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

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

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.

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.

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.

Party at the moontower.

Australian wallabies are eating opium poppies and creating crop circles as they hop around “as high as a kite”, a government official has said.

O.k., I could stretch and try and make some connection of Australian pharmaceutical companies to this story, but why bother. Enjoy it for what it is: kangaroos getting stoned and hopping in circles in fields of crops. Don’t skip the comments from readers either.

BBC NEWS | Asia-Pacific | ‘Stoned wallabies make crop circles’.

Image by monkeyc.netvia Flickr

After all those losses and bailouts, rank-and-file employees of Citigroup are getting some good news: their salaries are going up. The troubled banking giant, which to many symbolizes the troubles in the nation’s financial industry, intends to raise workers’ base salaries by as much as 50 percent this year to offset smaller annual bonuses, according to people with direct knowledge of the plan.

(New York Times)

Get this straight: unemployment is over 9% nationally and rising but Citibank, recipient of two taxpayer bailouts, says it need to raise salaries to be competitive. Your first reaction – like mine was – may be outrage. After all, you’re probably working just to keep the pile of bills from getting much higher. But then, if you think about it, how can you really be upset that another average Joe or Jane is getting a raise? We should be so lucky, right?

Maybe if that were true, we’d let it slide. But it’s not. Something bigger is going on here than the bank needing to be competitive for the masses of clerks and tellers out here. I bet Citi’s goal here is to lay the groundwork to make sure the top executives can get more money later on. It is the only explanation that makes sense right now.Why do I think that? Two facts:
Citigroup laid off 73,000 people in 2008.
The major Wall Street firms shed at least 160,000 jobs last year among them, likely much more (comprehensive data for layoffs the last third of the year is hard to pin down immediately).

All of those folks didn’t get scooped up by mutual funds or hedge funds or another investment bank – those places all had bad years too, and haven’t been adding payroll. Competing banks that were largely unscathed from the derivatives turmoil – like banks based out of Canada, Spain and China – don’t lavish as much money on employees as Wall Street and, in fact, now feel justified in not being as generous to staffers.

So consider how many of Citi’s 300,000 employees you really think feel so secure they aren’t worried about getting laid off and actually need a raise or they will bolt for the door? Very few, I bet.

I think Citi is boosting some salaries of some mid- to high-level people to lay the groundwork for even greater boosts of pay  poackages to top traders and executives, the kind of folks who will fall under the purview of ‘Compensation Czar’ Kenneth Feinberg.

Under Feinberg’s powers, he has a say over the compensation of each bailout-receiving bank’s 100 highest paid employees. We already know Feinberg is a big fan of using compensation mutiples to determine how much someone is worth from his controversial stint as 9/11 victim compensation chief.

Citi’s top dogs know this too. So when the top 100 executives want to justify their new, larger pay packages to Feinberg they can point to the higher salaries they have to pay the second and third tier employees ‘for competitive reasons’ and make a case for further boosting their own compensation.

If so-and-so if worth $2.5 million a year, aren’t I, a Managing Director, worth 14 times that?

And Feinberg, looking at the numbers and the fact Ctiti ‘had’ to boost salaries will likely say

Yes, you are.

Fetting, second from right, gets a bonus for a job done.

The latest wave of corporate proxy reports to the SEC brings a first -using the financial mess and a bank’s poor performance to justify giving a CEO bonus (credit goes to Michelle Leder at footnoted.org for being the first to catch it) 

The Committee noted that, since Legg Mason had a net loss for the fiscal year, there was no bonus pool under the Executive Incentive Compensation Plan. The Committee recognized, however, that the net loss resulted primarily from two items—the $1.4 billion in charges (net of taxes and related expense reductions) resulting from support for money market funds, including purchasing and reselling at a loss securities issued by structured investment vehicles, and $860 million (net of taxes) of goodwill and intangible asset impairment charges. If those two items are excluded, Legg Mason would have had net income, and the plan would have produced a total bonus pool large enough to accommodate the annual incentive awards made. 

Translation: yes we lost money, but take away the losses and we made money! 

Not only does Legg Mason justify the bonus where there shouldn’t be one according to its own compensation structure, it pats itself on the back for giving it (emphasis added):

The $1.36 million incentive award to Mr. Fetting is 52% less than Mr. Fetting’s $2.83 million incentive award for fiscal year 2008. Mr. Fetting’s total compensation awarded for fiscal year 2009, including the other long-term incentive awards discussed below, was approximately 29% less than his total compensation for the prior fiscal year. Despite the fact that Mr. Fetting’s individual performance during the year was strong, the Committee felt that these reductions were appropriate and consistent with its principle of linking pay to performance after taking into account the company’s performance metrics discussed above.

Let’s review Fetting’s crackerjack performance for which he was paid $1.86 million, including his base salary:

*Legg Mason lost $1.4 billion in fiscal 2008.

*Legg Mason’s earnings worsened much more dramatically last year than the investment services sector, the financial stocks sector and the S&P 500 (which actually grew the past year), according to data from S&P and Thomson.

*Only two of 13 Wall Street analysts following Legg Mason currently have a rating higher than hold. Four have the equivalent of sell.

*Average assets under management fell $300 billion (!) in one year, to $675 billion in the latest quarter.

*The share price has fallen from $50 to $22. 

As Fetting himself said in the company’s earnings call on May 5, “[O]ur shareholders deserve better results.”  Granted, he inherited many of the problems that made a mess of Legg’s year, but why have an incentive bonus structure at all if it is going to be set aside when time are tough? This serves only to mislead shareholders.

And Fetting’s reward for faithful shareholders in May when he said they deserve better? He cut the dividend 88% to three cents a share. Had the company directed his bonus to shareholders, the dividend would have been 33% higher, at four cents. Not a lot, but still something.

“We’re living in a new world of spare oil capacity,” Phil Flynn, energy analyst for futures brokerage Alaron Trading told me midday Friday. “There was a time when President Ahmadinejad giving a tirade would rally oil $5 because the world was so concerned of the ability to meet demand – OPEC couldn’t keep up, guys were worried Peak Oil had arrived – everything was just a panic.”

Now, the market is paying some attention, but just to pass the time:  ”Unless they take over the oil fields and cut off supply, then maybe there would be a problem.” But probably not. A year ago, “the market would have been up $10, $12 –  or more – immediately,” on simple fears of a disruption, Flynn says.

Last year, OPEC was churning out record oil of around 32 million barrels a day to try and meet demand not just from the U.S., which imports 12 million barrels a day, but also a go-go Chinese economy. Today, the cartel has been forced to cut back to just 26 million barrels and even that is too much for slackened demand caused by the economic recession. The current oil price of $72 many feel is too high given the state of the world economy and the significant amount of oil in storage. One potential result of the global excess of oil supply is that the U.S. may not be as hesitant to apply a little more pressure on Iran than it would be if we were in a state of high oil prices. Iran isn’t even high on the list of market worries: in recent months the market has lost more oil supply from upheaval in Nigeria than Iran even exports, so the action of the Ayatollah may mean a lot for democracy and even regional security, but not for the gas pump.

Kind of nice, for a change.

Flight records show numerous occasions when banks receiving federal money have flown their planes to destinations near resorts or executives’ vacation homes, including spots in Europe, Mexico, the Caribbean, south Florida and Aspen, Colo. In some cases, it’s clear that bank executives were traveling for personal reasons; for other flights, many of which were over weekends or holidays, the passengers and purpose couldn’t be established.

(CEOs of Bailed-Out Banks Flew to Resorts on Firms’ Jets – WSJ.com)

The pro-company jet lobby better brush up those talking points. But it’s not going to help – this is indefensible, at least in the public’s eye. The Wall Street Journal report on the private jet usage of some of the TARP recipient executives will do a lot to counter the nascent ‘private jets are good’ spin campaign. Now I know there are plenty of arguably valid reasons to use a private jet. Even if these executive trips fall under those reasons – which as the Journal notes could include a company policy requiring private jet travel or stipulations the company allows it but be reimbursed or personal use – this is just indefensible. 

The day PNC received its federal aid, Dec. 31, the same company plane was parked at Aspen, Colo., where it had traveled from Pittsburgh for a five-day trip over New Year’s. PNC planes also flew numerous times to Fort Myers, Fla., near vacation homes owned by other PNC executives.

The very day?  Not only can’t PNC chief executive James Rohr keep his bank from having to be propped up by the taxpayer, but he flies out the same day on the private jet. Seriously- did you think no one would notice?

My personal favorite from the Journal’s excellent reporting job here: a trip by executive of Regions Financial in Alabama to Prestwick Scotland, home of some of Scotland’s best golf courses.  As the Journal dryly notes, Regions “confirmed the Alabama-based bank has no operations in Europe.”

A little point of advice – when you don’t want the taxpayers to dig their paws further into your business, don’t do things to anger the taxpayers. Hopping on a jet to one of your many second homes or to play a course that – admit it –  is way above your skill level, are two of those things that make people angry. 

Let’s discuss this as frankly as we can, shall we. Using the private jet is 99% ego-driven. For all the business reasons to run out in support of doing it – it saves time, there isn’t a major airline to that meeting in Podunkville, SD – blah blah blah –  you just want to fly a private jet be cause it’s luxurious, it makes you feel big and you feel you deserve it. OK. If your board allows it and your shareholders don’t complain, I suppose I don’t have much of an argument. 

But it’s not like Marie Antoinette’s suggestion of cake is what set the people off. It was just the last straw.