Felix Salmon

The return of the plutocrats

Felix Salmon
Dec 3, 2009 15:02 UTC

It’s December, which means it’s bonus season, and time for more than the usual amount of bellyaching about pay. Will Bank of America’s TARP repayment give it a bit more wiggle room in terms of CEO compensation, thereby broadening the field of potential successors to Ken Lewis? Will General Motors be able to find a CEO when it’s state-owned and therefore probably won’t be able to pay a typical private-sector salary? Will Goldman Sachs be able to persuade shareholders that its $16 billion bonus pool is reasonable?

Meanwhile, there’s an even bigger row over pay at state-owned banks across the pond, with RBS’s directors threatening to resign en masse if the Treasury vetoes its bonus plan.

The underlying problem here is a fundamental disconnect between the plutocrats and the people. Politicians and their constituents simply have no time any more for people paying themselves multi-million-dollar salaries, especially when the companies in question only exist in their present form thanks to hundreds of billions of dollars in government interventions.

Back in March, at what was in hindsight the low point for both the markets and for political sentiment more generally, I genuinely feared class warfare. I don’t think we’re there any more: it’s hard to keep that angry for that long, and feelings have become a little more muted. But that doesn’t mean that the anger has disappeared entirely.

We’re at a fork in the road right now. People who were comfortable with seven- and eight-figure salaries a couple of years ago have a natural tendency to want to return to the status quo ante; the rest of us see a once-in-a-lifetime opportunity to bring executive pay down to the kind of levels which normal human beings can relate to. Given that the pay levels of old clearly did no good and colorably did a great deal of harm, that doesn’t sound like an unreasonable request. But there aren’t any mechanisms in place to make it happen, and when the likes of Kenneth Feinberg try to impose some kind of sense and order, the immediate reaction is to try to wriggle out from under his oversight.

So the plutocrats, it seems are going to win. They had a nasty couple of years, by plutocrat standards, and in a handful of companies operating under de facto state control they don’t quite have the free rein they would ideally like. But the system as a whole hasn’t changed, and those who thought that it might can’t quite believe how naive they were.


There was a class war. We (the rich) won. Ha Ha.

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Felix Salmon
Dec 3, 2009 05:21 UTC

Seeking Alpha to Pay Contributors? — Red Herring

The Too Much Joy Royalty Statement — TMJ

“Isn’t a 42-disc set of Dr. Quinn, Medicine Woman taking things just a bit too far?” — Slate

Gay marriage decisively defeated in NY senate, by 38 votes to 24. Unutterably depressing. — NYT

The phrase “world-class CEO” is always a dead giveaway for delusion — Baseline Scenario

Technium, explained — YouTube

Goldman’s defenestration test is a go. Lloyd, watch your back! — NYP

What was really going through Fritz Henderson’s mind yesterday? Try asking his daughter — Jalopnik

America’s unbanked

Felix Salmon
Dec 2, 2009 22:25 UTC

The FDIC’s EconomicInclusion.gov website is a fantastic resource for information on the unbanked — it has all the latest figures, including the rather depressing fact that if you look at the black and hispanic population in the US, one in five is unbanked. Single mothers, too, are disproportionately likely to be unbanked, none of which should come as a surprise: all of these things are basically proxies for the likelihood of being poor. And of course if you don’t have a bank account that just makes you poorer, since you’re forced into a system where banking services are much more expensive.

Not having enough money to feel they need an account is the most common reason why unbanked households are not participating in the mainstream financial system…

About 66 percent of unbanked households use the following alternative financial services (AFS): non- bank money orders and non-bank check-cashing, pawn shops, payday loans, rent-to-own agreements (RTOs), and refund anticipation loans (RALs).

Not mentioned on the list but also increasingly popular are prepaid debit cards, which are better than things like pawn shops and check cashers, but still much worse than just opening an account at the local credit union.

Be sure to play with the map at the top of the website: you can see state-by-state data there, as well as see major conurbations broken out. For instance, in the Riverside-San Bernadino area of California, over 24% of hispanics are unbanked; in Mississippi, one in three blacks are unbanked, and another one in three blacks is underbanked.

It’s not clear what if anything the government is doing about this problem, but it’s definitely a problem. If we can spend this much effort on trying to get healthcare for all, can we spend a tiny fraction of that on trying to get banking services for anybody who wants them as well?


You quote that most common reason is that they don’t feel they need banks, and then suggest the need for a program to help them sign up anyway? How much of the budget for said program would go toward convincing the people hit hardest by the bank-caused recession that giving their money to a bank would be a good idea?

Those dangerous yet well-capitalized banks

Felix Salmon
Dec 2, 2009 20:59 UTC

David Reilly has a good column today about bank health and capital ratios, honing in on the crucial fact that having a fair amount of capital is not in and of itself sufficient to reassure investors — or even the FDIC — that a bank is healthy. 96% of banks are well-capitalized, according to the FDIC, but 7% of banks are on its problem list, which means that there are dozens of at-risk banks which are also adequately capitalized.

That makes perfect sense to anybody who remembers Lehman Brothers or even Washington Mutual: if investors think that huge losses are coming around the corner, or that a bank is incapable of making sustainable profits over the long term, then no amount of capital today is likely to reassure them that a bank is safe. As Reilly explains:

Measures of capitalization are different from overall gauges of bank strength, known as Camels ratings. These ratings look at more than just bank capital. The acronym stands for capital, assets, management, earnings, liquidity and market sensitivity.

Camels ratings, which are secret, are supposed to reflect “the bank’s overall financial condition,” according to the FDIC’s Web site, and rank banks on a scale of 1 to 5. An institution rated 4 or 5 is placed on the FDIC problem list.

It is possible for a bank to technically be well- capitalized, yet receive poor-enough scores in other areas of its Camels rating to land on the problem bank list.

Camels ratings are, for good reason, kept highly confidential. But the point here is that they’re about more than just capitalization, despite the fact that the two can get elided: Reilly talks, a bit awkwardly, about “problem banks that are supposedly well-capitalized”.

In any case, stock-market investors don’t necessarily reward well-capitalized banks and punish those with only thin layers of equity — in fact the opposite is true much of the time. Even bond-market investors, who should know better, seem to be getting dragged back into the arena of complacence and moral hazard which proved so devastating last year.

There are lots of potential landmines which don’t show up in banks’ capitalization ratios. Reilly mentions modified mortgages; there’s also commercial real estate; quasi-sovereign emerging-market debt; and trillions of dollars in leveraged loans which have done very well of late but still look scary to anybody who’s been avoiding the Kool-Aid. And that’s just on the balance sheet: there can also be big problems in terms of the quality of management, or steadily-growing expenses on the income statement. On top of all that are liquidity issues: if a bank doesn’t have a large base of federally-guaranteed deposits, it’s always vulnerable to a run, no matter how much capital it has.

So while capitalization ratios are a more useful metric than, say, charities’ overhead ratios, there’s still a huge amount of information they ignore or obscure. Banks are complex entities, and can’t be boiled down to a single ratio. And if you think your bank is safe just because it has a capital ratio in double digits, it’s worth taking another look.


The comments by Dan here show that he either works for a bank or is some other form of corporate lapdog – who really believes that any of the banks are “well capitalized” when you factor in all of their real losses and liabilities. I wouldn’t be surprised if every bank in this country (except North Dakota) is insolvent.

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Who cares about charities’ overhead ratios?

Felix Salmon
Dec 2, 2009 19:44 UTC

Tim Ogden is on the warparth, blogging and tweeting and putting out press releases all trying to “kill the myth of overhead ratios”:

The month between Thanksgiving and Christmas is often known as giving season, not just for Christmas and Hannukah gifts but because many people make major donations to charity this time of year.

Given the global recession, it’s more important than ever to make those charitable dollars go further by putting them in the hands of charities that do the most good. For years, donors have been relying on one measure to evaluate charities—the overhead ratio.

I’m with Tim on the importance of looking at outputs rather than inputs — although of course that’s harder than just looking at a single unreliable metric.

But is it really true that donors in general have been relying to a great degree on overhead ratios? Allison Fine seems to think so. If it’s really the case that large number of philanthropists have been using overhead rates as a proxy for effectiveness, the world of corporate philanthropy clearly needs much more shaking up than I’d thought.

On an individual level, I think that people generally give to causes they believe in, or because of some personal connection to the non-profit in question: I can’t believe that overhead ratios play a huge role in the decision-making process, although once you’ve started supporting a certain charity, looking at a low overhead ratio can help you feel that much better about your decision.

But if you are one of the people for whom overhead ratios are very important, then go read Tim’s post. You’re part of the problem, providing incentives for charities to spend extra effort fudging their numbers, as opposed to actually doing good in the world. And you’re also contributing to the slightly poisonous idea that there’s something morally dubious about non-profit workers being paid for what they do. This Christmas, I’m even thinking of giving money straight to non-profit employees, rather than to the charity itself, as a way of saying thank-you for all the amazing (and extremely underpaid) work that they do.


Loved your points…just fyi, it is “homed” not “honed” in your opening paragraph about banks.Betsy

The Roubini rebrand

Felix Salmon
Dec 2, 2009 18:13 UTC

I’ve always had a soft spot for the original logo, dataing back to when Roubini Global Economics first launched at rgemonitor.com in April 2005:


Soon, however, it turned blue, although the monitor lizard remained:


And then it got even more gussied up:


Now, the lizard’s gone entirely, and the RGE Monitor name seems to be on the outs too. The brand is just Roubini Global Economics, at Roubini.com:


It even has a shadowy version:


The good news is that the silly little ™ sign seems to have disappeared. In any case, I guess that all talk about separating the RGE brand from Nouriel Roubini himself has gone by the wayside, and that they’re happy that Paul Krugman is referring to RGE strategist Arnab Das as “the Roubini people”. It’s Nouriel’s global economy, everybody else is just people.

Update: tentakles suggests that the new logo should have been a monitor lizard ripping the flesh from a vampire squid. File under “missed opportunities”, I guess.


My guess is that they ripped it off from Mozilla/Netscape for the digital age look, and thought it was tongue-in-cheek because of Gordon Gecko “Greed is good.”Did we ever figure out where he was really born? Turkey, or Iran? He has given conflicting reports. And who is his Mossad liaison?

Return on weaponry datapoint of the day

Felix Salmon
Dec 2, 2009 17:07 UTC

For really impressive stock-market returns, go to Haradheere, Somalia:

Piracy investor Sahra Ibrahim, a 22-year-old divorcee, was lined up with others waiting for her cut of a ransom pay-out after one of the gangs freed a Spanish tuna fishing vessel.

“I am waiting for my share after I contributed a rocket-propelled grenade for the operation,” she said, adding that she got the weapon from her ex-husband in alimony.

“I am really happy and lucky. I have made $75,000 in only 38 days since I joined the ‘company’.”

The problem is, what happens to the pirate stock market if share prices fall and there’s a Pakistan-style riot? The Pakistanis had stones and plant holders which they threw at the exchange; the Somalis I think can trump that very easily.


Are you saying we should go short on piracy? Is there an equivalent?

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Barack Obama, activist shareholder

Felix Salmon
Dec 2, 2009 15:56 UTC

We got a hint of it when the government ousted Ken Lewis as chairman of Bank of America; it became more obvious with the decisions of pay czar Kenneth Feinberg. And then of course there’s the revolving door into the corner office at AIG. But the defenestration of Fritz Henderson makes it clear if there was any doubt: Barack Obama is the most powerful and effective activist shareholder that this country has seen in a very long time.

Needless to say, this is not common when it comes to state-owned companies, which often amble aimlessly in random directions for decades. The Obama administration, by contrast, has clearly made a decision to err on the side of action and decisiveness, and to fire any CEO who isn’t showing (as opposed to promising) results. Good for them: would that America’s institutional investors followed suit.

That said, it’s easier for the government to behave like this than it is for most shareholders. If Ed Whiteacre wants to know what GM’s majority shareholder would like him to do, all he needs to do is pick up the phone and ask. At most companies, by contrast, the communication between the board and the shareholders they work for is distant and strained and largely filtered by management. Maybe the trick, when it comes to improving corporate governance, is to improve communication between shareholders and directors. Any bright ideas on that front?

At the same time, this development proves that the dream of the bank-nationalization crowd — the idea that the government could take ownership but have little if any control over management — was never going to happen. When this government takes over a company it does so with both hands: there’s nothing arm’s-length about it. And I’m happy about that: owners should take responsibility for maintaining their property.


I think James Kwak has the best take on this:http://baselinescenario.com/2009/12  /02/never-a-good-sign/

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The Manhattan income barbell

Felix Salmon
Dec 2, 2009 15:02 UTC

Did you know that there are more rich households (anything over $192,000 a year for a family of four) in Bay Ridge than there are on the East Side south of 14th Street?

I’m not surprised that the East Village and Chinatown have more extremely poor households, with household income for a family of four under $23,000 a year — it’s exactly these people that my credit union was designed to serve. But I always assumed that the East Village had more of a barbell distribution than this glorious chart shows. Play around with it: it’s addictive.

Clearly there is a barbell situation going on in Manhattan as a whole, which is split up into nine neighborhoods. In every neighborhood except the East Village and Harlem, the high-income households outnumber any other income group. Meanwhile, in the four neighborhoods constituting Harlem and the East Village, the extremely low income households are the most numerous. In not a single neighborhood is the median income group anywhere between $23,000 and $192,000 for a family of four.

The chart comes via Mike Konczal, with whom I had dinner last night. We were talking a bit about places to live in New York, and most of the conversation was about Brooklyn and Queens. Certainly if you chose a place to live just by looking at the chart, you’d probably end up in the Brooklyn Heights/Fort Greene neighborhood, which comes the closest to having an even income distribution. And indeed that’s where the plurality of my own peer group has ended up. It’s a great place to live, and not nearly as extreme as most of Manhattan.


“flat income distribution” is a very silly and incorrect distillation of these parts of brooklyn. what you mean is that there are the same number of squares in each of the bins that the authors happened to use for their chart. high income earners are vastly over-represented in these areas compared to the rest of the country and the world.if you want a flat income distribution which is more representative, move to astoria.(resident of cobble hill (last 2 years), former resident of astoria (previous 7 years))

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