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Nov. 3 2009 — 7:53 am | 19 views | 1 recommendations | 2 comments

Financial titans talk moral hazards, punchbowls

While keynote speaker Paul Volcker gave Global Financial Leadership Conference attendees a glimpse of presidential thinking on how to revamp the economy (see my earlier post), the bulk of his speech and the question period after revolved around the more pressing matter of how to reform Wall Street without creating further moral hazards, a topic that dominated the day.

The influential Volcker agued that commercial banks need to be refocused on valuing customer relationships rather than hedge fund-like operations and trading their own book. “At one point the financial [sector's] profits was 40 percent of all the profits of the country – and that was measured after all the bonuses. It’s very hard to imagine that the financial sector was contributing something worth 40 percent of all the profits of the country. That’s a sign something was amiss,” he said, adding later, “Let’s encourage the basic functions of commerical banking and discourage those that create conditions conducive to financial breakdown.”

To Volcker that doesn’t mean a return to Glass-Steagall – but something close to it wouldn’t be bad. Operations that lead to an increase in commercial activity and lending would be okay – so corporate bond underwriting, banned under Glass Steagall to commercial banks – would be acceptable by a commercial bank. Private equity funds,  hedge funds and money market funds that aren’t regulated as tightly as traditional corporate savings accounts would not be okay at all for commercial banks. For freestanding hedge funds and private equity funds, more stringent reporting requirements would be neccessary to find out who posed a systemic risk.

Continue reading this post here

Nov. 2 2009 — 9:00 pm | 6 views | 0 recommendations | 0 comments

Recession’s over, but the pain’s not

The worst recession since the 1930s is over, but the recovery is just starting to walk the long, difficult road before it, says Michael Moskow, the former Chicago Fed chief and current Vice Chairman and Senior Fellow at the Chicago Council on Foreign Affairs.

Leading off a slate of high-profile economists and financial thinkers at the second annual Global Financial Leadership Conference this afternoon in Naples, Fla., Moskow said that while the economy is out of the dire financial situation it faced one year ago, troubles in unemployment and consumer spending will continue to weigh on the economy. “Even though real GDP is increasing and the recession probably ended with this most recent quarter, it still is not going to feel good.” That’s because the national unemployment rate is likely to rise, peaking over 10 percent in the first quarter of 2010 and won’t sustainably fall below 7 percent until perhaps 2012 or later. Since consumer spending accounts for the bulk of economic activity, the strides made in stabilizing banks and the economic system this past year will be held back by pressured American shoppers suffering from wage stagnation and weak housing values.

Moskow’s opinions are particularly valued because… Continue reading at my coverage of the conference for Nasdaq.com here

Jul. 10 2009 — 12:35 pm | 2 views | 2 recommendations | 2 comments

Use taxpayer dollars to build an AIG competitor

AIGF supports some competition, why not more?

AIG supports some competition, why not more?

It seems AIG bonuses are destined to be a seasonal occurance – the once and future controversy . The latest news is from The Washington Post, which reports AIG wants the okay to pay $2.4 million in bonuses to its executives. Cue the outrage.

Does anyone like this solution? AIG employees don’t like it, because everything they do is subject to scrutiny and at their worst they get holier than thou. Taxpayers don’t like it because we’re stuck supporting the greedy incompetents who helped get us into this economic mess – especially when they turn around and hand $28 million for the right to grace the shirts of the punters like this one. The government can’t like it because, well, people don’t like it. And eventually, there will be an election again.

Why shouldn’t the government  do something that will do something to really punish AIG, please a lot of taxpayers and, heck, even some of the right wingers – start an AIG competitor?

The real reason AIG was bailed out wasn’t because it was hard up from bad derivatives – they were, but not so badly as to force a bailout in and of itself. The primary reason is a business you hear a lot less about – AIG insures and manages state, local and pension fund assets (over $72 billion according to AIG’s website today and certainly more last autumn). If AIG went under, a whole lot of pension funds, cities and even states suddenly would have had trouble accessing their assets and the structured products they invested bond revenue and retiree contributions in (and probably shouldn’t have in the first place) would have failed. It wasn’t the prospect of AIG failing, but the prospect of an AIG failure bringing about municipal bankrupticies that led to the $200 billion and counting federal bailout.

So if the government is really worried about the effect on Mom and Pop’s pension and state assets, take the bold step of shifting some of the billions they send to AIG into founding a new quasi-governmental company that will focus on creating insurance policies for pension fund and municipal needs, working on the nitty gritty of muni bond strategies and investing and managing the assets of those states. It can be done – this corner of the financial world is a little dusty, so there are experts who are underutilized and could easily be poached to work for the new entity (from AIG even), municipalities certainly would like a viable option to many of the niche services AIG fulfills because competition lowers their costs and improves the service they receive, and taxpayers could get some satisfaction that a new corporation is pushing into AIG’s trough. Best of all, the government promises the new company will go public eventually, selling the shares into the market, getting taxpayers their money back and providing a big payday for those financial experts who were smart enough to join the new company early on. This also goes right to the heart of what a true capitalist should want for our country – competition.

What we’re doing right now is half hearted and certainly won’t do much to change AIG’s hedge fund-like culture or make taxpayers feel as if the punishment fits the crime. In uncertain times, a little daring will go a long way.

Photo of Ben Foster courtesy of Manchester United. Image has been cropped by me.

Jun. 29 2009 — 11:55 am | 21 views | 2 recommendations | 1 comment

Madoff tops executive jail-time terms

Bernie Madoff stands once again, at the top of a pyramid. Image by AFP/Getty Images via Daylife

Bernie Madoff stands once again, at the top of a pyramid. Image by AFP/Getty Images via Daylife

With Bernie Madoff just sentenced to 150 years in prison for his massive Ponzi scheme, he easily wins the title of longest jail term ever given to an executive for financial-related fraud. Surpisingly, the man after whom the Ponzi scheme was named was given only a 3-year federal sentence after a plea bargain, only to be nabbed by Massachusetts for another 7.5 years under state charges after he was released. He then continued to be involved in schemes after deportation to Italy.Other high profile felons have managed to do good after a stint in the pokey: Junk bond king Michael Milken, for instance, has funded a number of efforts into cancer research. At 150 years in prison, Madoff won’t have the opportunity to have either a colorful or constructive post-jail life.

Here are the updated standings in the selective league of notorious financial felons:

  • Sentence  Name                        Title,  Company                 Crime
  1. 150 yrs    Bernard Madoff Chmn, Madoff Securities      $150 billion Ponzi scheme perpetrated over decades
  2. 25 years  Bernie Ebbers Chmn, Worldcom                  Fraud, in Worldcom’s false financial reporting.
  3. 24.3 yrs   Jeff Skilling President, Enron                    Securities fraud, insider trading related to Enron collapse.
  4. 15 years   John Rigas founder, Adelphia                  Fraud, with son Timothy, embezzled millions.
  5. 10.5 yrs   Charles Ponzi founder, Securities Ex.          Turned stamp arbitrage play into massive pyramid scheme.
  6. 10 years   Tone Grant President, Refco                       Stemmed from hiding $430mln in bad company debts.
  7. 8.3 years Dennis Kozlowski CEO, Tyco                                  Embezzlement. Maximum term of 25 years possible.
  8. 4.5 years  Charles Keating CEO, Lincoln S&L                   Wire, bankruptcy fraud stemming from ’80s S&L losses.
  9. 3.5 years     Ivan Boesky founder CX                                      Partners Insider trading, with Milken.
  10. 2 years      Michael Milken trader, Drexel Burnham            Felony securities violations.
  • Sources for the information above include the Wisconsin Law Journal, Dept of Justice press releases and  Cnn/Money.com.

UPDATE at 2:45pm:

Fellow True/Slant contributor Nancy Miller pointed out to me a couple more infamous and lengthy jail terms I overlooked.

Shalom Weiss garnered an extraordinary 845 years for money laundering that led to the collapse of National Heritage Life Insurance in 2000. His crime appeared far less voluminous –  money-wise – than Madoff’s, with about $27 million involved. The length of the sentence was likely informed by the fact Weiss had evaded authorities by fleeing to Austria at the time. He was extradited back to the U.S.

Norman Schmidt was a lot like Madoff, promising investors guaranteed returns of up to 400% per month. He used the funds to buy 8 Nascar race cars, among other items. He was sent up the river last year for 330 years.

Jun. 26 2009 — 9:05 am | 24 views | 2 recommendations | 2 comments

Of course the Fed threatened BofA – be glad they did

WASHINGTON - JUNE 25:  Federal Reserve Chairma...

Ben Bernanke, being second-guessed yesterday by Congress. Image by Getty Images via Daylife

Give credit to Rupert Murdoch for having some restraint. Even though he now owns The Wall Street Journal, today’s big story isn’t the death of any ‘icon,’ but the grilling of Federal Reserve Chairman Ben Bernanke by the House yesterday. Did he or didn’t threaten Bank of America CEO Ken Lewis when Lewis indicated he may want to back out of a deal to buy Merrill Lynch? Bernanke says no, he didn’t.

But of course he did.

Not in so many words. You buy Merrill or I’ll break your legs. Not even with a threatening implication. It’d be a shame if this bat fell on your executive wet bar.

No, but make no mistake  Ken Lewis knew the consequences if he backed out. And Bernanke didn’t need to spell it out for him. History shows the Fed squirrels away memory of actions it deems not in the best interests of the broad economy, uncovering them years later to dole out some measure of justice.

As I explained here in April (before any of the details about the back and forth came out):

When hedge fund Long Term Capital Management brought the world to the brink of financial collapse in 1998…. the heads of the big investment banks of the time – Merrill, Goldman Sachs, JP Morgan, Salomon Smith Barney, Morgan Stanley, Bear Stearns – were all called together by the Federal Reserve and told they needed to save LTCM to avert a worldwide financial crisis. They all stepped up to do so, except Jimmy Cayne and Bear Stearns. We now know, thanks to last year’s financial collapse, what would have happened if LTCM went belly up.

We also know what happened to Bear Stearns when their chips were down. Do you think the humiliating $2 a share takeover offer the Fed arranged last year wasn’t intentionally low to punish Jimmy Cayne for not being a team player in 1998?

So Ken Lewis may not have had much of a choice when the Fed pressured B of A to take on Merrill Lynch last autumn, and then not tell shareholders about how bad of a condition Stan O’Neal and John Thain left Merrill.

Basically Lewis had to know that if he didn’t play ball, the consequences would be very bad for him and Bank of America if the day came when they may have needed extraordinary government measures to save them. He didn’t even need to look back to the spring and Bear Stearns, he just had to look a couple of months earlier, at Lehman Brothers’ collapse. Do you think Lehman would have been so easily let die if officials had a better view of the combative Dick Fuld?

I’m not arguing that this type of regulation is ideal – it’s personality and ego-driven and prone to failure. But it worked in this case. Make no mistake, the size and scope of the derivatives problem was (and still is) so huge that if the Fed and rest of the government  hadn’t taken the extreme measures it did we’d be hoping right now we could plant enough food in our yards to get us through winter. Merrill failing would have been a huge step in a worldwide financial melt down.

So it makes good politics for Congressman Dan Issa and the other conservatives to grill Bernanke and warn of the specter of big government rearing up. But the idea of hands-off government regulation is a big part of what got us into this mess. Be glad someone decided to be hands on – and not worry about getting his hands dirty.

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    I've listened to Mort Zuckerman brag about the size of his yacht, reminisced with Donald Trump about the NJ Generals and sloshed back $150 bottles of wine with Gordon Getty on camera. I've written extensively for Forbes, The Wall Street Journal, Inc., Barron's, the AP, The Washington Post Magazine and many other outlets. I also write and edit the Cabot Green Investor (www.cabot.net/green), a newsletter on eco-friendly investing. In addition to writing about business titans and investing, I also write about exotic travel and wine. I'm based on Boston's north shore, with my wife Jeanne, also a writer, our baby daughter, who likes saying new words, and our cat, who sleeps on the daily paper. Reach me at bcoffey at riverleap dot com.

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