Felix Salmon

Unrepentant bankers

Felix Salmon
Nov 11, 2009 17:31 UTC

Andrew Ross Sorkin confirms what most of us have long suspected:

One of the frustrating parts of researching my book came when I finally got to ask the question of Wall Street chief executives and board members that you just raised: Do you have any remorse? Are you sorry? The answer, almost unequivocally, was no. (Or they just didn’t answer.) They see themselves as just one part of a larger problem, with many constituencies to blame.

Many of the most senior members of management on Wall Street now consider themselves “survivors,” as if they were cancer survivors or something. That’s the word they use. While many of them are self-aware enough to politely nod at the notion that they received help and were part of the problem, they seem reluctant to acknowledge they were “rescued” or “saved.”

One of the key drivers of the crisis was the hubris and general lack of humility of senior bank executives. This is connected to the issue of executive pay: almost everybody thinks he deserves what he’s earning. But the only way you can deserve an eight-figure pay package is if you’re really on top of what’s going on in your bank. Ergo, everybody thought they were on top of what was going on in their banks, even when they weren’t; lower pay and more humility would have helped enormously in curtailing some of the most egregious excesses.

If bank executives (with the notable exception of John Reed) see no need to apologize for destroying the global financial system, they are still part of the problem and are very unlikely to be part of the solution. Which bodes ill for the future.


Vachon – touche`!
tim – Andrew Cuomo’s fault? Do tell.

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Felix Salmon
Nov 11, 2009 16:42 UTC

If Forbes writes something on rent-to-buy schemes in March and then the WSJ puts up a blog entry in November along similar lines, even the stretchiest blogger might have difficulty discerning a trend. But that doesn’t mean it isn’t a good idea. In fact, it would be great if we saw much more of it in this country.

Rent-to-buy means lots of different things to different people. Often, it’s a simple lease with an embedded option to buy the property at a set price on a set date — an attempt to give the buyer a bit of time to scare up a downpayment, and to give the seller an income stream. Typically the option is purchased for cash (1% of the purchase price seems to be standard) at the same time that the lease is signed; generally if the option is exercised, the price of the option is deducted from the purchase price.

Alternatively, rent-to-buy schemes can increase the rental price and apply rent payments to the purchase price: here the price of the option is likely to be embedded in higher rent payments rather than being an explicit up-front payment.

Both schemes, however, essentially just kick the can down the road: at some point one or three years hence, the purchaser still ends up getting a conventional mortgage and buying the property in question. If property prices fall significantly over the length of the lease, then you don’t exercise the option, or you go back to the seller and renegotiate. But if property prices fall after you buy the house, you can still end up owing much more money than the house is worth.

Then there’s a scheme I’ve heard of in Germany. Essentially it takes banks and mortgages out of the picture altogether, and sets up a long-term contract between the buyer and the seller. The buyer pays rent monthly, the house is essentially placed in escrow, and the buyer ends up owning the house after a set number of years paying rent. I like this scheme because it involves buying a house without any debt — and the buyer can even move house and sublease the property, so long as she continues to make rent payments to the seller.

The downside for the seller, of course, is the lack of a big lump-sum payment. But lump-sum payments are overrated, especially if you’re not buying a house yourself. Anybody downsizing from a two-home lifestyle, or intending to rent themselves in future, might find this kind of scheme very attractive, since it provides a steady income and they don’t need to worry about how they’re going to invest the proceeds of the sale.

Buying a house slowly, over time, is a great way of building equity without taking on debt — and it’s also a great way of making sure that you’re spending what you think it’s worth to live in a house, rather than speculating dangerously on future property prices. It’s also a great way of giving renters the same kind of emotional equity in their home — and the ability to make changes and improvements — that are generally the domain only of homeowners. Right now, when a lot of motivated sellers are looking to any possible way to move their properties, might be a very good time for these ideas to gain traction.


These days more families are thinking to buy their first house in this scheme. As you said it is the way to buy a house slowly, over time.It is a great way of building equity without taking mortgage now and for some people it matter.

Robert Benmosche, frustrated civil servant

Felix Salmon
Nov 11, 2009 15:01 UTC

I’m not at all convinced that any CEO is ever worth a $10 million pay package, but if it wasn’t clear when that deal was signed, it became obvious very quickly that Robert Benmosche was something of a prima donna. That’s far from unusual in people earning 8-figure salaries: indeed, being the recipient of such a massive emolument tends to exacerbate such tendencies in anybody.

The real culprit in this story, however, isn’t Benmosche, who has been something of a known quantity from day one at AIG. Rather, it’s the people at Treasury, who are now zero for two in picking AIG CEOs. Maybe it’s not as easy as they thought.

The problem is that the CEO of AIG isn’t like the CEO of a public company: he’s fundamentally a civil servant, and is much more constrained in his actions, including his ability to hire people at high salaries, than 99% of other CEOs. The leader of AIG is always going to be second-guessed and micromanaged, which will make any CEO type unhappy.

It’s become clear that the Obama administration is incapable of hiring a largely-independent CEO for AIG and then leaving him to his own devices. So if and when Benmosche leaves, they should probably reconsider the whole job, and how much it’s really worth to them. My guess is that the answer is going to be much less than $10 million.


Middle class U.S. Workers have not had a cost of living raise, let alone a decent merit raise, in over 2 decades. The average merit raise has been 2.5-3.5%. Their salaries have shrunk, slowly and regularly. Workers are forced into foreclosure and moving down, not able to have children, and holding at least one job per adult, usually another part-time, hourly job to survive. The workers are not taking more than 2 weeks vacation, and cannot afford to travel across the U.S., let alone to Croatia.
Wall Street executives and financial gamblers are thieves. They are supported by politicians and lawyers who contrive the U.S. legal system to allow their thievery unregulated and unmonitored.
The time has come for that to stop. The public and workers have to speak up loudly now.
This man’s audacity and greed is alarming. How long ago had AIG milked the U.S. taxpayer for billions in bailouts. there should be no raises, no hidden offshore compensation, no merit increase, only taxable salary on the books for these crooks.
It sounds harsh, but the middle class is living an economic war with finance, banking, oil, pharmacy, insurance executives…the big corporate players. No one should be able to take from the U.S. citizen, and then cry about their millions of dollar salaries.
I am disgusted to read this article, and hope the citizens revolt through their elected officials, and buying power, against the crimes of economics being waged in our country.

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Felix Salmon
Nov 11, 2009 04:59 UTC

Mineral sequestration: where you use common rocks to eat CO2 and convert it into minerals. Neat! — Miller-McCune

Moscow’s deputy mayor has VERY expensive taste in watches — Hettena

Tweet your weight daily! Talk about an incentive to keep the pounds off — LAT

The FHFA has no external auditor — HuffPo

UPS vs. FEDEX–Ultimate Whiteboard Ad Remix — YouTube

Ponzi PriceChopper: Madoff’s UES Pad Drops $1 Million — Curbed

Those impenetrable Bloomberg headlines — Economist

New renderings of the 9/11 museum — 9/11 Memorial

Real retail sales during the last 5 recessions — Ritholtz

Love these Japanese barcodes — Dieline

Rather excellent 404 page du jour — Food52

The end of safe havens

Felix Salmon
Nov 11, 2009 04:21 UTC

I’m surprised to see this coming from Ryan Avent:

If everyone is certain that crises are going to be bigger and more frequent, and if everyone is certain that governments won’t be able to afford to bail everyone out the next time around, then shouldn’t everyone be busy limiting their exposure to risk? And shouldn’t that then reduce the likelihood, frequency, and cost of future crises?

Firstly, everyone isn’t certain that crises are going to be bigger and more frequent. To the contrary, there’s a strong urge among a large swathe of the markets to dismiss this most recent crisis as a once-in-a-century event and embrace the notion that we’re getting “back to normal”.

But more to the point, as I’ve said many times in the past, the most recent crisis was in many ways a consequence of precisely what Avent is talking about here — everybody being busy limiting their exposure to risk at the same time. The crisis wasn’t a function of too many people taking on too much risk and then coming a cropper — it was much more a function of too many people being incredibly overcautious and demanding limitless quantities of risk-free triple-A-rated paper.

The fact is that if the rest of the world is out there taking risks, then it’s quite easy for an individual investor to limit their risk exposure and be safe. But if everybody tries to be safe at the same time, that creates the biggest risks of all — and yes will increase the severity of any crisis.

Besides, there really isn’t an easy or obvious way for an investor to be highly risk-averse in this market, not when one of the biggest tail risks that people want to protect themselves against is inflation. Big investors can try taking the Taleb approach of buying large numbers of out-of-the-money options and reckoning that a bunch of them will pay off when the next crisis hits, but that’s not a strategy available to most of us. There’s only downside and no upside in lending money to the US government or your local bank at near-zero interest rates, and buying gold at $1,100 an ounce looks like a crazy speculative momentum play more than a flight to safety.

Personally, I’m quite glad that there’s no obvious safe haven these days: it forces investors to come to terms with the fact that investing, by its very nature, must and should involve taking calculated risks. When people try to flee to safety, markets fail.


“there really isn’t an easy or obvious way for an investor to be highly risk-averse in this market, not when one of the biggest tail risks that people want to protect themselves against is inflation.”

Huh? TIPS are both easy and obvious. While the definition of inflation varies (among bloggers, at least) to be something other than CPI, the “tail risk” inflation you refer to is clearly CPI inflation. TIPS protect quite well against this, since they are explicitly linked to CPI. The downside of TIPS is the risk of deflation, but it is hard to call deflation a “tail risk.” Has any developed economy ever experienced hyper-DEFLATION?

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Executive perk of the day, Vonage edition

Felix Salmon
Nov 10, 2009 21:58 UTC

Michelle Leder finds one of the weirdest executive perks yet in the employment contract for Vonage CEO Mark Lefar:

The Company shall also promptly pay, or reimburse the Executive for, the costs of his private air travel from and to the Company’s principal offices in Holmdel, New Jersey (subject to the submission of reasonable documentation) in (a) an annual amount up to a maximum of $250,000 in 2008 and $600,000 in 2009 and subsequent calendar years while employed during the Term, plus (b) an amount equal to the cost of commercial air travel for each trip (i.e., the cost of a first-class, fully refundable, direct flight booked one week prior to travel) while employed during the Term.

Stripped of the legalese, this seems to mean that Vonage is paying for Lefar to commute by private jet between New Jersey and his home in Atlanta — and then, on top of that, is giving him cash equal to the price that he would have paid for a commercial air ticket, had he flown commercial. As Michelle says:

What kind of sense does that make? Has Lefar figured out a way to be in a Gulfstream and a Delta 737 at the same time?

Maybe Lefar needs his personal assistant to be with him in both Atlanta and Holmdel, but refuses to let the assistant onto the private jet? It’s all extremely peculiar.


Pretty ridiculous. This is not Cingular. This is a voip company. There is not much value in that. Brilliany way for a company to give away their service to stay alive and suck the money dry so the investors will never see their money. What’s next? Executive retreat?

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The Dodd bill: Generally very good

Felix Salmon
Nov 10, 2009 20:28 UTC

I like a very great deal of Chris Dodd’s proposed regulatory reforms, and overall the Dodd bill is I think a significant improvement on Treasury’s proposals. A good place to start is the discussion draft, but there’s a great deal going on here (the full bill is 1,136 pages), so expect lots more details to emerge in the coming days and weeks. In general I’m a fan of it, although I have reservations about the new Agency for Financial Stability, and the reduced powers at the Fed.

The heart of the Dodd bill involves setting up three new agencies: the Financial Institutions Regulatory Administration, the Agency for Financial Stability, and the Consumer Financial Protection Agency. The last — the CFPA — is if anything a beefed-up version of the agency envisaged in Treasury’s proposal, and it’s a very good idea. But the first two are new.

The Agency for Financial Stability is the agency charged with monitoring systemic risk — a job which under Treasury’s proposal would be given to the Federal Reserve. On this I think I have sympathy with Treasury: the Fed in general, and the New York Fed in particular, is better placed to monitor these risks than a brand-new agency with no direct ability to supervise banks or to break them up. A giveaway appears on page 3 of the discussion draft:

The Agency for Financial Stability will identify systemically important clearing, payments, and settlements systems to be regulated by the Federal Reserve.

Clearly, the Fed is going to play a necessary role here, and it’s not exactly rocket science to identify key clearing and settlement systems. So why take that job from the Fed and give it to powerless technocrats in Washington? Similarly, on page 5, the discussion draft says that

The Federal Reserve will continue to play a key role in assessing financial stability and have guaranteed access to financial institutions and any needed information.

That does seem to me to be somewhat duplicative in terms of what the Agency for Financial Stability is meant to be doing.

The Dodd bill is also big on trendy concepts like contingent capital and living wills, none of which have ever been shown to work in practice. It’s so sure, in fact, that it can mandate a way in which the FDIC can “unwind failing systemically significant financial companies through receivership” that at the same time it places an outright ban on the Fed stepping in to bail out a failing institution.

I fear this is dangerous. Yes, it would be great if all of this worked as planned. But that never happens, in the heat of a crisis, and I’m not a huge fan of cutting off the optionality we currently have at the Fed. By all means put in place the contingent capital and the living wills and the FDIC as the first best option for resolving a bank in crisis. But there’s no harm in keeping the Fed as a backstop if none of that works.

The Financial Institutions Regulatory Administration, on the other hand — the new single bank regulator — is a great idea. As the discussion draft says, it

combines the functions of the Office of the Comptroller of the Currency and the Office of Thrift Savings, the state bank supervisory functions of the Federal Deposit Insurance Corporation and the Federal Reserve, and the bank holding company supervision authority from the Federal Reserve.

About time too. For political reasons, the state banking system, governing community banks, will remain in place; I also note that the discussion draft says nothing about the NCUA, and I wonder whether that too is somehow politically impossible to fold into the new agency.

The Dodd bill is great on derivatives regulation, giving the SEC and CFTC broad powers to force markets onto exchanges where they can pose less systemic risk. Any trades not taking place on an exchange will be penalized with margin and capital requirements: a very good idea.

I also like the way that the Dodd bill forces hedge funds with more than $100 million in assets — the potentially dangerous ones — to register with the SEC. Investment advisers looking after less than that will be left to state supervision, which is also a good idea, in terms of not stretching the SEC too far.

There will also, finally, be an Office of National Insurance, within Treasury. About time too!

The Dodd bill is good on regulating credit rating agencies, and also on executive compensation, although I worry a bit about the way that companies will be asked to compare executive pay to stock performance. Executives have control over how their companies perform internally, not over how much outside investors are willing to pay for their stock. But that’s a niggle: over a five-year time period, you’d expect a company which had shown significant improvements internally to also have done well in the stock market.

I’m a big fan, too, of eliminating different standards for broker‐dealers and investment advisers, and holding any broker who gives investment advice to the same fiduciary standard as investment advisers. Makes perfect sense to me.

Banks who securitize loans are going to be forced “to retain at least 10% of the credit risk”; I haven’t looked at the full bill to see what exactly that means, but it’s good in principle. And there will also be lots more regulation of the municipal-bond market, which is long overdue.

The worry, of course, is that if the Senate ends up passing anything like this, it’s going to be very hard to reconcile with something more along Treasury’s lines coming out of the House. But even the vague possibility that Treasury’s plans will end up being strengthened rather than weakened has to be heartening.


Ginger Yellow:
At a time like this, debauching capital requirements is immoral. It is also a serious policy response. One problem we’ve had is that capital requirements were too procyclical: easy in good times (because all securities were marked high) and tough in bad times. That’s bass-ackwards. The easy capital in good times makes sure that the firms have too little capital in bad times. The hard capital in bad times doesn’t help much: just a kind of morality play. A firm should rack up the capital in good times, to use in the bad times.
All the insurance regulators did is introduce some ad hoc anticyclicity into capital requirements. Ugly, yes. Immoral, yes. Irresponsible? Only if they persist when the times get good again.

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Is unemployment only 9.5%?

Felix Salmon
Nov 10, 2009 19:13 UTC

You remember Friday’s gruesome employment report, right? Floyd Norris has taken a second look at it, and found something quite surprising:

Unemployment rates remained steady at 9.5 percent. And the number of jobs actually rose, by 80,000. And the number of jobs for college-educated Americans rose more than in any month in the last six years.

That big hike in unemployment to 10.2%, and all the other terrible, horrible, no good, very bad jobs numbers turn out to have been entirely a function of the BLS’s seasonal adjustments. As Norris writes:

All this may be very reasonable, and there is no way I can think of to test whether the seasonal adjustments are reliable. But I suspect seasonal factors are less important this year, when the economy may be changing directions, than they normally are.

Now even the unadjusted numbers aren’t all sweetness and light, especially when it comes to those with less education. But it does make sense to think that seasonal factors aren’t going to be the same this year as they are in other years.


Sure seems a lot worse than what it is. Even those with jobs are paying more for groceries, fuel, health insurance, taxes, tuition, etc. And many employed are part-timers with no benefits at all, so they’re struggling too.

How to fix the US financial system

Felix Salmon
Nov 10, 2009 17:47 UTC

I had a very interesting conversation with Bob Pozen yesterday evening; his new book is out now, and I highly recommend it. It’s the first crisis book to make a detailed series of specific recommendations about what needs to be done going forwards — or, in the words of the book’s subtitle, “how to fix the US financial system”.

These recommendations are sprinkled liberally throughout the book, and are helpfully presented in bold type. Whenever I came across one, I scribbled the page number on the back flap of my copy, in one of four columns. The first column was recommendations I agreed with, or which were at least a step in the right direction; the next two columns were for recommendations I thought didn’t make complete sense or were questionable, and the final column was for recommendations I thought were bad ideas. The final tally looked like this:

index.jpg As you can see, Pozen seems to be right (or at least in broad agreement with me) the overwhelming majority of the time. And as you can also see, he makes a lot of recommendations, on everything from accounting standards to insurance regulation. Tyler Cowen is quite right to give the book a rave review.

I’m not in agreement with Pozen on everything: he thinks, for instance, that it’s crucially important to get the securitization market up and running again — complete with tranche structures which require sophisticated modelling — while I think that securitization is inevitably going to be used to shove risk into tails and appeal to investors who don’t fully comprehend what they’re buying.

I’m also not fully convinced by one of Pozen’s big ideas, which is that banks should have small and professional super-boards which, rather than simply rubber-stamping the decisions of the CEO, take a much more active interest in the way the bank is run; Pozen has in mind here the governance structures at companies owned by private-equity shops. (Indeed, he wants to encourage more private equity companies to own and invest in banks.)

My view is that the rates of return targeted and required by private-equity investors are far too high for banking, which should be a boring industry, and that even if safeguards are put in place to stop PE-owned banks from lending to sister companies, management at such institutions will try as hard as they can to bend the rules to maximize leverage and profits. And that they will be positively encouraged to do so by their small super-boards.

Pozen, on the other hand, is fundamentally bearish on the business of banking, telling me that “if all you do is make traditional loans, you will lose money and you will go bankrupt”. I don’t think that’s true, but insofar as it is true of banks, it’s also true of investors who buy securitized loans originated by banks — so securitization is not really a solution to the problem. More generally, I don’t like the idea of creating a banking system where banks run around trying to make money on clever innovations because they’re losing money on their core loan products. It sounds like a recipe for disaster to me.

Some of Pozen’s other ideas are really good, though, like capping FDIC guarantees on bank debt at 90%. He also thinks that AIG Financial Products should declare bankruptcy, perhaps along with the parent company, which would give its counterparties a lot of incentive to settle their claims at say 70 or 80 cents on the dollar.

What’s pretty obvious though is that most of Pozen’s recommendations will not be enacted. Which raises the obvious question: if we don’t do this, what’s going to happen to the financial system and the economy? Pozen’s answer: we will have more crises, they will be increasingly severe, and they will be increasingly frequent. I agree.

One of the tragedies of the current crisis is that far too many people consider it to be an anomaly, a once-in-a-century event. It isn’t. The recipe for this crisis — a complex global financial system with large imbalances and inadequate controls — remains in place today. And financial crises are common things: even if you exclude emerging markets, there’s generally one somewhere in the world every year or two.

We can’t afford the trillions of dollars it would cost to rescue the world from the next crisis — yet at the same time we’re doing very little to minimize its effects or the probability of it happening. It’s a very risky game that we’re playing, and it’s liable to end in tears. Which is one reason why I’m so keen on Paul Volcker’s idea that we should eliminate the tax-deductibility of debt interest. That’s a big one: so big, indeed, that Pozen doesn’t dare even consider it in his book. But that’s the kind of ambition that we need to have if we’re going to seriously curtail crisis risk in the global economy.

Update: Pozen writes to say that he thinks some of his proposals — like regulating hedge funds and derivatives, as well as reforming loan securitization — will indeed happen. He also adds:

I was exaggerating when I said that traditional commercial loans would lead to bankruptcy as a way to driving home my point that traditional unsecured loans have a terrible risk-return relationship — with no upside and a lot of downside.

Still, if that’s true of the loans, it’s true of the securities made from them, too. So it’s hard to see how securitization is the great solution that Pozen thinks it is.


Obama he promised to straighten Bush’s mess out Two Wrongs don’t make a right, By the way I found a website that give you prizes for your opinions and 4 play games here is a topic about this:
http://opinion.ezwingame.com/topics/who- do-you-blame-for-the-economic-crisis1

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