Opinion

Felix Salmon

Geithner in the hot seat

Felix Salmon
Jan 8, 2010 19:44 UTC

The New York Fed has announced that its decision to try to squelch AIG disclosures had nothing whatsoever to do with Tim Geithner. Who was the president and CEO of the bank at the time, and is famous for his attention to detail. But Geithner had every opportunity, both at the Fed and at Treasury, to agitate for greater transparency and for the release of even more emails. He never did so, and my feeling is that if nobody asked him about the AIG disclosures it was because there was no need to do so: his attitude to such things was clear.

It’s going to be very interesting to see Geithner’s congressional testimony on this subject. The Fed statement hints at one of those “I had no idea what my subordinates were doing” defenses, which is going to look pretty bad. But what alternative does he have? “The US public couldn’t handle the truth”?

COMMENT

Yes that is true, both Geithner and Bernanke choices are wrong at this time. Here is what I would like Obama WH to undertake:
- Geithner to resign immediately (you can not wait for Dodd to fill that post by year end, besides that will be too opportunistic for Dodd)
- Obama appoints a special Congressional committee with two objectives: one to rewrite charter / mandate of Fed and to find replacement to Bernanke, the new appointee who would implement that charter.
- Bernanke withdraws his nomination and Congress allows him to stay until new person comes along in next few months.
- The committee to rewrite Fed will be those who are doing Financial Regulation. But the key is it needs to include Ron Paul, Eric Cantor, Barney Frank, Nancy Pelosi, Christopher Dodd, Charles Schummer, John McCain and Harry Reid. Clearly unless the issue of ‘Fed rewriting’ is pulled beyond partisan pressurse, it will be not be delivered good for America.
- This Congressional Committee would have 3 external advisers to devise new Fed: Paul Krugman, Paul Volcker and Simon Johnson.
- Contrary to what some news magazine says, there should not be any Wall Street Banker to replace Geithner. Jamie Dimon of JPM should not be the next Treasury Sec. The whole point of this ‘mini revolution’ is to set new foundation for America where Bankers do not ‘eat we Americans alive’.
- Bernanke needs to go because of his speech this week in Atlanta where he essentially absolved himself from this Great Recession. When President wants to give ‘big lectures’ about accountability of intel folks; it does not work he lets go Bernanke accountability free and Geither off the hook of the employment mess.
- Bernanke has done is job, he has got his applause and now we no more want any further damages from him. Time to stop his is NOW.
- Anything short of this ‘mini revolution’; Dems will be and should be ‘toast’ in Nov election and Obama may be one term President too. He will deserve that unless he cleans this mess NOW.

Posted by umeshgeeta | Report as abusive

The upside of the Move Your Money campaign

Felix Salmon
Jan 8, 2010 19:07 UTC

I’m puzzled by Yvette Kantrow’s supercilious dismissal of Arianna Huffington’s Move Your Money campaign. Kantrow paints the campaign as being about “optics” over substance, and complains that “it emphasizes symbolism over reality and feeling over fact”. And she does so with no hyperlinks at all, which means that when she says the campaign “promises to help you ‘stick it’ to big banks”, it’s impossible to fact-check her. (That phrase certainly never appears on the initial blog entry which launched the campaign.)

Instead, the campaign was much more than an attempt to stick it to the man: it was an attempt to get people to do the right thing with their money. Here’s what Huffington actually wrote:

We talked about the outrage of big, bailed-out banks turning around and spending millions of dollars on lobbying to gut or kill financial reform — including “too big to fail” legislation and regulation of the derivatives that played such a huge part in the meltdown. And as we contrasted that with the efforts of local banks to show that you can both be profitable and have a positive impact on the community, an idea took hold: why don’t we take our money out of these big banks and put them into community banks? And what, we asked ourselves, would happen if lots of people around America decided to do the same thing? Our money has been used to make the system worse — what if we used it to make the system better?

Kantrow says that Huffington is “turning the decision on where to bank into a moral choice, like being green or buying organic” — and she’s right about that, but in a good way. People think long and hard about where and how they spend and give their money, and they — rightly — consider it very important that they do so in a manner that’s consistent with their broader beliefs. The big four banks, however, expanding across the country by acquisition, have simply taken over millions of consumers who never particularly wanted to bank with them and who are now giving them billions of dollars in fees and trillions of dollars in virtually zero-interest-rate deposits.

As Huffington says, there’s no doubt that community banks and credit unions generally have a positive impact on their communities, while the too-big-to-fail crew have had an inordinately negative impact on the entire country. If you continue to bank with the big four, you only serve to perpetuate that dynamic. On the other hand, if many people start moving their money into community-based financial institutions, those institutions are likely to be able to do much more good in their communities than they’re doing already. (If you live south of 14th Street and east of the Bowery, I’m on the board of one such institution which would love to put your deposits to good use locally.)

The point here isn’t to bring the big four to their knees: it’s not a negative boycott, in that sense, aimed at the destruction of something you hate. Instead, it’s a much more positive thing, telling people that if they move their money to community institutions, then they themselves will be better off financially (friendlier bank managers, lower fees, etc) and so will their community more generally. It’s a win-win proposition.

COMMENT

“I’m employed by a TBTF bank, so it would not be in my best interest to bank elsewhere.”
Haha, yeah and if you were employed by Hitler it would be in your best interest to continue incinerating Jews.

Posted by zylstra | Report as abusive

How Jeffrey Gundlach treats his clients

Felix Salmon
Jan 8, 2010 16:03 UTC

TCW’s lawsuit against Jeffrey Gundlach — Dealbreaker has the whole thing here — is nominally asking for lots of money. Of course it is. But I suspect that at heart it’s a strong message to all of those clients who haven’t (yet) left TCW for Gundlach’s new shop. Gundlach is a conniving diva, it says, who not only is willing to break his fiduciary duties if he thinks that’s in his own interest, but is also more than happy to leave his clients in the lurch as well.

I have no idea whether the allegations of law-breaking are true, although they’re both detailed and plausible. But the fate of Gundlach’s former clients is clear. Gundlach abandoned them for a new shop with no track record: even the fastest-moving institutional investor will take a long time to do its due diligence on DoubleLine, and will surely take even longer given the allegations in this lawsuit. And Gundlach’s destructive war with TCW shows that he wishes nothing but harm for TCW — and, by implication, anybody who stays with TCW in the wake of his departure.

Now that Gundlach has left TCW, a lot of TCW’s clients will be thinking about leaving. But I suspect Gundlach might have overestimated the proportion of TCW’s redemptions which will end up at DoubleLine. Bond investors are conservative folks, and Gundlach’s former clients at TCW are unlikely to want to run the risk of being treated in a similar manner again — especially if the allegations about Gundlach stealing attorney-privileged client information are true.

COMMENT

Nonsense. TCW probably underestimated Gundlach’s popularity with clients and their willingness to follow him. It was foolish for them to fire their best manager. I’ve pulled my own and clients’ money out of TCW – the redemptions have been enormous – and eagerly await the availablity of Gundlach’s new funds.

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No hiring yet

Felix Salmon
Jan 8, 2010 14:48 UTC

Today’s payrolls report is entirely consistent with the kind of recovery where the employment situation is going to remain grim even if and when corporate profits start picking up. I like the fact that the unemployment rate for adult men, at 10.2%, is down 0.4 percentage points from its October peak. But total underemployment — the famous U-6 — is still extremely and stubbornly high at 17.3%, and the total number of unemployed persons, at 15.3 million, is double what it was at the start of the recession in December 2007.

Manufacturing employment is still falling, while temporary employment is rising; the workweek is still at an all-time low of 33.2 hours. Those workers are going to be asked to put in more hours per week before anybody starts hiring again in large quantities. Meanwhile, the people who hire in small quantities — small and medium-sized businesses — are still largely cut out from the credit markets, which means they have to hire people out of new revenues, instead of creating new revenues by hiring people.

The markets of course are concentrating on the headline payrolls figure, which went down rather than up in December, after going up rather than down in November. That’s a game which is interesting only to traders. The bigger picture, however, is important. And it shows a US workforce which is underemployed and looking at jobs which, when they do exist, are insecure and often temporary. Capital took its lumps in 2008 and the early months of 2009; it then recovered astonishingly quickly. It’s labor which is suffering the real hangover.

COMMENT

Payroll employment in December 2009 is a shade below 131 million, down from a little more than 138 million in December 2007.

But payroll employment growth between 2000 and 2007 was well below the long-term (1950 – 2007) trend. Had we grown at trend through the end of 2009, the US economy would have about 150 million jobs. The economy is nearly 20 million jobs below its long-term trend.

If we start adding jobs now, and if employment growth is 50% above the long-term trend (2.65% per year, instead of 1.75% per year), it will take us until March 2011 to get back to where we were in December 2007–which was below our long term trend.

Getting back to trend actually seems all but impossible.

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Deutch finally leaves the Citi board

Felix Salmon
Jan 8, 2010 14:14 UTC

John Deutch, one of the many grandees with no financial experience who populated bank boards in the run-up to the financial crisis, is finally stepping down from his sinecure at Citigroup:

“Directors that served on Citi’s board during this financial crisis should rotate off in an orderly fashion,” Mr. Deutch, a chemistry professor at Massachusetts Institute of Technology in Cambridge, Mass., said in an interview Thursday. “My view is that there should be a complete turnover. Now is the time that’s appropriate for me.”

Which sounds very noble, until you realize that Deutch, who lasted 19 months as CIA director in the mid-90s, is actually rather late to this game. As Aaron Elstein writes:

Mr. Deutch, 71, is one of the last to leave from the old regime of Citi directors who apparently snoozed as the bank piled up more than $25 billion in losses in 2008. Five of those directors left the board last year, including former Treasury Secretary Robert Rubin. Mr. Deutch was replaced as chairman of the audit and risk committee last July by Jerry Grundhofer, a former chief executive of U.S. Bancorp.

Interestingly, Deutch waited until he was nominated to the high-level Defense Science Board before he announced his departure from Citigroup. Good to know that helping destroy a systemically-important part of the US economy didn’t disqualify him from that.

Counterparties

Felix Salmon
Jan 8, 2010 06:34 UTC

“Joan Robinson once described Milton Friedman as a magician who would put a rabbit into a hat in full view of the audience, and then expect applause when he pulled it out again sometime later.” — Business Spectator

Lady Gaga, creative director of Polaroid — NYPost

My sister, learning to sail — Smiling Footprints

Have a question you want to ask bank CEOs? Send it here — Keith Hennessey

Avent on MacGillis on Avent on MacGillis on Richard Florida. And this installment alone is 2,154 words! — The Bellows

Rajaratnam paid $1.75m for inside information — Reuters

How vanilla financial options would help prevent seniors being ripped off — Rortybomb

A new poll suggests that the Iceland referendum might actually pass, paying off the UK and Holland — Yahoo

Allen Stanford, cricket-loving WAG groper and serial marrier, named his daughter Randi — NYT

Why am I not surprised that buyer of the $177k tuna was paying for publicity rather than fish — The Atlantic

The next real-estate bust

Felix Salmon
Jan 8, 2010 04:17 UTC

Now that Roger Lowenstein has published an article in the NYT Magazine headlined “Walk Away From Your Mortgage!”, I think we can safely stay that what started as a controversial and minority stance has at this point become thoroughly mainstream. (The corollary is that arguments in favor of paying one’s debts are now contrarian.) It’s a credit to Mark Gimein that his blog entry from 14 months ago, entitled “Morally Conflicted About Walking Away? Don’t Be“, was not only one of the first places to make this point, but still stands out as one of the best expressions of the argument.

Similarly, I felt decidedly contrarian when I started arguing against homeownership in September 2007; that view now seems to be moving into conventional wisdom as well.

I’m not actually convinced that real Americans, as opposed to the chattering classes, have moved so far so fast. But it’s clear which way the wind is blowing — and it’s blowing in the direction of continued house-price declines. Houses are still more expensive to buy than to rent, in most of the country, and of course financing is all but impossible to come by, except for that provided by the government, which means that if and when the government prop is taken away, prices are liable to plunge. If that happens, expect a lot more walking away into cheaper rentals than we’re seeing right now, and a whole new vicious cycle of price declines and foreclosures.

Noam Scheiber has been waxing lyrical about the success of the stress tests, but it’s worth remembering that banks’ balance sheets haven’t been subjected to a really tough test since then — and also that those balance sheets are still full to bursting with toxic mortgage-backed assets, as all government attempts (TARP, PPIP) to relieve the banks of those assets have failed to do so.

There are lots of ways in which the US economy could see another sickening downward lurch, and residential real estate is probably not even the most likely. But it’s a nasty possibility, all the same, and one worth being alive to.

COMMENT

“WALK AWAY IF YOU CAN! WALK AWAY WHILE YOU CAN!”

I would like to see the effect on the banks and the banksters’ bonus!!

Want to stick it to the banksters .. you cannot get a BETTER WEAPON…

Posted by killben | Report as abusive

The debit-card interchange scam

Felix Salmon
Jan 7, 2010 22:41 UTC

Mike Konczal has a detailed response to Tyler Cowen on the subject of debit-card fees, but before disappearing any further down this rabbit hole, I think it’s worth clearing up one misconception which Tyler might have, given that he seems to think that his experience shows that maybe “things aren’t so bad after all”.

Tyler is absolutely right that there are lots of good reasons for people to use credit cards rather than debit cards. I do the same thing, for much the same reasons — mainly the miles and the insurance. But the thing which I found so outrageous about Andrew Martin’s NYT article had nothing to do with credit cards at all — rather, it was the rising interchange fees on debt cards.

Tyler makes a case — which Mike then tries to undermine — that it’s reasonable for people with credit cards to effectively team up with Visa against retailers. But in the case of debit cards, Visa and the issuing banks get all the benefit, and the individuals making the purchases get none: no miles, no insurance, nothing. (A few “premium” debit cards are beginning to appear, but they’re still pretty rare, and I daresay they carry credit-card-style interchange fees.)

Visa has a monopoly here, and is raising its debit-card fees with impunity, safe in the knowledge that there’s nothing anybody can do about it. Retailers get hurt a lot, consumers see no benefit at all, and the excess profits accrue to Visa and to the issuing banks. The question of incentives to use credit cards rather than debit cards is an interesting one, but it is a fundamentally separate issue, so long as credit-card interchange fees remain even a tiny bit higher than their debit-card counterparts.

Debit cards shouldn’t really carry an interchange fee at all, since the banks would much rather process a retailer’s debit-card transactions than have to deal with large amounts of cash. Indeed, when debit cards were first introduced, some of them did carry negative interchange fees. The rise in those fees is a hidden windfall for banks, and an unnecessary burden for retailers both large and small.

If you use a credit card to pay for a $100 item, then you can maybe consider that by dint of the miles and the insurance, a buck or two comes back to you in one way or another. If you use a debt card to pay for that item, then none of that money comes back to you at all. So there’s really no reason for consumers like Tyler to think that rising debit-card fees are anything but a bad thing.

COMMENT

@KidA: merchants can absolutely offer different prices for cash and credit – they just have to phrase it in a specific way. also, i don’t think they can offer different prices for credit and debit.

Posted by KidDynamite | Report as abusive

Does Feinberg want to control bankers’ pay or not?

Felix Salmon
Jan 7, 2010 21:15 UTC

In the wake of that massive Steve Brill profile, Ken Feinberg is now appearing on Bloomberg TV, and saying something very odd indeed:

Feinberg said his “biggest accomplishment” as pay special master is Citigroup and Bank of America’s repayment of U.S. aid.

“I find that to be the primary objective, and we achieved it,” he said.

The way this whole thing worked, of course, is that Citi and BofA were forced to get Feinberg’s approval for their executive-pay schemes — until they repaid the direct US aid. This was perceived to be a problem, especially at BofA, which was trying to hire a new CEO at the time, and so the banks moved heaven and earth to make those repayments, no matter how much they cost the bank and its shareholders, and no matter how much systemic risk was increased as a result. (After all, both banks are still too big to fail, which means they’re both still operating under an implicit government guarantee.)

It’s weird that Feinberg considers the repayment of aid to be his biggest accomplishment, because the day that repayment happened, he lost all control over executive pay on Wall Street — and he’s telling Bloomberg in the same interview that he wishes he had more control over that, rather than none at all.

Feinberg, it seems to me, can’t have it both ways. Either he wants control over pay, or he doesn’t. If he does want control over pay, he shouldn’t be encouraging banks to wriggle out from under his purview. If he doesn’t, then he shouldn’t be disappointed that his jurisdiction was so narrow.

COMMENT

The whole thing about executive pay deserves its own place in a series of reforms that are badly needed in corporate America, not just in finance or banking industry. Here’s a refreshing ranking of best-performing CEOs worldwide from Harvard Business Review (I heard it on NPR): http://hbr.org/2010/01/the-best-performi ng-ceos-in-the-world/ar/1

If I could have my may, I’d measure companies (public ones) not just by quarterly or annual financial result, but by a whole new sets of measures including:
- R&D investment
- annual return on equity (not just P/E ratio) but going back 5, 10, 15 years
- number of jobs created/lost at local/state/national level
- executive pay packages and how they stack up against median pay at the company
- environmental impact on communities it operates in …

The way Wall Street has been evaluating companies based on narrow, short-term quarterly results is monstrous and disastrous, for companies, their employees, and Wall Street itself. It’s high time we think out of the box.

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