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Money Talk

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Some Advice for President Obama

Tuesday, April 21st, 2009

[You should not exercise] excessive intervention in economic activity and blind faith in the state’s omnipotence. In the 20th century, the Soviet Union made the state’s role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost [them] dearly. I am sure nobody wants to see it repeated.

Nor should we turn a blind eye to the fact that the spirit of free enterprise, including the principle of personal responsibility of businesspeople, investors, and shareholders for their decisions, is being eroded in the last few months. There is no reason to believe that we can achieve better results by shifting responsibility onto the state.”

In the longer run, [military Keynesianism] won’t solve the problem but will rather quell it temporarily. What it will do is squeeze huge financial and other resources from the economy instead of finding better and wiser uses for them.

We must assess the real situation and write off all hopeless debts and ‘bad’ assets. True, this will be an extremely painful and unpleasant process. Far from everyone can accept such measures, fearing for their capitalization, bonuses, or reputation. However, we would ‘conserve’ and prolong the crisis, unless we clean up our balance sheets.

The time for enlightenment has come. We must calmly, and without gloating, assess the root causes of this situation and try to peek into the future.

          - Vladimir Putin
          - Russian Prime Minister
          - World Economic Forum, Davos, Switzerland
          - April, 2009

Categories: Money Talk, The World Wide Weird | No Comments »

Even loansharks took the money back

Monday, April 20th, 2009

I’ve written several long, rather technical posts on The Financial Crisis(TM). But this is short and sweet:

U.S. to put conditions on TARP repayment:

NEW YORK (Reuters) – Strong banks will be allowed to repay federal bailout funds, but only if such a move passes a test to determine whether it is in the national economic interest, the Financial Times reported on Sunday, citing a senior U.S. administration official.

The report said banks that had plenty of capital and demonstrated an ability to raise fresh capital from the market should, in principle, be able to repay government funds.

But the judgment would be made in the context of the wider economic interest, the report said.

So here’s my question: does refusing to take the money back when the banks are willing to pay it lessen our leaders’ ability to say, “How dare they spend money on <X> when they’ve accepted $<Y> billion in taxpayer-funded TARP money?”

No, I didn’t think so…

Categories: Money Talk | No Comments »


Sunday, April 12th, 2009



Categories: Money Talk | No Comments »

The Three Bubbles

Friday, March 27th, 2009

Jeff Porten posted a very cool graph, in that it provides a nice perspective on how the market has performed in the last ten years, relative to the sixty years before that. This illuminating tidbit finally kicked my butt into gear and got me to draw (and post) the graph I’ve been visualizing in my head for months now:

The blue line represents the NASDAQ composite from 1993-2003 (Source)
The red line represents average home prices in the US from 1999-2008 (Source)
The green line represents crude oil prices 2006-2008 (Source)

I’ve used different scales for each line so that the peaks are roughly even, in order to illustrate my point, which is this: we’ve had three economic bubbles in the last ten years; they are getting closer together, and they’re completing faster each time. Before we rush ahead with new laws and government regulations, we need to answer several very difficult questions:

These are not easy questions to answer. Most policies that accomplish one will not accomplish the others (in various combinations). Also, when we’re in the tail-end of a bubble, the bubbles seem like horrible things that we’d like to avoid in the future. When we’re in the beginning of one, though, we call it “unparalleled economic growth,” and it’s generally seen as a good thing (in particular, the kind of good thing that wins elections).

I don’t necessarily have answers to these questions, but at least Jeff and I are now tied at one cool stock market graph apiece. And that’s gotta count for something…

Doesn’t it?

Categories: Money Talk | 8 Comments »

Personalizing the Banker’s Fate: Jake DeSantis Resigns from AIG

Thursday, March 26th, 2009

Jake DeSantis, an executive vice-president in AIG’s Financial Products Unit, has resigned from the company. Rather than giving back his retention bonus (as requested by CEO Ed Liddy and many members of Congress), he has decided to donate all of the after-tax proceeds to charities that will help those disadvantaged by the Current Financial Crisis(TM). He also sent his resignation letter to the New York Times, who printed it in their Op-Ed section.

Here’s a pull quote:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I think the letter is excellent. It highlights, in a way no outsider could, how cavalier the court of public opinion has been in painting all bank and financial services employees with the same brush, and how these retention packages were seen by those within the company. Reading it, I hope some will begin to see this money as a prudent investment in the future of a company, and an unfortunate public relations disaster, which has little or nothing to do with the vast problems we seek to solve.

If you’re all interested in what I wrote here, here, or most especially here, I strongly implore you to click through and read the whole thing.

Categories: Money Talk | 12 Comments »

AIG – One more thing…

Wednesday, March 18th, 2009

It’s being reported today that seventy-three of the roughly four hundred AIG employees that received retention bonuses received bonuses of more than $1 million. It’s also being reported that eleven of them (including one who received $4.6 million) have already left AIG, and received the bonus anyway.

In my previous post, I attempted to explain that retention bonuses are not new, nor are they sinister plots to distribute taxpayer money to rich executives. Especially when a company is going through tough times, retention bonuses can be absolutely critical to retaining the most critical people so that the company can flourish again when the crisis is over. I roundly criticized our leaders (including the President) for misleading the American people into believing that this wasn’t the case.

I stand by that criticism. However, if AIG’s retention contracts were written such that bonuses (especially substantial ones) are still paid even after an employee leaves, then we’re talking about extremely poorly written contracts.  Also, if you believe that almost 20% of your division’s staff requires $1 million to remain with the firm, then you haven’t done nearly enough to incent them in other ways.

UPDATE:  Yes, I know – an update to an update, but these things evolve rather quickly.  Anyway, it was pointed out to me by those who know better that the eleven people who left probably stayed until the day they were required to stay to get their retention bonuses, and then left for the job they had lined up as “retention day” neared.  Payout of the bonus itself could we weeks or months later, which would create the situation described above – a person who’s already left the company receiving a retention bonus.  If that’s the case, then the retention bonus did exactly what it was supposed to do – keep the employee in the firm until a predetermined date.  The bit about 20% of the staff receiving $1 million or more for retention is still a valid criticism, though…

Previous statements made on this matter by our leaders and by the media leave me with little confidence that we’re getting all the facts straight, but if the above is true, I say that AIG fire those responsible for creating these contracts. Not because AIG has received government bailout funds, or because it feels good to punish rich people when times are bad, but because they did a lousy job structuring their retention contracts. Even in a good market, the above terms do the company no good and don’t achieve the retention incentive that they set out to achieve in the first place.

By the way, while I have your attention (if I still have it…), I’d also like to emphasize two things from my previous post that I fear weren’t clear enough:

Categories: Money Talk, News and/or Media, Political Rantings | 1 Comment »

What Happened? The AIG Bonus Kerfuffle

Tuesday, March 17th, 2009

[The third in a series of “What Happened” posts that endeavor to explain the causes and impacts of the Current Financial Crisis(TM) – the first two parts are available here and here.]

Today’s discussion is inspired by AIG’s payment of retention bonuses last Sunday, March 12, 2009, and the stinging reaction it engendered from Barack Obama, Barney Frank, Ben Bernanke and others. As before, those who are bored by such things should move along quickly and quietly.

Read the rest of this entry »

Categories: Money Talk, Political Rantings | 10 Comments »

Validation from Above

Monday, March 9th, 2009


Many of the boutique firms, who existed solely because of the MBS market, went out of business quickly, since they had little to no leverage to write and hold mortgages themselves. This made it even harder to get a loan, because it reduced the supply of available creditors.

(It also meant that the worst actors in this whole scenario had vanished, leaving Congress, the President and the media to assign blame to other, less nefarious players, such as Wall Street CEO’s. But, I said I’d remain fact-based and dispassionate here. Apologies for this momentary lapse into opinion…).

Ken Lewis, Chairman, CEO and President of Bank of America:

The story of our economic crisis mirrors every great market bubble in history. Clearly, banks were key participants, but they were not alone. Mortgage lenders, borrowers, regulators, policy makers, appraisers, rating agencies, investors and investment bankers all played a role in pushing economic excesses forward. The institutions that gave in completely to the frenzy are no longer with us. Those that balanced the need to compete with the need to lend prudently survive today and are helping to stabilize the system.


…the information coming from my commonly-used information sources has been so scrubbed, so watered down, so sanitized, and so reduced to inaccurate sound bytes and oft-repeated tag lines that I literally can’t watch it anymore.

Mr. Lewis again:

Unfortunately, our current debate has been riddled with misinformation that will not help us understand our current reality, or help us decide on a sensible path forward. I would like to provide some clarity on a few key claims that have been repeated so often they are now taken to be fact. They are not.

Again, I must stress that what I write in this (and all previous) blog posts represent my opinion only, not that of my employer. For all I know, most of the people I work with disagree with most of what I say here.

That said, it seems that Mr. Lewis and I coincidentally agree on at least a couple of points. For me, this reinforces my confidence that I understand the crisis substantially well. For others, I’m sure, it will be further evidence that I’m as much of a corporate shill as Ken Lewis is.

Regardless of their opinion on this question, though, I strongly urge anyone who wants to weed through the misinformation that’s so prevalent in the news media today to read Ken Lewis’ Wall Street Journal Op-Ed in it’s entirety.

Categories: Money Talk | 2 Comments »

Time Magazine: 25 People to Blame for the Financial Crisis

Thursday, March 5th, 2009

A few weeks back, Time Magazine published a list of the 25 People to Blame for the Financial Crisis, in which it details the 25 people (or groups of people) that it considers most “blameworthy.”

Unfortunately, it’s website requires you to click “Next” twenty-five times to see the entire list, which is pretty inconvenient. So, as a public service, here’s the complete list:

  • Angelo Mozilo, co-founder of Countrywide and IndyMac. Made predatory lending into a big business.
  • Phil Gramm, chairman of the Senate Banking Committee from 1995-2000. Repealed the Glass-Steagall Act in 1999 and modified the 2000 Commodity Futures Modernization Act to exclude OTC derivatives from CFTC regulation.
  • Alan Greenspan, chairman of the Federal Reserve, 1987 – 2006. Kept interest rates low through the booming 90s.
  • Chris Cox, chairman of the Securities and Exchange Commission, 2005-2009. Didn’t catch Bernie Madoff or sufficiently police the I-Banks.
  • American Consumers, borrowed up to 130% of their income by 2007.
  • Hank Paulson, Treasury Secretary, 2006-2009. Let Lehman fail, mis-managed the original bailout bill/TARP program.
  • Joe Cassano, founding member of AIG’s financial products unit. Made Credit Default Swaps big business, beginning in 1987.
  • Ian McCarthy, CEO of Beazer Homes since 1994. Admittedly violated regulations to get loans for unqualified borrowers.
  • Frank Raines, CEO of Fannie Mae, 1999-2004. Presided over a massive accounting scandal and kicked off investments in sub-prime mortgage backed securities.
  • Kathleen Corbet, President of Standard & Poor’s, 2004-2007. Assigned questionable ratings to CDO products that are now “toxic assets.”
  • Dick Fuld, CEO of Lehman Brothers, 1994-2008. Got Lehman into the MBS business, presided over it’s demise in September of 2008.
  • Marion and Herb Sandler, owners of World Savings Bank, who invented the adjustable-rate mortgage (ARM) in the early 1980′s.
  • Bill Clinton, 42nd President of the United States, 1993-2001. Presided over the repeal of the Glass-Steagall Act, signed the Commodity Futures Modernization Act and the Community Reinvestment Act, which pressured banks to lend in low-income neighborhoods.
  • George W. Bush, 43rd President of the United States, 2001-2009. Embraced deregulation, didn’t get Congress to control Fannie Mae and Freddie Mac, signed the Sarbanes-Oxley Act, blocked additional regulation of mutual and hedge funds.
  • Stan O’Neal, CEO and Chairman of Merrill Lynch, 2003-2007. Got Merrill into the CDO and MBS businesses.
  • Wen Jiabao, Premier of the People’s Republic of China, 2003-present. Purchased copious amounts of U.S. Government debt.
  • David Lereah, Chief Economist at the National Association of Realtors, 2001-2007. Recommended real estate as a sound investment, despite the bursting bubble.
  • John Devaney, Hedge Fund Manager and buyer of more than $600 million in mortgage-backed securities.
  • Bernie Madoff, purveyor of a $50 billion Ponzi scheme that bilked many of the rich and famous.
  • Lew Ranieri, Salmomon Brothers bond trader. Inventor of mortgage backed securities in the late 1970′s.
  • Burton Jablin, head of programming for HGTV. Created programs that taught homeowners how to extract value from their homes.
  • Fred Goodwin, CEO of the Royal Bank of Scotland, 2000-2008. Strained RBS’s capital reserves through acquisition, leading to a government bailout.
  • Sandy Weil, CEO of Citigroup, 1998-2003. Lobbied for the repeal of Glass-Steagall, formed the first “universal bank” (Citigroup) by merging Salomon Smith Barney, Travelers and Citibank.
  • David Oddsson, Prime Minister and Central Bank Governor of Iceland, 2001-2009. Privatized Iceland’s banks and presided over a “macroeconomic meltdown.”
  • Jimmy Cayne, CEO fo Bear Stearns, 1993-2008. Over-leveraged Bear Stearns and presided over it’s rescue/sale to JPMorganChase.

While the connection of some of these folks to the Current Financial Crisis(TM) range from obvious to tenuous, I generally like the list because it highlights the fact that “blame,” to the extent we need to find it, belongs with a large number of people across many industries.

It’s a welcome refresher from the “bash the banks” mentality that seems to have saturated our media and our leaders over the last couple of months.

Categories: Money Talk, News and/or Media | No Comments »

What Happened? A Summary of the Homeowner Affordability and Stability Plan

Friday, February 20th, 2009

In the spirit of my previous post – What Happened? A Summary of the Financial Crisis, I present what I hope will be a factual, non-partisan view of President Obama’s recently announced plan to reduce home foreclosures – the Homeowner Affordability and Stability Plan.

If such things interest you, click below the fold. Otherwise, please enjoy my next post, which makes reference to alcohol, gambling and sex.

Read the rest of this entry »

Categories: Money Talk, Political Rantings | 5 Comments »

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