ResourceWise

Hands Off Goldman Bonuses

While ‘outlandish’ bonuses do generate indignation is vast quantities, they’re just a symptom of a massive problem with the global financial system - a system built on arbitrage and leverage that facilitates theft of wealth from earners and savers. Governments – who are supposed to represent the interests of all their citizens need to take a hard look at the activities that are conducted under the banner of financial services and determine which are useful to society and which are harmful. Outlaw harmful activities and prosecute those that indulge in them. By demanding arbitrary caps and punitive taxes on earnings, we only legitimise activities that are injurious to the financial health of society and perpetuate the weaknesses in the current system.

Citi's Cities

In addition to Poland and Mexico, Citi has well established and successful Retail Banking businesses in over 50 countries around the world including Argentina, Australia, Belgium, Brazil, Canada, Chile, Czech Republic, Egypt, Greece, Hong Kong, India, Japan, South Korea, Malaysia, Philippines, Russia, Singapore, Taiwan, Turkey, UAE and the UK. The US centered sub-prime crisis and the subsequent collapse of financial markets have obscured the underlying strength of Citi's global franchise. As they get their act together under the Citicorp banner and put the customer back at the center of their business model, I hope they will re-establish their global position as the world's local bank - a position they lost to HSBC after their disastrous merger with Travelers in 1998.

Outlandish CEO Pay: How to Fix the Problem

It is reasonable to be angered by these examples where CEO pay is clearly unrelated to performance. However there is no silver bullet (e.g. CEO pay caps) that can prevent future melt downs of the markets. Reform is needed across all aspects of the market. Some of the many areas to examine:

1. Establish a clear link between pay and performance for all employees not just CEOs, where performance covers short term results as well as the actions taken to protect the longer term health of the franchise. Pay variable compensation i.e. bonuses based on net income not on revenues.
2. Risk rate revenues and treat the higher risk revenues to higher capital requirements.
3. Separate customer funds from bank funds (revive some form of the Glass Steagall Act, 1933).
4. Examine the social usefulness of activities that take place in the financial markets e.g. short selling, spread betting, high frequency trading, and tax arbitrage. Ban those activities that can cause harm to others.
5. Examine product structures that enable banks to profit from risk taking and pass on all risk to third parties (e.g. to customers, counter parties and tax payers). The cost of risk needs to be fully borne by the originator of the transaction and should not be passed on to other market participants without their specific agreement.
6. Bring all market participants (e.g. banks, hedge funds, private equity funds, insurance cos. etc) onto the same level playing field - with clearly marked boundaries, switch the lights on and let the games begin – in full sight of the regulators.
7. Simplify regulations, consolidate regulators and provide them with massive teeth.
8. Restrict gambling to clearly designated and regulated casinos – not the stock/bond/currency/co... markets.

It is clear to even a casual observer that many aspects of the current markets need substantial redesign. Let’s do that instead of demonising individuals who have just tried to take advantage of a crooked table with loaded dice.

Unwinding the Goldman Sachs Myth

GS, like many others in the industry feed on a deeply flawed global financial system - which is essentially a giant casino where the savings of individuals are used by insiders to gamble. Win or lose the bill is paid by these savers and tax payers.

We need to give careful thought as to the purpose such institutions serve and the price at which they serve that purpose. Currently these folk get paid as if they have solved the problem of world hunger and developed a pill to cure cancer - in a sinlge dose!

Citigroup Stock Drama: Capitalist Conspiracy or Profit Pursuit?

Keith, many thanks for a very enlightening explanation for roller-coaster ride that the Citi stock price has been having over the past months. Would you mind taking your explanation further, e.g. if hedge funds and other investors make a lot of money through arbitrage, who loses this money – and therefore who picks up the tab? Does this activity add to destruction of shareholder value? Does this activity have any wider purpose or value to society? If seems to me that the sharp practices (even though they may be considered as legal under current law) that got the whole world into the mess we find ourselves in, continue to this day. Unless the rules-of-the-game change substantially the 2-3 trillion dollar global stimulus (paid for by the world’s tax payers) is just money wasted.
Please provide your perspective. Thanks

The Good and Bad in Hedge Funds Today: A Manager's View

Hi Eric, thanks for providing outsiders like me a little peek into your esoteric world of high finance. A few questions spring to mind:

1. While hedge funds protect themselves from a ‘run’ by using gates - why do they simultaneously insist that short-selling i.e. selling shares that they do not own with the explicit purpose of driving down share price, is a good practice? Other than creating a ‘run’ on the victim’s shares and in the process making large sums of money for the hedge funds, short-selling seems to serve no useful economic purpose. Or does it? Moreover if hedge funds are such vociferous advocates of free markets why not allow investors to withdraw their money as and when they want it back?

2. Why charge a 2% fee irrespective of whether the investments make money or not? Hedge funds claim to make money in both rising and falling markets, in which case they should put their money where their mouth is and stick to the 20%-of-profits performance fee.

3. Experts seem to suggest that high-leverage by governments, banks and consumers have contributed to the severity of the financial crisis. What has been the contribution of hedge funds to this high-leverage?

Your response to these questions will certainly add to the general awareness of Main Street and the media. Thanks in advance!

Comparing Wall Street Compensation to the NBA

Mark, you're comparing apples with oranges. The negative impact of NBA players being overpaid is limited to fans (ticket price) and shareholders (ROI) of these clubs. The negative impact of the toxic weapons of mass financial destruction created and unleashed by players in the financial markets covers the globe. I agree that Cuomo should not just chase Merrill's top dogs, but needs to widen his net to cover the top dogs in all those NY based financial institutions that have contributed to this global carnage.

Massive Cuts Required to Restore Investment Bank Returns

Investment Banking needs a dramatic overhaul of its business model if it is to ever make money for the share-holder. If 50% of gross revenue is paid as compensation, what does the bottom line look like after all the other operating expenses - travel, technology, premises, support services are taken into consideration and taxes are deducted? All the US Investment Banks have opted to become commercial banks; therefore investment banking becomes one more product offered to corporate clients - no longer a stand-alone business, simply because it cannot stand alone.

A Scenario for a U.S. and Global Recovery, Part 2: Banks

Alexandre, I agree with your assessment. The shadow banking system and all the players involved in it must be brought out of the shadows and their business models examined in the bright sunshine viz., how do they make money, what purpose do they serve for the economy/financial markets, where is the opportunity for conflict-of-interests, what leverage do they create - thereby adding to the volatility and instability of the system. Without these reforms, we're condemned to serial destruction of value for the investor and huge profits for the speculator. We have to separate the stock markets from the casinos and clearly label them for what they are. Then individuals can choose to participate or not with a clearer view of the choices they make.

The Elimination of the Consequences of Bad Behavior Continues

Actually the bad behaviour was when individuals in banks took massive risks with the bank’s money so that they could get massive bonuses. These ‘masters of the universe’ – even if they lost their jobs as a result of their egregious actions are enjoying the fruits of their pillage.

On the other hand if a bank recognizes the difficulty their customer is in – due to losing his job, and makes some adjustment to try and keep the mortgage going, that is just common business sense.

Jim Rogers: It's Better To Let Financials Fail

User366653 has taken the trouble to spell out an overview of his plan, so should be lauded for it - whether one agrees with every detail or not. Other commentators need to move beyond slogans e.g. nationalize, wipe out existing shareholders, moral hazard, etc and should actually explain how their plan will work, what risks it would mitigate and what the long term prognosis will be.

Citigroup: The Death of Buy-and-Hold Investing?

Buy-and-hold has been in a long drawn out death-spiral for many years. Ask any trader and they will tell you that they don't care if the market is moving up or down, as long as it is moving! Even the buy-and-hold investors like pensions funds lend their shares to speculators, so that they can 'short' stock, create volatility and make money. Where do the billions of dollars 'made' by these speculators come from? Without major reform of these markets, buy-and-hold cannot survive.

Nationalization, By Any Other Name

This is not nationalization - it is a public private partnership, a temporary arrangement to assist in the stabilization of systemically important financial institutions. Shareholders have been 'diluted', but not wiped out. I agree with Randy Miller that Wall Street needs to lose its licence to be a Casino, so that investors can feel confident that their investments will not be siphoned off by unregulated gamblers.

Bank Nationalization: The Bigger Picture

This article should be read - carefully, by the quick-fix junkies who somehow believe that wiping out existing shareholders is the way to attract future shareholders. Current stock prices are not an accurate reflection of the value of a company like C that has well established businesses in 100 countries with over 200 million customers. We don't need hasty remedies that support the agendas of people who benefit from the short term volatility in share prices while having no interest in the longer term success of those companies.

Bank Nationalization: It's No Panacea

Rick, yours is a thoughtful rebuttal of the 'nationalization' argument. There is no quick fix. We have to work our way out of these difficulties by keeping the longer term well-being of the financial system in mind.