The cure, then, will maximize the likelihood that gratuitous moral hazard is too impolitic.

Historically, a job largely for the fourth estate (e.g., Jacob Riis, H.L. Mencken).

How, then, to make it maximally profitable for the fourth estate of today to muckrake?

Imho, the key insights:

1) The introduction of particular online markets, starting with a new kind of market for the ad spaces on blogs, will provide people with new and improved ways to develop, showcase and profit from expertise.

2) Owning popular markets of the aforesaid kinds is an ideal way to increase profits for an American media conglomerate that owns a broadcast TV network.

3) The less benefit individual speculators can derive from moral hazard, the more they will utilize said markets.

Details are online at http://www.loveatmadisonandwall.com.

Given the above, the sooner media conglomerates start introducing/popularizing the aforesaid markets, the sooner a lot of top-quality entertainment programming will, in part:

1) increase awareness of (proposed) public policies that (would) put taxpayers on the receiving end of gratuitous moral hazard (e.g., increase awareness via a next-gen Jed Bartlet channeling Jon Stewart and Vietnam-era Walter Cronkite)
2) showcase elected representatives who protect taxpayers from gratuitous moral hazard

Thoughts?

Best,

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.

In the long term this would be an incredibly healthy thing for resource distribution in the United States as it is forced to pursue a soft reindustrialization. then again maybe we can trade away some bankers for real engineers.

“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!

The fact that Citi rejected a proposal by Buffett is a sign that he’s right and Citi is wrong once again.. not that Salomon is correct!

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

The OTC derivative collateral market needs to be electronically structured, so that at least the collateral starts to get “priced” and published. If all the collateral for every piece of a complex derivative had to be valued as a “currency”, then that would add a lot of transparency to the market and start to let the “little people” play, or at least start to understand. Of course, it would cut down on the big time profits at the Global Investment Banks and their obscene bonuses, but it would start to keep the “market makers” from “hiding” the ball and it would level the playing field a little bit.

Make it mandatory to price the collateral and treat the collateral as the currency. Publish the prices/ticks and volume on the collateral, and then it gets down to a more rational risk management task instead of trying to “know your counterparty” from the bar or the golf course. price the collateral, publish the prices and volume and then we will see.

So, the idea behind viewing the collateral as the currency, is to be able to track that currency as it moves up or down the food chain of the derivative structures. If a piece/type/size of collateral starts to rise in price, then the derivative strcuture is getting more complex. So it gets a little more simplified to track and measuring risk, and we know more about what’s going on.

On Blackrock, would someone please buy Henry Waxman a cigar. Of course, the Fed would “select” Blackrock, a very mysterious and dark fund manager, formerly owned by PNC bank prior to Merrill. One could wonder why the majority of their ETFs started to dramtically tank at the time that the Sub Prime problem started to become visible to the “inside market makers”. Do you think that Blackrock was given an opportunity to protect its and its other counterparties rear ends and potential industry events, by having “exclusive” privilege to unraveling or “covering up” the OTC derivative mess?

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.

Chairman Waxman Requests Details of Federal Reserve’s No-Bid Arrangement with BlackRock

Chairman Waxman requests details of a potentially long-term arrangement between the Federal Reserve and BlackRock, an investment advisory firm selected to manage $30 billion in assets backed by federal taxpayers.

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’!!!!!!