Government Not Allowing Finance to Heal Itself

I was flattered when I first read Who cares if Wall Street ‘talent’ leaves?. It looked an awful lot like something I wrote in April, Don’t Fear the Brain Drain. The dozen or so readers I had at the time may remember it.

Actually, the CNN/Fortune article is quite good. And it warms my heart to see an outlet like CNN publishing rabble-rousing stuff like this. The fact that the piece is spreading like wildfire is good news. It means more people are waking up to the fact that our finance sector needs to be downsized.

The editorial focuses on exec pay caps; whereas mine was about how the “brain drain” is a necessary part of rebalancing our economy. And that many of these executives are essentially glorified salesmen, rather than the financial geniuses they are often portrayed as. (I wonder…. does a statement like that hurt my chances at landing a 7-figure job on Wall Street one day?)

Anyway, here are excerpts from Fortune/CNN’s piece:

There’s no need to fear a Wall Street brain drain — despite the crackdown on pay by Washington…

Critics warn that reining in pay makes it hard to keep talented employees. Hemmed in, institutions like AIG, Bank of America and Citigroup could lose their best people.

Still, we say Godspeed to this ‘talent.’ After all, the traders and suits in the corner offices don’t exactly have an unblemished track record. In 2008, Citigroup, BofA and Merrill Lynch (since acquired by BofA) posted a grand total of $51 billion in losses.

Yet even as they were running themselves into the ground, the firms managed to pay out more than $12 billion in bonuses — including 1,606 million-dollar-plus bonuses, according to a report from the New York attorney general’s office.

I would add that America’s leaders are not allowing finance to heal itself. Orderly bankruptcies would cure the brain drain naturally. We need to press them to do so, but it’s probably already too late.

I’m a free-market guy, so it pains me to say the following. But if they don’t put these zombie banks out of their misery, we need to force them to at least break up the TBTF institutions (or SDIs, systemically dangerous institutions, as William Black calls them).

Share and bondholders need to be wiped-out at insolvent firms. Moral hazard is one of the most pressing issues we face. In many cases, boards and upper management also need to be replaced. You can be sure that if the shareholders were wiped, this would happen naturally.

I’m torn on pay caps for financial firms, but am coming down on the pro-side. Those who say that this is socialist are misguided. Every big bank (and quasi-bank) is essentially a government-backed entity. They are huge beneficiaries of public support.

It is unacceptable to have bonuses like we’re seeing at Goldman Sachs (GS) and others. These “banks” depend on the taxpayer in many ways. I’ll list a few:

• FDIC Debt Guarantees, TLGP
• TARP, direct bailouts
• Artificially low interest rates, which benefit banks while punishing savers and retirees. Also forces people into riskier asset classes
• Selling garbage mortgage-backed securities to the Fed
• Transferring mortgage risk to Freddie (FRE), Fannie (FNM), and the FHA

Comments

[russ:]

Rambling and inconsistent, with some goofy ideology thrown in. "Forces people into riskier" investments? All investments involve making a choice between asset classes. There is no "forced", it is a simple choice between risk and return, as it should be. This guy must get his politics and economics from the Fox bozos.

Oct 26 08:31 AM

[Jim P. Smith:]

I don't see the inconsistency russ. He pretty much says "off with their heads"

Doesn't sound too ambiguous to me. I totally agree with him on the 'rewarded salesmen' bit... but that is exactly what a capitalist system rewards - top of the line (revenue) producers.

Where capitalism fails is that there is no protection against ignorance, and we can't (each one of us) know everything... and most plain folk don't want to know ANYTHING about finance.

Ignorance leads to exploitation by con-men (the very same salesmen we were talking about earlier - because the best salesmen/con-men rise to the top), and everywhere you look in a capitalist society there is ignorance to exploit.

Oct 26 09:19 AM

[User 465107:]

I'm disappointed every time I hear you say you're "pro pay caps". It weakens your "anti bailout" argument. Arguing for pay caps is arguing that "two wrongs make a right". Needless to say, they don't. We shouldn't have bailed out the financial sector and--for the same reasons--we shouldn't cap salaries. Both come from the same ideology that says the government can run things better than we can. In Ben We Trust. In short, if you argue for government mandated pay caps, you weaken your argument against government ownership, because only the owners of a company should have the right to set salaries.

Oct 26 09:37 AM

[really:]

That GS (among others) has been an enormous benefactor of the government and is not subject to pay restrictions is beyond explanation. Investors and the media seem to in awe of company and not critical enough.

Oct 26 10:04 AM

[countrybanker:]

Adam is correct. He is simply saying that private firms with 100% private capital owned 100% by private shareholders should have no gov't imposed paycaps.

Firms partially owned by govt, firms that rec'd bailout, firms with Fed Reserve specail bailouts, firms with taxpayers as shareholders, should be paid like other govt employees.

No inconsistency. If you take the money, you get the pay restrictions. I recommend the firm not take the money and not take the pay restrictions. Both are wrong.


On Oct 26 09:37 AM User 465107 wrote:

> I'm disappointed every time I hear you say you're "pro pay caps".
> It weakens your "anti bailout" argument. Arguing for pay caps is
> arguing that "two wrongs make a right". Needless to say, they don't.
> We shouldn't have bailed out the financial sector and--for the same
> reasons--we shouldn't cap salaries. Both come from the same ideology
> that says the government can run things better than we can. In Ben
> We Trust. In short, if you argue for government mandated pay caps,
> you weaken your argument against government ownership, because only
> the owners of a company should have the right to set salaries.

Oct 26 10:23 AM

[greedcanbgood:]

I'm getting terribly tired of these discussions. TARP was forced down the throats of many financial institutions and the government is WAY overstepping its authority in an egregious display of ex post facto.

In addition, all you people who say, "Good, let the talent go!" don't realize that all of these banks have other business lines that are profitable and had NOTHING do do with the demise of thier organizations. If you loose them, you loose leadership in profitable parts of the bank and end up throwing out the baby with the bathwater.

Oct 26 10:30 AM

[Adam Sharp:]

If TARP was forced down their throats, why did they have to raise capital to pay it back?

And most couldn't even raise capital until the government deemed them to big to fail, and gave them implicit backstops. IF they could have, it would have been much more expensive.

Goldman's deal with Buffet, for example - 10% preferred stock plus warrants.


On Oct 26 10:30 AM greedcanbgood wrote:

> I'm getting terribly tired of these discussions. TARP was forced
> down the throats of many financial institutions and the government
> is WAY overstepping its authority in an egregious display of ex post
> facto.
>
> In addition, all you people who say, "Good, let the talent go!" don't
> realize that all of these banks have other business lines that are
> profitable and had NOTHING do do with the demise of thier organizations.
> If you loose them, you loose leadership in profitable parts of the
> bank and end up throwing out the baby with the bathwater.

Oct 26 11:30 AM

[countrybanker:]

What cave do you live in? Yes, some banks claimed, like WFC Kovacevich, that we do not need it? What a joke! They need it today after 4 quarters of great earnings!. IF GS needed and asked for Fed help, volunteered to take BHC status, gave Buffet 10% fixed and converitible stock for $8B, how can you defend a decision that TARP was forced down their throat. The other choice was for regulators to close them!!

Your analysis only is logical if you believe banks should be able to run on zero or negative capital and they were too big to fail. Maybe you believe in that, but then you are not a capitalist....because capitalists believe in private capital, winners and losers, failures and bankruptcy. So if you are a capitalist, then the insolvent banks had to have capital or liquidate(200+ year tradition in America).

To say let zombie, insolvent, banks stay open is to ignore capitalism and accept socialism. If you accept the latter, why would you have problems with pay czars and salary caps?


On Oct 26 10:30 AM greedcanbgood wrote:

> I'm getting terribly tired of these discussions. TARP was forced
> down the throats of many financial institutions and the government
> is WAY overstepping its authority in an egregious display of ex post
> facto.
>
> In addition, all you people who say, "Good, let the talent go!" don't
> realize that all of these banks have other business lines that are
> profitable and had NOTHING do do with the demise of thier organizations.
> If you loose them, you loose leadership in profitable parts of the
> bank and end up throwing out the baby with the bathwater.

Oct 27 12:47 PM

[greedcanbgood:]

Adam....I'm not saying that they didn't have to raise capital, I'm saying the govermnet rammed TARP down their throats. Some institutions (i.e. USB & BB&T) could have simply raised the capital on their own because they were significantly less affected by the "crisis" than others.

Nov 03 12:04 PM