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The Holes in Obama's Wall Street Plan
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The president unveiled his plan to regulate the financial industry on Wednesday, a blueprint full of lots of a good individual ideas. But, William D. Cohan says, it completely misses the consistent thread that prompted the economic collapse: Wall Street's lack of accountability in the way it rewards itself.
As far as each individual proposal goes, it is hard to argue with the long-awaited Wall Street regulatory-overhaul plan that President Barack Obama and his two economic gurus, Larry Summers and Timothy Geithner, unveiled Wednesday after months of study, conversations, and roundtable discussions.
Who could be against requiring higher capital requirements for big banks? Who could find fault with seeking to formally and thoroughly regulate the weapons of mass destruction known as credit-default swaps, derivatives, and some of the crazier asset-backed securities? We’re all for giving the Fed the supreme power it needs to disassemble a troubled monster bank before it goes haywire and tries to devour the entire treasure of the American people. A Consumer Financial Protection Agency? Why not? Americans should be protected from their own short-sightedness and the greed of predatory credit-card and disreputable mortgage companies. “We thought we would fight the wars of necessity, not of choice,” an Obama administration official told Politico yesterday. “The big idea is to fix the problems that originated this crisis—to really go after what was at the core of this problem, which was gaps in regulations, and an approach that was purely focused on different kinds of institutions, without anyone looking at the system as a whole.”
A real, lasting fix will come only when the top 100 or so highest-paid executives at each of these firms—regardless of whether they remain TARPed or TARP-free—have some serious skin in the game, along the lines of their entire net worth.
But until Obama & Co. get to the heart of what caused this and many of the other financial crises that have threatened our livelihood during the past 40 years—namely, a compensation system on Wall Street that rewards taking big risks with shareholders' money in order to get big rewards for bankers and traders, free of all accountability—then the “problems that originated this crisis” will not be fixed at all. Rather, we will all just be biding our time until the next bubble is inflated and bursts anew.
There is little debate about why the leading players these days on what used to be known as Wall Street—Goldman Sachs, JPMorgan and Morgan Stanley—returned the billions of dollars in capital that Henry Paulson, the former Treasury secretary, force-fed them last October: They wanted to be free of the pesky government oversight that threatened to upset their beloved way of doing business. At the core of their concern was how and what they could pay their people—the lifeblood of the Wall Street circulatory system. During the past year or so, Congress and the Executive Branch have left little doubt in the minds of Wall Street executives that they would love nothing more than to limit the compensation paid to bankers, traders, and executives and that they would be happy to do that very thing if Wall Street failed to take the lead in compensation reform.
To some degree, Morgan Stanley read the political tea leaves wisely, and instituted a program to increase salaries and reduce bonuses as a way to limit misplaced incentives. The firm also reserved the right to claw back any bonus paid to an employee during a three-year period, if that employee caused outsized losses at the firm or caused the firm reputation damage. Morgan Stanley’s program is to be applauded as far as it goes. So far, there is no indication from either Goldman Sachs or JPMorganChase of how their compensation systems will be altered from the ones that got us into this mess.
True and lasting reform on Wall Street can come only with true and lasting reform of the decades-old compensation system that has been moving away from the general partnerships of yore ever since Donaldson, Lufkin & Jenrette went public in 1970. Once upon a time, the general partners of Wall Street firms—the ones making the decisions about what the firm’s business lines would be and how their capital would be deployed—had their entire net worths on the line, year-in and year-out. Partners shared profits and losses ratably depending upon their partnership stakes in the firm itself. To be sure, this was not a foolproof method of governance. Wall Street firms—mostly undercapitalized—went in and out of business all the time, since the founding of the system under a buttonwood tree in Lower Manhattan some 200 years ago.
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Jacob Bernstein is a senior reporter at The Daily Beast. Previously, he was a features writer at WWD and W Magazine. He has also written for New York magazine, Paper, and The Huffington Post.
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Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.
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Jeff Madrick is a contributor to the New York Review of Books and a former economics columnist for the New York Times. He is editor of Challenge Magazine, visiting professor of humanities at Cooper Union, and senior fellow at the New School's Schwartz Center for Economic Policy Analysis. He is the author of Taking America, The End of Affluence (Random House) and The Case for Big Government.
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William D. Cohan, a former senior-level M&A banker on Wall Street, is the author of The Last Tycoons: The Secret History of Lazard Freres & Co, and his new best seller House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.
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William D. Cohan, a former senior-level M&A banker on Wall Street, is the author of The Last Tycoons: The Secret History of Lazard Freres & Co, and his new best seller House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.
There will always be fewer winners than losers.
All those people who bet on someone else's failure, borrowing money for shorting, using derivative instruments, not really to hedge any more, but to profit from failure.
That is is what partly broke the bubble.
Sure assets were overpriced to a degree, but the way they were shorted out, people did make lots of money on that, and then they became undervalued. How can you build something up, as people gain from shorting it, and profiting on failure instead of success.
How could Madoff, say he made all those trades, billions of dollars worth, over at least a decade, if not two, without anyone noticing it was all a fiction.
SEC I can understand how got caught up in all the rules and regulations, but if it didn't make sense, it should have been investigated a lot sooner.
Madoff lived a pretty good life really, whatever good means.
He is going to die anyway, what difference does it make to him, getting caught now, his life is almost over.
The market is obviously only as efficient as the big (Dick) players' honesty allows it to be.
OK here it is ....the ace in the hole.......THE ONLY way any of these crazy ass financial instruments got some life pumped into them and were able to run wild is the rating agencies gave em' all triple A scores....who pays the rating agencies? why wall street of course.....so WE THE PEOPLE say to hell with giving the FED regulatory power (especially since they are a private org. any way) bring back the congressional laws rescinded to make all of this possible in the first place.
I don't know why guys like this write these articles. We the people, get it.
Now go kick Kudlow and Cramer in the balls. They and all of their Wall Street cronies are resisting even the smallest regulation from the government at every turn.
Get on their shows and call them idiots.
Thank you!
Please, explain to me why we (the government) - the people - have to get permission from Wall Street anyway? It is way into overtime now. Need to drop kick them into submission!
xbainx, We the people have short attention spans, and need to be constantly reminded of the facts. Remember Animal Farm? And irrespective of what occurs on Wall Street, we still have that other economic monster lurking in the hall, Big Oil !!!
Wall Street pre- and post-fiasco, is nothing but a scam, pure and simple. George Patton
I agree we have not adequately investigated the cause of the crisis, and this needs to be done prior to "fixing" it. I think Congress and the Administration need to put in place a 9/11 type commission that reports back to the American people. At this time we all are picking our favorite bogey man (in your case Wall Street traders). I don't know if you are right or wrong? Are the high salaries a symptom or a cause? I would suggest a more thorough analysis.
I bet the big Dicks know exactly what happened.
One big one.
Madoff took "out" possibly 65 billion which was meant to be invested in the stock market. This money somhow was misussed for years if not decades wihtout being detected.
The war effected the oil market so drastically the price went from around $35 to over $100, and then back down with a thump.So possibly the risk related to the derivative related oil market would have benefited only people who knew how one thng was effecting another thing, and the true future price oil. Everyone else was left in the dark.
Millions of people possibly feel that the people selling them financial products, which are future oriented are not providing them with valid information.
So people begin to believe SEC is either incapable of enforcing the rules or something more sinister, investors may have been set up so that they were making phantom earnings, and the fraudulent statements they were receiving were not being noticed, even though the amounts were in the billions, as their phantom earnings could be taxable, their wealth was being stolen, and money was going only God knows where making IRS the biggest benefactor of the Madoff scheme.
Another reason, people betting and shorting on failure of real companies making it impossible for them to get the financing they need.
People stopped believing the market is a fair playing field, and are guessing the big Dicks have inside information that is used to the Bid Dicks' advantage, and the little investor would be better off with money staying either staying in the bank or being played in the casino or being stuffed in Grandma's feathered bed.
Oops; [He is going to die anyway, what difference does it make to him, getting caught now, his life is almost over. ] Madoff didn't get caught, he gave himself up, before the scheme collapsed, giving him the physical security of jail etc.
The big fat bonuses don't help either in rebuilding investors faith in the market. The difference with Government, they get their revenue through coercion, whereas investors investors voluntarily, and when they stop, market failure will happen.
The status quo president.
If the beast editors notice that I used the word big "Dick", that is really a term used, for investors, with huge pockets. often investor bankers, who other investors follow, and can change the actual price of stock, when selling or buying.
My comment was not about Dick Cheney.
There will be regulation, but it won't amount to anything in the real world. The financial lobby has too much control over the government, so what we'll get is a small, insignificant amount of regulation that may be hard on the consumer, but will only help the financial industry rape this nation more than it already has. As an example, I offer the new bankruptcy regulations, which were drafted by the credit card industry. Diffenent president I know, but the same powerful lobby owns this administration, as it did the last.
Healthcare was another big "CHANGE" that was PROMISED, how's that looking these days?... That lobby is also in possession of the souls of our elected officials, and the LOBBY will decide what's best for the rest of us, and we will be forced to like it.
Obama was supposed to be different, he was supposed to bring an end to the powerful special interest groups that control our governments actions, he was supposed to change things.......................... All that changed was the party affiliation, but all of the power and control rests firmly with the Big corporate money, ALL of it.
Obama has disapointed me and mine. I believed what he said, what he promised. Now I feel stupid.
I would go much further and outlaw short selling across the board. Why reward any 'investor' for failure?
Let's get rid of it, now!
I think that's going a bit to far.
But banning naked short selling seems well within reason.
Obama's proposal is massively skewed in favor of big banks. Small ones will fold. The consumer protection part is therefore necessary because he has fed the consumer right back to the big sharks.
Change I don't want to believe in.
Continuing to debate over Wall Street comp is pointless and will ultimately accomplish nothing. In the end any firms that need to cap will see employees exit for the firms that don't, evidence of this is the recent mass departures of staff from the likes of JPM, Citi and UBS to "middle market" and boutique operators - the next generation of bulge brackets. One thing Wall Street is good at is getting paid and that will always be the case.
If you want to fix something fix the Fed...you should be more than just a bit concerned at any new powers the Fed squeezes out of this debacle, after all it is the very same Fed that presided over the crash 1921 and 1929, the Great Depression '29-'39, recessions in '53, '57, '69, '75 and '81, Black Monday in '87 and inflation that has destroyed 90% of the USD purchasing power..and now we want to give them MORE authority over the financial system, way to go.
"Let me issue and control a nations money and I care not who writes the laws"
-Mayer Amschel Rothschild
pious1001 when you lump all those events together, for a split second it appears to make sense. But you fail to mention is that there WAS NO SEC when the stock market crash hit. That's why the market crashed!!!! People are inherently greedy and if you let them have free access to the pie guess what? THEY TAKE THE WHOLE DAMN PIE!!!! This latest economic fiasco is a result of two decades of republican deregulation. When there is no watch dog or the dog is asleep at the watch station, markets crash. It amazes me that people are too stupid to recognize that FACT. The cons really brainwashed us good. Obama is right to overhaul the feds as it's been ineffective ever since the cons got their grubby hands on them.
Just like we have police officers who work to keep our streets safe we need to police our financial markets so that people can feel confident investing. Otherwise we might as well plunge ourselves back into the dark ages. You can argue semantics all day but if you cannot see past your nose you're just gonna keep slamming into that brick wall. It's called the big picture. Look it up.
"Advocates of capitalism are very apt to appeal to the sacred principles of liberty which are embodied in one maxim: the fortunate must not be restrained in the exercise of tyranny over the unfortunate" Bertrand Russell.
withcommunism man exploits man with capitalism it is the other way around.
until americans not just politicans understand these two simply stated but profound axioms nothing much will change in america.
spiritual or universal laws not religious dogma but these universal laws apply to all aspects of life yes even to wall street, to individuals and to nations. yes even to tribal mentality.
america is a failed state with two unwinable wars and deep deep trade inbalance and national debt. few in american see america as a failed state but are in denial a common human condition.
if capitalisim which is about profits not people than the universe would be a horrible place with little hope for better things to come in our lives in this world and others.
few will understand my words very few.
The taskmasters of Congress will never let it happen. They will always make-up excuses like..."The talent will go elsewhere."
About four years ago, I was having dinner with two friends who each ran a hedge fund. In the news that day was a story about some Wall Street trader earning a big big payout.
Both my friends immediately picked up that the guy's paycheck was too large for the job he had. "You want that kind of pay, become an owner." The only way an employee could earn really big bucks was to gamble with the firm's money. My friends thought that only owners had the right to take the sort of risks that led to big bucks. Because if they gambled wrong, it was their money they lost, it was their firm that went out of business.
If the big Wall Street firms are too big to fail, then we need to limit not compensation per se, but what traders/bankers do to earn it and the size of each firm's book for any particular line of business. And maybe forcing firms to have more skin int he game. Had Citibank been forced to hold a big stake in that crappy mortgage paper it was underwriting/securitizing, it might have paid more attention to credit standards and default rates. Instead, the more crap they could shoveled out the door to investors, no questions asked, the more money it earned.
[The flood of other currencies chasing US oil markets meant that the dollar was worth quite a bit while the US was a net exporter of oil. The oil, not the derivative currency contract, was the underlying strength.
However, when oil consumption rates in the US exceeded oil production rates, the US became a net importer. Guess what happened?
Yes, of course the dollar lost most of its (remaining) value in the following decade, but the point is that this had all been forecast far in advance by folks who knew what created trends and foresaw the intersection of two trendlines (domestic consumption and domestic production). Did you get THAT?] excerpted from http://www.financialsense.com/fsu/editorials/2005/0906.html.
Is it even possible to turn a public company back into a private partnership? I guess if they bought all their stock back... but if everyone knew they were doing that, they wouldn't sell. So the government would have to step in and say "They are buying it back at today's price plus a premium" and violate the spirit of the game which suggests a person can buy or sell when they want.
But your fundamental point, Mr. Cohan, that people continue to get rich even as they steer a company into bankruptcy is part of the problem.
Rich people in this country used to become poor if they exercised their right to epic fail.
Thank you.
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