naked capitalism

Richard Kline says:

Plender nails a key flaw in the present capital management regime late in his article: the bonus system. This is also where one can have the most impact on behavior. Here’s a simple proposal: Pay the putative talent bonuses for success, but also pay them for maintaining sound reserves, _and bill them for losses_.

How much for each is a matter of fine-tuning and perhaps institutional culture. If every firm did it, the putative talent has nowhere to go, except to go private which they often do now anyway. Good riddance to greater fools. The major problem is that the gamblers have no skin in the game on the loss side of the ledger. Seriously, if the bonus club also signed in their contracts that they had to pay out _personally_ a set amount or point level for losses accrued from their deals, and others assessed the losses, we’d see sanity return. Right now, though, it’s a rigged game: heads I win, tails I win, and I read the coin . . . so pay me.

Anonymous says:

OT, but highly correlated:

Rep. Henry Waxman, chairman of the House Oversight and Government Reform Committee, wrote a letter to New York Fed Governor Timothy Geithner to inquire about the selection of BlackRock Financial Management Inc. as the asset manager for the deal that allowed JPMorgan Chase & Co. to purchase Bear Stearns at bargain-basement price.

When bank managers feared investment bank Bear Stearns’ collapse, the Fed put together the emergency deal to avoid a Wall Street-wide panic. Bear Stearns was hamstrung by heavy investments in shaky mortgage-backed securities.

“Only limited details are known about the Federal Reserve’s understandings with BlackRock. It appears, however, that BlackRock is now directly responsible for managing a $30 billion portfolio on behalf of the American taxpayer,” Waxman wrote.

Waxman said he wants to know how the Fed came to select BlackRock, which appears to have secured a long-term deal with the Fed without competition usually sought in a government bid. Waxman said he also wants to know more about what compensation BlackRock will receive in exchange for its work.

Geithner’s “testimony before the Senate Banking Committee offered few specifics” about the deal, Waxman said.

Detailing a half-dozen specific questions about the deal, Waxman asked for a response by April 18.

Re: Now you see why Blackrock is managing Bear Level 2 unobservable assets @ Treasury/Fed:

Merrill Lynch owns approximately half of BlackRock, one of the world’s largest publicly traded investment management companies, with more than $1 trillion in assets under management.

Re: The Wall Streeters seem to assume that the next step will be the creation of something like the Resolution Trust Corporation….. Or, as David Rosenberg of Merrill Lynch told the firm’s clients last week, “ . . . the outright purchase (by government agencies) of illiquid mortgage-backed securities is probably required, and could employ government-backed fiscal action . . . The Federal Reserve itself could buy some of those securities, but the Fed alone cannot unclog the congestion in the capital markets, in our opinion.”

Re: Former Federal Reserve Chairman Paul Volcker questioned the central bank’s decision to rescue Bear Stearns Cos. with a $29 billion loan, saying it was at “the very edge” of its legal authority.

From Nakedcapitalism (TallIndian said…): The NY FED proclaims

The portfolio consists of collateralized mortgage obligations (CMOs), the majority of which are obligations of government-sponsored entities (GSEs), such as the Federal Home Loan Mortgage Corporation (“Freddie Mac”), as well as asset-backed securities, adjustable-rate mortgages, commercial mortgage-backed securities, non-GSE CMOs, collateralized bond obligations, and various other loan obligations.

All valued by BSC!

And the NY FED actually states that even revealing the CUSIPS of these instruments poses a ‘danger to markets’!!!!!!

VennData says:

All the plans fail to address the real problem of regulating; the apologists say we can’t do too much regulating of firms that are “too big to fail.”

So – as our esteemed VP declared recently – split them up. A system (think Internet, the electricity grid) that are not dependent on any node are more robust.

Imagine the small town banker demanding a $150M Golden parachute. Or the local investment advisor with a 386 machine buying all the stocks in the index having a trillion dollars in counter party risk.

Now that we’re de-leveraging, let’s de-size.

Anonymous says:

Reform..? No, we get nepotism, collusion and corruption, alondside discretionary abuse and theft!

Re: Greenspan the whore working at a hedge fund:

The best way to describe Peter Fisher is that he’s one of those behind-the-scenes guys who keep Wall Street from coming apart at the seams–which it almost does every few years. As the recently departed undersecretary for domestic finance at the Treasury, believe you me, Peter Fisher is known to every fiscal power broker from D.C. to Delhi. He’s an unusual guy. For one, he gets visibly excited talking about financial policy. And for another, he’s been pretty good at implementing it. He’s also obsessed with the business of risk.

Now Fisher has hung up his government scepter to join bond house BlackRock. (Fisher was on everyone’s short list to head the New York Fed or lead the New York Stock Exchange.) It’s a cashing-in of chips, partly.

These people have no integrity

zak822 says:

Richard Kline, in his last paragraph, defined the cause of the problem perfectly. Few others have even touched on it, but unless this part is understand and talked about openly we’re just going to have to do all this again. And Kline even offered a solution.

“The major problem is that the gamblers have no skin in the game on the loss side of the ledger. Seriously, if the bonus club also signed in their contracts that they had to pay out _personally_ a set amount or point level for losses accrued from their deals, and others assessed the losses, we’d see sanity return. Right now, though, it’s a rigged game: heads I win, tails I win, and I read the coin . . . so pay me.”

Kudos, Richard!

Richard Kline says:

To S, and more on financial fair practice:

I say putative financial talent because, as you, I see a limit to the actual worth of many of the boss speculators. Insofar as I can tell, they usually make major money by finding a small situational advantage no one else is onto yet, by using massive leverage, or both. Once the rest of the industry follows on behind, their ’strategy’—really just time-dependent corners—is constrained, and they do no better than anyone else. Yes, those few good years are worth something, but not what the ibanks are paying for it. Trader profiteering is the result of institutional and industry culture around which mythology of ‘talent’ accrues more than due to special _sustainable_ wizardry.

Re: Recovery for dealing losses being difficult, sure it would be: so don’t recover, escrow. Part of each year’s bonus is escrowed against future losses rather than paid out, building up a ‘recoverable asset’ to the firm in the event of losses or unsanctioned or illegal activity. The escrow belongs to the employee like pension money, and they cash out when they leave _and_ when their positions have cleared. Oh sure, cap the total pay-in at some reasonable if high level, some especially lucky traders or fortunate units will max out. And don’t limit the recoverable penalty to what’s in the escrow necessarily; that’s just the earnest money. But down the road the employee collects the escrow if they finish in good standing; fair is fair. One needn’t necessarily put a cap on compensation; the tax system should take care of _that isssue_, frankly. The whole idea of loss recovery is to limit firm exposure to excessive risk, not meet compensation head on per se.

The idea of unit- or firm-wide bonuses for returns is . . . loopy to me, but the same applies. If you have standing to collect bonus money, you see a slice going into escrow, and are evaluated against reserves and losses per your bonus (but not per your salary). Will bright guys sans scruples find ways to end around, as with the whole stock option greedfest? Of course, innovation is the American way; let’s start with a clear solution to a known ill and burn other bridges when we come to them.

No single firm could implement such unilateral policy; employee flight is a real issue. Well, the industry is down right now, right? They need public dough, and they need counterparty confidence. In another post of this date, William Kidder is cited for the points of his ‘Good Citizen’ proposal, a set of self-imposed industry standards. Explicitly as one of them should be a ‘bonus management’ clause of just this nature: we don’t ask the industry to initiate this firm by firm, or start by passing legislation. Rather call this clause and others similar to Kidder’s good points an industry Fair Practice guideline. One needn’t even call this a ‘comensation clause;’ call it a ’shared risk’ clause. All financial concerns which qualify for Federal Reserve repos are required to be binding signatories to such a set of guidelines. Ultimately, it would be better if this was a regulatory requirement if not necessarily a statutory one; it might start as a voluntary one. But make it necessary: the piglets shouldn’t get an IV to make it through bad times without being required to give up something and behave better. Now, they need us, so make them _ALL_ sign on to keep rolling over these repos—and they’ll do it: they have no choice. And frankly, they may well end up better managed for it, we’re saving them from themselves.

Putative ‘talent’ may still leave to set up their own boiler room outfits in office parks, yes. However, one might require public entities to only do business with firms who have binding commitments to the Fair Practice guidelines, whether those firms were repo elibible or not. Such a requirement would cut off non-signatories from major pools of capital. And it would identify non-signatories to all and sundry as Un-Fair Practitioners: that’s called fair warning.

Re: soft reindustrialization, I’m all for it, and we have needed to go this root for thirty years. We got Republican imperialism, bigot channel noise machines, and speculative manias too much instead. Now, we desperately need to re-expand our actual productive base. Can we? Yes. Will we? Well, we sure as Hell won’t try as long as we can play roulette with other peoples money on a mass scale: who’d work when they can (supposedly) just buy a ticket on the gravy train and watch that ticket appreciate in price? The US is hardly through; we just need to take a hard look in the mirror and capitalize on our _real_ talents. And we won’t find any too damn many of them with their feet up in a corner office above it all.