USA Today: What Happens When Investment Bankers Run a Country

If you’re like me, you’ve probably looked at the US recently and wondered what has happened to your country. I’m not talking about the GOP/ Obama situation nor am I referring to capitalism vs. socialism.

I’m simply talking about basic common sense items like: stay out of debt, don’t do anything if it doesn’t make sense, do you homework before signing a contract, etc.

Indeed, the American government (I’m including the Federal Reserve in this category) began charting a strange course as a country when the Financial Crisis first accelerated with Bear Stearns’ collapse in February ‘08.

Granted we’d flirted with government intervention several times before (Chrysler in the ‘70s, Long-Term Capital Management, etc.). But we’ve since taken it to a whole new level. The basic risk of capitalism (failure) has been removed from the equation for most major US businesses. However, this risk was removed at the expense of increasing the US’s debt load and putting the dollar at risk.

Pushing to remove risks so you can pursue insane business practices? Crazy deals that offer little benefit to the parties? Doing things quickly without actually considering the consequences?

Sounds a lot like investment banking doesn’t it?

Investment banking as an industry runs almost completely contrary to wealth creation since it thrives on fees rather that capital appreciation. Investment banking is about making DEALS (any deals) regardless of whether the deals make sense or benefit both parties (after all, the advisors to the deals, the investment bankers, get paid based on commission and free stock).

Indeed, investment banking is one of the few industries on the planet in which you can get rich by creating debt for others to pay off. Goldman Sachs (GS), as you know, is an investment bank. And this financial crisis is riddled with former Goldman Sachs execs.

Hank Paulson is the most famous. In the private sector you’ve got John Thain of Merrill Lynch, Robert Steel of Wachovia, Ed Liddy of AIG. On the government side of things, you’ve got Hank Paulson as Treasury Secretary, World Bank President Robert Zoellick, Neel Kashkar who’s in charge of running the Troubled Asset Relief Fund (TALF), and others. On a side note, Matt Taibbi, a reporter for Rolling Stone, just did an outstanding piece detailing the the full extent of Goldman's involvement in the bailouts and crisis:

You can see the “investment banking” stamp everywhere. Consider the deals the Feds have created and consider the actual benefit they offer to the parties involved:

• Bear Stearns/ JP Morgan (JPM)
  
• The US taxpayer/ Fannie Mae (FNM) and Freddie Mac (FRE)
  
• The US taxpayer/ AIG (and all of its counterparties)
• Merrill Lynch/ Bank of America (BAC)
  

All of these deals were terrible. All of them were rushed through. And all of them were allowed because of lax regulation/ poor analysis. To this day no one in the mainstream media seems to have adequately analyzed these deals in a way that includes actual numbers. Instead we get dopey adages like “it’s about stemming the tide,” it’s important to “stop the bleeding,” “it’s about saving the system.”

You can also see the “investment banking” stamp on the Federal Reserve. Two years ago, the Fed owned $800 billion worth of Treasuries. Today, its balance sheet contains $2.1 trillion worth of assets, only $543 billion of which are Treasuries. And with only $51 billion in capital, the Fed is leveraged at 42 to 1.

Tons of junk assets that aren’t properly valued? Refusal to reveal the real worth of your balance sheet? Leveraged to the hilt?

Sounds like investment banking.

To me, this financial crisis is nowhere near over for one simple reason: we continue to perpetuate the VERY same business practices that created it in the first place. It’s like a junkie getting clean by continuing to use dope. In the US government’s case, it’s just that the junkie has super clever explanations and jargon to explain why this is a good idea. The reality is that it’s not. And it’s going to end very, very badly.

Comments

[Ergo:]

Excellent points. There's a real problem with moral hazard, especially given how the vast money generated in fees has been used to capture the political machines. And a lot of economic efficiency has been sacrificed. There's a parable about not building a house on the sand. But our house is made of sand. Even if we do see a recovery, IMO, it'd be short term at best. There's too many potential disasters lurking about to not have something happen.

May 24 01:08 PM

[dcb:]

You knw this is the kind of article only a looser writes. Just because it didn't work before, and hasn't worked many times doesn't mean it won't work in the future. As an investment banker I advise that we keep the deals flowing until we find one that works. :-)

Hey, want to see something funny. I can't get the link, but there is a video on Bloomberg that has Geitner calling for wall street to change its pay practices. Isn't he the guy who called Dodd to ensure the bonus money kept flowing to AIG. Boy, I wonder how much I really believe a word that comes out of this guys ass (i mean mouth). I love people who say one thing for the media and do the exact opposite when they think nobody is looking.

May 24 05:40 PM

[Moon Kil Woong:]

dcb: Geitherner can call on everyone to change their pay practices all he wants. The simple fact is its tokenism unless he does something. He probably knows this just as well as you or I. That's why he is always saying such lovely things but actually nothing much gets done at his office besides continual bailouts to the financial community. he sees his job as a dispenser of yours and my money, not much else (not his since he likes to not pay taxes).

Also he is just stating the obvious that most agree with, bankers should get paid for long term performance not just annual performance which we all know can be windowdressing with real losses being hidden in some deep hole (often derivatives or assets that can't be assessed for their true value). You would think we would have learned a thing after Nick Leesen. Paying someone to outperform the market without controls and no real punishment for failure just leads to people just taking inordinate amounts of risk.

Even if we did pay people only for long term performance, the sad fact is, even poor performing people in the market get paid very very well. We can see this in the fact that 85-90% of fund managers are making hundreds of thousands to millions and not making $45,000 a year and living in a room that's about as big as a dorm in NYC. Why do I say 85-90%, because that's about as the percentage of funds that underperform the index they are linked too (most often the S&P 500). Strangely if you fit it onto a probability curve then you find that to be about 2 standard deviations out. Which may mean even the outlyers may just be balls on lucky.

Which means, probably everyone is overpaid, even the outperformers. Certainly Geithner is not willing or able to do anything about that.

May 24 11:43 PM

[JMac:]

Nothing was done at gunpoint, including voting. America is where American's have brought it.

The question is really this. Can this democracy or any democracy survive once voters discover and politicians to pander to voting themselves "generous gifts from the public treasury?"

Isn't voting for someone who will bring "generous gifts" to oneself acting in one's self interest? Isn't acting in one's self interest the premise for the most efficent allocation of resources in a free market it?

May 25 10:43 AM

[fireball:]

the republic was protected as were minority rights by constitutional, law and a system of checks and balances. it has been mangled, reinterpreted, and rearranged until it can be finished off by democracy (mob rule).
when banksters run the country they come to own all real assets. this is simply the warnings of the founders coming to fruition. they and their lobbyists have owned the politicians for a long time. think federal reserve as the owner of government rather than part of government. the lawyers they pay for make the laws for the bankster cartel.
voting integrity is subject to electronic integrity.

May 25 11:04 AM

[Sober Realist:]

The IMF says that if you covered up the name of the country in question (USA), then our current situation could be mistaken for one often seen in an emerging market --- private sector oligarchs who get in bed with the political system of the country, overleverage themselves, and bring down the country's economy. In our case, it's the financial oligarchs who have perpetrated a coup on our government.

May 25 01:53 PM

[EttU:]

Investment bankers are not worth a small percentage of what they now get paid. They do very little, they take my money move it around, take huge fees for doing so and what have they created in doing so, a BIG NOTHING, In the process my investments or savings are destroyed.

Our countries big mistake was when everyone went gag gag over the fact that we were becoming a service industry. Yeh, we serve the bankers and they screw the country while becoming supper rich. A country which can not actually manufacture and produce products and appears to be able to only enrich a few at the expense of everyone else is not likely to be great.

The Republicans and Bush did a beautiful job over their 8 years destroying the middle class, and enriching the top 5% of the population.

I hope that Obama's policies actually bring some change for the better, but I have my doubts.

May 25 05:33 PM

[Sober Realist:]

Ettu,
They won't bring about any change at all. Read the link in the article:
www.buffalobeast.com/1...

May 25 09:22 PM

[Graham and ...:]

Dear Sober Realist:

I think that it was Lehman Brothers, of all "people" who first said, that America's credit profile was similar to that of Third World countries such as Botswana (then single A). And this was shortly after the 1987 crash!

May 27 12:13 PM