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New York Fed Official Says Incentive Pay Fueled Credit Crisis
Ack! Where do they get these people:
Thomas Baxter, general counsel of the Federal Reserve Bank of New York, said Saturday that incentive compensation fueled the global credit crisis and there is a need for greater loan discipline.
"Incentive compensation can and has led us into temptation," and is one of the causes of the financial crisis, Mr. Baxter said. It "put people into loans they shouldn't have had at all."
Baxter, speaking at the ninth Harvard University Forum on Islamic Finance held at the university's law school, noted that U.S. lenders were given incentives to put consumers in more costly, riskier mortgages that they didn't require. Securitizing those loans and selling them off also contributed to the financial crisis.
Mr. Baxter called for greater discipline and prudence across the global financial system to prevent the next financial crisis from being as severe.
The credit crisis sparked by consumers' inability to make mortgage payments that suddenly ballooned on a wide scale about three years ago dried up liquidity in the U.S., producing shocks that continue to ripple around the world. ...
Mr. Baxter also said that Senate Banking Committee Chairman Christopher Dodd's (D.,Conn.) financial reform bill demonstrates the need for legal principles that are consistent with ethical behavior in the financial world.
Because the Daily Capitalist has high journalistic standards, I won't swear or throw things at my monitor. But this guy has absolutely no clue what happened. He must assume that all you need to do to start an international credit induced recession is to give high monetary incentives to the participants and off it goes.
He might just ask how all this stuff got started. He might just look at his own playpen and question the frenzied money pumping of Chairman Greenspan, the lax underwriting rules endorsed by Fannie and Freddie, Dodds and Frank, the Freddie and Fannie loan guarantees, FDIC bailout/moral hazard, and the inept models used at the Fed and Wall Street to evaluate market risk.
It's like saying greed is responsible for the crisis, ignoring the fact that greed always exists in the world of human activity.
Think, man, think!
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http://home.comcast.net/~lcmgroupe/2010/Trust_Fund_Transfers.htm this looks suspicious
Yeah, he says this and then points to Dodd as a beacon of light? Ha!
I agree...
Executives have turned corporate America into their own personal Disneyland.
This type of rampant malfeasance did not occur when unions were not corrupt and coopted and dividends were paid.
While the credit crisis isn't directly attributable to incentive pay. The .com collapse sure as hell was. And that transformed the business climate. The bankers saw that oh shit if we game the system real hard, we too can make megabillions. They used the tools provided by the Fed and Congress to do .com shit with banks.
This nation was a better place with a 25:1 CEO pay multiple, both less money for the CEO, more for the rank-and-file, and the profits disgorged to the OWNERS of the company (shareholders) via dividends.
Anyone here have a business? Do YOU let your management decide to pay themselves ALL of the profits of the business you own???
Where the fuck have the pensions and mooch funds been all these years to stop this
The fact that the FED actually pays this guy gives proof to notion that we are already in QE III and that the $50/hour minimum wage is already here. Forget about 'Audit the Fed' just 'Nuke the FED'
Let me ask this question. If it just high pay, then where do the profits come to pay it? So, you just jack up fees and, miracle of miracles, we have a credit bubble? Or, people just start paying too much for houses even with a boom in homebuilding? Something triggers the boom and that trigger is alway an increase in money supply: money pumping by the Fed.
Let me ask another question. Why would any lender lend to a home buyer who put 5% down, had a credit score of 500, and didn't have to prove his/her income? The answer to that is: no one. Unless ... the government, say Fannie or Freddie, guaranteed the loan. And why would F & F do that? Well, they had pressure from politicians like Dodd and Frank, who "wanted to roll the dice a little" to benefit poor people who couldn't afford a home without ridiculous financing.
I'm not suggesting Wall Street didn't play a part in this. They, along with the regulatory agencies and the Fed used fairy tale risk models that failed to see the big one coming. In fact they didn't realize the big one could even occur.
So, for this Fed lawyer to pop his mouth off about something he doesn't have a clue about, strikes me as idiocy or, to be generous, ignorant.
You describe a manufactured crisis. They switched weapon of choice from a pistol to an ICBM in 1998. 'Cut the Ribbon (Rubin)' in 1999.
They all get to point fingers at each other and they are right. This is perpetrated. This was the grand plan. One giant ball of election fraud, securities fraud and conspiracy all wrapped neatly together.
If November elections are not scuttled by these perps only then can we say RICO ACT.
I agree to some extent. I am of the philosophical opinion that "greed" is like gravity in that it is a constant. There is never an "age of greed" and an "age of non-greed". It's the foolish idealism of the naive to believe in such things.
That said, so long as a banker can get a $10 million bonus this year while taking a risk which may not manifest itself for 5 years, he will do so. To that extent, risk-based compensation needs to be tied to the duration of the risk. To the extent that liquidity then becomes an issue, the non-vested part of the bonus can be used as collateral for either a personal loan or it can be sold in a secondary market to investors with a longer time horizon, with the appropriate haircuts.
We need to stop fucking around and letting people profit from insane short-term leverage with zero consideration for anything beyond the next bonus cycle. Failing that, we need to let companies who don't put compensation schemes like the one I described in place fail in the market and wipe out whoever in the capital structure needs to be wiped out.
The fed chummed the water with massive amounts of blood soaked fiat meat, the govmint opened the cages for the biggest sharks on the planet and the fed acts surprised there was a massive feeding frenzy and blame it on the bloody meat. Oy, who takes these guys seriously anymore?
This crisis was caused by COMPUTERS....
Infernal machines!!
Don't blame the poor machines, they just do what they're told.
Why is this guy Baxstop speaking at an Islamic finance conference? Need I say anything about Islamic ponzinomics and legal opinions?
I think this guy reads the NYP for deep intellectual background material.
Moreover, if my memory serves me correctly, Mr Boxtop was in the room when Harvey Miller told the FRB putting Lehman into bankruptcy would most certinaly drag down the whole financial system.
The Facts About Usury: Why Islam Is Against Lending Money At Interest
http://www.islamic-awareness.org/History/usury.html
The Incentive:
All those debt-financed billionaires, who have cannibalized so many of the world's economies, and screwed everyone!
Let's face it, any comments on the veracity of anyone associated with the Fed, especially the NY Fed (ops command central) is rather futile.
Suffice it to say, everyone associated with the Fed this past decade, at least, come off like a bunch of clueless morons, or professional and highly-paid liars.
Evidently none of them are familiar with finance, international finance, Forex, credit derivatives, securitization, economic history, urban legends (oops, no, they are experts on urban legends), etc., etc., etc.
Crooked is as crooked does, whether its some clown from the Fed (or a Fed bank), Foxtard, NPR (This American Life did a wonderful propaganda piece where they fundamentally blamed Black-Americans for the subprime meltdown and credit crunch), it's all engineered consent and bull.
I would say the New York Fed fueled the crisis.
That's the one to keep your eye on in this shell game.
When Tim Geithner was the head of the NY Fed, all this deregulation and easy lending was happening right under his nose and he didn't know, he was actually helping promote it. Do you honestly think they weren't aware of the possible consequences? Please, save it for the people that sit home everynight and watch the Andy Griffith Show. The SEC, The NY FED, THE FEDERAL RESERVE and all the other so called watchdogs were just part of the ralley and bet the farm. They are ultimately responsible for the crisis because they were the ones appointed by the Government which supposedly represents the well being of its taxpayers. This is nothing but calling the kettle black, pointing the finger in another direction to avoid the truth. Wall St. meanwhile was gorging ond CDOS and mortgage backed securities, they just couldn't get enough. Let me ask this question to the NY Fed? If it was the lenders that caused the crisis, then why was it Wall street was calling up their builders in California and ordering up a new town a week? Hum, what will we call next week's town? Lincoln, Merced, Mountain House? They kept the flow going and allowed for these loans to happen because this was the only way they could fill all these homes they were building. It was nothing more then a feeding frenzy with everyone trying to get their hunk of meat. All this talk from the Government about regulating the banks because they are bad? It's nothing but lip service! They fueled it, they wanted everyone to experience the American Dream only because it meant homes would be built and anyone with a pulse was going to stuffed into one. Let's just keep pretending that it was the Subprime borrowers fault and it had nothing to do with the masters that schemed the whole plan. I guess when you have outsourced all your jobs and have a country that has 72% of its GDP dependent on consumer spending, you need to come up with ways to get the dollars out of people's pockets. I'm sure Goldman probably agrees with the NY FED? Those bad mortgage lenders and their incentives caused the problem. Right? If that was the case then why did they fuel the MBS and CDO markets only to back them with 80 Billion in CDS with AIG? They pumped up the markets, ordered up a new town a week, put these people in the homes and then just sat back and waited for it to collapse! PERIOD! You don't need to be a science rocket to figure it out! And while this master plan was being played out, The NY Fed and its leader Tim Geithner was turning their back the other way and hoping the house of cards would not come crashing down. Maybe that's why he then was promoted to Treasury Secretary, because he was such a good watchdog and looked out for the people? NOT, he was put in the position to follow through with the final stage of the plan, Bailout AIG to the tune of 185 BILLION in taxpayer dollars so they could payout the CDS payments to all the CRONIES he really represents at 100 cents on the dollar and screw the taxpayers once again!
Also, back when they had a 90% top tax bracket folks didn't pay themselves 50 million dollar bonuses only to give 45 million to the feds. The graduated tax bracket serves another purpose besides getting more for uncle sam.
But oh I know, let them keep more money and they "give" us jobs....we'll call it trickle down. (We work FOR them)
90% tax on ALL income over 1 million capital gains included. If you can't live on 1 million per year you're mentally ill.
They will NEVER regulate their own pay. They think they deserve it
No interest charges in Islam is entirely an Islamic falsehood. Interest is always paid indirectly through fees, accommodations, favors (like the Godfather, I will call on you some day), gifts (you can buy me a car or gift me some gold, your daughter, etc). I lend you $100,000 but I only give you $80,000 and I hold $20,000 here for safe-keeping...
Just don't call the cost of the loan "interest".
As to the point of the article, the NYFed guy is correct, but narrowly focused.
The housing boom and its tragic bust (destroying many families) required Greenspans effective ZIRP to get started. Hey free money- at 1% you need to earn $28 a day to pay for the cost of "renting" $1 million. You could pay your interest cost from capital for 100 years.
This leads to "misallocation" of investment. That is, this leads to squandering of scarce capital, something which we are continuing today.
At the margins, capital for productive investments is not available, instead it is being "pattycaked" to pump up damaged (or worthless) papers "assets".
Ultimately, we will have another financial crisis- one for which the Fed and the world central bankers will have hamstrung themselves.
"Ultimately, we will have another financial crisis-..."
Dude, we are living in the financial crisis -- phase I -- as long as we exist (in America and elsewhere) in an economy where 78% or greater is the financial sector -- everything is screwed.
This empire is following the same path as all empires.....
ALL human behavior comes down to Incentives. Or the lack of them.
He is correct.
The People who created these cock-eyed incentives and those who followed them were no doubt responsible for all the fraudulent behavior, the lies, the no-docs, the rest of the MBS, CDS and other derivatives' time bombs.
Fuld, Prince, Thain, and O'neal just to name a few, all the way down to the mortgage originators cold calling people to come in and buy a house with no income, no down payment were all paid increasingly larger incentives to falsify information.
Think of it backwards: Supposing they were paid, incentivized, to demand and get 20% down payments, verify incomes, and employment, check credit records, none of the following and continuing financial disaster would have happened.
Pavlov proved this theory a while back.
ALL human behavior comes down to Incentives. Or the lack of them.
He is correct.
The People who created these cock-eyed incentives and those who followed them were no doubt responsible for all the fraudulent behavior, the lies, the no-docs, the rest of the MBS, CDS and other derivatives' time bombs.
Fuld, Prince, Thain, and O'neal just to name a few, all the way down to the mortgage originators cold calling people to come in and buy a house with no income, no down payment were all paid increasingly larger incentives to falsify information.
Think of it backwards: Supposing they were paid, incentivized, to demand and get 20% down paymens, verify incomes, and employment, check credit records, none of the following and continuing financial disaster would have happened.
Pavlov proved this theory a while back.
Also, I forgot, and as noted Nobody, note the forum ("islamic finance") and venue (all poison ivy league law school).
"Good" mental liars (i.e., as in good at lying) are able to convince themselves of their own veracity, thus being able to convince others. This guy is probably a fair mental liar, but an idiot.
One of the techniques involved in fooling a lie detector machine. An important one, but there are more.
anything to avoid the conclusion that the inherent problem is central banking and credit-money.
+10
Not only Central Banking, but in the case of the Fed, essentially naught responsibility and oversight.
And who is this folk to be making pubic policy pronouncements concerning compensation, which is not in their regulatory venue, in from of an Islamic finance group (no interest financial culture) whilst his own employer is in the process of the greatest single expansionary monetary policy (on record) in history with the possible exception of post WWI Germany. Yeah, it's incentive compensation, as the basal disease..not a symptom...but the core rot. God help us all, Tiny Tim....er, guess that's not appropriate anymore.
Like Greenspan's recent polemitry, "what me, no bubble here" rot.
Quick men, a distraction!
Time for a house cleaning.
Does he actually believe the crap he is peddling or is this for the sheeple, you decide.....
Without touching the 3rd rail of Islamiphobia. This speech was given at a forum where the main premise is that NO interest should ever be charged on any instrument.
From that point forward anything presented by anyone is suspect.
One could make a case that "conflicts" were set in stone in the brokerage industry with respect to the brokerage industry when:
1) Straight commissions replaced salaries with short
time frames of stay.
2) The riskier financial products always paid the highest commissions.
A true recipe for future financial disaster.
The final straw was when the rating agencies gave in to getting paid for ratings.
There can be a very strong case that if the rating agencies had not rated CCC securities AAA, the US would not be in the dire straights that it is today.
So the gentleman has a very valid point and is making the proper suggestion that brokers' employees should be paid a salary and receive bonuses based on client retention in the long term.
The gentleman is correct in his observations.