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Sep 29 2008

Why the Wall Street bail out plan is bad-5: Rewarding greed

In this next-to-last post in this series (but probably not on this topic), I want to look at how senior Wall Street executives saw their profession as some sort of game in which the goal was to extract more personal benefit than the next executive, leading to a leap-frogging of various forms of compensation packages that would leave ordinary people gasping.

These executives were taking risks with other people’s money that left many ordinary people ruined while they themselves were benefiting:

The chairman of Lehman Brothers, Richard Fuld, still has his mansion in Greenwich, CT, his oceanfront estate on Jupiter Island in FL, and his Park Avenue co-op in Manhattan.

Many at Lehman blame Fuld for dallying while his investment bank went bust, taking risks with other people’s money while he cleared over $40 million in salary and stock in the last year alone.
. . .
Fuld isn’t the only top executive who remains well-off despite his firm’s collapse. Former Bear Stearns CEO Alan Schwartz collected more than $38 million in salary and bonuses in the last three years for which figures are available.

These people live in a different world from you and me. The report describes the ‘hardships’ being undergone by the Wall Street executives as a result of the current financial situation.

“A lot of those people will have to sell their homes, they’re going to cut back on the private jets and the vacations. They may even have to take their kids out of private school,” said Frank. “It’s a total reworking of their lifestyle.”

He added that it’s going to be no easy task.

“It’s going to be very hard psychologically for these people,” Frank said. “I talked to one guy who had to give up his private jet recently. And he said of all the trials in his life, giving that up was the hardest thing he’s ever done.”

And now we are supposed to bail out such people when their actions have resulted in other people losing their jobs or their only (modest) homes?

Some lawmakers are furious at what they are being asked to approve by the Bush administration, the Federal Reserve, and their own leadership. One anonymous Congressperson sent an email in which, in addition to demanding major reforms in the financial sector in return for the bailout, he/she also wants them to be publicly humiliated for what they have done to the country, and demanding that Congress should not be bought off with some trivial considerations.

I don’t want to trade a $700 billion dollar giveaway to the most unsympathetic human beings on the planet for a few [expletive] bridges. I want reforms of the industry, and I want it to be as punitive as possible.
. . .
I also find myself drawn to provisions that would serve no useful purpose except to insult the industry, like requiring the CEOs, CFOs and the chair of the board of any entity that sells mortgage related securities to the Treasury Department to certify that they have completed an approved course in credit counseling. That is now required of consumers filing bankruptcy to make sure they feel properly humiliated for being head over heels in debt, although most lost control of their finances because of a serious illness in the family. That would just be petty and childish, and completely in character for me.

I think this congressperson is merely channeling the deep reservoir of anger in the general public at what they rightly see as little more than a fraud perpetrated on them.

When poor people get into trouble because they make stupid or greedy decisions, they are lectured to by the rich on the need to be prudent and live within their means and to suffer the consequences of their actions. When the very rich do the same thing, the government rides to their rescue. ‘Throwing money at the problem’ (a favorite phrase used by the rich to denigrate any attempt to fund initiatives that help ordinary people, like education or health care) becomes the desirable mode of action when the recipients are Wall Street or the defense industries.

Meanwhile on the House floor Rep. Marcy Kaptur of Ohio tells it like it is:

As I have said repeatedly, the leadership of both parties are already bought and sold by Wall Street like any of the other commodities they trade in. They are simply looking for a face-saving way to capitulate and give away the store and a grand ‘bipartisan compromise’ is what they seek, so that one party cannot take advantage of public anger by accusing the other of selling out to Wall Street. It is only the ‘minor’ members of Congress who are not beholden to these interests that can stage a revolt.

I think that most people, even if they are not sure exactly what is going on, are suspicious that this is a sweet deal for insiders by insiders. Apparently opposition to the bailout is running at between 10-to-1 to 100-to-1, if measured by the calls and emails received by members of Congress. But just like in the run up to the Iraq war, regular Congresspeople can be frightened into thinking that they will be blamed if they oppose their party leaders and the group of ‘wise experts’ who solemnly tell them that they know what the best of action is.

As former Labor Secretary Robert Reich says:

Put yourself in the shoes of a member of Congress, including our two presidential candidates. The Treasury Secretary and Fed Chair have told you this is necessary to save the economy. If you don’t agree, you risk a meltdown of the entire global financial system. Your own constituents’ savings could go down with it. An election is six weeks away. Besides, in the last two days of trading, since rumors spread that the Treasury and the Fed were planning something of this sort, stock prices revived.

Now – quick — what do you do? You have no choice but to say yes.

But you might also set some conditions on Wall Street.

The public doesn’t like a blank check. They think this whole bailout idea is nuts. They see fat cats on Wall Street who have raked in zillions for years, now extorting in effect $2,000 to $5,000 from every American family to make up for their own nonfeasance, malfeasance, greed, and just plain stupidity.

Reich lists five conditions, the first of which is that “The government (i.e. taxpayers) gets an equity stake in every Wall Street financial company proportional to the amount of bad debt that company shoves onto the public. So when and if Wall Street shares rise, taxpayers are rewarded for accepting so much risk.”

There are alternatives. It has been pointed out that Sweden faced a similar crisis in 1992 but took a very different attitude and solved it with almost no cost to the taxpayers. (Thanks to Norm for the link.)

Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government.

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

Why should we not get what, say, Warren Buffett or JP Morgan Chase got when they invested in troubled firms like Lehmans or Washington Mutual? Why should the taxpayers not be treated as investors and have the same risk/reward expectations as any other investor? Why should we pay for something for which there is no clearly discernible public good?

It is time for people to get really angry. We should not take the word of sober-voiced people in suits who soothingly tell us that although they were the ones who created this mess and did not even see it coming, we should now unquestioningly trust them to solve the mess by giving them virtually everything they want.

We are being told that it is imperative that we ‘calm the markets’, as if the trillion-dollar financial sector is a colicky baby in a restaurant. We are being told that we must restore ‘confidence in the markets’ as if the market is a shy teenager about to go on a first date. Why should we care about confidence? And whose confidence are we talking about?

They are taking us for suckers and we will have only ourselves to blame if we allow them to do so. We, the people, technically own the government but it has been co-opted by the financiers. It is time to take it back from these usurpers.

POST SCRIPT: Imminent threat, anyone?

Jon Stewart reminds how Bush is using the same scare tactics to push the $700 billion giveaway plan that he used to push the Iraq war.

13 comments

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  1. 1
    Anonymous

    Mr.Singham in all honesty you are not very intelligent in your assessment of the situation and you are not very aware of current economics. Its obvious you do not understand the difference in economics from USA markets to Sweden and neither do you understand that the world is much more different now than it was in 1992. Sweden is based on welfare economic system while America has the most complex market system in the world. In 1992 when sweden faced its crisis the world was not in global slowdown. In fact, back then the markets were barely globalized. And your claim that sweden did not rescue its banks without taxpayers money is outright ridiculous. Another thing to understand is that the Sweden’s income tax is 55-60%. And its funny about how you rave about how Sweden’s plan barely cost its population and that the country recouped its investment. How do you think sweden got its investment back? It seized properties including peoples houses. Sounds real American to me Mr.Singham. And I like how people are complaining about bailing out wall st. If so why don’t these same exact people pay those mortgages on time? And please were you not the same people that collateralized your houses for extra equity? These are the same people that did not pay the banks back. Realize the true source of the problem. Banks can only give and risk if the people ask them. If sweden can recoup its investment by reselling the the assets it seized? How much more valuable are U.S assets? Exactly. Further addressing that you know nothing about this situation, professor is the fact you thought Mr.Buffet bought shares in Lehman. He actually bought shares in Goldman. And you do not get the same preference since you are not investing $5 bil in the company. I am student in finance in college and almost all student agree that a proactive bill such as this bailout bill is need. In this latest bill U.S taxpayers are getting equity in the companies that they are saving. So, Mr.Singham stick to theoretical physics and your half baked economic critiques because you obviously are not very familiar with such concepts. Is pluto still a planet? Please email me back I would be glad to respond to whatever you have to say.

  2. 2
    Anonymous

    Oh I almost forgot to honor your financial acumen. The bailout cost: $700 bil. The loss of market value in one day of trading after on the stock market: $1.4 trillion. Oh seems to me like an expensive bailout plan indeed Mr.Singham.

  3. 3
    tb

    “I am student in finance in college and almost all student agree that a proactive bill such as this bailout bill is need.”

    Sir, based on the above statement, consider your entire argument for a bailout to be negated in the worst way. Perhaps you’ll understand why when you enter the real world.

  4. 4
    greg

    I have to concur with tb on this.

    You may also want to check your grammar before posting a argument like that. Especially if you want anyone to take anything you say seriously.

  5. 5
    sanjay

    Glad to know that you guys care about grammar so much. Does it sound like I am giving a formal presentation in front of boardroom executives or congress? No, I am responding informally to an online blog. Its kind of like telling a guy you are talking to that he did not phrase his sentences correctly when he is talking. And Tb this is a response to bailout plan. You are writing a personal critique on my sentences and greg is writing about my grammar. Both of you might want to figure out your ADD problem before you correct my grammar. Just a thought.

  6. 6
    Sanjay

    Hey greg before you concur or correct anyone, make sure add some commas in your sentences big guy. Hope to hear from you soon jacko.

  7. 7
    Mano

    Sanjay,

    “And please were you not the same people that collateralized your houses for extra equity? These are the same people that did not pay the banks back. Realize the true source of the problem.”

    Are you really suggesting that ordinary borrowers getting mortgages and home equity loans managed to bring about this massive problem in the global financial system run by giant institutions with sophisticated managers? (I am assuming that the earlier post was also from you, although it was unsigned.)

    It is true that “Banks can only give and risk if the people ask them” but that does not mean that they have to lend to anyone who asks. If I lend out my money to anyone on the street who asks me, can I blame them for my subsequent bankruptcy if they cannot pay me back?

    Also, it is not sensible to base policy on the day-to-day gyrations of the stock market. Your second comment (again I assume it is you) compared the cost of the bailout to the big sell-off on Monday. What happens to that argument because of the big rise on Tuesday?

  8. 8
    greg

    Sorry Sanjay. As a rule I refuse to engage in a debate with someone who reverts to name calling and baseless accusations.

    Have a good day.

  9. 9
    sanjaymandava

    Mr. Singham let me give you a more sensible explanation than the the laughable example you wrote “If I lend out my money to anyone on the street who asks me, can I blame them for my subsequent bankruptcy if they cannot pay me back?”. Well Mr.Singham are you saying that you expect banks to come to your house and beg for your mortgages and loan? If any bank has provided that service to you, please let me know. Again I will not change my claim “Banks can only give and risk if the people ask them”. Everybody is responsible for this mess(financial institutions, liability financing population, govt) and we have to stick together to get through this. This is not about helping the rich or hurting the poor, this is about saving the most important and powerful economy in the world. And I am reminding you that rich people are going to be fine even if this bill does not pass and they actually might get richer in a undervalued and weak market, whereas the poorer class is going to lose their 401K values and are going to see a huge dip in their house values as well. Sorry Greg did not mean to sound rude, but i was irritated that I was trying to make an important point and you were missing that entirely and instead focusing on the irrelevant. Again I am sorry if i sounded rude.

  10. 10
    Ryon Adams

    Mano,

    I’m with you on this one.

    No way we should reward executives for bad behavior.

    A pox on both major parties for passing this.

  11. 11
    Chris

    Mano -

    Eventhough you wrote this article back in 2008, we are still seeing the side effect today. Interesting though that if our country never went into this financial low, these issues would not be part of our daily conversation. I believe we need to be more proactive with our finances for both individuals and companies to prevent financial disaster and bad behavior by our corporate executives.

  12. 12
    DebtMan from DebtTroubles.com

    @sanjaymandava,

    I couldn’t agree more, I don’t think you sounded rude in that. It is something that as you say, ‘we need to stick together on’. Pointing the finger and playing the blame game will not only waste time but also will never solve the problem. If each entity can take responsibility a greater move forward will be inevitable.

  13. 13
    Chris

    In retrospect I’m glad for the Wall Street bail out plan because it seems like it helped keep everything else afloat. I can certainly understand the sentiment though!

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