Posted tagged ‘banking industry’

Friendly Towards Business

February 8, 2011

President Obama has mounted a “pro-business” posture.  He has even addressed the Chamber of Commerce, this time carrying a fruit cake.  But why?  Is business the enemy?

Something is very wrong with our thinking. The President cannot directly influence whether any or all businesses will increase hiring.

“Too much uncertainty” is a complaint heard often from corporate offices.  Yet when a policy is announced, some offices cheer and others boo.  I guess the word “uncertainty” really means “not favorable to me”.

The President should be aware (and he is) that businesses create jobs and pay taxes.  They accomplish this by developing, manufacturing, marketing, and distributing something.  In a perfect system, products and services with outstanding features, will be preferred and find many customers.  These companies will grow.  Others will stagnate and eventually die.

The time it takes for a business to learn whether its offering is preferred requires “money” (in the form of credit, debt, or equity infusions) just to keep its doors open.  The 2008 great financial sector collapse sucked much of this liquidity out of easy reach for businesses.  This occurred at the same time as the effects of the burst housing bubble was spreading through the economy.  The combination of a weak market place coupled with a questionable supply of liquidity has caused all sensible businessmen to pause.  There should be no mystery here, and there certainly is no uncertainty.

The “center” of this situation lies in letting natural forces return growth.  Commonsense plays a roll too.  Business with global markets must play on a level field.  Domestic businesses must compete fairly without government rules favoring one set of players versus another.

The missing link, however, is with big banks.  They are playing a much smaller role in facilitating the growth of businesses than the past.  Big banks are much more interested in how to make more profit themselves without regard to how that is accomplished.  They are content to earn money by simply electronically trading faster than you or me.  In essence, we are the chumps and big banks have no difficulty with that.

There is no way government can reign in greed or insure good judgement prevails.  Government can, however, set some boundaries.   If banks cross, it is at their own peril.  Ideas such as taxing transactions, or executives pay (and bonuses) when the top executives earn more than some multiple of the median salary could get banks’ top management’s attention.

The objective is to put banks back in the business of extending prudent credit or debt, or backing capital infusions on the basis of sensible risk.  The free market tug of war should allocate the flow of capital to businesses.  No loans would lower bank risk, but also lower bank earnings.  Lending without sound risk assessment increases short term bank income but may lead to defaults and greater losses.

Oh the other hand, government acquiescence allowing or encouraging banks to trade synthetic securities, backed in some way by the government, will divert their attention from their traditional activities that actually could impact the economy.

As always, it is back to basics.


January 23, 2010

Yesterday “Banks” were once again the target of attack. It was not John Dillinger, nor was it Bonnie and Clyde. Instead it was President Obama who spoke with righteous indignation saying he was ready to take on the Banks. What was he saying?

In the past we have seen big steel, big oil, and just plain big business that Government felt had become just too large and needed to be broken into smaller pieces. Banks, of course, were no stranger to this process in the past either. Why now?

The answer in part is not so noble. Instead of keeping their heads low, rolling up their sleeves and lending money and renegotiating mortgages in order to stimulate the economy and keep people in their homes, banks have taken Government money and effectively zero interest loans and “voila”, produced huge profits and paid themselves obscenely high salaries and bonuses. So it has become politically necessary for the President to scold publicly the Banks.

There is a far more important reason.  The Government needs to protect the average citizen from practices few others understand.  Banks today, especially the largest banks are no longer just in the game of taking people’s deposits, conservatively investing those funds, and paying interest back to their depositors. Banks are now complex institutions whose purpose is to create ever increasing profits.  They accomplish this by creating, as well, buying and selling derivatives. These opaque financial instruments (derivatives), are vaguely tied to assets or income streams and so their absolute value is indeterminate. Banks further engage in buying and selling credit default swaps as an attempt to show on their books that any risk associated with derivatives is covered by a form of unregulated insurance. On top of this house of cards is that the banking system is part of a complex, global network, where failure in any part could impact the US. (Interestingly, it was the implosion of US banks that nearly brought down the world banking system in 2008).

Wall Street has grown to like banks the way they are now because they have provided a method to produce exceptional returns. These returns powered the growth of 401K’s, hedge funds, and delighted individual investors during the 2000-2008 period. No one has stopped to ask, was it reasonable to gain an 8-10% or higher return year after year? If the results look unreal, they probably were.

The President has said he wants to fight for the average person.   The first step he should take is to once again introduce the “Glass Steagall” act that separates banking from investment and insurance activities. Citigroup would return to three separate entities, a bank, an investment house, and an insurance company. If investors wished to use their money and invest in the products of investment firms, so be it. General banking deposits, however should not be at risk.

If the President and Congress were really clever, they could exempt existing big banks from Glass Steagall if they agreed to deal only in regulated derivatives and used governance processes that did not pay obscenely high bonuses and executive salaries. Second tier banks (who are quite large but not like Goldman Sachs, JP Morgan, Morgan Stanley, Bank of America etc) might find this exemption attractive, while the big guys would likely prefer to go it alone until Republicans regained power and once again deregulated the industry.

8 Digit Bonuses?

January 11, 2010

Wall Street is reported to be awarding 7 and 8 digit bonuses to their “big producers”. I normally rejoice in other people’s good fortune, but I am at a loss to explain this act of wealth redistribution.

Most Americans jerk up when the words “wealth redistribution” are used. We hear Americans decry the death tax or social programs aimed at raising people from below the poverty level. We hear Americans call out for lower taxes and to stop taxing the middle class to give to the poor. These Wall Street bonuses are an even more blatant redistribution than all these other social justice driven programs.

Let us be clear than none of these bonsuses are going to individuals who discovered a way to convert dog poop into gold. None of these individuals have discovered a way to make retail banking more customer friendly, nor have they found ways to help business leaders to invest wisely and create American jobs. These bonus recipients have, however, found ways to make money by selling greedy investors financial products that in and of themselves create no value. These bonus grabbers sell instuments whose value is derived mainly from the fact that they can find someone else to buy it for a higher price.

Still is is difficult to explain the size of these bonuses. The money used to fund these over the top awards could have been plowed back into basic banking or investment management. Instead, a large portion of the profits are “redistributed” to this select group of contributors. Banks and investment firms say they must pay these bonuses if they wish to retain this “top” talent. I just wonder whether the coincidence that top executives always earn as much or more than their subordinates has anything to do with it?

What Can Government Do?

October 28, 2009

It is probably easier to answer the negative of this question. We know Government can not write tax code that is understandable. We are told that Government can not run health care (although those receiving Medicare generally do not agree). We are advised that Government will muck up our free enterprise system if they intervene and set remuneration packages for the big banks. So, there seems to be evidence of what Government can’t do, but what can they do?

  • We have reason to believe that Government can help those who have helped them. Otherwise, why would so many contribute so much to so few?
  • We can also guess that Government employs intelligent and persuasive people. If that was not true where would all those lobbying firms get their talent?
  • We are taught that the institution of Government is about increasing the commonwealth and providing an environment for all citizens to pursue prosperity. History and biography books are full of these examples. So why are there so many that warn that Government can not do anything?

Let’s look at two examples. Healthcare and Wall Street salaries.

Healthcare. It is ridiculous to assert the Government can not administer a national health care service program that handles the payment of basic health care benefits. If Government is good at anything, it is good at bureaucracies. Government is also good at leading industry panels such as one designed to define what is basic health care (care and services that apply to everyone). A panel of scientists and medical specialists could recommend a protocol of treatments and measure outcomes against the cost of these treatments.  The bench mark would be other modern countries. Mirroring what is done in Europe, Canada, and Japan should result in better health care at a much lower cost.

Wall Street salaries. It is also ridiculous to think Government can set Wall Street salaries any better than in times of inflation, Government can set “wage and price” controls. Government can, however, set trip points that will prevent institutions getting “too big to fail” and in all cases, that management including the most senior leaders are held fully accountable for the financial institutions performance. For example, a Citigroup should never be allowed to form unless there was a strict debt to equity leverage ration of under ten. Or, if financial institutions decide to pay its executives salary and bonuses greater that the President’s remuneration package, then bonuses must be long term in nature and fully deniable if the institution’s performance does not match the initial expectation behind the award. And should the institution fail, all members of the top management team for the last three years would be potentially both criminally and civilly liable.

Government can play a useful role in setting rules, administering the rules, and modifying the rules as outside events dictate. It is about decisions and consequences, about outcomes and costs.



October 16, 2009

Over the past few months I have read and seen too many one sided, distorted, and down right ignorant criticisms of President Obama. But it is a free country and our Constitution protects free speech, so you have to take the bad with the good.

President Obama’s critics have targeted everything from his birth certificate to his support of non-existent death panels. In this milieu is also Obamanomics which critics purports will ruin America, our currency, and the future for our children. They cite the forecasted growth of the national debt as the prime example of irresponsibility. To be sure the debt projections are serious reasons for concern and if left unattended could in fact lead to undesirable outcomes. What the critics fail to tell Americans is what are the largest elements of the forecasted $ 10 trillion deficit.

About 80% of the debt will result from present law (Medicare, Medicaid, social security, and the Bush tax cuts).  If laws are not changed, the size of these expenditures will happen.  Without more government revenue, there will be deficits.  While cutting waste and unnecessary spending are critical elements, there are two steps that must take place in order reduce this deficit.

  • A progressive and prudent tax policy must be implemented which will raise taxes (probably to the level of Bill Clinton’s years where the country prospered).
  • A robust economy must emerge based on genuine value creation. This will in turn stimulate more tax revenue at any level of taxation.

To criticize the President is every person’s right. To make incomplete and misleading claims is dishonest, unethical, and a huge disservice to the Country. It will be interesting to see where these detractors come down on the retirement of Bank of America CEO Ken Lewis. Under pressure from the Obama Administration “pay czar”, Lewis voluntarily agreed to give back his $ 1.5 million 2009 pay package.

This BoA situation is another example of trying to close the barn door too late. Lewis is in line to receive over $100 million in retirement benefits (including stock) when he officially retires at the end of the year. My guess is that if the pay czar interferes, and in some way gets this amount reduced, critics will cry out about big government and unchecked powers. If the government blinks and Lewis retires with the loot, critics will then cry out about the Obama Administration being pals with Banks.

I just wonder why no one asks how anyone could be worth, or could need, $100 million retirement send off? I just wonder how this could happen in a publicly traded and regulated company? I guess it is just easier to throw snot balls than think about what is really happening.

What’s Wrong With Making Money?

September 15, 2009

The American way is often confused with “life, liberty, and the pursuit of happiness”. Today, however, we are bombarded with news reports of successful people and companies, and the one criteria to qualify for news is to make money. More newsy is more money. Most newsy is making the most money. And what’s wrong with that?

In the abstract, nothing. In the specific, everything. Reading history there is no shortage of American heros and highly news worthy people who gained this notoriety by amassing (and spending) gobs of money. It seems to me, however, that in the past these “made rich” people actually did something (other than Ponzi schemes) to become wealthy. They may not have been perfect in ever respect but they did make things, invent things, or provide a critical service (like railroads). In doing so, they provided Americas with jobs, and products and services that made life fun and a lot easier. Money was simply their reward for creating value.

Today there is still some of that. Unfortunately, not enough, and there is more money to be made other ways. You can run a bank or investment firm and look for ways to make a sure bet when someone else (trying to do the same thing, make money without working) does not bet as well. No new products or services result from this and for sure no jobs results. You also could run an insurance company and deal in the field of health care coverage. This is an extremely important service but interestingly it is also a gold mine of opportunity to make money. With limited competition and a service that people can not do without, it is perfect for skimming profit. And with no regard for improving the quality or productivity of the service there is lots more time to think of ways to make more profit.

While some degree of regulations would help shield Americans from some extremes in money making, it would help us more to put greater emphasis on returning to basics, math, science, and engineering. We need people who get rich by making, mining, and growing “things”, and in the process providing jobs for many other Americans. This type of honestly earned money will make the Country strong and dilute the cancerous infection of the pure money making leaches.

Vision and Leadership

August 7, 2009

It is August and the wheels of government are turning slowly. The great “to do” about nothing ended yesterday when Sonia Sotomayor was confirmed as a Supreme Court Justice.  Health care reform legislation is banging around with the public only slightly more informed about what the new reform might look like. And we are being told that the Stimulus is working (albeit slowly) but unemployment is still rising. GM and Chrysler are functioning again, and the big banks look like they will survive if not flourish. What is there to worry about?

In the last election, Americans voted decidedly to reject the Republicans and George W Bush years of divisiveness and abject foolishness in foreign policy. President Obama promised a much brighter and more promising future. As time passes, however, Americans will forget George W Bush and will focus on whether they think the future is really more promising. It should be clear that if Republicans offer that promise convincingly, they will do well in future elections.

The rock and the hard place facing President Obama is that he can not have it both ways. He can’t promise a better future and stick with the notion of bipartisanship. Why? The answer is that there is nothing in it for Republicans, or so they think.

Obama must set out clearly his vision and use his Presidential leadership tools to get these visions enacted into law. Continually seeking consensus and worse bipartisanship, is a prescription for a stalemate (root cause, campaign financing via special interests). President Obama must be prepared to demonstrate the courage to enact his vision, and to require Americans to pay for it. If the vision is a good one, after the grousing that always takes place around taxes, growth will return and Americans will see the wisdom of Obama’s vision.

And what if the future does not get brighter?   Democrats and President Obama will lose.  And, this is a very distinct possibility since the American economy has been so terribly whopped with math, science, and engineering being replaced by sociology and even less descriptive studies. Look around and tell me where the engines that will drive national wealth creation lie?

We had 8 years of the Republican laissez faire style of free enterprise and what we got in return was an explosive growth of the financial services sector at the same time there was a mass exodus of manufacturing jobs. We had a sharp increase in college and university attendance with graduates obtaining useless education and huge debts. We had a holiday from common sense where we over built houses and then decided to practically pay people to live in them.

Now tell me again there is not room for a brighter vision of the future and the courage to make it happen?