Andrew Haldane · The Doom Loop: Equity in Banking · LRB 23 February 2012 In 1989, the CEOs of the seven largest banks in the US earned an average of $2.8 million, almost a hundred times the annual income of the average US household. In the same year, the CEOs of the largest four UK banks earned £453,000, fifty times average UK household income. These are striking inequalities. Yet by 2007, at the height of the financial sector boom, CEO pay at the largest US banks had risen nearly tenfold to $26 million, more than five hundred times US household income, while among the UK’s largest banks it had risen by an almost identical factor to reach £4.3 million, 230 times UK household income in that year. How do we make sense of these salary increases? The continuing backlash against banking, as evidenced in popular protests on Wall Street and in the City of London, is a response not just to the fact that the world is poorer, as pre-crisis riches have turned to rags, but to the way these riches were privatised, while the rags are being socialised.
"Too Big to Jail" by Simon Johnson Exit from comment view mode. Click to hide this space WASHINGTON, DC – Among the fundamental principles of any functioning justice system is the following: Don’t lie to a judge or falsify documents submitted to a court, or you will go to jail. Breaking an oath to tell the truth is perjury, and lying in official documents is both perjury and fraud. These are serious criminal offenses, but apparently not if you are at the heart of America’s financial system. As Dennis Kelleher of Better Markets has argued, the recent so-called “robo-signing” settlement – in which five large banks “settled” their legal liability for carrying out fraudulent foreclosures on mortgages – is a complete sell-out to the financial industry. First, there was no serious criminal prosecution – meaning that no one will be charged with a felony, and no one will go to jail. Even the terminology used to frame the discussion is wrong. Top bankers want to make a lot of money.
Where is Wal-Mart when we need it? The role of the finance industry is to produce, trade, and settle financial contracts that can be used to pool funds, share risks, transfer resources, produce information, and provide incentives. Financial intermediaries are compensated for providing these services. The sum of all profits and wages paid to financial intermediaries represents the cost of financial intermediation. I measure this cost from 1870 to 2010, as a share of GDP, and find large historical variations, shown in Figure 1 (with the various data sources, see Philippon 2011 for details). The cost of intermediation grows from 2% to 6% from 1870 to 1930. Figure 1. Then comes the issue of measuring the output of the financial sector. Figure 2. For the corporate sector, we need to look at bonds and stocks, and for stocks, we want to distinguish seasoned offerings and IPOs. We can then estimate the cost of financial intermediation, defined as the value-added share divided by output series. Figure 3. Figure 4. What happened?
Wall Street Confesses to Bonus Culture’s Ills: William D. Cohan Imagine if you could hear directly, albeit anonymously, from the normally secretive bankers and traders who manufactured and sold the trillions of dollars in toxic debt securities that pushed the world’s financial system to the brink of disaster in 2008. Would they defend themselves and their actions, or show a degree of remorse for what they caused and have not been held accountable for? Well, you can find the answer to that question in “Conversations With Wall Street,” a compact -- and largely overlooked -- book by Peter Ressler and Monika Mitchell published last year by FastPencil Premiere, in Campbell, California. Ressler and Mitchell worked together at a Wall Street executive search firm that specialized in finding senior people for fixed-income trading departments. “In the beginning of the crisis, we were as horrified as anyone else,” Mitchell wrote in the book’s preface. Stripped of Glamour It ain’t pretty. “The whole game was about price appreciation,” he explained. (William D.
Reckless: The Inside Story of How the Banks Beat Washington (Again) - Jesse Eisinger/ProPublica - Business One year ago, the largest financial institutions on Wall Street were desperate to show off their strength by paying out, or raising, dividends for the first time since the Great Recession. After conducting a secretive test of the banks' health, the Federal Reserve granted most of their requests in March 2011 -- over loud objections from economic luminaries in Washington and across the country. Now, for the first time, we tell the story of why the Federal Reserve caved, and how Wall Street still owns the place. Reuters In early November 2010, as the Federal Reserve began to weigh whether the nation's biggest financial firms were healthy enough to return money to their shareholders, a top regulator bluntly warned: Don't let them. "We remain concerned over their ability to withstand stress in an uncertain economic environment," wrote Sheila Bair, the head of the Federal Deposit Insurance Corp., in a previously unreported letter obtained by ProPublica. Tarullo is known for his temper.
Tim Geithner: Financial Crisis Amnesia The Incentive Bubble Photograph: Joe Costa/NY Daily News Archive via Getty Images: Macy’s Thanksgiving Day parade, 1939 The past three decades have seen American capitalism quietly transformed by a single, powerful idea—that financial markets are a suitable tool for measuring performance and structuring compensation. Stock instruments for managers and high-powered incentive contracts for investors have dramatically altered the nature and level of incentives and relative rewards in our society, on both sides of the capital market. In 1990 the equity-based share of total compensation for senior managers of U.S. corporations was 20%. By 2007 it had risen to 70%. This transformation would be welcome if it served to structure incentives and rewards appropriately—indeed, nothing is more important for a market economy than the structure of incentives for managers and investors. It has become fashionable to bash capital markets and financial institutions. The Ideal
Sovereign ratings when default can come explicitly or via inflation Charles A.E. Goodhart, 2 February 2012 Inflation in the UK is now more than double that of France, but only one country has had its credit rating downgraded. This column argues that government credit ratings should be aided by a second rating measuring the potential loss of real value, whether by inflation or default. The authorities in Britain are proud of the fact that over the last three centuries there has been no default on British government debt, despite debt-to-GDP ratios climbing to high levels (near or over 200%) after each of the three main wars. Credit ratings do exactly what is claimed on the tin – they measure the risk of default. In the last three years, for example: Inflation in France has averaged 1¼% compared with 3⅓% in the UK.Expectations of future inflation, as measured by the margin between indexed and nominal bonds are 1.6% in France and 2.5% in the UK. Financial institutions would not be happy with such an additional (real value) rating.
Central Bankers in the Line of Fire - Luigi Zingales Exit from comment view mode. Click to hide this space CHICAGO – Central bankers should not only be above suspicion of wrongdoing, but also appear to be above it. On August 15, 2011, Hildebrand’s wife, Kashya, exchanged 400,000 Swiss francs into dollars. A central banker should put his and his spouse’s money in a blind trust. Nonetheless, the circumstances of Hildebrand’s departure might be more worrisome than his lapse of judgment. Most importantly, together with the Swiss finance minister, Hildebrand introduced the “Swiss approach” to bank regulation. Any economist would consider these policies wise, but they won him few friends in the business world. I was born in the country of Machiavelli, and yet I still find it remarkable that, after all these attacks on Hildebrand, the stolen private record of his family’s bank account was leaked to a vice president of the SVP, who made it public. Fortunately, we have a good independent test.
The Case for Treating Big Finance Like Big Pharma - James Warren - Business A pair of University of Chicago law professors say the federal government needs to regulate new financial products the same way it tests new drugs for safety Roadside Attractions Jeremy Irons captured a new Wall Street's moral ambiguity in the 2011 film "Margin Call" when his fictional chief executive lectured his investment bank staff on the three ways to make money. "Be smarter. Be first. Or cheat. That moment is central to a distinctly non-fictional proposal by two University of Chicago law professors which will cause dyspepsia among their famous free market colleagues at the university and the well-heeled leaders of Chicago's booming and path-setting exchanges, where many of the most important financial products of the past 20 years have been born, including derivatives. They want to dramatically re-regulate new financial products, including sophisticated derivatives, that they assert "facilitate gambling and regulatory arbitrage, both of which are socially wasteful activities."
Hudson: The Neo-Rentier Economy « Multiplier Effect Michael Hudson is giving a talk titled “The Road to Debt Deflation, Debt Peonage, and Neofeudalism” at the Levy Institute on Friday, February 10 at 2:00 p.m. Hudson is a research associate at the Levy Institute and a financial analyst and president of the Institute for the Study of Long Term Economic Trends. He is distinguished research professor of economics at the University of Missouri–Kansas City and an honorary professor of economics at Huazhong University of Science and Technology, Wuhan, China. The abstract for the presentation is below the fold. “What is called “capitalism” is best understood as a series of stages. To make a long story short, the end product of capitalism thus has become a Neo-Rentier Economy – something that Industrial Capitalism set out to replace in is Progressive Era from the late 19th century to early 20th century. The result is economic shrinkage – the opposite of industrial capitalism’s original expansive industrial and commercial impulse.
Michael Hudson: Banks Weren’t Meant to Be Like This By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College A shorter version of this article in German will run in the Frankfurter Algemeine Zeitung on January 28. 2012 The inherently symbiotic relationship between banks and governments recently has been reversed. In medieval times, wealthy bankers lent to kings and princes as their major customers. Yet the banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. If there is any silver lining to today’s debt crisis, it is that the present situation and trends cannot continue. Fortunately, it is not necessary to re-invent the wheel. How Banks Broke The Social Compact, Promoting Their Own Special Interests People used to know what banks did. The Present Debt Quandary
Free the Banks! The Case for Massive Deregulation of the Financial System - Megan McArdle - Business Pascal-Emmanuel Gobry Since the financial crisis of 2008, everybody and their mother has been looking for some way to make sure it doesn't happen again. The responses so far have been woefully inadequate. No one thinks the reforms that have been enacted or are being considered would solve the problem. The most "radical" reform anyone has proposed is a return of the separation between retail and investment banking, which in my view doesn't solve anything: the two biggest busts in the financial crisis, Lehman Brothers in the US and Northern Rock in the UK, were full-investment banks and full-retail banks respectively. What's more, the devil is in the details: when you get down to it, it's very hard to draw the line between "retail" services and "investment" ones, or at least not in a way that would choke credit off the economy and take the financial system back to the 1990s. So, what do we do? My blueprint has two basic planks: I know, I know, but hear me out. It's antiquated. Everything.