From corporation-watch at countercorp.org Mon Nov 2 02:57:55 2009 From: corporation-watch at countercorp.org (Corporation Watch) Date: Sun, 1 Nov 2009 23:57:55 -0800 Subject: [Corp. Watch] Wall Street back to business as usual -- at our expense Message-ID: <1D40DCF7-9787-4438-9834-DE37A490DC59@countercorp.org> Goldman Sachs: Your Tax Dollars, Their Big Bonuses Goldman Sachs is having a banner year, and is getting a big boost from government programs By Colin Barr (Fortune magazine, Oct. 15) -- It's probably cold comfort, but Goldman Sachs couldn't have done it without your help. The New York-based investment firm turned another eye-popping profit Thursday, earning $3.2 billion in the third quarter, as revenue from trading rose four- fold from a year ago. As Wall Street firms typically do, Goldman set almost half that sum aside to compensate its workers. Through the first nine months of 2009, the firm socked away $16.7 billion, enough to pay the average Goldmanite $526,814. The bonus pool is on pace to hit $21 billion for 2009, which would match the record bonus pay-out of 2007. Goldman said it won't decide the size of the bonus pool until year- end. In any case, the payments will be substantial -- and will come just one year after huge sums of taxpayer dollars were funneled to financial institutions. Critics charge that the lion's share of Goldman's profits comes from making big bets using cheap dollars printed by the Federal Reserve. Plus, given the crisis that followed the failure of Lehman Brothers, there's a sense that government officials won't let big firms go bust. That in effect gives too-big-to-fail firms a license to bet the house. "This is almost an 'in your face' kind of set-up here," said Michael Panzner, a Wall Street veteran who blogs at financialarmageddon.com, and who wrote a 2007 book predicting economic disaster. "They're rolling the dice, and so far they're winning," said Panzner. Goldman denies that it is taking on too much risk and leaning on the government for support. "We don't operate the company that way," said financial chief David Viniar in response to a question on Thursday morning's Goldman media call. "We stand on our two feet as a financial institution," Viniar said. "None of our bondholders has ever talked to us about" an implicit government backstop. And compared to many of its peers in the financial sector, Goldman looks like a paragon of virtue. Unlike Citi and Merrill Lynch, for instance, Goldman never paid out billions of dollars in bonuses while losing huge sums of money. Even last year, when the firm took big write-downs and posted its first quarterly loss as a public company, Goldman managed to stay profitable. Goldman re-paid its $10 billion Troubled Asset Relief Program (TARP) debt with interest this past spring. And in contrast to the likes of Lehman Brothers, which dithered while it could have saved itself, Goldman raised $11 billion in capital over the past year, including a preferred stock sale on Warren Buffett's tough terms. Still, there's no denying Goldman has had a lot of help. It was one of the nine big banks that received loans from Treasury last fall. It received $13 billion in the costly, widely questioned September 2008 rescue of insurer AIG. [AIG owed Goldman money, so when the government bailed out AIG, some of that money went to Goldman.] It has sold $22 billion in federally-guaranteed debt under a plan the government started to restore capital markets activity. And it has been a major beneficiary of the low interest-rates the government has adopted in hopes of re-starting the economy. Of course, Goldman wasn't the only beneficiary of those moves, but it has certainly been among the most nimble in cleaning up. That has attracted the attention of investors. "There's a perfect storm of arguments against paying that much" in bonuses, said Tim Smith, a senior vice president at Walden Asset Management, a $4 billion Boston-based asset manager focusing on socially responsible investments. He notes that Walden, which owns a small amount of Goldman stock, sponsored a shareholder resolution last year calling for Goldman to allow investors to advise the firm on compensation practices. The measure failed, but it did score a 46% vote, Smith said. He is hopeful that a similar resolution this year will pass. "There are many faces to this discussion," Smith said, "but the outrage over the bonuses is going to be focused on the larger context, with foreclosures and job losses" among the general public. While Goldman churned out $3 billion in profits in the third quarter, the economy shed 768,000 jobs, and home foreclosures set a new record. More than a million Americans have filed for bankruptcy this year, according to the American Bankruptcy Institute. A September survey of state finances by the Center on Budget and Policy Priorities found that state governments faced a collective $168 billion budget shortfall for fiscal 2010. Goldman, by contrast, is sitting on $167 billion in cash, in the name of making sure it can withstand another market melt-down if that day comes. Goldman was guarded in its assessment of the future -- Viniar said he has seen signs markets have stabilized without necessarily improving. But Panzner believes many Americans have been caught up in the massive stock market rally. On the next down-turn, he said, they could be left nursing huge losses again. Meanwhile, Washington has made little progress in re-casting a financial system that only a year ago was on the verge of collapse. "We need to be mindful about the dangers of complacency," said Doug Hamilton, deputy director of the Pew Economic Policy Group. "We can't go back to the old way of doing business." -------------- next part -------------- An HTML attachment was scrubbed... URL: From corporation-watch at countercorp.org Thu Nov 5 15:38:02 2009 From: corporation-watch at countercorp.org (Corporation Watch) Date: Thu, 5 Nov 2009 12:38:02 -0800 Subject: [Corp. Watch] Orthodox Economics: The dinosaur discipline Message-ID: <59FFBC79-82A0-4125-A0E5-C87CE8A81918@countercorp.org> Ivory Tower Unswayed by Crashing Economy By Patricia Cohen (Adbusters, July 15) -- For years, economists who have challenged free- market theory have been the Rodney Dangerfields of the profession. Often ignored or belittled because they questioned the orthodoxy, they have been shut out of many economics departments and the most prestigious economics journals. In other words, they got no respect. That was before last Fall's crash took the economics establishment by surprise. Since then, former Federal Reserve chairman Alan Greenspan has admitted that he was shocked to discover a flaw in the free-market model, and has even begun talking about temporarily nationalizing some banks. At the most recent annual meeting of the American Economic Association, Janet Yellen, president of the Federal Reserve Bank of San Francisco, said, "The new enthusiasm for fiscal stimulus, and particularly government spending, represents a huge evolution in mainstream thinking." A Newsweek cover last month declared, "We Are All Socialists Now." Yet prominent economics professors say their academic discipline isn't shifting nearly as much as some people might think. Free-market theory, mathematical models, and hostility to government regulation still reign in most economics departments around the country. True, some new approaches have been explored in recent years, particularly by behavioral economists who argue that human psychology is a crucial element in economic decisionmaking. But the belief that people make rational economic decisions and the market automatically adjusts to respond to them still prevails. The financial crash happened very quickly, while "things in academia change very, very slowly," said David Card, a leading labor economist at the University of California at Berkeley. During the 1960s, he recalled, nearly all economists believed in what was known as the Phillips curve, which posited that unemployment and inflation were like two ends of a seesaw: as one went up, the other went down. In the 1970s, however, the country experienced "stagflation" -- high unemployment and high inflation. Yet it still took ten years before academia let go of the Phillips curve. Academic economists are "like an ostrich with its head in the sand," said James K. Galbraith, an economist at the Lyndon B. Johnson School of Public Affairs at the University of Texas who has frequently been at odds with free marketers. "I don't detect any change at all." "It's business as usual," Galbraith said. "I'm not conscious that there is a fundamental re-examination going on in journals." Unquestioning loyalty to a particular idea is what Yale economist Robert J. Shiller says is the reason the profession failed to foresee the financial collapse. He blames "groupthink," the tendency to agree with the consensus. People don't deviate from the conventional wisdom for fear they won't be taken seriously, Shiller maintains. Wander too far and you find yourself on the fringe. The pattern is self-replicating. Graduate students who stray too far from the dominant theory and methods seriously reduce their chances of getting an academic job. "I fear that there will not be much change in basic paradigms," Shiller wrote in an email message. "The rational expectations models will be tweaked to account for the current crisis. [But] the basic curriculum will not change." "I hope I am wrong," he added. Given the short time span since the crisis began, no one expects major curriculum changes yet. But economics professors at a number of prominent universities -- including Chicago, Harvard, and Stanford -- say they are unaware of any plans to reassess their curriculums and reading lists, or to re-think the way introductory courses are organized. The political undercurrent undoubtedly makes change more difficult. There is a Crayola box full of differently named economic schools of thought that are critical of mainstream free-market theory, but these heterodox -- as opposed to orthodox -- economists generally tend to fall into the liberal camp. John B. Taylor, an economist at Stanford and one of President George W. Bush's advisors, whose forthcoming book is titled "Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis", said he was planning to update his introductory textbook, "Principles of Macroeconomics", because of the crash. But while the revision will include information about the financial crisis, he said, explanations of fundamental principles won't change. To Philip J. Reny, chairman of the economics department at the University of Chicago -- Milton Friedman's intellectual home and free- market headquarters -- such caution is a good thing. "Academia typically moves slowly and carefully and thoughtfully," Reny said. "There is a lot of speculation in the press as to why the financial system collapsed," he added, but a lot of "work needs to be done to figure out what really happened, which dominoes were in front and caused others to fall." Outside of the classroom, debates about the crash are taking place in several public lectures and faculty workshops on the subject. But "before we're certain of what the answer is, we're unlikely to think in terms of changing the curriculum," he added. "That's very serious. The responsible thing to do is wait until we have some understanding of what went on here." There are a handful of departments that have welcomed alternative theorists, like the University of Massachusetts at Amherst and Boston, the University of Utah, and the University of Missouri at Kansas City (where the Heterodox Economics Newsletter is published). To James Galbraith and Missouri economist L. Randall Wray, the thinkers whose work is most relevant today are John Maynard Keynes, who argued that the government should spend its way out of the Great Depression, and Hyman Minsky, who maintained that financial institutions could prompt ruinous crashes by taking on too much risk. Neither, Galbraith said, is part of the core curriculum in most economics graduate programs. When asked why graduate students don't study Keynes or Minksy, Reny replied that grad students work on subjects -- such as developing models of business cycles -- that are at the frontier of the field, and Keynes and Minsky are not cutting edge anymore. Missouri's Wray prefers to call such mathematical modeling "the frontier of nonsense." For more than a decade, he has asserted that both the theory and the models used by risk-rating agencies are wrong. He has been invited to speak at the University of Chicago, he said, but by social science graduate students, not by the economics department. When it comes to the financial crisis, Harvard economist Dani Rodrick said, "The problem wasn't with the economics, but with the economists." Theories and models can be useful tools, Rodrick said, but "we have fixated on one of possibly hundreds of models, and elevated it above the others." "We formed a narrative of the moment, which fit the zeitgeist," he said. For many, the narrative that seemed to best explain the experiences of the 1970s, '80s and '90s -- including the collapse of the Soviet economy, and the increasing market orientation of India and China -- was told by free market theorists. A real shift among economists will come only if there is a wholesale collapse, Missouri's Wray and Berkeley's Card agreed. If unemployment is still high three years from now, Card said, then we might start to see a paradigm shift; economists will "have to say that the market isn't supposed to work this way." But if the economy bounces back in a year, then they will be able to dismiss the financial crash as an anomaly that is unimportant to the larger theory, he said. A field shifts, Card and Wray said, not so much because wise elders change their minds -- they are too invested in the way things are -- but rather because a new generation of scholars comes along and pushes into new areas of research. --------------------- Patricia Cohen is a journalist for the New York Times From corporation-watch at countercorp.org Sat Nov 7 17:04:35 2009 From: corporation-watch at countercorp.org (Corporation Watch) Date: Sat, 7 Nov 2009 14:04:35 -0800 Subject: [Corp. Watch] If Wall Street pay is determined by performance, executives should be unemployed Message-ID: <19DD42E8-A6AF-44FC-8184-7796C741F07E@countercorp.org> Who Cares If Wall Street "Talent" Leaves? If lower pay lures some of Wall Street's finest away, so be it -- It's not as if the best and brightest were doing a good job to begin with By Colin Barr (Fortune, Oct. 23) -- There's no need to fear a Wall Street brain drain, despite the crackdown on pay by Washington. On Thursday, White House pay czar Kenneth Feinberg outlined compensation restrictions at seven firms that got special bail-outs, and the Federal Reserve proposed to review pay practices at 28 unnamed giant banks. Critics warn that reining in pay makes it hard to keep talented employees. Hemmed in, institutions like AIG,Bank of America (B of A), and Citigroup could lose their best people. These firms would then supposedly perform even more abysmally, if that's possible, leaving them hard pressed to re-pay tens of billions of dollars of taxpayer- backed loans. Still, we say good riddance to this "talent." After all, the traders and suits in the corner offices don't exactly have an unblemished track record. In 2008, Citigroup, B of A, and Merrill Lynch (since acquired by B of A) posted a grand total of $51 billion in losses. Yet even as they were running themselves into the ground, the firms managed to pay out more than $12 billion in bonuses -- including 1,606 million-dollar-plus bonuses, according to a report from the New York attorney general's office. "Even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks' financial performance," the report said. Meanwhile, it's hard to imagine that defection-hit firms would have a lot of trouble finding qualified replacements in the current job market. Unemployment has doubled nationally since December 2007, when the recession started. Securities industry employment has fallen 10 percent nationwide and 14 percent in New York from a mid-2008 peak, according to Bureau of Labor Statistics data, costing some 90,000 jobs in the U.S. Notwithstanding Goldman Sachs' charm offensive, it looks like the official response to runaway pay is just starting. The Fed's plan to weigh big banks' compensation plans against their potential for undermining the economy could eventually put pressure on pay at all the big banks. "This could be a game changer," said Simon Johnson, an economist at MIT. "There will be a lot of pressure on them in Congress to stick it to the big firms." But maybe the best reason not to fret about talent flight is one familiar to cubicle dwellers everywhere: Just because someone has a big, high-paying job doesn't mean they're good at it. Long-time Bank of America CEO Ken Lewis, for instance, unexpectedly announced his retirement this month, while agreeing to give back his 2009 salary. Lewis didn't say why he was leaving, but it seems that criticism over his empire building, mishandling of the Merrill acquisition, and outsize pay got to him. The Charlotte Observer reported he had grown tired of the "mud being thrown on him day by day." Another helping or two of that mud could be just what Wall Street needs.