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The United States of America vs. Andrew Hall

Econophile's picture




 

By Jeff Harding of The Daily Capitalist

In case you missed it, Citigroup will owe Andrew Hall, top trader and head of its Phibro energy trading unit, an estimated $100 million paycheck in 2009. Actually I’m sure you didn’t miss it because this stunning sum has made Citi and Mr. Hall the poster children for Wall Street’s “excesses.” On the one side you have the government that bailed Citigroup out to the tune of $45 billion so far, not an insubstantial sum, plus harsh criticism from politicians and commentators about “excessive” pay and systemic risk. Then there is Citi which has a binding contract with Mr. Hall to pay him performance bonuses which in 2009 may add up to $100 million. There is also Ken Feinberg, the Obama Administration’s new Pay Czar, who has the duty to determine who gets paid what in banks and regulated financial institutions.

The politicians believe that “excessive compensation” led bankers to take “systemic risks,” risks that endangered the entire financial system and brought on the recession. A number of new rules enable Mr. Feinberg to be the banks’ paymaster.  These new rules are nothing but a form of government wage controls. Fortunately for Mr. Hall these rules may not apply to him; his contract pre-dates the new rules.

The Fed has been tasked with the job of writing up new rules concerning the pay of bank executives and employees.

Fed officials would give banks wide leeway in how they structure their rewards. They would not prohibit million-dollar pay packages or address issues of fairness. Rather, the rules are intended to restrict pay plans that encourage reckless behavior by rewarding only short-term gains. …

 

The draft rules, which are expected to be introduced in the next several weeks, would apply not just to the pay and bonuses of top executives but also of traders, loan officers and others. The biggest and most complex institutions, roughly 20 companies, would have to present their compensation plans to bank regulators, who could then demand changes.

 

Fed officials do not plan to impose specific rules on how those banks structure their pay plans. Instead, they are expected to spell out ways in which banks can reduce incentives for excessive risk-taking.

 

For example, examiners will be looking to see whether banks defer bonus compensation for several years, allowing enough time for risks and potential losses to surface. …

Some industry analysts said the Fed’s plan would complement what banks have already started doing in their own self-interest.

“The simple proposition should be that you don’t want people being paid for taking too much risk, and you want to make sure that their compensation is tied to long-term performance,” said Timothy F. Geithner, the Treasury secretary, in an interview by telephone.

This is one of the key issues of the G20 meeting this week in Pittsburgh. These major economies are trying to coordinate their efforts at regulating financial institution compensation so they don’t engage in regulatory forum shopping.

By the way, Paul Krugman thinks this is a really good idea:

Equally important, in this case populism is good economics. Indeed, you can make the case that reforming bankers’ compensation is the single best thing we can do to prevent another financial crisis a few years down the road.

Let me say that compensation or bonuses had absolutely nothing to do with the crash or systemic risk to economy. These rules are a scapegoat, a proxy for attacks by people who perceive that capitalism is a destructive economic system and should be allowed only with strict government supervision. These people have no clue what caused the economic crisis, the boom, or the crash. Basically, they confuse effect with cause.

I have written extensively about the causes of the crisis. But here are the highlights:

1. The main systemic risk in the economy is interference from the Fed and the government.

2. This crisis, like all economic crises, was caused by the Fed's easy money policy, starting in 2001.

3. Money flowed into housing and its derivates that emerged during the boom because of government policies that favored housing.

4. The risk models that investors and investment bankers used were flawed and the systemic pervasiveness of these models hid the obvious from them: bubbles never last.

The fact is that greed always exists, on Wall Street, and everywhere else, in that it’s basic to our nature. It takes something more than greed to create a bubble and that something is the creation of fiat money, something that only the Fed can do. Because people made stupid bets doesn’t mean that they caused the bubble. The Fed and government policies set the stage and created the rules and provided the excess credit for this crisis and traders and capitalists do what they always do: make money. Or at least try to make money.

Limiting pay or structuring bonuses' longer term results won’t change anything if people still use the same risk models. Investment bankers and investors don’t yet understand the flaws of their basic concepts of evaluating risk. Modern Portfolio Theory, CAPM, and Black-Scholes are all based on the same faulty science. You would think that after a while the advocates of these models would wonder why their models don’t work and why their strategies keep blowing up in their faces. But they really don’t question the basic science.

Back to Mr. Hall. Vikram Pandit, Citi’s CEO, said the other day that Mr. Hall’s $100 million pay package was too much. Apparently others at Citi disagree:

Senior company executives have justified Mr. Hall’s contract by noting that his trading resulted in earnings for the bank that were many multiples of his pay. A Citigroup executive who was granted anonymity because he was not authorized to speak for the company, said that Mr. Hall’s pay was based on a percentage of the pretax profit at the Phibro trading unit he leads and that the payouts were adjusted for risk so that the more leverage taken by the firm, the lower the potential bonus. Mr. Hall’s contract also contains provisions to recoup some the money if the unit loses money.

How much did Mr. Hall earn for Citi? According to the NY Times, “Mr. Hall … the standout performer at [Phibro] has netted Citigroup about $2 billion over the last five years. If Citigroup will not pay him the huge sums he has long made, someone else probably will.” Phibro reportedly made Citigroup $667 million in revenue from commodities trading last year, while the company overall had a record $27.7 billion net loss.

If I were Mr. Pandit, I would be kissing Mr. Hall’s behind to thank him for the wonderful job he is doing in helping keep the Citigroup ship afloat. If I were Mr. Feinberg, or Mr. Geithner, or Congressman Frank, or Senator Dodds, I would beg Mr. Hall to stay and take the money and go forth and do what he has been doing successfully for years. If he leaves and takes his traders, he will also take a big chunk of Citi’s earnings with him, which only lessens the chance that Citi will be able to pay the $45 billion back to the taxpayers.

This illustrates the problem with having a “Pay Czar”, or any kind of czar for that matter, make decisions based on politics rather than market conditions. They have no clue what they are doing, they don’t understand what the consequences of their actions will be, and it will usually cause the opposite of what was intended.

There is no “fair” compensation in the marketplace. Pay is determined by freely contracting individuals, and if an employee doesn’t work to the firm’s advantage, it will be because the market says so. Ultimately it is the consumer who determines what pay should be. In this case, with a trader like Mr. Hall, his consumers are his investors and if he loses their money on a consistent basis, not only will his pay not have been worth it, he will lose his job.

Pay czars have been around for a long time, mostly in socialist countries where bureaucrats determine who gets paid what. China and the USSR found that it didn’t work very well. Wage controls along with price controls have been tried in this country and they have always achieved the opposite of what was intended. All this pay cap will do is deter competent people from working in wage controlled businesses. In this case, Mr. Hall should run for the doors and set up his own hedge fund.

Let’s see what Citi can do without him.

 

Notes:

For information on risk, I urge you to read:

Benoit Mandelbrot, The (Mis)behavior of Markets.

Nassim Taleb, The Black Swan, and Fooled by Randomness.

For information on Vikram Pandit I recommend you read the article on him in Wikipedia. He should be the last one to complain about compensation.

 

 

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Mon, 09/28/2009 - 15:04 | 81662 Anonymous
Anonymous's picture

The reading recommendations are GREAT! Plus "Fooled by Randomness".

Mon, 09/28/2009 - 14:20 | 81618 Econophile
Econophile's picture

Wall St. has always taken big risks! That's the game they play and always have. There has always been huge winners and huge losers. You are focusing on the wrong issue. You need to question why this happened now. Apparently you don't notice the fact that many, many hedge funds blow up all the time. What about Buffet and the huge fortune he's made on bets? Second richest man in the world and all he did was take investors' money and put it into big bets. Most of his bets paid off. Yet he produces nothing "useful" as some commenters have put it, because he's a mere investor. 

You should be pissed off about the bailout, not Mr. Hall.

And, Green Sharts, we don't agree. But if you come up with economic arguments, I would be happy to discuss the issue further.

Thanks for all the comments.

Mon, 09/28/2009 - 16:40 | 81757 Green Sharts
Green Sharts's picture

How does one respond to this unprovable assertion...

"Let me say that compensation or bonuses had absolutely nothing to do with the crash or systemic risk to economy."

...with economic arguments?

To believe it you'd have to think that the subprime mortgage growing from basically nothing to more than $1 trillion in just a few years had nothing to do with the vast profits they generated for the mortgage originators, the Wall Street firms who packaged the loans into securities, and the credit rating agencies who rated the securities.

Charlie Munger, Buffett's partner at Berkshire Hathaway and a brilliant man, has often said that he spends more time thinking about how incentives affect economics more than probably anybody he knows, yet he finds that he still underestimates their power. 

Mon, 09/28/2009 - 12:05 | 81466 trader1
trader1's picture

i disagree with the author.  compensation structures incentivize certain behavior.  wall street's compensation structures played a role in encouraging some of the reckless risk-taking that occured.    

 

Mon, 09/28/2009 - 09:59 | 81362 Anonymous
Anonymous's picture

To say the bonuses had NOTHING to do with the crisis, is simply wrong.

If bankers were on set salaries, the hunt for alpha would be less obsessive.

Mon, 09/28/2009 - 09:33 | 81331 John Self
John Self's picture

Pay the man his money this year.  Then make a decision as to how he will be treated in future years.  If you're unwilling to pay him in the future, then he can respond accordingly.  But Citi has known all year that they're wards of the state and that this comp issue was out there.  It's bs to wait until now to tell him he won't get paid.

Mon, 09/28/2009 - 01:27 | 81199 Econophile
Econophile's picture

Sorry to tell you this, but banks always play with depositors' money. Lending is a bet, some riskier than others. The question is: who pays for the risk? In our unfortunate system, the taxpayer has been set up as the guarantor. Why should they? This is too complicated of a topic for this post, but fractional reserve banking and fiat money have something to do with it.

Let me put it another way. If the government was out of the deposit guarantee business, which bank would get your money? I'll bet it's one with private insurance guaranteeing a certain level of your deposit (vs. a bank that had no such insurance). I would suggest that insurers in that situation would establish stricter  restrictions on bank capital and requirements and lending standards because the insurer isn't in the business of getting wiped out.

So, then, why do we have this screwed up system of federal guarantees and risky banking practices that couldn't really exist without federal/state action? A rhetorical question of course. The really risky stuff should rest with those institutions where investors understand that there is a risk (i.e., the shadow banking system: hedge funds and the like). 

Also, I picked out Mr. Hall just because he made so much money. Why can't you admit that he's good at what he does? Why is he worse than John Paulson, George Soros, or Bruce Kovner? He's not. My point is that who the hell can tell me what's "fair compensation?" There is no such thing.

Mon, 09/28/2009 - 11:17 | 81415 Green Sharts
Green Sharts's picture

I read this piece again, this time more carefully, and must say it is pathetic piece of ideological garbage that would have Larry Kudlow emphatically nodding throughout.  There is too much blind ideological stupidity in the piece to comment on all of it so I'll just hit the highlights.

Actually I’m sure you didn’t miss it because this stunning sum has made Citi and Mr. Hall the poster children for Wall Street’s “excesses.” On the one side you have the government that bailed Citigroup out to the tune of $45 billion so far, not an insubstantial sum, plus harsh criticism from politicians and commentators about “excessive” pay and systemic risk.

Note the quotation marks around "excesses", as if to suggest it is an inflammatory term.  No, there were no excesses on Wall Street, even if it did require massive capital infusions from the government to keep Wall Street firms and the global economy from complete collapse.

However, in the preceding paragraph you use the term "systemic risk" without quotation marks around it.  The next time you use the term it has quotation marks, another of those inflammatory terms that the "politicians" like to throw around. 

The politicians believe that “excessive compensation” led bankers to take “systemic risks,” risks that endangered the entire financial system and brought on the recession.

And then on to this: 

Fortunately for Mr. Hall these rules may not apply to him; his contract pre-dates the new rules.

Mr. Hall's contract with Citi was written when Citi was a freestanding private entity, not a ward of the state.  Had the government not intervened to bail out Citi, Mr. Hall would be standing in line with other Citi creditors.  I suspect any contracts related to the employment and compensation of Mr. Hall can be thrown out the window. 

Let me say that compensation or bonuses had absolutely nothing to do with the crash or systemic risk to economy.

Let me say that this comment is almost too stupid to justify a response.  Where did "financial innovations" like CDOs and CDO squareds and credit default swaps come from if not from Wall Street desire for large compensation and bonuses?  Did Wall Street's voracious appetite for more garbage subprime loans from garbage lenders like New Century and IndyMac and Countrywide not have anything to do with the massive compensation to Wall Street for repacking the toxic waste and selling it to dupes around the world?  Are you that ideologically blinded, or just stupid? 

I have written extensively about the causes of the crisis. But here are the highlights:

1. The main systemic risk in the economy is interference from the Fed and the government.

The "main" "systemic risk" is interference by the Fed and the government?  Earlier you had "systemic risk" in quotation marks as if it was a perjorative term.  Here you don't.  Is it a legitimate term?  If the Fed and the government are the "main" sources of systemic risk, who are some of the other sources?

2. This crisis, like all economic crises, was caused by the Fed's easy money policy, starting in 2001.

3. Money flowed into housing and its derivates that emerged during the boom because of government policies that favored housing.

And this flow had nothing to do with compensation on Wall Street.  There was no venal behavior.  It just happened.

4. The risk models that investors and investment bankers used were flawed and the systemic pervasiveness of these models hid the obvious from them: bubbles never last.

I get it.  The models of the Wall Street geniuses and credit rating agencies were flawed.  It had nothing to do with the fact that the Wall Street geniuses were motivated to take huge risks because their compensation models provided them with huge financial upside and little financial downside.  Moody's and S&P weren't motivated by the fact that they made multiple times the fee for rating this garbage versus a plain vanilla corporate bond.  Of course not, it was just bad models.

Mon, 09/28/2009 - 13:31 | 81567 Anonymous
Anonymous's picture

+1

Mon, 09/28/2009 - 12:40 | 81507 McGriffen
McGriffen's picture

+1....well said

Mon, 09/28/2009 - 07:22 | 81266 Anonymous
Anonymous's picture

So... I finally get it. OUR BANKING SYSTEM IS ACTUALLY SOCIALISM, NOT CAPITALISM. In capitalism, you work, get paid, and save enough out of your paycheck to buy tools to increase your production. In socialism, you don't work, because the taxpayers give you money. The banking license we taxpayers give bankers allows them to create money out of thin air and then lend it to themselves, which is the same thing as them not working because we give them money. Apparently, then, the bankers do what a lot of people do if you give them money. They gamble. In fact, the "investment" bankers like Citigroup even create new games to gamble on, and then gamble in those games until they go bankrupt. Then what? Well, we taxpayers give them our children's money, so that they can create more games to gamble in. Socialism with a capital S, or all caps, or something.

Mon, 09/28/2009 - 03:41 | 81219 ToNYC
ToNYC's picture

Who in the real world gets paid as per agreed ( like GS 100% through AIG dead-man conduit) by a bankrupt entity who is not a co-conspirator to a fraudulently hijacked system by Friends of FED? The US taxpayer is paying his bogus and were it me or the successful private hedgies you mention, we'd get bupkis. Too Big To Fail, Too Big To Lose Talent? Fear sells to weenies.

 

Sun, 09/27/2009 - 22:00 | 81129 Anonymous
Anonymous's picture

while we agree in principle with your argument against wage controls as well as with your criticism of the gross hypocrisy of pandit the bandit, we have to say to you seem to have to picked the worst poster boy imaginable.

we think that this whole drama about mr. hall's pay is a oh-so-clever ruse to get most off us off the scent with how exactly Phibro generated all that revenue in the 1st place.

http://www.counterpunch.org/martens06212008.html

we also think mr. hall should be thanking his lucky millions that he's being investigated by the Pay Czar for his compensation, rather than by the AG for his actions and how they contributed to the oil price spike of 2008.

scum rises

Sun, 09/27/2009 - 21:18 | 81116 mnevins2
mnevins2's picture

How much longer can this form of "holding our fingers in the dike" status quo exist? I think that most of us are in agreement that, simply, banks are not allowed to use depositors' money for "speculation."

In a perfect world, we'd have the 1-2 years to have the necessary safeguards put in to place and then live happily ever after.

But we don't live in that "perfect world" and we don't necessarily have those 1-2 years - before, we fear, more really bad crap hits the fan.

A few voices are just now starting to rise above the din about these issues. Ron Paul was shouting about much of this for a while. Alan Grayson is adding his 2 cents, and many, many bloggers and posters are SHOUTING from the blog-tops - but are we just talking to ourselves?

Sun, 09/27/2009 - 21:09 | 81112 rapier
rapier's picture

A system has been  designed to allow speculators, especially institionalized speculators, to make  stupendous incomes. People who are not putting their own money at risk. Institutions that have been implicitly socialized for a generation and are now explicitly socialized. Institutions that sometimes have market power.

Trading is overwhelmingly a zero sum game unless monetary expansion is present. Well well, surprise, monetary expansion is the rock upon which the system is built. Now I am not some hard money type who decries this. Just saying.

So a system has been designed, of which leveraged speculation is a big part, which concentrates INCOMES to people with the odd talent to be big winning traders, sometimes.

Now that the US has an income distribution like the third world please don't pretend for a moment this systematic mess has anything to do with smart. Anyone can come up with some rationaliztion about how this prick, or saint I don't know which and I don't care,  should have a net worth the the sum total greater than maybe 20 million America's bottom households.

Knock yourself out.

Sun, 09/27/2009 - 20:53 | 81109 Anonymous
Anonymous's picture

Mr. Hall+Citi= FOUR DOLLAR GASOLINE!!!!!!!!!

Sun, 09/27/2009 - 20:45 | 81105 Green Sharts
Green Sharts's picture

I wish the people who have lost billions for Citi over the last few years would get as much attention as Mr. Hall.

Let's say in scenario A you had Mr. Hall and another entrepreneur/trader/speculator with bank capital.  Each broke even for the year after a charge for the capital and received no bonus.  In scenario B Mr. Hall makes $2 billion and his counterpart loses $2 billion.  So Hall earns a bonus of several hundred million and there's no way to claw back any of the losses from his counterpart.  The shareholders of Citi are worse off in Scenario B.  The incentives for entrepreuneurs/traders/speculators to take enormous risks to possibly earn high returns are obvious when their compensation upside is enormous and their downside is truncated.

If Vikrim Pandit is so worried about keeping Hall, let him cough up some of the windfall he received for selling his old hedge fund to Citi, after which it had enormous losses and was closed down.

Sun, 09/27/2009 - 22:46 | 81140 McGriffen
McGriffen's picture

Old Lane...more like Dead man lane.

Chuck Prince has been a little MIA...

Sun, 09/27/2009 - 19:59 | 81086 Anonymous
Anonymous's picture

Mr Hall should get exactly nothing. Neither should anyone else at Citigroup. Mr Hall is an employee of a company that went bankrupt. If a company in the real world goes bankrupt, all employees lose their jobs, pensions, health insurance, the works. In the bizarro world of criminal finance, the company gets bailed out with 45Billion taxpayer $, and someone is allegedly owed 100 Million. This article is an example of wall street logic. Mr Hall made a bet which won -- this time. Anyone can do it, if every time the bet loses, the taxpayer gets the bill.
It is fun to blame the government for everything that goes wrong. The bubble appeared, because wall street employed leverage, supported by an entirely fraudulent system of circular insurance, used to cook the books and permit ever greater leverage. Calling it a fanciful name of counterparty risk changes nothing.

Mon, 09/28/2009 - 14:12 | 81610 panda6
panda6's picture

Hall is NOT an employee of citigroup...he is an employee of Phibro which is owned by Citi....it's completely different, and afaiu his bonus is effectively siphoned out of the profits from phibro before citi sees anything...

Sun, 09/27/2009 - 18:41 | 81061 Comrade de Chaos
Comrade de Chaos's picture

"The difference with Mr. Hall is that he did it trading commodities, not issuing subprime debt. "

I still don't get it. Why the CEO of Intel is getting 0.05% of revenue as his compensation while mr Hall is getting 17% of revenue? (667 ml annual revenue)

Maybe the reason that Intel doesn't have to be bailed out while City does is right there, compensation is linked to the risk undertaken rather than long term performance.

I am also pretty sure there are plenty of people who would do the job as good as of mr, Hall for much less money.

I am not saying our government should directly interfere and redistribute the pay checks. I am saying, our government should stop taking contributions from corporations (!!!) and should be forced to enable laws that protect SHAREHOLDERS and provide more power to shareholders. Unfortunately, as long as financial firms control the lobbing of congress, etc it is not going to happen.

p.s. Enabling government sponsored lawsuits on behalf of shareholders to strip excessive compensations, where those are not based on long term performance might not be such a bad idea as well.

 

p.s.s. Isn't the government largest shareholder of city with 45+ bl bailout? Shouldn't the largest shareholder have a right to influence corporate structure?

Sun, 09/27/2009 - 19:04 | 81067 panda6
panda6's picture

Hall built up Phibro into the powerhouse it is...his compensation is really very similar to an entrepreneur having a stake in the company they start-up.  And anyway his pay package was based on long-term, risk-adjusted performance metrics...which is exactly what most pay-reform proposals are based on!!

Oh, and the current CEO of Intel (whoever he is) didn't build up the business to anything like the same degree.

Mon, 09/28/2009 - 19:36 | 81931 Anonymous
Anonymous's picture

"Hall built up Phibro into the powerhouse it is..."

really?
Marc Rich was working there in 1973.
Phibro was around long before Dandy Hall.
and Dandy Hall ain't got nothin on Marc Rich.
that guy makes swindling an art form.
it's hard to even not to like him in some twisted way.
but Dandy Hall?
the straw that broke the american consumer's back?
nothing but a 2 bit hustler masquerading as a chump

Sun, 09/27/2009 - 22:50 | 81142 McGriffen
McGriffen's picture

If Hall's indeed as good as advertised, which I've read elsewhere: it's quite surprising he never left the mother ship.  Plenty of opportunity to leave 3-4 years ago and write your own ticket.

Such an entrepeneurial star could, or should have, yearned to step out on his own.

Mon, 09/28/2009 - 14:10 | 81609 panda6
panda6's picture

Why?  He seems to have done perfectly well out of phibro and allegedly has a nice work/life balance to go with it

Tue, 09/29/2009 - 10:56 | 82360 McGriffen
McGriffen's picture

For the same reason Meriwether left Salomon a long time ago, and any other star trader leaves:  be your own boss, pay yourself however you please, pocket as much of the upside you want.

In the annals of hedge fund start-ups 4-6 years ago, how many stars left Goldman (one example) to run their own funds?  It's implausible that he did not leave.

Maybe his balls aren't so big after all.

Sun, 09/27/2009 - 17:17 | 81023 ratava
ratava's picture

This is against the economic cycle rules. They were supposed to go extinct but enough money and politicians made them undead for our money. Undead economy ftw!

Sun, 09/27/2009 - 15:28 | 80987 Econophile
Econophile's picture

Sqworl:

Thanks for the Taleb quotes.

Sun, 09/27/2009 - 15:21 | 80983 Econophile
Econophile's picture

Wouldn't it be great if there were no bailouts of these companies that take big risks at the expense of the taxpayer. The moral hazard of these bailouts promotes risky behavior. As does FDIC bailouts of depositors--the deposit guaranties actually increased risk taking during this cycle.

I don't buy "too big to fail." It's just not true. The failure of these bailed out companies is still occurring, albeit at a slower pace, and we're paying for it in taxpayer dollars and the perpetuation of risky behavior. The government just panicked because they had no clue about what was happening and why.

The difference with Mr. Hall is that he did it trading commodities, not issuing subprime debt. It is a valid criticism to say that he was gambling with depositors dollars, but that's not his fault: Citi bears that responsibility. Mr. Hall, with that kind of track record, will have no problem finding investors if he starts his own fund, so direct crtiticism of him is unwarranted.

Any argument that a pay czar is justified to regulate the markets is incorrect. If you read the article carefully, the point was that wage controls don't work and never have. All they do is distort the economy and cause greater readjustments down the road. The consequences of these controls are often the opposite of their intentions.

Also, many commenters confuse the effects of the government policies that caused this crisis with its cause. I would say that criticism about the lack of regulation is misplaced. This was a government induced crisis caused by the Fed's policy, political decisions about promoting housing, and reckless behavior of Freddie and Fannie encouraged by politicians. 

I don't excuse the behavior of those people on Wall St. who were ignorant of the risks they were taking. Their actions were pro-cyclical, but they wouldn't have existed without the rules set by our government. I've explored these themes in other articles and have referenced them in the above article.

Sun, 09/27/2009 - 19:25 | 81071 perpetual-runner-up
perpetual-runner-up's picture

TBTF is a misnomer...TBTF is a psycological term meant to fixate us that possability...

 

In actuallity it is false in that it presumes the US as the backstop is TBTF....

 

In reality it is socalizing the failure via the losses in the dollars value

Sun, 09/27/2009 - 17:15 | 81022 Gunther
Gunther's picture

Lobbying to get the rules that Wall Street wants is the fault of the Government?

Government and Fed are two different units; the Fed is supposed to be independent.

"This was a government induced crisis caused by the Fed's policy,(...)" Were the underwriters who sold the subprime contracts to people unable to pay back innocent?

Sun, 09/27/2009 - 16:16 | 81003 Hephasteus
Hephasteus's picture

Pay Czar is not regulting anything. It's simply paying someone too much money to regulate someone else who makes too much money. The people have to rise up and demand more equal relationships, contracts, systems.

Sun, 09/27/2009 - 14:02 | 80941 Sqworl
Sun, 09/27/2009 - 13:39 | 80930 Gunther
Gunther's picture

Econophile,

you take a one-sideed approach.

 

Freedom of contract is fine, but without bailout Citi would be broke and the trader would not be employed by Citi.

The bailout was not a clear takeover by the government, so the situation now is messy. The applied solution is wage controls, a messy solution again.

 

Your enumeration deserves a detailed response too.

  1. To limit risk, the government enacted Glass-Steagall and limited leverage; over-the-counter-derivatives were considered illegal gambling.
    Over time all those safety measures were eliminated after a huge amount of lobbying by financial players. The Central Bank(s) helped with easy money and the “Greenspan/Bernanke put”
    But, under a gold standard and without central bank, there were financial crises too.

  2. The reaction to LTCM and the break in the stock market 1998 was easy money, blowing the dot.com bubble. An earlier starting point could be argued as well.

  3. Money flowed into housing-yes, but NINJA and liar loans are a sign of bad business practices and missing accountability.

  4. The risk models are flawed- no question about that. Claiming “six-sigma-events” several times in a year should be proof enough. But two rating agencies found a programming error in their risk modelling for CDO's. That smells of government-approved fraud, especially because the rating agencies did not get any sanctions.

 

 

Greed always exists- agreed. The balance for greed is fear of loosing money.

In the current payment structure this balance is completely missing. A trader makes money- fine; he/she gets a good bonus. He/she blows up the firm- try somewhere else, or if you are the manager, take the golden parachute. The taxpayer will cover your loss.

This asymmetry has to stop; either by keeping gains and losses private or by limiting risk-taking and compensation.

 

Sun, 09/27/2009 - 13:37 | 80929 Comrade de Chaos
Comrade de Chaos's picture

“Mr. Hall … the standout performer at [Phibro] has netted Citigroup about $2 billion over the last five years. If Citigroup will not pay him the huge sums he has long made, someone else probably will.” Phibro reportedly made Citigroup $667 million in revenue from commodities trading last year,"

 

Does phibro consist only of Mr Hall, who will single-hand take 17% of revenues the division crunched within the last year?

 

Let's say Intel, revenue would be around 35+ bl. Will the CEO of that firm be making around 5 bl this year?

 

If you ask me, City has fucked up their compensation structure in the same manner it has f. up its business model.

Sun, 09/27/2009 - 14:42 | 80969 ToNYC
ToNYC's picture

If they were to tax total compensation at 95% maximum including no maximum ceiling on Social Security over 10 million in a truly progressive income tax, would that leave something on the table for the sub-10 million types of which I understand there are a few? Would that destroy free enterprise and lead to distribution of wealth? Get real, this is a society and not a gang of independent robber barons who control the game and membership to the club..or is it?

 

Sun, 09/27/2009 - 18:47 | 81063 Comrade de Chaos
Comrade de Chaos's picture

going for extremes will not solve the problem. the problem is not necessary in our tax structure, the problem is within all of those loopholes that enable wealthy to avoid their fair share of taxes.

all that has to be done is the cancellation of deductibles for everyone making over 120,000, and taxation will become relatively fair.

Sun, 09/27/2009 - 13:26 | 80926 Sqworl
Sqworl's picture

I forsee violence at 11 Wall and 85 Broad street.  I recently observed a couple of banksters beaten outside a Nyc club.  Nobody came to their rescue???

Sun, 09/27/2009 - 16:05 | 80997 Hephasteus
Hephasteus's picture

It got bombed and shut down for something like 4 weeks during the great depression.

 

Sun, 09/27/2009 - 12:16 | 80898 True Constant
True Constant's picture

A thoughtful piece written in a flowing prose that further gilds the red herring.

 

If on-the-books bankruptcy and regulatory law is applied, the entire story is moot.

 

If the law was actually applied, the story would be:

1.  Due to questionable business practices, a great many US banks are insolvent--including and especially the Federal Reserve.

2.  The insolvent banks declare bankruptcy. Funds that were FDIC insured are returned to owners to redeposit in banks that remain. Uninsured funds are lost--as described in the risk documents signed by all investors at account opening.

3.  Those institutions that are bankrupt would have assets liquidated or otherwise distributed to creditors as assigned by the judicial process.

4.  Should the judge to allow them to continue to operate while restructuring or more slowly unwinding, the use of any supporting funds would require judicial oversight.  This is what prevents executives in bankrupt companies from looting the safe.

5.  Wealth is rebuilt on the shoulders of the surviving institutions.

 

This happens every, single day.  It's not that extraordinary.

 

Nor is it unusual for corporations to call in every favor they're owed to prevent this. That's why there are legal recourses: prosecution, for the regulators who continue to ignore their post; and, impeachment, for the legislators who will not indict.

 

In disregarding centuries of legislated, upheld, and affirmed insolvency law, US legislators have chosen to disregard their very purpose.

 

I suspect that when those wronged can no longer feed their families, they will take matters in their own hands.

 

How much worth is law worth when those who claim to uphold it, make it prostitute?

 

By gilding the herring, journalist, pundits, and columnists add to a pointless dialog and are equally complicit. No wonder viewship and distribution are at record lows.  Who would pay to see the same erroneous talking points repeated?

 

If the reward of professional responsibility isn't enough, then look to Matt Tiabbi whose work earned him elevation in social and economic status--possibly enough to stay well fed through the coming disorder.  This is your opportunity to preserve yourself, your friends, and your nation.

 

For the sake of social and civil order, I beg those who make their living in media:  Please address this story. 

Sun, 09/27/2009 - 11:48 | 80889 DaddyWarbucks
DaddyWarbucks's picture

I disagree on several points but I agree with one.

"Let’s see what Citi can do without him."

In fact let's see what AIG can do without all those people who got retention bonuses.

"Pay is determined by freely contracting individuals, and if an employee doesn’t work to the firm’s advantage, it will be because the market says so. Ultimately it is the consumer who determines what pay should be."

Not so. Firstly if it was the consumer instead of the federal government Citi would be out of business and the execs would be making nothing. Instead our tax dollars are keeping this loser in operation. Secondly there is a day and night difference between compensation arrangements for corporate officers or executive level level employees and the rest of the "human resources". For the latter group it's pretty much a cookie cutter contract, take it or leave it, and for the former group the variety and complexity of compensation is astounding.

In all I feel that Mr. Harding's article is quite deceptive.

Sun, 09/27/2009 - 16:01 | 80995 Hephasteus
Hephasteus's picture

Bah. Then you could go to a bank and like get your money out. That would be boring. LOL

Sun, 09/27/2009 - 13:40 | 80933 perpetual-runner-up
perpetual-runner-up's picture

so making investors who made idiotic bets whole (e.g. bondholders, preferred stock holders, etc) is ok in your book, but not paying th people that actually work at the company is ok with you...

this is all an effort to take peoples eye off the ball...the fact that us taxpayers money went straight to foreign investors...

 

your argument is a strawman...

Sun, 09/27/2009 - 19:50 | 81082 DaddyWarbucks
DaddyWarbucks's picture

"so making investors who made idiotic bets whole (e.g. bondholders, preferred stock holders, etc) is ok in your book, but not paying th people that actually work at the company is ok with you..."

I made no statement about making anybody whole in my comment. Routine bankruptcy procedures should have been applied to Citi instead of any kind of bailout and if that meant that bond and equity holders took a loss so be it, it's called risk.

I don't see much risk for the executives in their compensation contracts.

Sun, 09/27/2009 - 11:36 | 80884 Anonymous
Anonymous's picture

Banks KNEW people will not be able to repay loans, yet they gave them the loans. Can any capitalist please tell me WHY BANKS GAVE LOANS TO PEOPLE, KNOWING THEY WOULD NOT BE ABLE TO REPAY!!??

Answer: Because banks were making TONS OF MONEY on those loans. Banks, like all capitalists, do not care about what happens tomorrow, as long as they are making a killing today. The disaster over the last 2 years is your proof that this is true.

Regular Joe does not have the education to necessairly know about finance and whether he will be fine with a certain mortgage. IT IS THE BANK'S JOB TO DETERMINE THAT. It's their job and resposibility to DENY you a loan if it is risky.

If economics and finance were taught in American schools (and I mean in gradeschool, NOT even high school or college) then I would also blame average Joe Shmoe. But since they are NOT, it is the banks job, and their fault ENTIRELY.

It is a doctor's job to know what is wrong with you and how to treat you, NOT YOURS. Why would you except average Joe to know about finance??

Sun, 09/27/2009 - 11:28 | 80879 Anonymous
Anonymous's picture

Krugman is a nancy-boy with miniballs. What a stooge.

The solution to this thing is simple. Traders who want to take huge risks on toxic junk or on anything including Hall must risk a corresponding portion of their annual salaries and packages. Say they contribute to windfall losses for the year than not only are they not paid but their property and savings are attached. Talk about reducing bizarre risk-taking, this would end it overnight. These sociopaths are not capitalists and they are not risktakers. They are overpaid theoreticians out of overblown academies like MIT who engage zero personal risk, insulate themselves with numbers and models and swing for the fences. IF you actually were to pass laws that directly involve them emotionally in the Game, they would return from whence they came and end up at simple desk jobs either teaching or counting beans.

Mon, 09/28/2009 - 16:56 | 81775 Anonymous
Anonymous's picture

Actually, that was the old investment bank model before they all went public back in the 80's. The senior partners in the firms had a lot of their personal capital tied up in the investments the firm made, and because of that, they tended to make much more prudent investment decisions.

Mon, 09/28/2009 - 01:24 | 81198 Anonymous
Anonymous's picture

Well said, agreed fully. These motherf*ckers can stop gambling with our money, then see how great they are.

Mon, 09/28/2009 - 06:28 | 81253 Enkidu
Enkidu's picture

Exactly - what 'risk models'? We don't care what 'risk' they take as long as it is not with our money!

Sun, 09/27/2009 - 11:17 | 80874 McGriffen
McGriffen's picture

3. Money flowed into housing and its derivates that emerged during the boom because of government policies that favored housing.

There's a key point missing here:  funding.  Fannie Mae and Freddie Mac (previosly) received funding in the public debt markets as does FHLB system.  The amount of money which flowed into housing had many sources, of course: home buyer/residential investor demand, homebuilder demand for suitable land, and MBS investors' demand for yield.  The non-agency MBS market would not flourish at it once did, specificially from 2005-2007, without alternate funding provided to the mortgage finance firms like Ameriquest, New Century, Novastar, etc..

It is a fact those mortgage firms were provided warehouse financing of 60-90 days, on average, by the same firms who securitized that mortgage product into new issuance for investors to sop up.  It's foreseeable this explanation is more detailed than necessarily needs to be known.  But anyone in the fixed income markets should have or would have known it to be so.  If wall street funded it, then surely it must have been quite profitable.  And when the issuance is measured in $billions on an annualized basis, well, let anyone do the math.

It's a gosh-darn free-for-all, thats what it were.  This debate should be less about absolute pay scale, and more about the best method to reward the best performers, and not everyone fits that description.

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