from David Cay Johnston:
Closing Wall Street’s casino
The author is a Reuters columnist. The opinions expressed are his own.
A superb example of a sound rule in law and economics that needs reviving, because it can halt the rampant speculation in derivatives, is the ancient legal principle that gambling debts are not enforceable through court action.
Not so long ago -- before casinos, currency and commodities speculation, and credit default swaps became big business -- U.S. courts would not enforce gambling debts.
Restoring this principle offers a simple way to shrink the rampant speculation in derivatives that was central to the 2008 meltdown on Wall Street.
Professor Lynn Stout, a deeply principled Republican capitalist who teaches corporate law at the University of California, Los Angeles, raised this issue at a conference where we both spoke about the 2008 Wall Street meltdown.
"Derivatives are gambling," she said, referring to credit default swaps, at the University of Missouri-Kansas City law school conference on the financial crisis. "They are a zero-sum game in which one side loses the bet and one side wins," Stout said.
Actually they are worse than that, since the hefty fees Wall Street pockets for arranging the bets result in a less-than-zero-sum game.
Senate vote exposes Wall Street impotence
Wall Street’s diminished influence in Washington was made plain yesterday when the Senate voted to approve financial reform legislation by 59 votes to 39.
Industry lobbyists will point out the bill only just managed to scrape the required votes needed to end debate and forestall a filibuster. It fell far short of a lopsided bipartisan majority.
But the formal tally on HR 4173 (Wall Street Reform and Consumer Protection Act 2009) as amended by S 3217 (Restoring American Financial Stability Act 2010) conceals a much wider bigger majority of 63-37 for enacting far-reaching reforms.
In the final vote on passage, the bill was backed by 53 Democrats, 2 Independents and 4 Republicans (Maine’s Susan Collins and Olympia Snowe, Iowa’s Charles Grassley and Massachusetts’ Scott Brown).
It was opposed by 37 Republicans and 2 Democrats (Maria Cantwell of Washington and Russ Feingold of Wisconsin). Two senators were not present (Democrats Robert Byrd of West Virginia and Arlen Specter of Pennsylvania).
But the two Democrats who voted “No” did so because they thought it did not go far enough and were registering a protest in a bid to get it toughened further. The two absent members were Democrats who had voted in favor of the legislation before.
All four votes should really be added to the “Yes” column to give an effective underlying majority of 63. By any measure that is a very high tally or a major piece of legislation.
“adverse” struck me,too. populist = equalitarian, not stupid masses. so many terms get rendered toxic in the “spin,” what’s needed is a reassertion of the “all [persons] are created equal . . . endowed with . . . rights to life, liberty and the pursuit of happiness” understanding of what it means to be a citizen. it isn’t “adverse” to reduce the size and impact of an exploitive paracitic oligarcy, is it?
Wall Street’s biggest trade of the year
Wall Street’s famed army of lobbyists does not seem to have had much success pushing back on the regulatory overhaul bills now being considered by the U.S. Congress.
The Street remains perilously isolated in Washington, deserted even by its normal friends. As a result it has little influence over the course of bills that will have a significant impact reshaping the industry over the next few years and risks being steamrollered.
Isolation is the result of a basic miscalculation about how angry voters are about the financial crisis and its aftermath in terms of lost jobs and income.
Voters may be angry with the government and Congress (as evidenced by the passions stirred in the healthcare debate, sagging ratings for legislators in both parties, and a string of election defeats for Democrats at state and national level). But they are even angrier with banks they blame for sparking the crisis in the first place.
In this environment, the industry’s lobbying strategy has been high-risk. By pushing back on so many fronts (from the proposed consumer protection agency to the Volcker Rule and derivatives clearing) it has sometimes seemed to be arguing in favour of the (discredited) status quo. Industry lobbyists may have overplayed their hand.
DESERTED BY FRIENDS
The extent of the isolation has been on vivid display in Washington in recent days.
“But they are even angrier with banks they blame for sparking the crisis in the first place.”
Well, it’s easy to be cavalier with somebody else’s money. Especially when you’ve got a high six figure salary and can count on a bonus just as large.
from James Saft:
Learning from Ken Feinberg
Sometimes it's what doesn't happen that is most illuminating.
When Pay Czar Kenneth Feinberg first slashed executive compensation at U.S. firms that benefited most from a government bailout the cry was that this would hurt these weakened firms when they could least afford it, as the best and brightest would leave for better money elsewhere, where the free market still ruled.
Well, the door didn't hit them on their way out, but mostly because they stayed rooted to their desk chairs. Feinberg evaluated the compensation of 104 top executives at affected companies in 2009, reducing pay for most to levels far below financial industry norms and their own former earnings.
Yet here we are in 2010 and about 85 percent are still working for the same firms, still toiling for the kinds of wages that may well make them wish they'd gone into the law rather than finance. Remember all those articles in glossy magazines about how impossible it is to make it in New York City on $500,000 a year?
"The argument that we hear all the time; that if we don't pay more this key official will leave, he will go to a foreign competitor," Feinberg told CNBC television.
"I've always been dubious about that argument and I think the statistics bear out the fact that most officials stay at those companies."
Feinberg announced this week that he has told AIG, General Motors Co, GMAC Inc, Chrysler Group LLC and Chrysler Financial Corp to cut cash compensation for 119 top executives by a third in 2010 and total pay by 15 percent. Bank of America and Citigroup have repaid taxpayer funds and are now subject to diminished supervision by Feinberg, whose brief is to determine if pay at bailout firms is "in the public interest."
from Commentaries:
Wall Street’s $4 trillion kitty
The Obama administration's plan for reining in derivatives leaves unchecked one of Wall Street's dirty little secrets: the ability of a derivatives dealer to redeploy cash collateral that gets posted by one of its trading partners.
On Wall Street, this practice of taking collateral and reusing it is called rehypothecation. In essence, it's a form of free money for derivatives dealers to use as they please -- even to repost it as collateral to finance their parent company's own borrowings.
And we're talking big bucks. The International Swaps and Derivatives Association recently reported that derivatives dealers have taken in $4 trillion in collateral from their trading partners. That's an 86 percent increase over the $2.1 trillion in cash collateral those same dealers reported having on their books in early 2008.
Now it's not surprising that investment firms took in more collateral from their trading partners over the last year, when the financial markets were in turmoil. Cash collateral is one way for derivatives dealers to protect themselves against the risk of a trading partner defaulting on one of these sophisticated financial contracts.
There's nothing wrong with a dealer taking legitimate steps to insure an orderly unwind of a busted trade.
But Wall Street firms should not have free license to reuse this collateral any way they see fit. The Obama administration should revise its proposal to require derivatives dealers to hold all cash collateral in segregated escrow accounts that can't be reused or touched by the dealer.
The same rule should also apply with any collateral that is posted with a regulated exchange on which a derivative contract gets traded.
Certainly we want liquiidty in our markets. Certainly we want credit available to help finanace growth. BUT, we also want that growth based on sound economics in doing this. The key to sound economic growth is actual real savings that are used then invested in sound growth opprotunities. Look at the savings rate in the USA for the past 20+ years. It’s the worse by far in the the world among industrialized countries.
Basing growth on derivitives and other “fiat currentcy” approaches leads to the very bubbles that have brought down our country to its knees. Let;s speak truth. Deruvitives is simply a method that enriches the rich and steals from the average American. Bottom line, run away GREED.
from Ask...:
Bailout bonuses: Does the public have a right to know?
Is it anybody's business how much money you make?
When it comes to Wall Street and the meltdown that whacked financial markets and emptied investors' pockets, the normal rules of etiquette don't seem to apply.
Wall Street salaries seem to be everybody's business lately. Nevertheless, the Obama administration's pay czar may try to keep a large portion of the compensation plans he is reviewing under wraps.
It's Kenneth Feinberg's job to review salaries at the biggest corporate recipients of government bailout funds.
How much of his report will become public is the multimillion dollar question.
Privacy laws and fears that highly compensated executives will become targets for an angry public argue for limiting disclosure.
Definitely yes. Public companies as the name suggests belong to public. Every share-holder is entitled not only to know, but have a say in CEO’s salaries and compensations. I believe that their pay is currently determined only by who they know not what they do or even can do. I am really fed-up by not seeing any reform on this. The index number (average CEO pay divided by the lowest paid worker) has risen by thousands since 25 years ago. And then we are wondering why the moral of the workforce is going down the …
Goldman needs to lose Gekko image
– Jonathan Ford is a Reuters columnist. The views expressed are his own –
So, Goldman Sachs has a “Gordon Gekko feel to it” according to an executive at Brand Asset Consulting. In a survey of leading U.S. brands, the market research firm has reached the conclusion that the investment bank’s stature has been diminished in the eyes of the public by recent events.
Somehow, this fails to do justice to the emotions the name Goldman stirs in the breast of the average American.
Goldman’s stature isn’t diminished; the firm is becoming actively hated, and this emotion is going mainstream. When Rolling Stone recently published a cover story describing Goldman as a “vampire squid wrapped around the face of humanity”, its author, Matt Taibbi, was simply saying what a lot of people think — if more eloquently and memorably.
Normally, the good opinion of the wider world, or of its rivals, wouldn’t matter too much to the steely-eyed Wall Street firm. So long as Goldman continues to be supremely well-represented in the corridors of power, retains the respect (if not affection) of its clients, and is able to hire the brightest bankers, then what Joe Public thinks is surely largely irrelevant.
Goldman itself certainly seems to believe this. Despite public revulsion at the excesses of Wall Street, it has returned as quickly as possible to normal service sucking up cheap government and Fed funding, making pots of money trading for its own account and paying fat bonuses to staff. Meanwhile, it has liberated itself from the political fetters of the TARP.
If FASB gets its spine back and reverses that terrible mark-to-myth ruling, many more banks will fall like dominoes.The depth of the deception in 2nd quarter earnings goes far, far beyond Goldman. But like the government, they will not let the upcoming financial crisis go to waste.
@AdamSmith
“We need a fighter”. How about Elizabeth Warren in the future?