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HomeVolcker Locks and Unloads on Wall Street and Washington
Posted by Larry Doyle on September 24th, 2009 12:15 PM |
Former Fed Chair Paul Volcker
I find it interesting, but not surprising, that former Fed Chair Paul Volcker’s testimony to Congress this morning has received little to no coverage by major media outlets. Why? With few exceptions, the financial media plays along with the financial industry which pays the bills while relegating investors and the American public to the bleachers.
Recall that just a week ago I wrote “Volcker Launches Bombshell on Wall Street and Washington.” I highlighted Volcker’s direct hit:
While the insiders on Wall Street and Washington pander about real financial regulatory reform, former Fed chair Paul Volcker yesterday hit ground zero on this hotly debated topic.
The heart of financial regulatory reform is centered on the implementation of leverage by our largest financial institutions. The leverage is exercised in a wide array of activities, both on and off-balance sheet. The capital utilized by the banks in these activities is credit that has not and will not flow directly through to the economy. Why? The banks believe that they will generate a greater return on the capital via proprietary activities rather than facilitating client business and addressing customer needs.
Today, Volcker locks and loads and unleashes another volley on the wizards in Washington and their incestuous brethren on Wall Street. Whatever you may think of Volcker as a central banker, I hold him in high regard for elevating the debate at this critical point in our country’s economic history. Regrettably, President Obama’s adviser, Mr. Larry Summers, has taken Mr. Volcker’s chair away from the table. Yes, this is the same Mr. Summers who The New York Times described this past April as having received A Rich Education . . .
Mr. Summers, the former Treasury secretary and Harvard president who is now the chief economic adviser to President Obama, earned nearly $5.2 million in just the last of his two years at one of the world’s largest funds, according to financial records released Friday by the White House.
Impressive as that might sound, it is all the more considering that Mr. Summers worked there just one day a week.
Although I digress from my focus on Mr. Volcker, I find it enlightening that the man in Washington who has pushed Volcker away from the table stuffed himself at the Wall Street trough. Back to Mr. Volcker. (more…)
Smoothing Out Earnings is Finance-Speak for ‘Cooking the Books’
Posted by Larry Doyle on September 14th, 2009 2:41 PM |
When I hear financial industry insiders opine that they need vehicles and procedures which allow them to ‘smooth earnings,’ I get very suspicious. Why? That very thought process was the business model which led to the failures of Freddie Mac and Fannie Mae.
I witness it again in Bloomberg’s commentary, Beware Bankers Spinning Story of Smooth Results:
The financial results that companies give investors are supposed to paint a picture of how things are. Banks and their regulators want to turn that notion on its head so they can spin a smooth tale of how they would like things to be.
Sadly, some accounting rule makers may be ready to appease banks and the politicians who back them. If that happens, financial results will change from a vital tool for investors to a vehicle catering to managers, regulators and employees.
The practical result of such approaches would be to allow banks to report smoother results that supposedly reflect their long-term prospects. For banks, smoother profits would presumably lead to higher share prices. For regulators, less volatile results would supposedly make it easier to maintain financial stability.
Make no mistake, these accounting procedures are merely a formula for the continuation of a ‘heads we win, tails you lose’ approach which was so prevalent in causing this crisis in the first place.
Investors should not be so naive as to think otherwise. If these procedures are fully implemented, then rigorous risk management will go right out the window and prospects for real, long term economic prosperity along with it.
Regrettably, I have little confidence that the ‘wizards in Washington’ have the intellectual capacity, the moral fortitude and unquestioned integrity to take this issue on and truly protect the American public.
LD
Eliot Spitzer Calls Financial Self-Regulation a Canard
Posted by Larry Doyle on September 14th, 2009 10:06 AM |
Eliot Spitzer
Say what you want about Eliot Spitzer, but in his pursuit of financial chicanery he took very few, if any, prisoners. Regrettably, his personal failings caused his demise at a time when the American public truly needed an advocate to unearth the failings in our financial regulatory structure.
Spitzer is slowly regaining his stature. He pulls no punches in taking on the many holes in our financial regulatory framework as he writes in The New Republic, Better Regulate Than Never. I commend Spitzer as he calls out the Wall Street self-regulatory oversight in writing:
We know markets are still the best way to allocate resources and to set prices and wages. But the first and essential corollary to any theory of markets should hold that they are fragile and must be protected. No matter how frequently large swaths of the world loudly shout, “We love the market!,” virtually nobody does. In the absence of rigorous enforcement of rules, market players seek monopoly power and unfair advantages; they take risks at the undisclosed expense of others, or violate fiduciary duty. None of this means these actors are “evil” or “immoral.” But their actions demonstrate that self-interest, unbridled by enforcement of rules, will destroy the very market so many people so ostentatiously claim to adore.
So, we can now dispose of that old canard that self-regulation preserves the integrity of markets. There is essentially no evidence that any self-regulatory entity–from the Securities Industry Association to the New York Stock Exchange–ever revealed or resolved a single structural flaw in the market place. Rather, they papered over and rationalized away all the bad behavior they witnessed. (LD’s highlight)
I totally concur. As much as financial self-regulatory organizations would promote that they are aggressively moving forward to clean up the industry, their historical track record belies that fact.
I would point out that Spitzer’s reference to the Securities Industry Association (SIFMA) is misplaced. SIFMA is merely a de facto trade organization rather than a real cop. Spitzer should have targeted FINRA (Financial Industry Regulatory Authority), which is supposed to be the ‘tough cop.’ That said, I commend him for raising this topic.
Will our media and government pick up on Spitzer’s premise, elevate the debate, and serve the public interest? We have yet to witness any real concerted efforts by the media or the government on this front. Why? The media and the government serve at the behest of the financial industry to a far greater extent than they serve at the behest of the American public.
Spitzer sheds further light on this point by writing:
Our market has been–and will continue to be–undermined by regulators who are intellectually or ideologically unwilling to confront powerful market players. Too many of our regulators have been tarnished by the culture of Washington, where the constant movement between government and the private sector has created a fear of disrupting the status quo. It is an environment where stringent enforcement–the very type we needed–jeopardizes future confirmations, alienates potential clients, and engenders social ire. This cozy world isn’t exactly corrupt. Rather, it perpetuates an insidious process of socializing the regulators and the regulated alike. Everyone emerges accepting a way of doing business that ultimately fails the public and the economy.
I totally agree with Mr. Spitzer. Perhaps he is a regular reader of Sense on Cents!!
In all seriousness, where do we go from here? Do we allow the media and the government to neglect their public duty and continue protect Wall Street vs. Main Street?
Keep reading Sense on Cents as I will continue to bang the drum. Readers can help by spreading the word.
LD
A Wall Street Veteran’s Recollections of September 11, 2001
Posted by Larry Doyle on September 11th, 2009 6:49 AM |
On Tuesday September 11, 2001 I was employed as the National Sales Manager for Securitized Products at JP Morgan Chase located at 270 Park Avenue in the heart of midtown Manahattan. As I recall, it was a beautiful Indian Summer day.
At 8:30am, I entered a meeting with a salesman to discuss the fact that our Credit Department was not willing to do business with a particularly high profile client. This meeting took place in a small meeting room situated on the trading floor.
I exited the meeting at 8:50am to witness a woman literally collapsing on the floor. I then heard somebody say that a plane had crashed into the World Trade Center. Looking across the trading floor to a TV monitor, I saw what appeared to be a hole in one of the towers. I dismissed it as either my looking from a distance or a problem in the transmission. I distinctly recall thinking that a small prop plane had likely lost control and crashed. That said, I quickly hustled back to the sales desk only to be apprised by a young salesman that a jumbo jet had crashed into the WTC. I sensed real concern amongst my surrounding colleagues.
The young salesman asked me what I thought of the chances that this crash was no mere accident, but an act of terrorism. Thinking it over, we agreed the crash very well could be terrorism. It was now approximately 9:00am.
We had a number of clients located in both towers. A senior salesman situated to my right called a client in the tower not yet hit and asked him what was going on inside the building. The client responded that building management was putting out the message to remain in the building as management monitored the situation. Our salesman apprised him of the mayhem surrounding the first tower. Little did our client know that he and his colleagues at Sandler O’Neil only had a few minutes to exit the building. In hindsight, those few minutes had already passed. Within a few minutes, we witnessed the horrific scene of the second jumbo jet slicing into the second WTC tower.
Panic set in on our desk as we all felt that the city of New York was under attack. I thought we would likely witness a string of attacks at other high profile locations, including Grand Central Station, Penn Station, the PATH Train, and the Empire State Building. Thinking we would literally be trapped in Manahattan, I gave my corporate credit card to the aforementioned young salesman and asked him to go reserve a slew of hotel rooms.
I then called my brother who worked one block away from the WTC and encouraged him to get out of his building. He agreed that he would do just that. In turn, I called my folks to apprise them that I had touched base with my brother and that he was leaving his building. When I called him 30 minutes later, at approximately 9:45am, he still had not left the building. He informed me that it was a sea of humanity surrounding his building and he and his colleagues were trying to determine if they were safer inside or outside. I encouraged him to leave and get uptown. Shortly thereafter he did.
At this point, an eery silence had set in as people were trying to determine the circumstances surrounding these crashes. We were thinking of the people trapped in both towers. We then learned of the plane which crashed into the Pentagon and the other that was downed in the fields of Pennsylvania. Not only was New York under attack, but our country as a whole was under siege.
The young salesman whom I had asked to reserve the hotel rooms returned and apprised me that no hotel rooms were to be had.
After witnessing the collapse of both towers, we knew the world was a changed place. How many friends and colleagues perished literally right before our eyes. I remember thinking that given the points of entry of both jets, a likely death count could be upwards of 8-10 thousand people. Fortunately I was quite high in my estimate as many people had been able to exit. That said, for the thousands who perished and the loved ones they left behind, this was a nightmare beyond description.
I encouraged my colleagues who lived in NYC to head home, and those who lived outside the city to make plans to leave. I heard that train service from both Grand Central (my means of transportation) and Penn Station resumed shortly after noon or thereabouts.
I was in constant contact with my wife throughout this ordeal. Knowing that I had no other way of getting home, I was going to have to go into Grand Central. I was very nervous thinking about that prospect. Ultimately after everybody on our sales desk had departed, I left to catch a train around 2:30pm. The train was jammed, but it was silent. People admittedly were in a state of shock.
For the better part of the next 4 months, I drove into Manhattan every day to avoid Grand Central Station. I would leave my home around 4:30am in order to avoid traffic at bridges and tunnels.
Like many people, I had problems sleeping. I lost a dozen friends and colleagues that day.
May they rest in peace . . . and may we never forget.
LD
Did Morgan Stanley’s John Mack Just Get ‘Shot?’
Posted by Larry Doyle on September 10th, 2009 7:42 PM |
Why would John Mack step down from his role as CEO at Morgan Stanley? Mack is widely regarded as one of the most competitive, if not cutthroat, individuals on Wall Street. I find it very hard to believe that he is stepping down because he just turned 65. Morgan Stanley is not the U.S Post Office.
Morgan Stanley has been ridiculed for not taking greater risk within its trading division over the last 6 months. In the process, Morgan Stanley has lagged its main rival, Goldman Sachs. What did Mack do to address this problem? He recently hired Jack Demaio, a highly regarded markets pro with whom Mack worked during his short tenure at Credit Suisse. So what happened? Why is Mack stepping aside? I think in true Wall Street fashion, he may have been pushed out, or — in Wall Street parlance — he just ‘got shot.’ Why? What have we learned and what do we know?
After Mack left Morgan Stanley in 2001, he was headed to work at Pequot Capital, a large hedge fund run by the legendary Art Samberg. In the midst of his transition to Pequot, Mack was thought to have been involved in providing inside information about Microsoft to Samberg.
Bloomberg addressed this story on May 28th in writing, Pequot Capital to Shut Amid SEC-Insider Trading Probe:
Arthur Samberg, once the world’s biggest hedge-fund manager, said a federal insider-trading investigation is forcing him to shut Pequot Capital Management Inc. more than two decades after starting its first fund.
“With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business,” Samberg wrote in a letter to clients yesterday. Pequot oversees $3.47 billion, according to a May 15 regulatory filing, down from $4.3 billion in November and $15 billion in 2001, when it was the top-ranked hedge-fund firm by assets.
The U.S. Securities and Exchange Commission in January resumed a probe into whether Samberg’s funds illegally profited in 2001 by trading on inside information about Microsoft Corp., people familiar with the matter said at the time. That was about a year after the agency told Samberg and Morgan Stanley Chief Executive Officer John Mack they wouldn’t be accused of wrongdoing related to insider trading.
So John Mack stepped down because he is soon turning 65? Yeah, right!! If you believe that, can I interest you in some toxic mortgage assets priced at 90 cents on the dollar? I think there is real value there!!
In my opinion, ‘Mack the Knife’ getting shot is an indication of the SEC flexing its muscle.
LD
Wall Street Meets Main Street at the Courthouse
Posted by Larry Doyle on September 8th, 2009 8:50 AM |
With the gap between Wall Street and Main Street never wider, the American public is left wondering who truly is looking out for their interests. The Wall Street lobbying machine is working overtime to dilute real regulatory reform. The financial regulators themselves are increasingly exposed as overmatched and incompetent, if not worse. Where can the American public turn to get some relief? Slowly but surely the courts are taking action to address the gross injustices that the American public has had to bear at the behest of Wall Street and with the protection of Washington.
Make no mistake, the slope of the mountain of injustice is quite steep. Furthermore, we are just starting the trek. Little doubt there should be many stops along the way. You can rest assured that the Wall Street lawyers and financial lobbyists are working diligently to put out the smoldering ruins of fires and campsites which wreaked havoc upon our economic landscape. There appears, however, to be mounting evidence that the Wall Street fires were fed by Washington and financial regulators looking the other way.
Bloomberg highlights some initial progress made on behalf of the American public in the fight for truth, transparency and integrity on our financial and economic landscape. This morning Bloomberg writes, Judges Punish Wall Street as Regulators Just Talk About Reform:
As the White House and Congress debate how to regulate financial firms to avoid another economic crisis, judges have assumed the point position in punishing Wall Street for causing the worst recession since the 1930s.
The executive and legislative branches have been discussing reforms such as more regulation of hedge funds and transparency for derivatives as a response to the financial crisis that began a year ago. As that battle with a reluctant Wall Street inches forward about how to prevent another disaster, judges are taking the first steps toward the same goal, punishing executives and issuing rulings with national impact.
I can only hope the momentum in the courtroom accelerates given the slow and painstaking rope-a-dope game being played out between Wall Street and Washington. Wall Street clearly wants a ‘mulligan’ from the excessive improprieties that led to our current economic crisis. The courts are starting to get wise and adjudicating otherwise. Bloomberg highlights some recent rulings for the public and against the Wall Street-Washington cabal including: (more…)
Sarkozy Ups the Ante on Banker Compensation
Posted by Larry Doyle on August 26th, 2009 9:26 AM |
French President Nicolas Sarkozy
How is it that the country that is supposed to be the bastion of capitalism and free enterprise is taking serious direction on the topic of banker compensation from none other than French President Nicolas Sarkozy? The fact that Sarkozy is elevating the banker compensation topic prior to the G-20 meeting in Pittsburgh in September is a clear indication that the powers that be in Washington and on Wall Street have failed miserably on this topic.
There is NO doubt those on Wall Street would like to return to ‘business as usual’ as quickly as possible. Little do the Wall Street wizards appreciate that the ‘usual business’ brought our country to its knees. Let’s address the ultimate motivator, that is, compensation.
Wall Street’s initial response to potential increased oversight of the compensation process has been to increase salaries as an overall percentage of compensation. From a productivity standpoint, I view this maneuver as counterproductive. Increased salaries will increase fixed costs and actually serve as a disincentive. The fact is compensation needs to be viewed in its entirety, both salary and bonus. The entire process should not be gamed by firms to appease regulators.
Bloomberg highlights French President Sarkozy’s approach toward banker compensation in writing, Sarkozy Threat to Shun Banks on Pay Draws U.S. Alarm:
Aug. 26 (Bloomberg) — French President Nicolas Sarkozy’s plan to shun bankers who don’t accept pay limits was met with alarm by analysts and investors in the U.S., where Citigroup Inc. and six other bailed-out companies are being grilled by the government on how they compensate top-paid executives.
I am definitely not for strict government control of private enterprise compensation; however, if the boards of these private enterprises are not performing to protect the industry, the franchises, and the shareholders, then those boards need to be exposed. From my standpoint, the boards are a large part of the problem. Why? The boards are in the pocket of the senior executives. The senior executives have shown themselves to be excessively greedy and disinterested in protecting the industry and, in turn, our country.
Moving right along, I have always maintained that Wall Street banks must be obligated to fully align compensation with returns generated and risks remaining on the books. What do I mean? (more…)
JP Morgan’s Winters Identifies Problem, But Offers No Solutions
Posted by Larry Doyle on September 28th, 2009 11:17 AM |
Who on Wall Street is willing to break camp and call for real change in the industry that crippled our global economy?
Strong managers and real leaders not only identify problems before they develop, but they define and implement solutions as well. No one individual or institution led us into the current economic mess and no one individual or institution will lead us out. That said, if leaders in finance want to regain a degree of credibility and respect, they can not expect to be accorded those benefits by merely identifying problems in global finance. They must also provide answers and policies which cut across the entire global economic landscape and serve the interests of all. I have yet to see this type of leadership from anybody on Wall Street or any other center of global finance.
Identifying a problem without proffering a solution is nothing short of pandering. I witness exactly that in reading the London Evening Standard’s, JP Morgan’s London Head Slams ‘Greed’ of Bankers:
Having worked with Bill at JP Morgan, I respect him while admitting that our paths crossed to only a limited degree. That said, his comments here are nothing more than a ‘tremendous grasp of the obvious.’ Bill, what about the solutions?
Where are you and JP Morgan CEO Jamie Dimon in terms of the following:
1. Total transparency in the derivatives business achieved via the utilization of TRACE
2. Compensation practices which promote full correlation between long term risks and rewards (banker compensation)
3. Total transparency for Wall Street regulatory bodies, primarily FINRA
4. Fair and equitable credit card rates and practices
5. Supporting a fiduciary standard for financial brokers
6. Support for accounting practices which offer a full and honest look into banks’ books and records
7. Legislative changes for the ratings process
Without support for these initiatives, the very culture of greed which Mr. Winters would appear to be calling into question will perpetuate.
In fact, with all due respect, his lack of speaking out at this conference or at another forum on these topics can only lead me to believe his remarks are largely disingenuous.
LD
Related Sense on Cents Commentary
For JP Morgan’s Winters’ The Ledge Got Very Narrow and The Elbows Razor Sharp’ (September 29, 2009)
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