The Looting of Wall Street

[Master Shake]

	from the inside. Why is no one willing to call things by their proper names, and instead resort to euphemism and double-speak? A New York Times story today, "On Wall Street, Bonuses, Not Profits, Were Real," makes its most important point in its headline, and managed to get some good data points on how rich investment bank compensation was in the peak years, but otherwise glosses over the fundamental nature of what went on. It was looting, and it is high time the media starts describing it in those terms. Let us turn the mike over to Nobel Prize winner George Akerlof and Paul Romer. From the abstract of their 1993 Brookings paper: Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations. Bankruptcy for profit occurs most commonly when a government guarantees a firm's debt obligations. The most obvious such guarantee is deposit insurance, but governments also implicitly or explicitly guarantee the policies of insurance companies, the pension obligations of private firms, virtually all the obligations of large or influential firms. These arrangements can create a web of companies that operate under soft budget constraints. To enforce discipline and to limit opportunism by shareholders, governments make continued access to the guarantees contingent on meeting specific targets for an accounting measure of net worth. However, because net worth is typically a small fraction of total assets for the insured institutions (this, after all, is why they demand and receive the government guarantees), bankruptcy for profit can easily become a more attractive strategy for the owners than maximizing true economic values... Unfortunately, firms covered by government guarantees are not the only ones that face severely distorted incentives. Looting can spread symbiotically to other markets, bringing to life a whole economic underworld with perverse incentives. The looters in the sector covered by the government guarantees will make trades with unaffiliated firms outside this sector, causing them to produce in a way that helps maximize the looters' current extractions with no regard for future losses...." Re-read the key phrase: "pay themselves more than their firms are worth and then default on their debt obligations." This has happened en masse in what formerly were investment banks who have now become wards of the state. But no one is willing to call this activity for what it was. In fact, some are still urging that we not squelch "financial innovation," which Martin Mayer described as ... a way to find new technology to do what has been forbidden with the old technology....Innovation allows you to go back to some scam that was prohibited under the old regime. http://www.nakedcapitalism.com/2008/12/new-york-times-story-pulls-punches-on.html

[Serge_Tomiko]

Re: The Looting of Wall Street

Profit is always commensurate with risk. The leaders who have betrayed the public trust are very much wrong if they think there was no risk in their iniquitous behavior.

Justice will come, you can count on it.

[c1ue]

Re: The Looting of Wall Street

Profit is always commensurate with risk. The leaders who have betrayed the public trust are very much wrong if they think there was no risk in their iniquitous behavior.

Justice will come, you can count on it.

But you are missing the important proviso: he who gets the profit doesn't necessarily hold the risk.

Look at Mozilo. Or even Nardelli.

Not seeing much justice there, nor anticipating much future justice.

[GRG55]

Re: The Looting of Wall Street

Profit is always commensurate with risk. The leaders who have betrayed the public trust are very much wrong if they think there was no risk in their iniquitous behavior.

Justice will come, you can count on it.

There appears to have been no great [financial] risk to themselves at any point in the proceedings, including their final sentencing ;)

Some justice...

October 29, 2007


Merrill Lynch chief Stan O'Neal is toppled in wake of $7.9bn writedown

...Mr O’Neal is said to have spent yesterday afternoon negotiating departure terms. Although he is not contractually entitled to a severance package, he is expected to walk away with at least $159 million (£77 million). Merrill Lynch’s compensation committee also has discretion to offer severance pay.

Mr O’Neal, who is 56, is entitled to a retirement benefits fund of $30 million and $120 million in shares and share options. It is estimated that in his five years as chief executive Mr O’Neal has received about $160 million...


Chuck Prince gets $140 million to slice $36.4 billion from Citigroup's market value

Nov 3rd 2007

Prince pay. He got $140.1 million -- vested stock of $87 million plus compensation of $53.1 million in his four year tenure at the top. A severance package has not been negotiated. But the 19% drop in Citigroup's stock reduced its market capitalization by $36.4 billion...

November 9, 2007


Ex-Citigroup chief to exit with bumper payoff

Charles "Chuck" Prince, the deposed head of Citigroup, is in line to walk away from the Wall Street giant with a total pay, perks and shares payout worth just under $100 million, it has emerged.


Lehman's $8B Transfer of Funds to US Irks Brits

Posted Sep 22, 08
An $8-billion transfer from Lehman Bros.' European headquarters to its New York headquarters on the day the firm declared bankruptcy is raising issues on both sides of the Atlantic. As the sale of Lehman's US operations to Barclays was approved Saturday, the administrators of the company's bankruptcy filing in Great Britain were demanding that the money be returned, reports the Wall Street Journal, saying it belongs to clients and employees.

Those expecting "justice" may have unrealistic expectations. It is not possible to run a racket like this without suspending a good portion of ones own common sense. In order to credibly sell a pyramid scheme to anyone else, one just has to have adopted a reasonably high level of personal belief in its validity [and CDOs, CDO squared, CDO cubed, is nothing if not a pyramid scheme]. This is why it is often the perpetrators of such schemes that are the most surprised when it collapses. And why they often continue to vigorously defend the merits of the scheme long after it has become abundantly apparent to the less intelligent [everyone else] where the truth lies.

Far too many of the senior financiers around the globe continue to act as though they are truly in a class apart from the rest of the human race. Many continue with the delusion that their ability to amass great fortunes before the age of 35 confirms, in their minds, their superior intellect. I have no doubt that there are tens of thousands of finance sector employees who do not fit this description, but then they were only able to partake in the crumbs filtering down from the executive floors...how else to explain the almost complete lack of contrition, and the howls of outrage if anyone dare question a senior bankers right to a bonus [these days often funded by a taxpayer] this year?

A read through Chapter III [In Goldman, Sachs We Trust] of John Kenneth Galbraith's "The Great Crash, 1929" will bring perspective to a lot of what is transpiring today.