Consider the chart posted by Felix Salmon, illustrating Morgan Stanley’s borrowing from the Fed from 2007 through the end of 2010. I don’t object to the borrowing. As Mr. Salmon correctly notes, that’s the Fed’s job:
On September 16, 2008, Morgan Stanley owed $21.5 billion to the Fed. The next day, that number doubled, to $40.5 billion. And eight working days later, on the 29th, the bank’s total borrowings from the Fed reached $107 billion. The Fed didn’t blink: it kept on lending, as much as it could, to any bank which needed the money, because, in a crisis, that’s its job.
The Fed likes to say that it wasn’t taking much if any credit risk here: that all its lending was fully collateralized, etc etc. But it’s really hard to look at that red line and have a huge amount of confidence that the Fed was always certain to get its money back. Still, this is what lenders of last resort do.
What I object to are the bonuses. Any dividends it’s paid since then. Sales of stock by top management. Basically, those are looting. The top management of banks that are wards of the government need to be paid like the civil servants they are.
There are generally two protests to this. The first is that such restrictions would make it difficult for these banks to hire or retain talent. How much talent does it take to lose the kind of jack these banks did? That talent deserves to be lost. It’s what would have happened in a market.
The other objection is legal, i.e. that the banks had contracts with various employees that required them to pay such and so. My reaction to that is something that an old boss of mine used to say: make it happen. If the banks had failed they wouldn’t have collected anything.
I agree 100%. The “talent” argument has always been bunk. Bonuses should be tied to profitability period. No profit = No bonus.
The problem with the following paragraphs is that its all horse already out of the barn stuff.
“What I object to are the bonuses. Any dividends it’s paid since then. Sales of stock by top management. Basically, those are looting. The top management of banks that are wards of the government need to be paid like the civil servants they are.”
That’s fine. But employees of the Department of Motor Vehicles can’t run Citicorp. Better: government bailouts shouldn’t have insulated the shareholders (and the Board) from their duties.
“There are generally two protests to this. The first is that such restrictions would make it difficult for these banks to hire or retain talent. How much talent does it take to lose the kind of jack these banks did? That talent deserves to be lost. It’s what would have happened in a market.”
Again. Good snark. But do you really want Mayor Daley and 100 guys from Streets and San running B of A?? Not me. Better: don’t bail the shareholders and Board out for abrogation of duty.
“The other objection is legal, i.e. that the banks had contracts with various employees that required them to pay such and so. My reaction to that is something that an old boss of mine used to say: make it happen. If the banks had failed they wouldn’t have collected anything.”
Scorched Earth. Again, outside of government intervention and the notion of bail out the culling of the heard would have occurred in a reasonable fashion over time. Remember, many of the I-Banks used to be partnerships. Think this would have happened if the partners thought their capital accounts were in jeapordy due to lone wolves???
We’re not talking about first choices, Drew. We’re talking about, maybe, fourth or fifth best.
My first choice would have been to prevent the banks from presenting systemic risk. Then when they failed, they failed and would have been resolved using the conventional methods.
My second choice would have been to nationalize the big banks, let them continue in operations (removing top management but leaving the remainder of their structures in place) until they could be broken up.
Letting the banking system fail, which has been the claim of what would have happened if the big banks had simply been allowed to fail, doesn’t sound like a particularly good option.
I know, Dave. But grousing about “looting” and advocating “civil servant” wages is an understandable emotional reaction…but goes nowhere as a practical matter.
“My first choice would have been to prevent the banks from presenting systemic risk.”
I understand. But I’m stll flummoxed as to how to compete internationally with a Swissbank and not cede an entire industry to the competition. And further, how does this worldview dovetail with notions of centralized healthcare, or pension systems or education?
“My second choice would have been to nationalize the big banks, let them continue in operations (removing top management but leaving the remainder of their structures in place) until they could be broken up.”
I would only add, and the cap structure be rectified in a standard manner.
“Letting the banking system fail, which has been the claim of what would have happened if the big banks had simply been allowed to fail, doesn’t sound like a particularly good option.”
Agreed. But I’m not sure who that is directed at.
That’s fine. But employees of the Department of Motor Vehicles can’t run Citicorp.
Why not? What’s the worst that would happen, they would run it into the ground? No need to pay top wages for that kind of ‘talent’. $7.77 TRILLION in loans (not to mention everything else that was done) doesn’t exactly instill confidence that the people running the place could find their asses with two hands even if you gave them a one cheek headstart. Seriously, why the fuck isn’t Vikram Pandit a homeless beggar? Yeah, yeah, I know, because he knows people that matter. A fine way to run a system….
Oh, this is rich:
Apparently being a President of a regional FRB doesn’t actually guarantee that you know what the Hell the FED is doing.
More:
I wonder when Gregg knew he’d be on the GS payroll. Thank God for independent oversight and adult supervision.
I think it is all a timing issue.
Taking away earned bonuses would have garnered numerous lawsuits of civil rights violations, that IMHO would ultimately be successful and would have tied the government up in policies and messages that addressed punishment, not economic remedies. (In hindsight, if we think the government response was bad, then the latter complaint is weak) (FN)
The Pay Czar determined that certain levels of bonuses were needed to retain talent to unwind positions. I’ve not seen any evidence to contradict that. In the short term it makes sense.
We appear to have codified a pseudo-monopoly of too-big-to-fail institutions, I have no problem imposing compensation on these government protectorates going forward, though I suspsect such restictions will reduce them in size and scope.
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FN: Worse, it could have weakened protections for earned wages which IMHO are weaker than they need to be. Anybody read a story about workers not getting paid their last few weeks wages? Or finding out that payroll deductions weren’t paid to the government during the last several months?
“I believe that the Fed should have independence in conducting highly technical monetary policy, but when they are putting taxpayer resources at risk, we need transparency and accountability”.
This kind of gross error is why I fear for the future. The Fed does NOT depend on tax revenues for its operations. It can inject unlimited liquidity into the banking system, period. Either Shelby is pig-ignorant of how the central bank actually functions (which I do believe) or he’s grandstanding.
From Icepick’s link:
“That the central bank didn’t lose money should “lead to praise of the Fed, that they took this extraordinary step and they got it right,†says Phillip Swagel, a former assistant Treasury secretary under Henry M. Paulson and now a professor of international economic policy at the University of Maryland.”
The central bank CAN’T lose money Mr. Swagel: it can’t even be said to HAVE any money. It simply pushes buttons to create what it needs, it doesn’t have a vault where it puts money until it makes a loan. The quote is pure spin from a man using what he must know is an inproper characterization of the central bank to pull the wool over the public’s eyes.
The money is amorphous and limitless. Consequently I don’t give a damn about “losing” it, I care about the malinvestment which the Fed is promoting via massive liquidity injections to save what are still insolvent banks. The more it does this the greater the damage from the next financial shock, not only to real assets and investments, but in the public’s already abysmal trust in our government.
… I have no problem imposing compensation on these government protectorates going forward, though I suspsect such restictions will reduce them in size and scope.
Feature, not bug.
Anybody read a story about workers not getting paid their last few weeks wages?
Happens to construction workers a lot, as does the other issue. That’s the whole reason for general contractors to use sub-contractors. (Yes, I am saying construction is a racket.)