Opinion

The Great Debate

Are the big banks winning?

The Dodd-Frank Act to re-regulate the big banks was intentionally tough. It was passed in the wake of the 2008-2009 financial crash to end cowboy banking; require far more capital  and much less leverage, and rein in the trading-desk geniuses who pumped up serial bubbles. Since Congress is a poor forum for crafting such a complex statute, the details were left to the expert regulatory agencies.

The big banks pay lip-service to the goals of Dodd-Frank — but they’re mounting bitter, rearguard actions in federal courts to block meaningful constraints and regulations on procedural and other grounds. This is an ominous turn of events, since these banks have the legal firepower to overwhelm budget-constrained U.S. regulatory agencies.

While Dodd-Frank is aimed at preventing another cycle of bubble-and-bust, shrinking the financial sector is crucial for other reasons. One is a mass of evidence demonstrating that hyper-financialized economies have lower growth. Another is the appalling ethical record of large financial companies. The chance of making huge paydays by risking other people’s money, it seems, can sometimes derange moral compasses.

First, the pro-growth argument for clamping down on the banks: Once the financial sector achieves a certain size, its continued expansion reduces economic growth, according to a new study by two senior economists at the Bank for International Settlements, Stephen Cecchetti and Enisse Kharroubi, using a large international data base stretching back more than 30 years.

Their conclusions are unambiguous. No country can achieve a high rate of growth without a well-functioning financial system. China, for example, lacks a deep system of consumer finance, forcing it into a lop-sided development strategy. The result is the creation of dangerous imbalances that could threaten continued rapid growth.

On Wall Street, big paychecks do not replace corporate culture

Goldman Sachs can’t seem to stay out of the wrong spotlight these days. With reports about executive layoffs and high numbers of senior people leaving, Goldman is losing its once-untouchable luster as analysts scrutinize its performance through a new lens.

The oceanic rift between average Wall Street salaries and those of everybody else has been measured by both public and private facilities. The New York State Comptroller’s office released a report last October showing that while total profits at Wall Street’s major brokerage houses declined during the first half of 2011, employee compensation, which accounts for about 60 percent of expenses for the firms, increased by 18.7 percent compared with the same period the year before.

The report showed the average salary in the securities industry was $361,330 in 2010. The national average wage that year was $45,230, according to the Bureau of Labor Statistics. A big difference was that while many suffered unemployment and pay freezes during the recessionary years, finance firms rewarded employees with raises. According to a survey by eFinancialCareers.com that polled 2,860 financial professionals, 54 percent were offered higher salaries in 2011.

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.

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.

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.

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?

from Commentaries:

Wall Street’s $4 trillion kitty

matthewgoldstein.jpgThe 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.

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.

Goldman needs to lose Gekko image

jon_ford

– 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.

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