focusing everything on stocktwitsHe’s given up youtube for twitter
hahaha – absolute class!
Fred, thanks for bravely extending our discussion on Financial McCarthyism. Some great comments on both sides of the issue have been raised by your readers, providing lots of food for thought for us all. The broader issue we’re raising is that specific events become tools that are increasingly misused by various constituencies (in this case politicians and the media) that take us down an increasingly slippery slope.The latest case in point is the recent “return of AIG bonuses” engineered by NY authorities. That they did so is a good thing. What makes one uneasy is the way it was done. I went so far as to term it reputational waterboarding. Again, the specific result may be laudable, but the cost to us all should be considered in the broader context. http://tinyurl.com/d2wmxy
I was hesitant to out you as the other participant in the discussion thatset this post in motion MichaelBut since you’ve done that yourself ……
Thanks Fred for that consideration. Feel strong enough about this issue though to participate in the discussion.
Fred- One of the most important forgotten elements of Wall Street compensation is that these firms used to be partnerships by and large. So the partners would take a cut of the firm’s profit (and the up and coming almost partners would get something as well). This was perfectly self-reinforcing, because if a firm produce a huge loss, the partners would come of out of pocket to bolster the firm’s balance sheet. So risk and reward were theoretically balanced, at least much more so than today.Now with virtually all the firms as public companies, the employees still take their huge bonuses, but the shareholders (and taxpayers) are responsible for the losses.
Partnerships — own 100%, distribute losses, distribute gains, distribute tax results, contribute capitalCorporations — own a few shares, absorb losses, distribute gains, absorb tax results, raise capitalPartnerships are always more nimble about managing the firm’s capital because they own it. Corporations are usually less nimble about managing capital because they raise it externally.Small difference with a huge impact.
As a partner in an investment firm, I understand and appreciate the way thatthese partnerships worked and agree that they were better structures for themost part
“The people who built the house of cards are the ones who know how to take it down without it collapsing.”Isn’t that kind of like saying the wild partyers who accidently burned down a whole neighborhood are the experts we should hire to build it again? Better hand them lots of money, or they might not help us out!The people who built this US financial “house of cards” should be in jail. And you can’t persuade me that arresting (or at least de-bonusing) some of the known culprits would be unfair unless we track down and penalize every single one of them. That doesn’t apply to arsonists, rings of drug dealers, or other criminals, so why should it apply to Wall Streeters?
This comes from a man who a) brags about being an “unabashed capitalist” and b) who advocates greed as part of the solution to go forward.You’re not that naive to expect a VC (Venture CAPITALIST) to defend social resposibilities, or are you?
A little historical perspective here: The original McCarthy used lies, fabrications, fantasy and paranoia to attack large numbers of innocent people for political advantage. I think we need to be as careful about using the word “McCarthyism” as we should be when we use the words “fascism” and “socialism” to represent a social phenomenon that we think unfair or uninformed.Most people recognize that not everyone on Wall Street is responsible for blowing up the financial system. That said, “Wall Street”, a generalization about as useful as “Financial McCarthyism”, enjoyed for nearly 30 years the complete political, cultural and media support that generated an almost cult-like consensus that free-market capitalism, unfettered by any real oversight, would provide wealth, employment and a better future for the entire society. So what you’re really seeing, after a sustained increase in income-inequality over those same 30 years, is as simple a thing as a “backlash” by people who don’t want trillions of their tax dollars to clean up a mess they played a relatively small role in creating. No need to bring a term like “Financial McCarthyism” into the argument…..and if you persist I might have to start calling you a “Financial Fascist.” Would you find that a helpful contribution to the conversation?
Harmiclir, regarding your comment: “The original McCarthy used lies, fabrications, fantasy and paranoia to attack large numbers of innocent people for political advantage”,All four of those tools can be found in the Congressional hearing transcripts on AIG and related “Bonusgate” deliberations. Not to mention the various “list” extracting subpoenas being issued by one state AG after another. The House has gone on to include all TARP recipients in it’s bonus tax initiative when most of the public still thinks it’s primarily targeted at AIG.The Senate version goes beyond TARP and starts to look at all bonuses, even if it has nothing to do with AIG.All of these actions are using the public righteous anger against the original perpetrators of AIG’s downfall, most of whom are long gone and had collected their bonuses long ago.I have friends who work for banks who’re being told they’re evil AND responsible for the current crisis by fellow passengers on a plane…in coach. And they’ve had nothing to do with AIG or the subprime mess.When hundreds of thousands of people in the financial industry are AFRAID to identify where they work, it’s similar to the McCarthy era, when thousands of people in Hollywood were afraid, and in many cases utterly unable to work in their field.We’re going down a slippery slope that could lead to that situation. It just needs to be flagged and discussed as early as possible. And hopefully nipped in the bud.
Amen.”Demagogue: one who will preach doctrines he knows to be untrue to men he knows to be idiots.”H.L. Mencken
I didn’t go into all the details of the conversation that prompted this postbut in that conversation I heard about hard working honest people whoworking in the financial sector being heckled or harassed because they werecarrying a bag with the name of a large financial firm on it. That kind ofthing is not right.
I think hypermark nailed the analogy and came very close to identifying the core problem in this whole train wreck scenario: COMPENSATION.Compensation is what we’re seeing out of whack at AIG, obviously. Out of whack compensation is why mortgage brokers pushed sub-prime mortgages even when the borrower could afford a 30-year fixed. Compensation was WAY whacked out when the financial wizards came up with formulas to asses risk in ways that allowed hedge funds and “insurance” companies to leverage their assets to ridiculous new highs. The average Executive compensation grew in proportion to their workers’ salaries so much in the last 10-15 years that the endangered middle class needed fancy mortgages to afford the price of homesGovernment regulators make nothing compared to the fat cats their supposed to regulate. Is it any surprise, then, that they’re susceptible to favors and job offers in exchange for leniency? again, compensation is out of whack. Every single example you can think of regarding this financial disaster has a common link: out of whack or disproportionate compensation.
Considering the opinion of many in America as well as the Obama Administration itself, Bush and his administration created many of the messes that we are currently facing as a country/in the world.Carrying the argument from this piece to it’s logical conclusion, doesn’t it mean Bush should have been kept in office to extricate us from these messes that occured during his tenure?Hopefully the lunacy of keeping these people in charge on Wall Street just hit home.
I have no good response to that. touche
Bill, not sure I follow that logic. The people brought into fix this mess at AIG are different than the ones responsible for the debacle. Those folk are long gone.Just as the past administration has been replaced by a new one.
Good performance, good results, good bonus… no entitlement. Bad performance and results… new employee??? Capping salary at $250,000 is absurd… big saleries for losing money is too.In my limited experience with human nature, people are always motivated to improve themselves and their place in life… regardless of social and governmental conditions. Smart and hard working people will continue to do well, and populations will recover and hopefully learn some lessons. The question now is how to effectively recover from these self-generated conditions. We are smart, motivated, and resourceful. And, I don’t think for a second that any of us will roll over and give up. No matter who is driving the bus or how they are compensated.
Ted – good comment. Did you see my post on bonuses? Curious what you think of that
hey and speaking of the boss? hi Ted. this is an example of what happens when you throw a good leader out and bring in the new administration. Ted Rubin He knew what he was doing. Is this what happened at AIG? Ted Rubin knew how to run a company. We didn’t always agree with him… but we always knew we earned what we deserved. we trusted the system. when Ted left the company the whole thing tanked because no one trusted the people above us. In the short term I made twice what I made while Ted was there because the rules blurred. In the long term… the whole trust between warring parties tanked.
Geithner: “Our regulatory system was not equipped to prevent the buildup of dangerous levels of risks. Compensation practice rewarded short-term profits over long-term financial stability, overwhelming the checks and balances in the system.”just sayin… it’s the compensation thing again!
Speaking of compensation systems and practices, one also needs to be looking at what’s been in place for our political representatives as well as Wall Street.I’m not referring to just financial compensation and lobby-driven fund-raising for politicians, but also the rewards that political representatives get for short-term actions in terms of public exposure and bragging rights for their next election and/or political position.What is the equivalent of “Bonuses” for politicians? What is the equivalent of a “clawback” on these publicity bonuses, “earned” for short-term performance on long-term legislation?Where are our systems where we rate and judge legislation passed by classes of Congress, and compare that to the “bonuses” earned by those politicians in those years in terms of PR windfalls through hearings, and TV interviews?The sub-prime and CDO debacles didn’t happen in a regulatory and legislative vacuum. Nor did they happen without active participation and encouragement by politicians at the national, state and local levels.Compensation practices need to be reviewed not just for Wall Street, but for Washington as well. And we may as well look at compensation systems for media as well.What about the bonuses earned in terms of ratings by TV and radio personalities, done for short-term gains vs. long-term interests of the country? Both on the right and the left?We should be generous in our demands for accountability, and not just restrict it to Wall Street.
When did he say that?
I’m pretty sure it was yesterday, the 24th. Here is the article I pulled it from: (see point #3)http://www.time.com/time/po…
The one thing I am absolutely sure about, is this WILL happen again. It may look different, sound different and play out different, but the underlying drivers to this mess are inherent in man and therefore capitalism.The demand for quick profits, easy money, wealth, consumption, status and more aren’t going anywhere. They are always just under the surface, waiting for their chance to show their ugly faces again.The good has to be vigilant to minimize their grip.
The real lack of leadership during this financial crisis is in the business sector itself…I’m amazed at the stunning silence coming out of all sectors of business and industry. Apparently they all are still quite busy greasing the wheels of government lobbying to get laws passed or regulations gutted that will favor their short term business plan, when it is past time for them to simply run their businesses according to the law.About the only major industy leader that has provided any leadership and who showed guts was Ford Motors. They have been in bad shape for a long time, but they keep chugging along and have so far, anyway, refused government hand-outs. Who else?Where are our generation of principled people like Ned Johnson, John Bogle or Warren Buffet? Guys who built their financial empires on long-term growth and a belief in the American worker and in companies that create something of real value in the econmony?All the so-called “Masters of the Universe” who brought down our economy, have once and for all shown that they are in the market for short end money and absolutely nothing else; and revealed themselves to be “gutless wonders” when it comes to real leadership in a capitalist society.Who in the business world is ready to step up and lead?
Is finance is too important to be left to bankers?:-)
I am also quite impressed by ford and I’d like to buy my next car from them
it is safe to say that if you aren’t following this closely, you shouldn’t comment. I have been paying attention due to my personal unemployment and perhaps failure to concentrate on my social criticism art. I am having a hard time illustrating what is going on because an editorial by default ridicules and points blame. I think it is safe to say you are absolutely right that there is a lot of blame to go around. the situation is very close to our situation in 1998 and 2003 with Iraq, and the solution will come when we trust the people who started the problem by first ostracizing them so they understand the serious boo boo they did, and then letting them go about their business because the people disciplining are as much to blame. We need to understand in the future that the whole enchilada is not clockwork. these people are not saints, but they acted like everyone else who’s shit stinks. the business needs a new operating system. the bonuses were in the old system. we need some kind of new OS so the existential parts know they don’t get rewarded next time. it isn’t justice to the tax payers, but the tax payers voted for people who acted like spoiled children and broke the system instead of fixing it… mostly because they were unhappy with the other slippery slope: Iraq
FredAs a company owner, I believed I was best served – and more respectful of my employees – if I got rid of people who did bad work. Especially when that work threatened the existence of the organization.I still think that.But your other point, that got overwhelmed in the comments yesterday, was that some good people, who did nothing wrong are being thrown overboard in this political maelstrom. And that they still have value.(As an aside I wonder how long it would take if we were to expose TARP and the Stimulus Bill in $160 million chunks to the same level of scrutiny as the AIG bonuses?)This article from today’s New York Times from a soon-to-be-former AIG executive http://bit.ly/Ds6H offers an interesting adjunct to your point and serves to remind that there are, as always, two sides – at least – to every issue.
Everyone should read jake desantis’ resignation letter. I am going to tweet it
I just read it. And I see your grander point in it.But it still contains this piece of glaring hypocrisy:>>Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid.and then goes on to say:>>On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes.Which was a contractual “guaranteed” bonus payment. Which means that he did NOT agree to work for $1. He agreed to work for $1+ million dollars.I don’t feel sorry for this guy. Hell, I’ve worked in struggling business units for a normal salary (most people do!) The only reason he still has any job with AIG is the taxpayer. I’m sure we can find plenty of smart people who will step in for a sixth of that, even given the uncertainty.
I don’t feel sorry for him but he did give away the entire $740k to charity
Read it and enjoyed it. I even agree and sympathize with much that he said. But two comments on the NYTimes site struck me as sage: “And, Mr DeSantis, what if the federal government had not bailed out your company and allowed it to go under? Would you have received your bonus then?”and:”Hint: If your company accepts tens of billions of dollars from taxpayers, consider your bonus renegotiated.”But then again, it’s a tricky combination of private contracts and public trust as this guy points out well:http://community.nytimes.co…So I’m still torn. I mainly think that a $1/year salary is ridiculous. These people should be paid reasonable amounts and get bonuses if their companies do well… is that too much to ask?
Speaking of McCarthyism and people to blame… one of TIME magazine’s 25 scapegoats is… Ian McCarthy! He’s the implicated CEO of Beazer Homes who puffed up the housing bubble and probably broke the law…http://www.time.com/time/sp…
David Beim, an economist from Columbia University, recently told This American Life that the problem is “us.” Transcript: “…for most of history, the amount we owed was a lot smaller than the economy as a whole. This ratio, household debt to GDP bounces along around between 30 and 50%, for most of the ’30s and ’40s 50s, 60s, and 70s, right into the 80s. Then it breaks through 50% in the 80s, starts heading up in the 1990s. And then…from 2000 to 2008, it just goes, almost a hockey stick, it goes dramatically upward. It hits 100% of GDP. That is to say, currently, consumers own 13 trillion dollars when the GDP is $13 trillion. That’s a $100 trillion owed by individuals. That is a ton.” Has there ever been a time where we owed that much before? “The earlier peak, which is way over on the left part of the chart, where debt is 100% of GDP, was in 1929. This is a map of twin peaks. One in 1929 and one in 2007…That chart is the most striking piece of evidence that I have that what is happening to us is something that goes way beyond toxic assets in banks, it’s something that had little to do with mortgage securitization, or ethics on Wall Street, or anything else. It says the problem is us.”
I agree on the theory of this, but as for “evidence”, beware a simple correlation. With so many POSSIBLE data points, you can always find something to correlate. We should be very wary of boiling this whole situation down to something simple, when it is in fact very complex.But yes, we’re all to blame. We’ve all reaped the rewards of the boom, and should now sober up and understand there is a price to pay.
Re: Blame to go around. I’d put the rating agencies at the top of the list. Unlike consumers, the government and the bankers, the are PAID to make the right risk calls for the entire market and failed at their primary mission. AIG could not help it that they grew without peer to eventually underpin the financial system. Effectively they were too close to the bankers they rated and their integrity seriously compromised. They were huge enablers in this catastrophe and alone could have prevented it.
recommended reading: http://www.rollingstone.com…
Sorry Fred — “Financial McCarthyism” ?McCarthyism was tarring the innocent with innuendo to ruin the accused lives.What is happening now is anything but. AIG, Merrill Lynch, Bank Of America, et.al. are NOT innocent victims. They are the perpetrators of the biggest heist of all time.These financial “wizards” have demonstrated that the only financial knowledge and ethics they have is that of a swindler.This is a perp walk for a reason. They are the criminals – not victims.
Maybe the top guys and a few bad actors, but by and large those who work inthese firms are not bad peopleCheck out the resignation letter an AIG employee wrote for the NY Timesyesterdayhttp://www.nytimes.com/2009…That sort of sums up why I wrote this post
Fred –Read sob letter. My answer is …. so?Look AIG is bankrupt. At a bankrupt firm, bonuses aren’t paid, contracts are torn up – usually by bankruptcy court. Look at the UAW, GM, GM’s creditors, and bondholders – pennies on the dollar for them.AIG should be in receivership. Instead, we the sheeple taxpayers, *paid* for the privilege of declaring AIG bankrupt. Instead of dumping billions down the AIG rathole in the first place, AIG should have just been seized like a bank in a similar situation would have been.My wife and I both at various times were promised bonuses at startups that went through an asset sale and shutdown. Not always were those bonuses delivered. Should we have have been able to write such a letter to the NYT. What would be your attitude toward a person at one of your portfolio companies writing such a letter?Some more points: 1. The letter writer (Jack) claims he had nothing to do with CDS. How do we know? Was he in meetings when the issue was brought up and went along with/and or encouraged CDS? We only have his word on this. 2. How do we know that his work didn’t “blow up” in later years? Only his word on it. 3. “$742,006.40, after taxes”. As a bonus. In a bankrupt firm. “$1” annual salary. Show me many people who could take that kind of salary cut. My wife who is a tax accountant has some people coming in with $300K+ in W-2 wages crying about how much taxes they have to pay. A client who makes more in tax-free California muni’s than my wife and I have all year. I am sorry, cry me a river. The *average* income for a family of 4 in the San Francisco Bay Area is about $85,000. Cry me a river. 4. Jack claims to have suffered as a result of the economic downturn. Oh really? Is Jack being foreclosed on? Are his kids having to pass up on dreams of going to college? Is Jack looking at his medication and deciding which prescription he isn’t going to renew? Or maybe its powdered milk this month, or a trip to Second Harvest. Are creditors calling him? Considering that Jack’s firm helped with the 2005 bankruptcy law re-write, that helped result in so many foreclosures — cry me a river. 5. When deciding to hold out for the bonus, he should have factored in the possibility that AIG wouldn’t be able to pay up on the promises. Are GM and Chrysler execs writing such letters? Probably not. Would a UAW member looking at a slashed pension get the same sympathy?Once again, Jack is not an innocent victim. Jack may not be a criminal. No one is talking jail for Jack (yet). But Jack just learned a hard lesson in not-counting-chickens-before-they-are-hatched, and he is “upset”. I bet half the country would switch places with Jack and not be upset at all. Maybe Jack needs to step back, clear his head, and go work at a homeless shelter for some time to get a proper perspective.Final question — how come is it that people like Jack who don’t actually *make* anything, who don’t actually increase the value of the world are so highly compensated? Jack is just a fancy pants banker. Fred, you as a VC add value. You help create companies and bring new ideas to fruition. My wife makes sure that her companies spend their money wisely. I am building a company (http://amplafi.net ). What did Jack and his ilk build or create? Near as I can figure, they built a fancy casino.
All good points and well said.But post bankruptcy companies do enter into contracts that are recognized by the court as valid. I agree that AIG should have been liquidated and still think it should beBut if it had been thrown into bankruptcy protection, the court could have approved bonuses like the one this guy was promised and got and is now giving away to charity
Read the entire Desantis letter, then read the 500 comments. A large number of those comments were well thought out, and some of them were actually supportive of him. But the central themes of the comments were:What makes this guy think that his year of work has almost twice the value of the President of the US?What makes him think his year’s work is worth ten to twenty times the work of the guy out on the manufacturing line?You guys will never understand this populist rage until you get out of New York and Wall Street for awhile, deal with real people and real lives. Wall Street, and most of the media that covers Wall Street, lives in this insulated castle, where compensation is based mostly on the ability to BS, to convince somebody that you are worth far more than you are.Maybe, just maybe, instead of attacking the populist rage, you tried to really understand it, you might change the way you look at things. Because, right now, if people really believed that Global Warming would lead to the flooding of Manhattan, they would vote for Global Warming.Desantis did not do himself any good, and the media that shows sympathy for him needs to introduce him to the real world.
I agree that main street’s view needs to be understood by wall street. Thatwas my favorite line of the president’s appearance on 60 minutesBut main street ought to take a second to understand wall street tooThe reason a hedge fund managers made $2bn last year is he generated $10bnof profits to his investorsThat $2bn is earned compensation and should not be demonizedNow guaranteed bonuses are another story and they are not acceptable, periodBut just because someone makes a lot of money does not mean they are a badperson
Fred –I am not saying that because someone makes a lot of money they are bad. I am working to be rich myself. But all Jack did was make money, he didn’t create value.Bonuses of this size should only be paid out in the form of restricted stock that can only be sold in 2 years. That way we can see if the money being made is truly made or is just fraud.For me the biggest sticking point is that there are no clawback provisions. No penalties for destroying the company (and the economy). All bonus compensation should have maluses provisions as well.But the worst thing about all of this, is that a few years ago these titans of wall street were lording over the rest of America their superiority and their wealth. This is the undercurrent that fuels the rage.
Great points PatThis has been a great discussion. I’m a lot smarter about these issues because of the conversation
I like your blog but I think you’re being naive about the ability of the Wall Street to accept their responsibility. Populist measures like the guillotine are appropriate with the sociopaths now on 10% bonus.Differences of opinion are of course the start of discourse.
That’s for sure. I hope you are right about his message tonight
I was going to write it that way Nivi but then I decided that even morewould take offense to the postI am willing to share the blame in the same way you are
Well said, Nivi.