October 28, 2010, 9:01 pm
On Wall Street: All Reward, No Risk
On Wall Street: All Reward, No Risk
By WILLIAM D. COHAN
For the life of me, I can’t figure out why Wall Street bankers, traders and executives get paid so much money year after year for doing jobs that rarely require them to innovate, enlighten or put their own capital at risk, and have the nasty habit of periodically sinking our economy.
After a two-year stint as a reporter on a daily paper in the early 1980s, I worked on Wall Street for nearly two decades, and quickly discovered that I could make more money in one year as a banker than I could in a lifetime as a journalist. And that was when I was a relatively junior banker. By the time I was a managing director, the pay — and the pay spread — was astronomical.
Curiously, though, the amount of time and energy I devoted to the two professions on a daily basis wasn’t all that different; both were totally demanding. While it was true that as a banker I generated revenue, or helped to generate revenue, and as a journalist, the publisher likely figured I was part of a cost problem, the discrepancy in pay never made much sense to me since I always had trouble imagining a newspaper without writers.
Now, after six years of writing about Wall Street — including two lengthy books — I remain at a total loss to explain the pay phenomenon. What’s worse, even the most modest slights when it comes to pay on Wall Street — “The guy next to me got a $2 million bonus, why did I only get $1.9 million?!” — is enough to reduce someone to tears. Indeed, I have yet to encounter a person on Wall Street who can, with a straight face, justify his compensation on other than the most painfully tone-deaf grounds, usually along the lines of how they “add value” for their clients.
The Wall Street Journal recently estimated that Wall Street bonuses in 2010 will total $144 billion, in a year that has been less than stellar for most banks. Goldman Sachs has set aside $13.1 billion in bonuses for its approximately 35,000 employees, an average of $370,000 per person, which completely ignores the fact that people at the top of Goldman’s golden pyramid get paid millions of dollars annually while those at the bottom do not. (In 2007, the three top executives at Goldman split around $200 million.) Goldman’s accrued bonuses for the first nine months of the year equaled 43 percent of its revenue and were down from the $16.7 billion that the firm accrued in 2009, or 47 percent of its revenue. (In a nod to the political gales blowing in its direction, Goldman accrued nothing for bonuses in the final quarter of 2009.)
At Morgan Stanley, half of the $24 billion in revenue the firm has generated in the first nine months of the year has been earmarked for compensation. At Lazard — a somewhat different Wall Street animal, in that it largely limits its actions to asset management and advising on mergers, as opposed to trading for its own account — 61 percent of the revenue generated so far this year has been set aside for bonuses. And, incredibly, according to the Financial Times, UBS, the giant Swiss bank, has asked Swiss authorities to waive a $1 million bonus cap for its bankers “amid complaints” the cap “has strained some executives’ personal finances.”
Do Wall Street firms exist for the benefit of their shareholders, like other public companies, or do they exist primarily for the benefit of the people who happen to work there? The answer to this rhetorical question is painfully, and sadly, obvious. No other large public companies pay out anywhere near as high a percentage of revenue to their employees. But where is it written that this madness has to continue? Why does a financial engineer have to get paid exponentially more than a real engineer?
With his usual narrative flair, the New Yorker writer Malcolm Gladwell recently tried to figure out why Americans pay their “stars” so much money. “There was a time, not so long ago, when people at the very top of their profession — the talent — did not make a lot of money,” he wrote. That’s true of Wall Street as well: in 1949, when Felix Rohatyn started at Lazard Freres & Co., in New York, he was paid $37.50 a week. This was a 15 percent better weekly salary than Ace Greenberg received that year when he started at Bear Stearns, where he would eventually rise to chief executive and chairman.
As Gladwell explains — thanks to such visionaries as Marvin Miller, the former head of the Major Baseball Players Association, and Mort Janklow, the literary agent — the talent began taking a larger percentage of the pie. The logic evolved, soundly, that those who took the greatest risks or had achieved greatness on a daily basis deserved the bulk of the financial reward, as opposed to those who happened to own the team or the printing press. We may not always like Alex Rodriguez, but most Americans can understand why he got a $275 million, 10-year contract to play baseball; he’s one of the great players of all time, and his talents bring in the crowds (and TV money) to the Yankees.
In finance, the rough equivalent of A-Rod are top private-equity titans, like Steve Schwarzman and Henry Kravis, or hedge-fund managers, like John Paulson and James Simons. These men risk large chunks of their own money (as well as their investors’) and make calculated gambles they hope will pay off. If they bet right, they get fabulously wealthy; if they don’t, they disappear into oblivion. Teddy Forstmann, a onetime star of the private-equity firmament, explained to Gladwell why he chose that business: “I wanted to be a principal and not an agent.” He wanted to be the talent and to be paid like the talent, assuming he performed.
But unlike hedge-fund guys, investment bankers are not principals. They are agents. And they are at their best when they provide important services to their clients — such as advice on mergers and acquisitions or the capital their clients need to grow — and at their worst when they pretend to be principals, using other people’s money to make bets for their firms that they hope will be eventually reflected in their bonuses.
And yet, somewhere along the line, bankers decided that they deserved to get paid like those quantifiable talents who put themselves or their capital at risk day after day. This is what mystifies me, since, as a group, investment bankers are the most personally and professionally risk-averse people I’ve ever met. After all, in what other business could they make so much money without putting any of their own money on the line? Outsized financial rewards should be reserved for those who take outsized financial risks with their own money or have outsized, demonstrable talent. Investment bankers, by and large, just do not make that cut.
At the end of his essay, Gladwell tells the story of how the baseball Hall of Famer Stan Musial, after turning in a batting performance that was 76 points below his career average in 1959, asked the St. Louis Cardinals for a 20 percent pay cut off his $100,000 annual salary. This was a decade before Marvin Miller came and changed the calculus for players. Gladwell concedes that Miller would have been appalled by Musial’s decision. “There wasn’t anything noble about it,” Musial said in explaining why he did it. “I had a lousy year. I didn’t deserve the money.”
Which brings to mind what happened to Felix Rohatyn, at Lazard, when he took the advice of Samuel Bronfman, the Seagram’s magnate, and switched from foreign-exchange trading to Lazard’s mergers-and-acquisition group, where he would go on to become a legend. The moment he made the switch, however, Andre Meyer, Lazard’s senior partner, cut Rohatyn’s annual pay to $10,000, from $15,000. And Rohatyn had not even had a bad year.
“There’s a real danger here,” said Peter J. Wallison, a senior fellow at the American Enterprise Institute, a conservative think tank. “Every time a bank gets sued, it devotes a huge amount of time defending itself, instead of spending time on things it normally does to improve economic growth.”
This statement is completely false and obfuscates the truth. Financialization, buying paper, has become the business model for banks too BIG to fail, rather than allocating and organizing capital to invest in the real economy.
There are two ways to become richer. One is to provide more goods and services; that’s economic growth. The other is to snatch someone else’s wealth or income; that’s the spoils society. In a spoils society, economic success increasingly depends on who wins countless distributional contests — not who creates wealth but who controls it. This can be contentious. Winners celebrate; losers fume.
What’s emerging today is more self-interested and self-destructive. The dilemma of a rich society is that its prospects can be undermined by its very abundance. Countries preoccupied with distributional wars are distracted from production. The ambitions of many of its most talented members can be satisfied not by adding to the total output but simply by subtracting from someone else’s. They are merely rearranging economic assets among themselves. If taken too far, this promises more political division and economic decline.
Four years into an economic recovery in which most of the benefits have flowed to the top earners, a majority believe that the American Dream is becoming markedly more elusive, according to the results of a Washington Post-Miller Center Poll exploring Americans’ changing definition of success and their confidence in the country’s future.
Although most Americans still think hard work and education breed opportunity, their faith in a brighter tomorrow has been eroded by intensifying struggles on the job and at home that have led some to conclude that the United States has emerged from the Great Recession a fundamentally changed nation.
“The American Dream is to have your own house with a white picket fence, a dog running around the back yard and a happy family,” said Rachel Bryant, 28, a hairstylist and homemaker in Aurora, Ill. “I do own a home. I have no college debts. I have two kids. I am the American Dream. But it’s not what it used to be. It was a lot easier for my mom and dad to get where they are than my generation. I’m scared to death for my children. They say Social Security is going to be running out. I’m worried to death where the country is going.”
Plutocrats Feeling Persecuted
By PAUL KRUGMAN
Published: September 26, 2013
Robert Benmosche, the chief executive of the American International Group, said something stupid the other day. And we should be glad, because his comments help highlight an important but rarely discussed cost of extreme income inequality — namely, the rise of a small but powerful group of what can only be called sociopaths.
For those who don’t recall, A.I.G. is a giant insurance company that played a crucial role in creating the global economic crisis, exploiting loopholes in financial regulation to sell vast numbers of debt guarantees that it had no way to honor. Five years ago, U.S. authorities, fearing that A.I.G.’s collapse might destabilize the whole financial system, stepped in with a huge bailout. But even the policy makers felt ill used — for example, Ben Bernanke, the chairman of the Federal Reserve, later
And it got worse. For a time, A.I.G. was essentially a ward of the federal government, which owned the bulk of its stock, yet it continued paying large executive bonuses. There was, understandably, much public furor.
So here’s what Mr. Benmosche did in an interview with The Wall Street Journal: He compared the uproar over bonuses to lynchings in the Deep South — the real kind, involving murder — and
declared that the bonus backlash was “just as bad and just as wrong.”
You may find it incredible that anyone would, even for an instant, consider this comparison appropriate. But there have actually been a series of stories like this. In 2010, for example, there was a comparable outburst from Stephen Schwarzman, the chairman of the Blackstone Group, one of the world’s largest private-equity firms. Speaking about proposals to close the carried-interest loophole — which allows executives at firms like Blackstone to pay only 15 percent taxes on much of their income — Mr. Schwarzman declared, “It’s a war; it’s like when Hitler invaded Poland in 1939.”
And you know that such publicly reported statements don’t come out of nowhere. Stuff like this is surely what the Masters of the Universe say to each other all the time, to nods of agreement and approval. It’s just that sometimes they forget that they’re not supposed to say such things where the rabble might learn about it.
Also, notice what both men were defending: namely, their privileges. Mr. Schwarzman was outraged at the notion that he might be required to pay taxes just like the little people; Mr. Benmosche was, in effect, declaring that A.I.G. was entitled to public bailouts and that its executives shouldn’t be expected to make any sacrifice in return.
This is important. Sometimes the wealthy talk as if they were characters in “Atlas Shrugged,” demanding nothing more from society than that the moochers leave them alone. But these men were speaking for, not against, redistribution — redistribution from the 99 percent to people like them. This isn’t libertarianism; it’s a demand for special treatment. It’s not Ayn Rand; it’s ancien régime.
Sometimes, in fact, members of the 0.01 percent are explicit about their sense of entitlement. It was kind of refreshing, in a way, when Charles Munger, the billionaire vice chairman of Berkshire
Hathaway, declared that we should “thank God” for the bailout of Wall Street, but that ordinary Americans in financial distress should just “suck it in and cope.” Incidentally, in another interview — conducted at his seaside villa in Dubrovnik, Croatia — Mr. Benmosche declared that the retirement age should go up to 70 or even 80.
The thing is, by and large, the wealthy have gotten their wish. Wall Street was bailed out, while workers and homeowners weren’t. Our so-called recovery has done nothing much for ordinary workers, but incomes at the top have soared, with almost all the gains from 2009 to 2012 going to the top 1 percent, and almost a third going to the top 0.01 percent — that is, people with incomes over $10 million.
So why the anger? Why the whining? And bear in mind that claims that the wealthy are being persecuted aren’t just coming from a few loudmouths. They’ve been all over the op-ed pages and were, in fact, a central theme of the Romney campaign last year.
Well, I have a theory. When you have that much money, what is it you’re trying to buy by making even more? You already have the multiple big houses, the servants, the private jet. What you really want now is adulation; you want the world to bow before your success. And so the thought that people in the media, in Congress and even in the White House are saying critical things about people like you drives you wild.
It is, of course, incredibly petty. But money brings power, and thanks to surging inequality, these petty people have a lot of money. So their whining, their anger that they don’t receive universal deference, can have real political consequences. Fear the wrath of the .01 percent!
Maximizing shareholder value: The goal that changed corporate America
By Jia Lynn Yang, Published: August 26
ENDICOTT, N.Y. — This town in the hills of Upstate New York is best known as the birthplace of IBM, one of the country’s most iconic companies. But there remain only hints of that storied past.
The main street, once swarming with International Business Machines employees in their signature white shirts and dark suits, is dotted with empty storefronts. During the 1980s, there were 10,000 IBM workers in Endicott. Now, after years of layoffs and jobs shipped overseas, about 700 employees are left.
Investors in IBM’s shares, by contrast, have fared much better. IBM makes up the biggest portion of the benchmark Dow Jones industrial average and has helped drive that index to record highs. Someone who spent about $16,000 buying 1,000 shares of IBM in 1980 would now be sitting on more than $400,000 worth of stock, a 25-fold return.
It used to be a given that the interests of corporations and communities such as Endicott were closely aligned. But no more. Across the United States, as companies continue posting record profits, workers face high unemployment and stagnant wages.
Driving this change is a deep-seated belief that took hold in corporate America a few decades ago and has come to define today’s economy — that a company’s primary purpose is to maximize shareholder value.
The belief that shareholders come first is not codified by statute. Rather, it was introduced by a handful of free-market academics in the 1970s and then picked up by business leaders and the media until it became an oft-repeated mantra in the corporate world.
Together with new competition overseas, the pressure to respond to the short-term demands of Wall Street has paved the way for an economy in which companies are increasingly disconnected from the state of the nation, laying off workers in huge waves, keeping average wages low and threatening to move operations abroad in the face of regulations and taxes.
This all presents a quandary for policymakers trying to combat joblessness and raise the fortunes of lower- and middle-class Americans. Proposals by President Obama and lawmakers on Capitol Hill to change corporate tax policy, for instance, are aimed at the margins of company behavior when compared with the overwhelming drive to maximize shareholder wealth.
“The shift in what employers think of as their role not just in the community but [relative] to their workforce is quite radical, and I think it has led to the last two jobless recoveries,” said Ron Hira, an associate professor of public policy at the Rochester Institute of Technology.
The change can be seen in statements from IBM’s leaders over the years. When he was IBM’s president and chief executive, Thomas J. Watson Jr., son of the company’s founder, spoke explicitly about balancing a company’s interests with the country’s. Current chief executive Virginia Rometty has pledged to follow a plan called the “2015 Road Map” in which the primary goal is to dramatically raise the company’s earnings-per-share figure, a metric favored by Wall Street.
Job cuts have come this summer — the biggest wave in years at the company. In Essex Junction, Vt., about 450 workers were axed in June. In Dutchess County, N.Y., 700 jobs were lost. At Endicott, at least 15 workers were told to leave.
EARNINGS August 20, 2013, 5:12 p.m. ET
On Wall Street, a Reversal of Fortune
Slump in Aluminum Deliveries Marks Unraveling of Profitable Business.
A Shuffle of Aluminum, but to Banks, Pure Gold
Aluminum ingots waiting to be shipped from a processor. Financial institutions like Goldman Sachs have used industry pricing regulations to earn millions of dollars each year.
By DAVID KOCIENIEWSKI
Published: July 20, 2013
MOUNT CLEMENS, Mich. — Hundreds of millions of times a day, thirsty Americans open a can of soda, beer or juice. And every time they do it, they pay a fraction of a penny more because of a shrewd maneuver by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars.
The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.
This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country.
Tyler Clay, a forklift driver who worked at the Goldman warehouses until early this year, called the process “a merry-go-round of metal.”
Only a tenth of a cent or so of an aluminum can’s purchase price can be traced back to the strategy. But multiply that amount by the 90 billion aluminum cans consumed in the United States each year — and add the tons of aluminum used in things like cars, electronics and house siding — and the efforts by Goldman and other financial players has cost American consumers more than $5 billion over the last three years, say former industry executives, analysts and consultants.
The inflated aluminum pricing is just one way that Wall Street is flexing its financial muscle and capitalizing on loosened federal regulations to sway a variety of commodities markets, according to financial records, regulatory documents and interviews with people involved in the activities.
The maneuvering in markets for oil, wheat, cotton, coffee and more have brought billions in profits to investment banks like Goldman, JPMorgan Chase and Morgan Stanley, while forcing consumers to pay more every time they fill up a gas tank, flick on a light switch, open a beer or buy a cellphone. In the last year, federal authorities have accused three banks, including JPMorgan, of rigging electricity prices, and last week JPMorgan was trying to reach a settlement that could cost it $500 million.
Using special exemptions granted by the Federal Reserve Bank and relaxed regulations approved by Congress, the banks have bought huge swaths of infrastructure used to store commodities and deliver them to consumers — from pipelines and refineries in Oklahoma, Louisiana and Texas; to fleets of more than 100 double-hulled oil tankers at sea around the globe; to companies that control operations at major ports like Oakland, Calif., and Seattle.
In the case of aluminum, Goldman bought Metro International Trade Services, one of the country’s biggest storers of the metal. More than a quarter of the supply of aluminum available on the market is kept in the company’s Detroit-area warehouses.
Before Goldman bought Metro International three years ago, warehouse customers used to wait an average of six weeks for their purchases to be located, retrieved by forklift and delivered to factories. But now that Goldman owns the company, the wait has grown more than tenfold — to more than 16 months, according to industry records.
Longer waits might be written off as an aggravation, but they also make aluminum more expensive nearly everywhere in the country because of the arcane formula used to determine the cost of the metal on the spot market. The delays are so acute that Coca-Cola and many other manufacturers avoid buying aluminum stored here. Nonetheless, they still pay the higher price.
Goldman Sachs says it complies with all industry standards, which are set by the London Metal Exchange, and there is no suggestion that these activities violate any laws or regulations. Metro International, which declined to comment for this article, in the past has attributed the delays to logistical problems, including a shortage of trucks and forklift drivers, and the administrative complications of tracking so much metal. But interviews with several current and former Metro employees, as well as someone with direct knowledge of the company’s business plan, suggest the longer waiting times are part of the company’s strategy and help Goldman increase its profits from the warehouses.
Big banks’ dangerous monopoly on life
By Harold Meyerson, Published: July 23
In 1909, as one of the scores of short pictures he turned out that year, D.W. Griffith directed “Corner in Wheat ,” a 14-minute film adaptation of a story by the populist antitrust novelist Frank Norris. In it, a Wall Street speculator buys up so much of America’s wheat and keeps it off the market that prices soar and millions — including the farm family Griffith shows laboring in the fields — go hungry.
Americans’ long-standing apprehensions about banks getting control of the stuff of life are, as we’ve learned again in recent weeks, generally justified. The latest episode of Wall Street’s manipulation of commodity prices was revealed Sunday in a remarkable New York Times article by David Kocieniewski that showed how Goldman Sachs, just by warehousing 1.5 million tons of aluminum, has managed to raise the price of every beer and cola can the world over. Goldman doesn’t own the aluminum, yet in the best tradition of middlemen who add no value to the product but manage to nonetheless take a hefty cut, it owns a vast expanse of warehouses outside Detroit, where much of the nation’s aluminum is stored. And stored. And stored.
Before Goldman bought the warehouses three years ago, the Times reported, aluminum ingots generally were kept in the warehouses for six weeks before being shipped to factories to be turned into goods. Now they linger on average for 16 months, during which Goldman collects a daily storage fee from the banks, hedge funds and traders who own the ingots — a fee that is factored into the metal’s spot-market price and that raises the price for all aluminum sold on that market, no matter where it’s stored. (Goldman thoughtfully pays those traders a premium so they won’t suffer too much from the lengthy rentals.) Regulations imposed by the London Metals Exchange — which until last year was owned by banks, including Goldman and Barclays, that are its members — say that an ingot can remain in a particular warehouse for only a certain period, so Goldman employs truckers to move the ingots from one warehouse to the next in its vast storage yard.
This is capitalism straight out of Frank Norris — or Franz Kafka.
Aluminum isn’t the only commodity that banks are cornering. JPMorgan Chase is facing a reported $500 million fine by the Federal Energy Regulatory Commission (FERC) for allegedly manipulating California and Michigan energy markets. Earlier this month, the commission fined Barclays $435 million for similar transgressions in California. In the former case, the FERC claims that JPMorgan’s energy traders misrepresented the price of electricity contracts, which led to the states’ electricity buyers — and, ultimately, consumers — overpaying power plants that the company owned. It’s Enron revisited, albeit on a more modest scale.
Bank control of the commodity markets is both an old and new phenomenon. It was commonplace when Griffith made “A Corner in Wheat.” Four years later, in 1913, future Supreme Court Justice Louis Brandeis noted with alarm that “investment bankers” had become “the directing power in railroads, public service and industrial companies.” In 1956, however, after the New Deal reined in big banks’ power and abuses, Congress passed and President Dwight D. Eisenhower signed the Bank Holding Company Act, which limited banks’ investments to other related financial entities.
In the 1990s — a decade in which banks grew to dominate the U.S. economy — the Bank Holding Company Act was effectively undone. Congress passed the Gramm-Leach-Bliley Act, which amended the 1956 law to permit banks to establish financial holding companies and gave the Federal Reserve authority to designate the kind of firms that these companies could invest in or purchase outright. In those halcyon Greenspan days — and even in some subsequent Bernanke days — the Fed approved Wall Street’s investments in commodities and a whole lot else. Indeed, in a Senate Banking Committee hearing Tuesday, Ohio Democrat Sherrod Brown reported that “”the six largest U.S. bank holding companies have 14,420 subsidiaries, only 19 of which are traditional banks.”
The threat this poses to Americans and the U.S. economy is twofold. First, banks hold the ability to jack up prices on life’s essentials. Second, since giant, publicly insured banks such as JPMorgan Chase are investing in all manner of businesses and markets, taxpayers would be on the hook if those businesses and markets should tank. That’s why we need to bring back something like the Glass-Steagall Act, which built a wall between depositor banks and investment banks, and the 1956 Bank Holding Company Act. Otherwise, Wall Street will continue to corner both matter and energy.
Fury at Google’s £12m tax bill on sales of £3bn: ‘Paltry’ sum attacked by MPs who call for action to force Internet giant to pay moreAfter last year’s outcry, Google handed over £11.6million in corporation tax
Select committee chairman Margaret Hodge branded the company ‘calculated, unethical and evil’
Beanie Babies Founder Ty Warner To Pay $53M For Offshore Tax Evasion
GETTING SERIOUS ABOUT TAX EVASION
WASHINGTON — In the 1960s, ’70s and ’80s, if you went to a conference on economics here in the nation’s capital, you were sure to see glowing faces at the podiums raving about “globalization.” The opening of markets across the globe was a “win-win” situation. Everyone would gain. There was a preternatural exciting assurance about the whole thing, rather like the landing of a UFO in Central Park.
As I recall, both liberals and conservatives were equally hypnotized by globalization. Only a handful of cranks like me, of the common-sense ideology, asked barely tolerated questions, as the win-win speakers became more and more cross.
How, I asked, could everyone win if American factories, like those producing everything from clothing to steel to industrial parts to children’s toys, were “globalized” — moved overseas?
What would happen to the American men and women who had been doing these jobs? As for the companies themselves, would they keep being “American” if they moved parts or all of their corporate divisions overseas? And, finally, where would they pay taxes?
“Oh, my dear,” the speakers would respond, with barely concealed contempt, “this will give us the opportunity to be service economies.” The other two questions rarely, if ever, were addressed. If there had been an old-fashioned vaudeville hook, they would have dragged me off the stage of this new world I so obviously failed to understand.
But now, we do know the answers — to all of those irksome questions. Vast numbers of Americans are unemployed because their companies moved work overseas for cheaper labor. At home, it seems that burly steel workers do not make good servers at the Hiltons. As for the companies, many of them remain barely “American” when they move overseas. “When in Rome …” you know.
But finally, we see virtually all of the industrialized nations attacking the “tax problem” at the same time.
Just this week, the huge Dolce and Gabbana fashion conglomerate out of Italy was found — by an Italian court, not often given to the productive anger of the Puritans — to have avoided no less than $2 billion in taxes this year. They were smacked with a huge fine and provisional jail time.
This follows America’s GE, which American courts have now accused of parking more of its money overseas than any other conglomerate. Citizens for Tax Justice has declared that GE paid no taxes at all between 2008-2011, and got a tax credit of $3.2 billion on $5.1 billion of its reported American profits.
Ah, but now we come to Apple Inc., that luscious corporate fruit tree of Silicon Valley, the company built by the late Steve Jobs, who exemplified all the highest values of American product innovation and corporate citizenship. Indeed, Apple has been the apple of our eyes. You can bet that we wouldn’t sit under the apple tree with any other company, not even Microsoft or Yahoo, even though they’d make a peach of a pair!
But now, Apple has accomplished the unthinkable! News stories recently detailed how the all-but-sanctified Steve Jobs, while enjoying the lavish praise heaped upon him by his countrymen, was actually dividing up his company into four subsidiaries in Ireland, where he paid nearly no taxes at all.
In fact, Forbes magazine and others noted, in part with awe, Apple Inc. had become the first corporation in the world that paid no taxes anywhere!
It has seemed, since Barack Obama became our leader, that, for all his good and genteel qualities, he wasn’t the sort who was going to pare the apple, or demand payment on the electric bill. He’s a great contender, just not a confronter.
Until now, the anger against the tax-skirting big corporations and the Wall Street casino players seemed to come only from those of us who couldn’t afford to do anything about it. Now the big boys in the international political realm are downright mad.
At the June meeting of the G8, the association of industrialized nations, for instance, the leaders of the world signed the “Lough Erne declaration” in Northern Ireland. In it, they vowed to “fight the scourge of tax evasion” by automatically exchanging tax information and changing the rules to stop multinational companies shifting profits across borders to avoid paying their fair share.
In short, tax information will be shared across the world; and while there is still plenty to iron out, it will now be more difficult to play the “to hell with our own country” game.
Since World War I and before, the world has been striving for political unity, or at least governance, first in the League of Nations and then in the United Nations. Now it appears that kind of unity is about to be tried in the far different world of business.
With any luck at all, it could be an awfully good show!
The corporate ‘predator state’
What lawsuit? Hedge fund billionaire buys $60m Hampton’s mansion to go with his Picasso painting after paying $616m to the government in insider trading case
Billionaire: Hedge fund manager Steven A. Cohen, founder and chairman of SAC Capital Advisors, has just spent $60million on a house in the Hamptons
This is Mars vs. Venus stuff, in the sense that Pareene is coming from a different planet than Bartiromo and others who are creatures of the Wall Street world. The latter group sees Dimon as the most successful of the masters of the universe, as evidenced by the fact that he steered his bank around the calamities of 2008 and has kept it roaring ahead since. In this telling, some of the unpleasantness the bank has faced, like the $6 billion “London Whale” trading loss and potential $11 billion settlement being negotiated with the Justice Department as a fine for its involvement in shady deals for mortgage securities before the crisis, are just a cost of doing business.
Stop subsidizing Wall Street
The ‘Intimidate the CTFC Act’
By Alexis Goldstein, Published: June 12
Alexis Goldstein worked on Wall Street for seven years and is now an Occupy Wall Street activist.
When it comes to helping Wall Street lobbyists gut reforms passed in the wake of the financial crisis, there is often very little difference between the Republicans and the Democrats. Recent votes in the House Financial Services Committee demonstrated this bipartisanship all too well. Last month, the committee considered H.R. 1256, the Swaps Jurisdiction Certainty Act, which garnered a “Yea” from every single Republican and a majority (17) of Democrats. Eleven Democrats voted against the measure, including Ranking Member Maxine Waters (D-Calif.). Republicans are making a move to bring this de-regulatory bill to the House floor as early as Wednesday.
Despite its formal name, H.R. 1256 should really be called the “Intimidate a Financial Regulator Act.” The bill seeks to change how derivatives are regulated. Derivatives allow bets to be made on the future value of some real asset like corn or gold or a stock. Warren Buffett has called derivatives “financial weapons of mass destruction,” and they played a major role in the financial crisis; it was derivatives trading, for example, that brought down the giant insurance company AIG and led to a government bailout.
The Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have authority to oversee different portions of the derivatives (or “swaps”) market. And in the wake of the financial crisis, the Dodd-Frank financial reform bill approved new regulations for derivatives, requiring the two agencies to come up with new enforcement rules, including how derivatives should be regulated when one portion of the trade is in the United States and another side is overseas, which regulators call “cross-border.” The SEC’s proposed cross-border rule is weak and allows U.S. banks to dodge rules governing derivatives if portions of their deals are done in their foreign branches.
But the CFTC has signaled that it will take a much tougher approach. When the industry got rules that limited their ability to speculate in commodities (which can drive up the price of food and oil) overturned in court, Gary Gensler, the CFTC’s chairman, vowed to fight back. Gensler has long been hated by the financial industry for his tough stances. It was the CFTC under Gensler that vigorously pursued the LIBOR-fixing scandal , where banks were found to have been deliberately manipulating a key benchmark for short-term interest rates. They continue to pursue an investigation into whether banks manipulated yet another key market benchmark , ISDAfix. Gensler has led the CFTC to complete 40 Dodd-Frank rules, more than any other financial regulator, despite the fact that his agency has the smallest budget of the financial watchdogs. He has also been fighting hard to ensure that U.S. rules will govern derivatives traded overseas so that banks can’t just sneak past U.S. regulations by trading out of, say, London. And that’s exactly the kind of spine that H.R. 1256 wants to snap.
Wall Street won’t stand for such strength coming from the CFTC, especially since, between the two regulators, the CTFC regulates the majority of the swaps market. The bill is sponsored by one of Wall Street’s favorite House members, Rep. Scott Garrett (R-N.J.) . The New York Times reported that Garrett received more than a half-million dollars in contributions from Wall Street in the last election, and that, according to Garrett himself, the banks asked in return that he “Put as much pressure as possible on the CFTC.” The bill forces the two regulatory agencies to “harmonize their rules,” which is Beltway-speak for “weaken the side that’s fighting back against Wall Street.”
But that’s not all the bill does. It makes a crucial, and dangerous, blanket assumption: If a U.S. bank does derivatives trading in one of the nine largest swaps markets, that country’s rules are assumed to be as strong as the United States’, so the U.S. rules need not apply.
This is a ridiculous assumption, because if the rules were truly equivalent, there would be no need for this bill in the first place. In fact, this would allow U.S. banks to dodge U.S. rules in favor of weaker rules overseas. Yet as the last crisis showed, even when banks attempt to hide the risk overseas, that risk remains at home. AIG failed because of derivatives traded out of their London office. More recently, JPMorgan Chase lost more than $6 billion last year due to their infamous “London Whale” trades, which were the subject of a devastating report from the Senate’s Permanent Subcommittee on Investigations. In fact, Wall Street lobbyists attempted to pass this very same bill last year, but after the “London Whale” story hit the press, the Agriculture Committee, which was due to mark up the bill, canceled it.
There are some signs of opposition to the bill, but those aren’t entirely encouraging. Treasury Secretary Jack Lew did criticize this and several other anti-Dodd-Frank bills that were up before the House Financial Services Committee, but as the New York Times noted, his words were “hardly a full-throated defense of financial reform.” On Tuesday, the White House stated that it doesn’t support the bill, but it did not go so far as to issue a veto threat.
And the pull of money is strong on Capitol Hill. Another bill that passed the same House committee, the Swaps Regulatory Improvement Act, only garnered six “Nay” votes from Democrats, despite being written by a Citigroup lobbyist. As the groupMapLight pointed out , the Democrats who voted for H.R. 992 received 2.6 times more money on average than did those on the committee who voted “Nay.” Will the Democrats vote with the White House, or will they continue to vote with monied Wall Street interests, hoping that the public simply won’t see it? This Wednesday, we’ll find out.
It’s still a lovefest between Wall Street and regulators
Here’s how we regulate banks and funds: they pay a small fine and ‘neither admit nor deny’ wrongdoing. And nothing changes
Larry Summers’ record should rule him out of the Fed chairmanship
Why would we want a key advocate of the banking deregulation that brought us the great recession to head the Federal Reserve?
The explosion of the housing market, abetted by phony credit ratings, securitization shenanigans and willful malpractice by mortgage lenders, originators and brokers, has been well documented. Less known is the balance-sheet explosion among the top 10 Wall Street banks during the eight years ending in 2008. Though their tiny sliver of equity capital hardly grew, their dependence on unstable “hot money” soared as the regulatory harness the Glass-Steagall Act had wisely imposed during the Depression was totally dismantled.
In the past few months, the nation’s biggest bank has found itself ensnared in a series of probes and litigation that may trump the legal woes of other mega-banks. JPMorgan is staring down six separate investigations by the Justice Department, four by the Securities and Exchange Commission and three by the Commodity Futures Trading Commission, according to the bank’s-second-quarter filing.
There are also probes being conducted by the Federal Reserve, the Office of the Comptroller of the Currency, Congress and British authorities. And that is only the investigations. The bank is also facing a mountain of individual and class-action lawsuits.
Wall Street is winning the long war against post-crash regulation
Feeble as it was, Dodd-Frank was a high point of reining in abuses. Thanks to financial lobbying, it’s business as usual
The bank lost $6.2bn during the debacle that became known as the ‘London Whale’ trading scandal. Photograph: Justin Sullivan/Getty Images
No Banker Left Behind
August 19, 2013, 1:49 pm
Banks Not Tough Enough on Themselves in Stress Tests, Fed Says
By PETER EAVIS
The Federal Reserve is in charge of the stress tests that banks have had to undergo since the 2008 financial crisis.
Most large banks appear to have been sailing through the annual “health checkups” they have had to undergo since the financial crisis.
But on Monday, the Federal Reserve described some significant shortcomings in the banks’ responses to the so-called stress tests.
Despite the severity of the recent housing crisis, the Fed said some banks were not taking into account the possibility of falling house prices when valuing certain mortgage-related assets for the tests.
In other cases, banks assumed they would be strong enough to take business away from competitors in times of stress.
The Fed’s findings are part of its efforts to improve the stress tests, which aim to ensure that banks have the financial strength to withstand shocks in the economy and markets.
The tests have created tension between the Fed and the banks. One reason is that the tests can determine how much a bank is allowed to pay out in dividends or spend on stock buybacks.
In March, the Fed announced that two out of 18 banks had effectively failed the latest tests. One was BB&T, a regional bank based in Winston-Salem, N.C. The other was Ally Financial, a consumer lender that has struggled to right itself since the financial crisis and still has not fully repaid its bailout money to the government. Also in March, JPMorgan Chase and Goldman Sachs passed the latest tests, but the Fed said their responses contained weaknesses, and the banks were required to resubmit their plans by the end of September.
“We continue to work with the Fed and will resubmit in September,” Goldman Sachs said in a statement.
In its review released on Monday, the Fed appeared most concerned that banks were applying the tests too generally. In other words, banks did not pay enough attention to the risks that were particular to their assets and operations. Banks excluded material that was relevant to the bank’s “idiosyncratic vulnerabilities,” the Fed said.
Under the tests, the banks have to assume weakness in the economy and turmoil in the markets, and then calculate the losses they would suffer under such conditions. The banks then subtract those losses from capital, the financial buffer they maintain to absorb losses. If the assumed losses cause capital to fall below a regulatory threshold, the banks effectively fail the test.
As part of the stress tests, banks have to carefully lay out capital plans to show regulators that they would have the strength to operate through tough times.
But, again, some banks acted too formulaically, the Fed said.
The banks that showed weak responses based their capital plans solely on hitting regulatory requirements, rather than their unique risks, the Fed said.
One upshot of this is that banks may have to hold capital well above regulatory minimums to be considered properly capitalized in the Fed’s eyes.
By making its expectations clearer, the Fed could sacrifice some of the unpredictability that could keep the banks on their toes when they apply the tests.
Perhaps anticipating that, the central bank warned that “designing an internal capital planning process that simply seeks to mirror the Federal Reserve’s stress testing is a weak practice.”
The Fed’s review also contained hints that some banks still operate with some of the same hubris that got them into trouble during the crisis.
For instance, some banks “assumed that they would be viewed as strong compared to their competitors in a stress scenario and would therefore experience increased market share.”
Bank of America acquired two large firms during the crisis that then burdened the bank with hefty losses.
JPMorgan’s big acquisitions during the crisis caused less damage to its bottom line, and recently its chief executive, Jamie Dimon , promised, “We will be a port of safety in the next storm.”
BB&T, which fell short in the last test, said in a recent securities filing that it had resubmitted its capital plan in June, adding that regulators had 75 days to review it. Ally is preparing to resubmit its capital plan, Gina Proia, a spokeswoman for the bank, said.
The Fed also said on Monday that 12 more banks would be included in the next stress tests, the results of which will be made public early next year. That group will not include the large nonbank financial firms, like the American International Group , that regulators recently designated “systemically important.” Eventually, though, such firms will be subject to stress tests.