Posts Tagged 'bailouts'

The Audacity – and Righteousness – of Citigroup

Published June 24, 2009 Trivial , Universal Leave a Comment
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Citigroup executives have decided in their infinite wisdom to increase base salaries for many of their employees by as much as 50 percent.

The bank says the raises – which will be partially offset by a reduction in bonuses, though overall compensation packages could be higher or lower – are necessary to remain competitive … in an environment where the official unemployment rate will soon be in the double digits no less.

It’s easy and probably fair to accuse Citigroup management of being at a minimum extremely audacious and tone-deaf to the current environment. This is, after all, a financial institution that did everything in its power to run itself into the ground – egregious compensation, dubious loan-making, wanting risk management, overambitious acquisitions, questionable business line expansion.

As a result of its shoddy strategy and the crumbling economy, the company lost a whopping $27 billion in 2008.

The only reason Citigroup even exists today is because the government decided in its infinite wisdom that the company was ‘too big to fail’ and stepped in with capital several times – $40 billion in direct investment and another $300 billion in loan guarantees – to save it from bankruptcy.

Now the government owns a huge chunk of the company, which still apparently doesn’t give it the right to have a say in determining compensation for the rank and file.

The funny thing is, Citigroup executives may be doing the right thing, although they certainly could have done a better job explaining/defending their action.

One of the reasons – though certainly not the primary one – this country and its financial institutions got into the mess it did was because compensation policies were so heavily tilted to short-term performance, encouraging all employees, even those in areas like compliance, to woefully undervalue risk.

The decreased reliance on bonuses as an assumed form of regular compensation should help mitigate that carefree behavior in the future (though it will also likely stifle innovation as employees focus more on keeping their jobs as opposed to generating outsized profits – well, you can’t have everything and if i had my druthers, I’d rather our banking system be more preoccupied with stability than unnatural growth).

And while I want to scoff at Citigroup’s explanation that the salary increases are necessary to “ensure its employee compensation practices are competitive,” as a company spokesman put it in a Bloomberg article, it’s not entirely untrue. The irony is that because the government stepped in to save Citigroup as well as dozens of other troubled banks, the market for financial services employees is not nearly as bad as it would have been. Many of Citi’s competitors have already paid back the TARP money or plan to do so soon and will likely be offering better compensation packages to top employees.

You may think this is all a good thing, because the economic fallout of a collapse in our banking institutions could have been disastrous, certainly much more damaging than the destruction caused by the dislocations in the automotive industry.

I unfortunately believe for all the hundreds of billions of dollars we’ve spent, we’ve changed very little structurally, and only put off our economic day of reckoning a little while longer.

I also think this focus on compensation is mostly noise and beside the point. What the government really needs to do is start breaking up some of these institutions which we deemed necessary to save because they were ‘too big to fail’ and crafting regulation to limit this kind of concentration of power within the financial services industry.

Alas, if anything, mostly I’ve been seeing it go the other way, as stronger players in the industry snap up the weaker ones and get even bigger. Combined with the moral hazard we’ve perpetuated with our reliance on bailouts, that consolidation is likely a recipe for disaster.

But Kate Edmonds Donner, an event planner in New York, said the best plan is to leave children at home or send them home after the ceremony.

“If it’s a formal wedding, children should go home after the cocktail hour,” she said. Practicing what she preaches, Ms. Edmonds Donner and her husband, Alex Donner, the society band leader, did not invite children to their wedding last year in Garrison, N.Y.

Newspaper bailout? Please no … but we do need The Watchmen

Published May 5, 2009 Deep , Universal Leave a Comment
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What a shock. A reporter (fearing for his own job, perhaps?) asked White House Press Secretary Robert Gibbs if the potential imminent closure of the venerable Boston Globe calls for yet another government bailout, this time to save the flailing newspaper industry.

Gibbs was sympathetic to the plight of the industry but at best non-committal with his answer. Yet Clusterstock writer Joe Wiesenthal seems to think such a bailout is coming (although not in time to save the Globe), and that the Obama administration and Congress will justify such largess by carping “about how the lack of a thriving fourth estate posed (sic) ‘systemic risk’ to democracy.”

I don’t think Wiesenthal is right. The public appetite for more bailouts is basically nil, and if the auto industry is now getting the stiff arm from Congress then I can’t see how newspapers are going to be able to feed in any significant way at the public trough. The Obama administration has already rejected calls from house Speaker Nancy Pelosi asking for looser antitrust restrictions created under the Newspaper Preservation Act of 1970.

However, I’ve also seen our government do some stupid and surprising things over the past year, and it did after all once create a Newspaper Preservation Act, so perhaps we will see government intervention in the newspaper industry.

And make no mistake, a widespread newspaper bailout would be a stupid thing to do. No one under the age of 50 wants to read newspapers anymore. So what? Most of these people haven’t stopped staying up to date on current events, but are finding the news – at least the news they want – through other means, such as our beloved Internet and the emerging blogosphere.

As a former journalist, trained at one of our nation’s finest J-schools, I want to be sympathetic to the cry and hue I hear everyday from folks in the industry. But media companies should have to deal with the same technological creative destruction forces that numerous other industries have been forced to confront.

The newspaper industry will have to find a way to stay relevant amid emerging technological (perhaps the new large-screen Kindle will offer one answer) and societal changes, or die the slow death it deserves. I am confident a market will always exist – or at least eventually reemerge – for people who know how to effectively create and/or edit content.

However, I have one important caveat here. There is one function that newspapers perform that I do think is vital to our democratic society: Investigative journalism. I cannot begin to enumerate all of the political and business scandals that would likely never have seen the light of day had it not been for the fine investigative work funded by the newspaper industry.

Indeed, much of that investigative work is already disappearing as the industry adjusts to the new economic realities by paring their operations to the bone. Whether newspapers survive or not, the days are already numbered when editors would allow their best investigative journalists to go off the grid for months at a time pursuing a potential scoop that could net the publication a bunch of Pulitzer prizes.

Other media – like magazines and television – have occasionally shed some light on some very dark corners of American history, and certainly some in blogland would pick up the muckraking mantle of the newspaper industry, but it is possible that the private market will no longer be interested in supporting the important investigative work the newspaper industry has historically done.

If the newspaper industry does not survive, and no other privately funded source emerges to effectively replace the investigative work it once did, then the government should step in to create and fund an investigative agency that would perform that function.

A group of Watchmen, if you will (and Watchwomen, of course).

I haven’t given much thought about the organization or mandate such an agency would have – although it would have to have an extraordinary amount of independence from government interference and electoral politics, even more than the Fed and the Supreme Court currently enjoy – and certainly we’d need to figure out who would watch the watchmen. It could be that the creation of such an agency may be too complicated or costly for the federal government.

In any case, I can live easily in a world without newspapers. But a world without a functioning investigative journalism system would be scary indeed.

Playing God and Taking Shortcuts…

Published April 1, 2009 Deep , Universal Leave a Comment
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This financial crisis is more than what it appears.

It is symptomatic of a society that sometime over the last 30 years lost its way by seeking not the road less traveled, but instead the quickest route.

It is the culmination of a mindset that increasingly became interested in pursuing immediate gratification at any cost.

Look around you. In every area of modern life, the shortcut has become the rule, not the exception.

In sports, we substituted medicine for athleticism as steroids offered the quickest path to success (And I cheered as Mark McGwire belted homer after homer chasing down Maris’ record).

In entertainment, we substituted notoriety for talent as reality television offered the quickest path to fame (And I lapped it up as Richard Hatch ‘survived’ an island and dozens of out-of-control women wooed Flavor Flav).

In war, we substituted power for strategy as shock and awe offered the quickest path to victory (And I couldn’t pull my eyes away as CNN aired its little war video game, the pinball-like sights and sounds of buildings being destroyed and people getting killed).

In friendship, we substituted technology for intimacy as tweets and status updates offered the quickest path to communication (And I blog away, making facile analogies as dreams of writing the Great American Novel slip away).

It goes on and on and on.

We wanted it big, we wanted it all, we wanted it now.

Cheating, if not encouraged, was at least ignored. Just pay no attention to that man behind the curtain.

So is it really any surprise that in business, too, we fell prey to the same phenomenon? In hindsight, it almost seems inevitable that we indulged in this financial alchemy, pursuing policies and practices to make the quick buck while conveniently ignoring the potential long-term negative consequences of our actions.  The no-doc loans, the credit default swaps, the collateralized debt obligations belong in the same metaphorical bucket as the anabolic steroid, Omarosa and gastric bypass surgery.

The funny thing is, the issue isn’t due to a loss of work ethic. Most of the bankers who concocted these weapons of mass destruction worked insanely hard at their jobs, just as our medically enhanced athletes put in long hours at the gym, just as our most vacuous reality stars went to incredible lengths to promote themselves (and just as I am spending way too much time trying to fine-tune this post).

And I’m not about to suggest that this eagerness to seek the shortcut is an entirely new development. People have of course always found ways to cheat or exploit the system – it’s just that in the past, the tools were more rudimentary and thus less dangerous (e.g. the spitball and the corked bat just can’t wreak the same havoc as the human growth hormone).

We became too smart and too powerful for our own good. We acquired knowledge and technology, but not the wisdom to use them productively, or to realize that sometimes we should refrain from using them at all.

And unfortunately, our primary solutions to this crisis so far – the stimulus plans, the bailouts, the monetary injections – offer more of the same. We are still seeking the quick, easy way out. Wanting it all, and wanting it now. Not willing to deal with the consequences of our actions.

Which of course makes perfect sense. In a world where man ultimately controls so little, including the time and manner in which he will depart it, how can we be surprised when he believes he has figured out a better way of accomplishing a goal and overplays his hand.

We have gotten what we deserved.

We have somehow lost our way.

We better find it back.

The Congress AIG Bonus Bill: Bravo! (Seriously…)

Published March 20, 2009 Trivial , Universal Leave a Comment
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Great. Now there’s a backlash to the backlash to the AIG bonuses, and everyone is scolding Congress for acting so rashly in crafting a bill designed to recover 90% of the bonuses in taxes.

Conservatives are complaining the bill is unconstitutional and unproductive. In his Obama interview, Jay Leno said he’s frightened about its implications, and dagblog.com’s own Genghis is mocking the effort.

Gimme a break.

Don’t get me wrong. I have plenty of problems with this bill.

I question the constitutionality of the law.

I think targeting bonuses alone is unwise and insufficient. Companies will just get around the law by increasing base salaries, and bonuses in any case are a reasonable compensation incentive, as long as they’re tightly tied to performance at the individual AND corporate level.

I agree that some talented people may be poached by companies not encumbered by the law and that this would put the very institutions we’re trying to rescue even further behind the eight ball.

I worry that banks that aren’t healthy may try to return the TARP money as soon as possible, undermining the main purpose of the program in the first place – keeping the banks well capitalized and the credit flowing.

However, I think all of these potential issues aren’t nearly as concerning as the critics would have you believe.

I’m no lawyer or Constitutional expert, but I do believe the bill of attainder issue has been at least somewhat addressed by broadening the law to include bonuses paid by any bank receiving a certain amount of TARP money. At a minimum, the answer doesn’t appear clear-cut and deciding questions of legislative constitutionality is one of the reasons why we have the court system anyway.

While I’d rather have Congress devise a broader, much more considerate compensation bill, I’m not going to cry that banks which are receiving significant sums of taxpayer money in order to stay solvent are severely limited in their ability to pay out bonuses to people already making a very good living (the bill only targets households with income greater than $250,000). When these banks are healthy and making a profit again, they can return the money and institute whatever compensation policies they want.

In terms of top talent leaving banks targeted by the bill, I think this concern has been wildly exaggerated. The financial industry has been decimated; unemployment in the sector is very high and even some very talented capable individuals are out of work and available should any talent be poached. Besides, you gotta find it laughable that we are worried about these ‘best and the brightest’, since it was in large part these very same folks with their fancy financial alchemy that created the monster which finally broke our system. Perhaps a thorough management cleansing at some of these companies would ultimately be helpful.

I also largely dismiss concerns regarding the unintended consequences of incentivizing banks to return the TARP money too quickly. If banks are healthy, we want them to return the TARP money as soon as possible. If banks are not healthy, and still attempt to return the TARP money, the government can stop them. Government regulation requires a certain amount of capitalization, and the stress tests will hopefully further separate the healthy institutions from the sick ones.

In short, I am glad Congress is moving in haste on this issue, even if in practical terms the AIG bonuses are chicken feed and any legislation addressing them will do very little in terms of getting us out of our current mess.

Would it have been so much better had we used force of law to stop AIG from giving out the bonuses n the first place? Absolutely, and if Geithner or others did not act forcefully enough to make that happen, I hope they are taken to task for that failure.

Do I hope our legislators take the time to craft a meaningful, defensible bill that minimizes any negative unintended consequences? Of course. Now that the first tranche of bonuses have already been paid out, and it will be up to the government to get the money back, it only makes sense to do this right.

But symbolism matters, and if we plan on continuing this practice of doling out hundreds of billions of dollars to companies in need, we have to show that this kind of behavior won’t be tolerated. It’s our money, and we have a right to say how it is used.

If in the process, we begin talking about how our culture of excess and misaligned compensation policies led to an unhealthy focus on short-term profit and an imbalance in dangerous risk-taking, then all the better.

Dealing out a bunch of hooey and driving me mad …

Published November 16, 2008 Trivial , Universal Leave a Comment
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It’s bad enough the government will soon be doling out billions and billions of taxpayer dollars to bail out the bloated, mismanaged U.S. auto industry.

But please, please, do not give any of that money to the nation’s car dealers.

According to a Yahoo story, an auto bailout package is likely to pass in large part because of pressure from the American auto dealership lobby. Even worse, a spokesman for the National Automobile Dealers Association says he wants dealers to get some of that money.

“That legislation needs to operate to ensure the presence and the viability of the dealer network. The two go hand-in-hand. You can’t have one without the other,” the spokesman said. Another industry lobbyist said dealers are bringing a ‘lot of heat’ on legislators to get a deal passed.

Ugh. I can’t stand the car dealership lobby. There are thousands of car dealerships in the U.S., in almost every district in the nation. They have a ton of money and yield far too much influence in our political system. The automobile dealer network is an inefficient, outdated business model which has only continued to thrive because of its successful political wrangling.

You want to know why you can’t go on the Internet today and buy a car directly from a manufacturer (or even from a dealer)? Because in most states, the auto dealer lobby has made sure that direct selling of cars is illegal. The best you can do is go to a site and ask for a quote from your local dealer, who will undoubtedly try and upsell you a whole bunch of stuff you don’t need as soon as you get to her lot.

I’ve only had to go through the car purchase process once but I remember it being about as unpleasant as can be, as I was quite sure I was being screwed in a thousand different ways. The Internet has helped level the information playing field somewhat, but it could have done so much more if car dealers hadn’t successfully resisted almost all efforts at innovation.

Unfortunately for the US taxpayer, it’s mostly business as usual … on their lots AND in the hallways of Congress.

Obama will mean the end of capitalism!!! (Whoops, too late) …

Published November 12, 2008 Deep , Universal 7 Comments
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The day after Obama won the election, a Republican friend of mine on Facebook joined a group that planned on getting together on Inauguration Day to mourn ‘The End of Capitalism as We Know It’*.

Members of the group were waxing bitter in the message board, complaining about how Obama was a socialist who was going to destroy the U.S. economy.

I had to laugh … and cry.

Cry because these people were so caught up in their own right-wing economic philosophies (many of which I actually agree with) that they couldn’t even for one moment take the time to appreciate the historical significance of what this country’s voters had just done.

No matter what your politics, every one should be able to do what John McCain eloquently did on election night: Recognize that this country has taken a large, profound step to move past its racist beginnings (and recent history) and elected a candidate that preached unity and bipartisanship and re-engaged vast segments of the American people by inspiring a renewed sense of hope and idealism.

But many of Obama’s opponents don’t even want to give him a fighting chance. They believe he is doomed to fail and his liberal agenda will cause the collapse of the American empire and its glorious capitalist experiment … which is why I also had to laugh when I read those messages.

That experiment has already failed. The empire is already collapsing. Socialism is already here … And it all happened under a Republican administration.

Just today, Treasury Secretary Hank Paulson generously let the American people know that after careful deliberation, the $700 billion he asked for from Congress is now going to be put to a vastly different use than was originally intended.

Money that was supposed to be used to buy up bad loans and mortgages rotting away on the balance sheets of banks and gumming up our credit system is now going to be doled out  (in a command-control style, I may add) to buy stakes in troubled banks, as well as potentially help out a number of as-of-yet unspecified companies in as-of-yet unspecified non-financial industries.

(So much for the program’s name: TARP, Troubled Asset Relief Program. Calling it the Tits and Ass Relief Program would have made about as much sense).

Mark my words: The cost of this program will end up far exceeding $1 trillion (though we may eventually get some of that money back). And that’s in addition to the hundreds of billions the Fed has already spent trying to buck up our decrepit financial system.

Instead of facing the consequences of a decade-long U.S. consumer spending binge, which was encouraged and exacerbated by a housing/credit bubble caused by our government’s easy money policies, we are flailing around haphazardly, trying anything and everything to bail our way out of this mess. But all we are doing is throwing good money after bad, and leaving future generations of Americans an enormous, crippling pile of debt.

The most egregious example of this will likely be the auto industry bailout that is quickly becoming a political inevitability. Right now, the best I can hope for is that the money comes attached with some sort of regulatory plan and set of conditions. If changes aren’t made to the auto companies’ operating structure (i.e. mainly, a renegotiated contract with the labor unions), they’ll be facing the same dire situation a few months down the road because they just cannot currently compete with the lower-cost manufacturers in Japan and throughout the rest of Asia.

Do I think an auto bailout is a good idea? No way. I’d much rather see GM and Ford be allowed to go bankrupt, and work to restructure their operations through that process, while we spend the money we’ll be using in the bailout to retrain displaced workers and invest in start-ups pursuing new green energy technologies. But I understand millions of jobs are at stake. I understand that the American people would find it hard to understand why Wall Street and the fat cat elites who work there and produce nothing of tangible value got bailed out while the manufacturing engine of the country was left to wither on the vine.

The fact of the matter is, America has never been a purely capitalistic system. We came to grips some time ago that capitalism without safety nets ends up benefiting the few at the expense of the many, and will eventually destroy itself through social instability. That’s why we have Social Security, and welfare, and Medicare, and public schooling and student loan programs, etc. etc.

But it is still quite ironic that the biggest government nationalization and socialist expansion efforts in decades will be coming at the end of a Republican administration that never pursued the fiscal responsibility platform of the conservative movement and is now too afraid to deal with the nasty flip side of the free market policies it espoused.

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*I think that was the name of the group – I can’t find it on Facebook any longer … maybe they, too, realized the insanity of their hypothesis

 

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