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Wall Street’s New Mousetrap?

Posted by Larry Doyle on March 17, 2009 11:33 AM |

Populist outrage is growing at the egregious bonus payments made at firms which took government money. Not every firm voluntarily took government money and, in my opinion, should not be restricted by government controls over bonus payments. However, the entry of the government into the financial industry is quickly creating a sea change in Wall Street’s outlook on compensation.

Is Wall Street working on building a better mousetrap to sidestep the government’s involvement? You can bet on it.  Wall Street Pursues Pay Loopholes highlights some of the early maneuvers firms are looking to make to address this issue.

The onus should be put on the Board of Directors of these companies along with their senior executives to properly align net income, residual risks, and total compensation. In all honesty, this is not a difficult process but it requires a level of integrity and moral fiber on behalf of the boards and senior management across Wall Street to make it happen.

Will the Wall Street money machine buy Washington once again so that firms with significant government capital can “beat the system?”

Sense on Cents will be watching very closely!


  • thinkaboutthis

    I do not know all the ins and outs of Wallstreet. However, I would bet my last time that human nature, Maslowe, and survival of the fittest will have the folks at Wallstreet always be one step ahead of the government.

    This may be far fetched, and just a gut feeling, but I think the real big money makers are going to remove themselves from the USA and look for other opportunities in other countries and I also believe that allot of the cheap stocks now are going to be bought by foreigners, not primarily Americans. This situation has such a large ramification that the people should look beyond the the fogged mirror.

    • Larry Doyle

      I totally agree with you and know that moving business offshore is a regularly discussed topic amongst many financial entities.

  • Mountainaires

    I don’t know about “better mousetraps” by Wall Street; but Main Street is getting the shaft, even from Sheila Bair and the FDIC. This is just wrong.

    Mish Shedlock highlights it at his blog:

    Punished For Prudence

    One might think that a bank with no foreclosures, no loan losses, and no loan loss provisions would be top rated. If so one would think wrong. The clowns at the FDIC gave a negative rating to such a bank last week.

    Please consider Community bank finds paranoid a smart bet.

    Joseph A. Petrucelli is one of the most cautious bankers in America. In fact, Petrucelli is so cautious that the Federal Deposit Insurance Corp. recently criticized his bank for not lending enough. The FDIC’s negative review of East Bridgewater Savings Bank’s loan volume is an anomaly in today’s current banking scene as lenders reel from their role in offering too many cruddy mortgage products to borrowers with weak credit.

    Bad or delinquent loans? Zero.

    Foreclosures? None.

    Money set aside in 2008 for anticipated loan losses? Nothing.

    “We’re paranoid about credit quality,” Petrucelli said. The 62-year-old chief executive has run the bank since 1992.

    Still, the FDIC slapped East Bridgewater Savings with a rare “needs to improve” rating after evaluating the bank under the Community Reinvestment Act.

    FDIC examiners also faulted East Bridgewater for not advertising and marketing its loan products enough.
    Congratulations go to Sheila Bair and the FDIC for helping take asininity to new heights.

    Mike “Mish” Shedlock

    Original article:

    • Larry Doyle

      Thanks for sharing that link. If we only had more prudent and disciplined lenders such as Mr. Petrucelli, perhaps we would not have the degree of problems that taxpayers are forced to bail out.

      Perhaps these are the situations that reverberate in the face of so much moral hazard.

  • fiscalliberal

    This is an interesting point of view from Baseline Scenario regarding who is the one person most to blame for the finacial crisis – I agree, but wouldput Chris Cox (SEC) right behind him. Both had the chartered job to protect the economy and they let ideology dominate their thinking.

    He Blames Greenspan
    Filed under: Players

    James Kwak, our friend at Baseline Scenario, considered our quest for people to blame in the economic crisis. Kwak writes:

    If I had to pick one person or institution, there is only one possibility: [Former Federal Reserve chairman] Alan Greenspan.
    Obviously a crisis of the current magnitude requires the participation of many people and institutions. But if you are looking to place blame, you need to focus on people who could have made a difference. Blaming things on “greed” or “greedy people” is silly, because as someone once said, greed is like gravity: you know it exists, and you have to expect to be there. Blaming individual rating agencies, mortgage lenders, investment banks, bank CEOs, etc. also doesn’t work. In each case, if that agency/lender/bank/CEO had behaved differently, it would have made no difference. In a competitive market, it would have simply lost market share and been replaced by a less scrupulous competitor (or, in the case of a CEO, he would have been fired).
    Greenspan is different, and uniquely important, for a couple of reasons.
    First, he was unique. The Federal Reserve, to begin with, is a unique institution. It has no competitors who could replace it, and the central bank of the United States is by far the most influential central bank in the world. In addition, Greenspan himself had enormous personal control over the Open Market Committee, and by 2001 had already established himself as the most influential figure in the global economy. No one else in the world had more ability to combat precisely the sort of credit bubble that we experienced.
    Second, it was his job — arguably, at least. The Fed’s official mandate is to control inflation and limit unemployment, and for over two decades it has focused on the former. Asset price bubbles are a form of inflation. People buy houses to live in them, so when house prices go up, housing is becoming more expensive. People buy stocks in order to save for retirement, so when stock prices go up, saving is becoming more expensive. That’s inflation. Now, Greenspan made an explicit decision that asset price inflation was not the sort of inflation he was responsible for. That was a plausible and defensible decision — but in retrospect, clearly it was the wrong decision.
    Third, he was wrong — wrong about derivatives, wrong about unregulated financial markets, wrong about housing fundamentals, etc. Yes, most other people were wrong at the same time, and I know that, as Martin Wolf said, Greenspan was celebrated at the time. But that doesn’t change the fact that if you are the most powerful economist in the world, it is your job to be right. I’m not saying he did anything corrupt, or he should lose any money, or he should be thrown in jail. But just as central bankers are praised when things go well, they should be blamed when they go badly.
    Fourth, and most importantly, unlike every other blameworthy candidate I can think of, he could actually have done something about the bubble. If he had taken asset price inflation seriously, the answer would have been obvious: raise interest rates much earlier than he actually did. He wouldn’t even have had to ask if there was a bubble or not. The way the Fed usually works, they look at the CPI — if it is too high, they raise rates. They don’t stop and think about whether there are fundamental reasons why inflation should be high; they just raise rates. If they had taken the same approach with asset prices, they would have raised rates earlier, which would have deflated the bubble.
    Now, maybe Greenspan alone couldn’t have prevented the crisis. But he had an opportunity, and a responsibility, that no one else had.

  • Larry Doyle

    Fiscal…If that is not a comprehensive recap of Mr. greenspan’s dereliction of duty I do not know what is.

    The public has no appreciation for his degree of involvement on all of these issues. I personally did not appreciate it until I read the piece as to How Wall Street and Washington Betrayed America.

    We have seen enough of Greenspan trying to resurrect his reputation recently to know that he feels and understands the culpability directed his way.

    Thanks for all of this great color.

  • fiscalliberal

    Larry – several hearings in the next couple of days at the following sites. Their websites give the written testimony of the witnesses and the video’s of the hearings. One can view them at night which is what I do instead of watching the trash TV in these days.

    Senate Banking Committee

    March 19th Current Issues in Deposit Insurance
    538 Dirksen Senate Office Building, room 538
    2:00 PM

    March 19th Modernizing Bank Supervision and Regulation
    538 Dirksen Senate Office Building, room 538
    10:30 AM

    March 18th Lessons Learned in Risk Management Oversight at Federal Financial Regulators
    538 Dirksen Senate Office Building, room 538
    2:30 PM

    House Financial Services committee

    3/26/2009 Addressing the Need for Comprehensive Regulatory Reform Full Committee

    3/25/2009 Exploring the Balance between Increased Credit Availability and Prudent Lending Standards Full Committee
    3/20/2009 Frank Announces Financial Fraud and Enforcement Hearing Full Committee

    3/19/2009 H.R. 627, the Credit Cardholders’ Bill of Rights Act of 2009; and H.R. 1456, the Consumer Overdraft Protection Fair Practices Act of 2009 FI and Consumer Credit

    3/19/2009 Examining the Making Home Affordable Program Housing and Community Opportunity

    3/18/2009 American International Group’s Impact on the Global Economy: Before, During, and After Federal Intervention Capital Markets

    3/17/2009 Perspectives on Regulation of Systemic Risk in the Financial Services Industry Full Committee

    • Larry Doyle

      Fiscal….on behalf of all our readers, I thank you for providing this lineup.

  • lizzy

    It seems that both our markets and governmental institutions are so badly broken that we can no longer trust them. Why should I trust my future and money to these crooks, whether it is Madoff or the derivative wizards at AIG.
    I guess that Greenspan kept interest rates so low for so long that both housing and equity markets became bubbles. One thing occurs to me, if prices go up in a sector such as housing or fuel that area is excluded from the CPI. Have you seen studies about the true rate of inflation?

  • Larry Doyle

    I know that inflation is a lot higher than what is reported for the very reason you reference. Gaming the system once again.

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