Some Motivation

From Matt Taibbi's blog:

...Nomi Prins’s book, It Takes a Pillage. Nomi, who used to be a VP at Goldman but is now one of the leading authorities on where the bailout monies have been spent and why, frequently makes the point that the bailouts were more about paying off bets than they were about stabilizing the economy. This is from her second chapter, “This Was Never About the Little Guy”:

Here are some numbers for you. There were approximtely $1.4 trillion worth of subprime loans outstanding in the United States by the end of 2007. By the first quarter of 2009, there were forclosure filings against approximately 4.4 million properties. If it was only the subprime market's fault, $1.4 trillion would have covered the entire problem, right?

Yet the Federal Reserve, the treasury, and the FDIC forked out $13 trillion to fix the housing “correction”… With all that money, the government could have bought up every residential mortgage in the country – there were about $11.9 trillion  worth at the end of December 2008 – and still have had about a trillion left over to buy homes for every American who couldn’t afford them.  

And to cover the devastating losses these wankers sunk on teachers' pension funds, we want to take away collective bargaining rights? Of people who make $40k a year (in a generous state) and drive a '98 Ford Taurus????

Union Busting and Book Burning

Paul Krugman noted in his blog today:

That Iraq Feeling

I don’t watch cable news, or actually any kind of TV news. But I gather that there’s a virtual blackout on the huge demonstrations in Wisconsin, except on Fox, which portrays them as thuggish and violent.

What that makes me think of is January-February 2003, when anyone watching cable news would have believed that only a few kooks were opposed to the imminent invasion of Iraq. It was quite spooky, realizing that hundreds of thousands of people could march through New York, and by tacit agreement be ignored by news networks whose headquarters were just a few blocks away.

And it’s even more spooky to see it happening all over again.

Thus, you wouldn't know, for example, that according to a NYT/CBS poll, over 60% of independents support collective bargaining rights -- and over 70% of democrats.

Phil Merritt, 67, a retired property manager from Crossville, Tenn., who identifies himself as an independent, explained in a follow-up interview why he opposed weakening bargaining rights for public workers. “I just feel they do a job that needs to be done, and in our country today if you work hard, then you should be able to have a home, be able to save for retirement and you should be able to send your kids to college,” he said. “Most public employees have to struggle to do those things, and generally both spouses must work.”

Fair wages for fair work.  Unions being the only stopgap (toilet clog? Thanks Mssr. Perot) between our economy and ones found... in Mexico.  And Egypt.  


And this is definitely a class issue.

Although cutting the pay or benefits of public workers was opposed by people in all income groups, it had the most support from people earning over $100,000 a year. In that income group, 45 percent said they favored cutting pay or benefits, while 49 percent opposed it. In every other income group, a majority opposed cutting pay or benefits: Among those making between $15,000 and $30,000, for instance, 35 percent said they favored cutting pay or benefits, while 60 percent opposed it.

It's time folks started standing up for themselves.  To point out to Washington that the emperor has no clothes it sold out to Wall Street -- and that includes, most especially, Obama -- and we've finally pulled the wool from over our eyes.

Silencing the Voice of Activist Investors

Today, the NYT describes a trend in state legislatures to roll over defined benefit pension plans into a version of 401(k).  401(k) funds (because of Taft-Hartley?) are decidedly not-activist.  They are even accused of "apathy" by certain defenders of director primacy when challenged by opponents who decry the lack of "democracy" in corporate governance.

The biggest player? CALPERS.  Who made news last week by forcing Apple into majority voting, and who is now under attack by the Juggernator:

California’s problems are so acute that just last week a government-appointed commission of experts urged the state to consider at least a partial switch to 401(k) plans; six years ago, an effort by Arnold Schwarzenegger, then governor, to move new employees into such plans was blocked by local governments and public-employee unions.

Making everyone roll their pension fund into a 401(k) will kill CALPERS.  Which is exactly what industry wants.

Exec Pay as a Strawman?

Biglaw partner Jeremy Goldstein has a piece on why corporate directors deserve their hefty paychecks.  Certainly, the downward pressure on these paychecks is coming from many directions -- from Dodd-Frank, from institutional investors with their say-on-pay votes.  A manifestation of populism and deep frustration at our crap economy and the financial boondoggles that have made us all victims.

Over the past decades, we've seen the paychecks of working people stagnate, subsidized by easy credit, while the surplus value got allotted directly into the pockets of the uber -- and growing uberer -- rich.

But has anyone ever done a study to see how much more corporate executives have been making vis a vis the bankers?  Arguably, at least corporate executives do productive things, like, um, run companies that make things and pay workers.  The bankers, though?

One might even argue that the crowing of activist pension fund investors is a bit misplaced.  They should be targeting not so much corporate leadership, but the titans of wall street.

Noon Tomorrow

Get off your couches and find your local rally.

Our unions are our last best hope to preserve a comfortable middle class lifestyle.

Moody's and Union Busting

To bring this issue full circle, in an attempt to lay blame where it's due:

State pension funds are supposed to invest in safe assets.  Indeed, the law even requires them to buy up only "investment grade" securities.  I.e., those assets rated AAA to B- by ratings agencies.  This was supposed to make up for the fact that all of them got privatized and therefore people didn't have their retirement income funded directly by the government.

And they did what they were supposed to do.  With gusto.  They bought all those AAA-rated toxic mortgage backed assets.

Unfortunately, Moody's and S&P slapped this pristine AAA wrapping on all cowpaddie mortgage derivatives.  Why, why, oh why would they do this?

Among Mr. Clarkson’s [former Moody's exec] duties: make nice with Wall Street. Some banks and debt issuers in the 1990s regarded Moody’s as uncooperative, even rude, which led firms to seek ratings elsewhere.

“From the day that I started at Moody’s, Moody’s was deeply concerned about the relevance they had in the marketplace,” he said in his private testimony with commission examiners. “A rating agency may have a methodology that is superior. But if they’re not assigning any ratings, they don’t have any relevance in the marketplace.”

Okay.  So credit ratings agencies gave big warm bear hugs to spinoff entities birthed by Bear Stearns that contained nothing but toxic assets.  Even if Bear Stearns was actually betting against those assets.  So they could stay "relevant."

And here's another question.  Why, why, oh why do our regulations force our reliance on these private ratings agencies by requiring our pension funds to rely upon their ratings?

And, lastly, why oh why are credit ratings agencies immune from lawsuits over the crappyness of their ratings? (according to our courts, such ratings, as mere "opinions," can't serve the basis for claims for fraud and misreprentation against the agencies that give them. 

Of course, at the same time, the bankers themselves hide behind the ratings to shield themselves from liability.  Their argument goes like this: they couldn't have committed fraud in selling these crap securities while telling everyone they were safe -- Moody's, after all, gave those securities AAA ratings.  It was just a big mix up.  No criminal intent here.

So who gets stuck with the bill for all this? The union pension funds, of course.  Which are so broke that state governors like Walker are using it as an excuse to bust the unions in the first place. 

Putting Money Where Your Mouth Is -- and Spitting It Back

So much about the proposed federal budgets -- anyone's version -- is shocking and awful.  But this is particularly apropos to this blog:

Republicans propose cutting the budget of the Commodities Futures Trading Commission by one third.  This is the agency that is supposed to be regulating the shadow-banking "derivatives" industry that got us all into such terrible trouble.

You know, the same reason why everyone is clamoring about austerity to begin with.

Though the point has been iterated ad nauseum, here it is again: you can't have good government if you starve it to death and outsource the rest.  Or, in the words of a CFTC commissioner:

The process “will mean nothing, squat, diddly, if we don’t get the resources to do the job,” he said. “If we get cut, we’re going to be in a world of hurt.”

It should be noted, too, that the CFTC still has a reputation of being a watchdog with some teeth, unlike the SEC, who was and remains wall street's BFF. 

The Great American Frontier

According to Tim Geithner, American High Finance will lead us marching proudly into the future.  Providing finance to other countries that actually make things and could use the cash to invest.  I suppose he's assuming that all Americans will benefit by getting jobs working for wall street.  Riiight.

After all, High Finance thus far has worked out so well for the rest of us.  But I suppose Geithner has a good reason to think the past has no bearing on the future.
Not that Tim Geithner has any skin in the game or anything -- I'm sure after his tenure as treasury secretary, he won't go back into Wall Street but will get a job pruning bushes and welding at a plant in Detroit.

Note to parents: quit pushing your kid to get that football scholarship.  Enlist little Susie and Timmy into tots 'n quants.

Puke

Even people in the UK, public sector unions are BAD because their members get better terms than private counterparts.

Why can't we ever compete up, and not down?

<insert flushing toilet sound>

Ross Perot, we miss you.

"Americans Choosing to Pay Overdraft Fees"

ahhh, linguistics.  And one would expect better from the lofty intellect of the financial times....

Just like they "choose" to pay 500+% on their payday loans.

The Exercise of Shareholder Democracy

Yields majority shareholding reforms at Apple.    A favorite child of activist institutional investors like the CALPERS and TIAA-CREF pension funds, majority voting measures prevent the election of directors without the votes of a majority of shareholders.  And rumor is that more reforms are on the way in many publicly traded companies.

Without such reforms, directors can be elected, theoretically, by just one vote, i.e., the majority of shareholders that bother to vote.    Most shareholders, like most Americans, don't bother voting.

The result is a system of political entrenchment, especially as individual shareholders have to first pester their brokers to exercise proxies on their behalf.

Before we throw any parties, though -- activist investors, at least in American firms, are focusing their activities only on voting reforms.  It is still up to them to elect directors that will do something good for the world.

And as do-gooder investors like CALPERS and TIAA-CREF represent only a small minority of share ownership, we can have every expectation that directors will be still judged and selected by short term share price.

D'oh

Whaddya know.  Self-regulatory bodies can't get no cooperation from those they self-regulate.  Even when it comes to disclosing petty crimes that don't have anything to do with securities fraud.

How very.... efficient.

Command and Control - Incomplete Contracts and Workers

Paul Krugman's post from yesterday touches a point regarding which most scholars of corporate governance are familiar:

February 19, 2011, 10:07 AM

Thank You, Boeing

For providing such a clear illustration of the forces driving the theory of the firm.

Oliver Williamson shared the 2009 Nobel mainly because of his work on a question that may seem obvious, but is much less so once you think about it: why are there so many big companies? Why not just rely on markets to coordinate activity among individuals or small firms? Why, in effect, do we have a lot of fairly large command-and-control economies embedded in our market system?

Williamson answered this in terms of the difficulties of writing complete contracts; when the tasks that need to be done are complex, so that you can’t fully specify what people should do in advance, there can be a lot of slippage and strategic behavior if you rely on market incentives; in such cases it can be better to do these things in-house, so that you can simply tell people to do something a particular way or to change their behavior.

In Boeing’s case, they outsourced far too much, only to find that they were getting parts that didn’t do what they were supposed to — and also to find that the subcontractors were seizing a lot of the rents. They discovered, in effect, that there are times when it’s better to rely on central planning than to leave things up to the market.

Obviously this isn’t always true. There’s a tradeoff. But that’s the point — and it’s this tradeoff that determines how big firms should be. Boeing has now provided a clear motivating example. Their loss, the economics profession’s gain.

*******

These "incomplete contracts" are used by director-primacy type scholars to justify a command-and-control structure.  The board and management run the show and, as long as they're not stealing, everyone else has got to eat the results or get out.  Theoretically, according to these scholars, it's more efficient for everyone.  Having to re-negotiate with adverse third parties every time you want to get something done can be wasteful and counterproductive.

Thus, adding in shareholder meddling in corporate governance can undermine the efficiencies of command-and-control.  Suddenly, stuff's being re-negotiated again.  Usually to the benefit of the shareholder.  And the company is spending time and resources re-negotiating.

Yet, allowing more negotiation isn't inherently a bad thing.  It can also lead to fairer results and efficiencies.

The problem comes when you only allow one group to re-negotiate.   The folks without a seat at the table tend to get screwed over.

 Think of it this way: a subcontractor that provides mail and shipping services to a corporate client will get paid better than in-house secretaries, file clerks, and drivers.  They can negotiate their prices upwards, while secretaries, file clerks and drivers can only apply the same amount of leverage through collective bargaining -- and then, only when employment contracts come up for renegotiation.  Meanwhile, they've just got to swallow orders.

In the public corporation, because they have a seat at the table, shareholders can force directors to pay more attention to stock price.  Non-unionized employees have no such power.  The result? lower wages and layoffs.

Closing the Circle on the Financial Crisis

How did we get into this mess? Certainly, poor regulation.  Certainly, wall street greed.  Certainly, government-subsidized home ownership.  But where did it all start? Poor regulation, government subsidies, and wall street greed are nothing new.

Trade imbalances, offers Bernanke.   And the roots can be seen in the fact that Americans don't own any real estate in America anymore.  And the fact that Americans don't make anything anymore.  Remember when Rockefeller Center was sold to Mitsubishi??

As a result of free trade policies, among other things, Corporate America picks up and moves shop to cheaper labor and regulatory markets.  Cheaper labor and regulatory markets start selling Americans cheap stuff, and get a bunch of cash.  Americans, instead of making things, buy more stuff from abroad than they sell abroad.

Soon, these cheap labor and regulatory markets start sitting on dollar-denominated savings gluts.  What to do with it all?  They start snapping up investments denominated in dollars.  They're risk adverse, so first it's real estate.  Like commercial real estate in Manhattan.  Their job is made easier by trade rules greasing the movement of capital across borders.

And then when the real estate market got saturated -- or foreigners' savings grew -- it was AAA rated securities for which they hunted.

Meanwhile, the privatization of pension funds -- both overseas and American -- also start looking for places to dump folks' retirement savings.  UK institutional investors and SEIU pension start looking to snap up "safe assets."

Bear Stearns, Lehman, Goldman et al. were happy to comply -- aided by credit ratings agencies.  "Structured Finance" entities that bundle and collateralize and securitize home loans, for example.  An easy pick, given the glut of home loans.

And so Chinese dollar reserves and retirement savings funds bought those risky assets.  A lot of them.  And Goldman et al kept making more.  The demand for AAA investments was too high not to. 

Perhaps it wouldn't have happened if these AAA investments were actually investment-grade.  Had ratings agencies and home loan markets not gone bananas.  And perhaps there wouldn't have been so many of these crap AAA investments had the U.S. government not bent over for wall street lobbyists to repeal Glass Steagall.

But the money was there to be taken.  Somebody would have grabbed for it.  We shouldn't be surprised that someone did, and did it poorly.

How do we fix this?

We make sure labor markets and regulatory markets everywhere are on a level playing field.  Take care of our trade imbalances.  And we get serious about defined benefit pension funds.

More Wet Noodles

And Finra's enforcement chief is going private.

Finra -- the NYSE's and NASD's enforcement arm -- of course well-known for its stern treatment of financial crisis crooks.

Well, at least public worker unions in Wisconsin finally got tired of getting laughed at.