Same as Ever

At least the Crash of ’29 led to the Pecora Hearings and the bankers that gambled with depositors’ money were ruined themselves.  Today the people that engineered the recent disaster are looking forward to their best payday ever.

The “punishment” Wall Street got out of the 2008 meltdown was one year of lowered bonuses.  Pay was rolled back to levels of four or five years earlier, but still far more than way back in 1999. The people on Main Street should be so lucky.

Happy days are here again, at least for the investment bankers.

No one went to jail.  New rules with teeth in them seem less and less likely.  The propaganda machine is pumping out the smokescreen.

Some are calling any attempt to set up a new regulatory scheme to protect consumers a “government takeover.”  Others are blaming the Congress and legislation from 33 years ago for the disaster created by Wall Street subsidiaries that weren’t even subject the “offending” legislation.

Estimates of this year’s bonus pool for Wall Street are running around 1% of our GDP (through the first three quarters of the year).  When you look at it that way, it makes the big numbers comprehensible.  For comparison purposes, all individual income taxes combined amount to about 8% of GDP, and all the Social Security and Medicare taxes also come in near that 8% level.

Over the weekend I caught part of a C-span Book TV interview of Nomi Prins, former Goldman Managing Director with her new book “It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals from Washington to Wall Street.”

While the title is too cute by half, I have to say she nailed the psychology of the people actually making the decisions and doing the deals that led to the meltdown.

She essentially echoed last night’s comment by my friend Dr. Tom Drake:

My point is that many still believe that the derivatives of the past two decades will continue to be the preferred vehicles for increasing returns versus risks. The current flood of money suggests it’s the same this time, but where are the outsized returns this year?

Tom is an interesting character because he tends to treat policy the way a truly wise wolf would treat the moon.  Instead of howling at it, he uses the light to hunt.  In Tom’s case, to hunt for investment themes that will provide him a comfortable retirement and leave something for his progeny.

To see just how quickly Wall Street has forgotten its lessons, check out this statement by the co-head of Morgan Stanley’s global capital markets division:

Morgan Stanley, the second-biggest U.S. securities firm before becoming a bank last year, is hiring as many as 400 sales and trading employees to boost revenue from the business. While debt and equity underwriting have recovered this year after slumping in 2008, Dhanda said he expects the securitization business to rebound next year.

“Within our capital markets business this is one of the big growth areas,” Dhanda, 41, said in an interview. “Nobody expects underwriting to double, but securitization or structured solutions business can double, or triple.”

As Nomi Prins said in her interview, it’s as if the meltdown never happened, and in 2009 the Wall Streeters have returned to doing exactly what they did that led to the problem.  Not only that, she notes, they do it as if they were put on this earth with the inalienable right to do whatever it takes to make money, without a thought to rewarding the ordinary citizens that bailed them out so recently.

The Bloomberg article says it most succinctly:

U.S. Aid Repaid

Morgan Stanley, which reported its first quarterly profit for a year in October, is one of the biggest U.S. banks to return money received from the U.S. Treasury department this year, although it continues to benefit from federal guarantees on some of its debt. The firm repaid $10 billion in June.

Let’s try this on for size:

What if the bailouts had been structured as capitalism would dictate?  Wouldn’t the provider of capital and credit when the companies were on the brink of collapse get favorable terms and very significant control?  Seems to me they would.

So if Wall Street owes its very existence to the taxpayers as lenders and capital investors, why is so anti-capitalist to expect that the providers of that capital and credit have a say on how much the people working at those companies take home in their personal paychecks?

Spare me the whining about “socialism.”  This is pure capitalism.  The provider of the capital stands in the front of the line and sets the terms of employment.  To be otherwise is a form of welfare, or worse yet, extortion.

What turned CNBC into union agitators for those poor abused investment bankers?  Why are they so sure that cutting the current cash and replacing it with enormous untaxed (until years later) equity upside is so bad for the poor downtrodden workers?  Isn’t that the goal of every private equity and hedge fund’s compensation structure?

Imagine what Wall Street and the banks would do if forced to “bail themselves out” by holding onto cash equal to half a percent of our GDP and reinvesting it.  We’d see a lot more investment by private enterprise into the credit system, that’s for sure.  We’d also see the Fed stop being the only game in town, the trough that every hungry piglet turns to rather than deploying their own risk capital.



3 Responses to Same as Ever

  1. Eric iousa says:

    I have heard phrases like “Corporate Communism” and “Welfare for the Rich, Capitilism for the Poor”, but what I haven’t scene much of is rage turned to action by the taxpayer. I don’t know what it would take to make people mad enough to march on the streets by the millions of poor, but I fear the day it happens Wall Street will be scared to death. For me, I work to make money from the situation as I should. Good work as always Howard.

    • hhill51 says:

      Here’s how I think the senior people (as a cut-off, say anyone with total compensation in excess of $1 million) should be compensated. To start with, I’m pretty sure they could survive on $400K or so in cash. Make the rest of their compensation in an equity class pari-pasu with taxpayer equity. For the top performers, let them get millions in stock that does well if the company and the taxpayer does well.

      Let the existing support roll off and get repaid as the loans they truly were, leaving an equity class that taxpayers and employees share in.

  2. Jon says:

    I feel like I’m in church. I don’t go to church, but now I want to. Amen, brother

    (Reading this over I realize that it may seem like I’m dismissing the piece for being preachy. Not at all. This reads like a sermon and a great one at that. Keep it up.)

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