UBS is dealing with an outflow of its top talent by raising pay. Of course, since they’re constrained in paying bonuses, they will have to raise salaries, instead, increasing the risk of their business with higher fixed costs, and insuring that they pay more in a downturn than they otherwise would have.
Here is a scary comment on normally conservative Swiss sensibilities:
On Sunday, paper SonntagsZeitung reported the results of a poll that showed 75 percent of participants would vote in favor of government-imposed restrictions on management pay in Switzerland. Only 9 percent said they would vote against.
Don’t ask me why any country as attractive as Switzerland would want their only wealthy people to be foreigners.
Assistant Professor of Finance Linus Wilson has done a valuation of the warrants bought by Old National Bancorp from the U.S. Treasury to satisfy repayment of the Capital Purchase Program, the investment that healthy banks everywhere are dying to pay back. Prof. Wilson has estimated that Treasury accepted a discount of up to 80 percent. Tyler Durden comments:
While these days, when $9 trillion misplaced here or there by the Federal Reserve is taken as almost a given, the amounts in question are nominal, it merely underlines the continuing trend of short shrifting taxpayers at the cost of established banking interests. One can be sure that what is valid for ONB, is more than valid for Goldman Sachs, Citi and BofA.
Wilson summarizes it best:
U.S. taxpayers do not appear to be receiving fair market value for the risky securities that they purchased. Policy makers should be troubled because Wilson estimates that the CPP warrants could be worth between $5 billion and $24 billion based on May 1, 2009 closing prices. It could mean billions of dollars in lost revenue if the U.S. Treasury continually negotiates deals at the low-end of or below fair market value. Further, if the U.S. Treasury agress to sell the CPP warrants below fair market value, then the estimates of the subsidies involved in the CPP investments by the Congressional Budget Office (2009) and the Congressional Oversight Panel (2009) may be significantly underestimated.And here comes the kicker:
Many readers will not be surprised by this results. U.S. Treasury officials’ incentives are not as well aligned with the interests of taxpayers as bank managers’ incentives are aligned with the interests of their shareholders. For this reason, we should probably continue to expect the U.S. Treasury to negotiate a price that is below or on the low-end of the fair market value of the CPP warrants. Without a major change in the structure of compensation in the federal bureaucracy, which seems nearly impossible, the best hope for taxpayers is to sell the warrants to third party investors.
Of course, Treasury may have particular reasons for giving Old Bancorp a great deal on their warrants, besides simply not caring about a few measly millions. Taxpayers are oblivious to the amounts or the reasons. If the press gave them the information, which would require more financial literacy than possessed by their average readers, they would have no idea what to make of it. And, because this theft is invisible to the taxpayers, it means absolutely nothing to the bureaucrats managing their money.
But to hear it from our legislators, our country needs a massive dose of help in making its public corporations more accountable to their shareholders. Meanwhile, the largest accountability gap on earth continues unabated under the very noses of Congress, while their putative oversight focuses on pointy-headed academic dissertations about what Treasury ought to be doing.
One of my dear senators Chuck Schumer, has introduced a “Shareholder Bill of Rights” in his august body. After the reaming investors have gotten from recent government actions, it seems appropriate that the government offers them some relief. So what does this bill promise?
– Say on pay
– Proxy access
– A risk committee
– Separation of CEO and Chairmanship
– Annual election of all directors
If this sounds like an activist wish list without any identifiable link to the current financial problems, you’re right. I defy anyone to point to how any of these items, or all of them in tandem, would have prevented a single liars loan, or the artificial inflation of asset prices that drove so much behavior the wrong way, or would have stopped a single homeowner from taking on a mortgage they couldn’t afford. By insuring directors are elected each year? By providing access to the proxy statement to hedge funds and union chiefs? Aren’t the people arguing that a risk committee could have contained risks the same ones who argued that compensation committees could contain compensation?
“It has become apparent that one of the central causes of the financial and economic crises we face today is the widespread failure of corporate governance,” Schumer, a key member of the Senate Banking Committee, said in a letter to fellow lawmakers.
Like any good lawyer, Schumer selects his facts carefully. If any knowledgeable observer was to rank the central causes of the financial and economic crisis we face today, corporate governance would not possibly make the top ten. It would fall well behind such government induced causes as Fed loose money, federal guarantee of Fannie and Freddie bonds, CRA quotas, failure of regulators to identify fraud at SEC registered funds like Madoff’s…
Corporate governance has been far from perfect. But our current downturn may not have been preventable by any combination of public and private behaviors. Market downturns happen naturally; they create sparks and fires in various parts of economy. This downturn could, however, have been a far less damaging if the government had not thrown gasoline all over our economic structure.
Peter Orszag, White House OMB director, published an editorial about the importance of containing health care costs, and how to do it. The portion of our health care that is nationalized, i.e., Medicare and Medicaid, indeed threatens to bankrupt the country. From this, Mr. Orszag concludes that “we” are in big fiscal trouble and “we” need to do something about it, “we” being code for “the government.”
Mr. Orszag is optimistic about what “we” can do:
Representatives from some of the most important parts of the health-care sector — doctors, pharmaceutical companies, hospitals, insurers and medical-device manufacturers — confirmed that major efficiency improvements in health-care are possible. They met with the president and pledged to take aggressive steps to cut the currently projected growth rate of national health-care spending by an average of 1.5 percentage points in each of the next 10 years. By making this pledge, the providers and insurers made clear that they agreed the system could remove significant costs without harming quality.
A Bolshevik’s word is his bond. Bolsheviks are in the habit of fulfilling promises made by them. But what does the pledge to fulfil the control figures for 1931 mean? It means ensuring a total increase of industrial output by 45 per cent.
Like Stalin’s central planners, Orszag is using this faith in government-led change to make us all into guinea pigs of centrally planned reform. Orszag ignores the 800 lb. gorilla standing next to the guinea pig, i.e., the virtue of competition.
When one casually looks at the areas of our economy, they can judge the relative availability, variety, quality, and cost of different parts:
More competitive … More regulated/socialized
Private/Charter schools Public schools
UPS, FedEx Post Office
Private railroads Amtrak
Phone service post-1984 Phone service pre-1984
Anything pop out?
Imagine what restaurants would look like if their menus, prices, and policies were dictated by central planners.
Never mind what they would look like if they were actually owned and operated by the government.
Unfortunately, most people can’t visualize a free market in health care because they’ve been told, and appear to believe, that our current health care system is “free market.” To others of us, it appears as if the government is heavily involvedin nearly all areas of health care, especially insurance, and that the more it has gotten involved, the worse things have gotten.
President Obama, indicating that no aspect of corporate management is beyond the direct control of government, is now proposing to establish pay standards for the entire financial industry.
The administration is discussing issuing “best practices” to guide firms in structuring pay…
Government officials said their effort, which is just beginning, isn’t aimed at setting pay or establishing detailed rules. “This is not going to be about capping compensation or micro-management,” said an administration official. “It will be about understanding what is the best way to align compensation with sound risk management and long-term value creation.”
All this fuss about alignment is built on the clear evidence of Wall Street pay being clearly insensitive to performance. For goodness sake, don’t those greedy people know that we had a crash in 2008? Why do they continue to pay themselves as if nothing happened?
Boom and bust on Wall Street
Oh, well, I guess the real question is, why did they pay themselves any bonusesat all? Well, the reason doesn’t make any difference to this discussion. This is not really about alignment or risk management. If it were, the government would look to its own incentives, and their utter disregard for the incentives they have created–and continue to create–for making key players in the financial markets completely insensitive to the downsides of the risks they take. This is really about scoring more political points against a politically vulnerable target.
Options being considered by the administration and regulatory officials include using the Federal Reserve’s supervisory powers, the power of the Securities and Exchange Commission and moral suasion, the paper said, adding that officials are also looking at what could be done legislatively.
I love the part about moral suasion. The U.S. government has grabbed the moral high ground on financial management. That’s rich. But I’m looking around at my fellow citizens to see if they’re in on the joke.
Meanwhile, we in the compensation community are trying the best we can to help our clients not place themselves at risk of ending up like Dick Fuld or Jim Cayne (who, contrary to the implications of these proposed “options” really are not who Wall Street bankers aspire to emulate) while navigating the most treacherous set of incentives and constraints ever laid down by government.
Residents in Greenwood, Ind., planned to widen a road leading to I-69 in hopes of attracting businesses, Mayor Charles Henderson said. Instead, a regional authority gave the city $1.2 million in federal stimulus funds to build a pedestrian trail bridge over a road. “It does not stimulate long-term economic development, but we’re going to take that money,” he said.
Most people admitted that trying to quickly spend $780 billion just to spend it would yield some inefficiencies. One of the many things the bill writers didn’t consider is how the raw amount of money offered in different ways to states and cities would interact to place different hands in the same pocket.
Charlotte received far less than that — about $4 million from the stimulus funding for road refurbishing — only to learn that the state would take back nearly $4 million it had planned to provide to the city in highway funds…
In Rhode Island, Providence Mayor David N. Cicilline, a Democrat, said city schools were happy to get about $10.2 million in federal money. Then the state Legislature cut state school aid by the same amount. “It clearly undermines the intention” of the stimulus legislation, Mr. Cicilline said.
And how are state governments deciding where to give and take these funds?
Pat McCrory, Charlotte’s mayor, charges that states often hand out federal dollars “by politics and not by need.”
Perhaps Charlotte is not exactly Chicago, but c’mon. Mayor McCrory cannot be such a political neo-phyte that he is actually stating this in surprise.
Myth 1: Hedge funds attract the best and the brightest
Not more so than any other industry. In fact, it attracts its fair share of cranks and fools. Case in point: One can accuse a president of many things. Keeping his campaign promises isn’t one of them:
A top Obama fundraiser and hedge fund manager said: “I’m appalled at the anti-Wall Street rhetoric. It was OK on the campaign but now it’s the real world. I’m surprised that Obama is turning out to be so left-wing. He’s a real class warrior.
Which brings us to the second myth.
Myth 2: Hedge fund managers are a bastion of Republicanism
Most people mistakenly think of Wall Street in general as pretty Republican. Most people, as usual, are wrong.
"The report says that we might need to shore up those levees"
I have often noticed how business regulation is almost completely headline driven. If a photo of rats in a restaurant makes it on the front page of the local paper, city council members will stand up before the cameras and announce hearings the very next day. If a large business gets an offer from a foreign firm, and instead of portraying this as a vote of global confidence the press chooses to portray it as a foreign invasion, congressmen will step over each other to get to the microphones first to denounce it, even to the point of advocating law breaking. I see this phenomenon all the time with regards to compensation and governance. Serious issues get treated with populist sound bites. The intended effects of poorly conceived legislation invariably get perverted into consequences no one intended.
Given this pattern on visible issues, it should come as no surprise that we see the opposite–political neglect–on issues that could actually benefit from the attention of government, like water management.
Out of sight, water infrastructure remained largely out of mind for U.S. policymakers in the federal economic stimulus effort. The $787 billion program allotted less than $10 billion for drinking and wastewater projects.
State and local officials will not turn the cash away but they say much more is needed to fix and add capacity to the nation’s water systems.
“It’s something that concerns me, because we pay so much attention to things we see and this is something we don’t see — until it’s too late,” Maryland State Treasurer Nancy Kopp told Reuters in a recent interview.
“In Maryland and other eastern states there have been repeated episodes in which pipes carrying clean water or sewage have collapsed,” Kopp said. “Over the next 20 or 30 years, water systems are likely to hit obsolescence.”
I think that one of the reasons that Swiss government is so much more efficient in many ways is that their politicians are more anonymous than ours. They don’t have as much opportunity to jump in front of the spotlight because their society is not so politicized. (American society is relatively unpoliticized, too, compared to most of the rest of world, thank goodness, so far.)
Perhaps we should amend our Constitution to compel our legislators to remain anonymous or random, kind of like jurors, unable to discuss any issue they are working on with the press. I can’t help but think it would make the institution a little more serious. It might make the legislature less responsive to the crisis du jour, but it would prevent them from legislating about things that really deserve more than a day of contemplation. Removing the klieg lights might also encourage them to spend a little more time contemplating items that currently get less serious attention than they deserve.
Of course, nothing will get a politician to better allocate their time and attention better than value-based incentives.
Did Fifth Third need $2.6 billion in additional reserves, instead of the $1.1 billion claimed by the final results of the “stress test”? Or was this the kind of test where you could negotiate your grade?
The basic problem with estimating required capital reserves is that we’re measuring an inherently uncertain variable, i.e., the likelihood of a bank running out of cash under very bad economic conditions. To properly evaluate this, the analyst must quantify the bank’s assets and liabilities, the degree to which they would vary under a broad range of possible future environments, including how the different parts of that environment would vary with respect to each other, as well as how significant changes in those various parts would impact the various assets and liabilities of the subject bank.
I would guess that even if the Fed came close to having the tools to do this right, political management would render it impossible to properly bring those tools to bear on the problem in the few months these tests have been conducted.
Given the difficulty of the question, the inherent uncertainty around any answer, and the practical stakes held by distinct interests in those answers, we have a recipe for a very silly exercise, which is what we got. While it’s clear that the banks wanted to have as low a number as possible for the capital deficit, it’s not clear that the government had any interest in seeing any particular number for any particular bank, except that the overall report should look like it came up with plausible answers. In other words, all the banks couldn’t have a zero deficit, or the same deficit, or anything else that looked like what a third or fifth grader would have come up with on an afternoon with a spreadsheet. Politics dictated that the numbers couldn’t be too big, either, enough to spook the markets into thinking that widespread insolvency was a possibility.
So, we ended up with a negotiation. This article gave a hint about how that went:
“In the end we agreed with the number. We didn’t necessarily like the number,” said Wells Fargo Chief Financial Officer Howard Atkins. He said the company was particularly unhappy with the Fed’s assumptions about Wells Fargo’s revenue outlook.
At Fifth Third Bancorp, the Fed was preparing to tell the Cincinnati-based bank to find $2.6 billion in capital, but the final tally dropped to $1.1 billion. Fifth Third said the decline stemmed in part from regulators giving it credit for selling a part of a business line.
Citigroup’s capital shortfall was initially pegged at roughly $35 billion, according to people familiar with the matter. The ultimate number was $5.5 billion. Executives persuaded the Fed to include the future capital-boosting impacts of pending transactions.
SunTrust Banks Inc. also persuaded the Fed to significantly reduce the size of its estimated capital gap to $2.2 billion, after identifying mathematical errors (!) in the Fed’s earlier calculations, according to a person familiar with the matter.
PNC Financial Services Group Inc., saw a capital hole materialize at the last minute. As recently as Wednesday, PNC executives were under the impression they wouldn’t need to find any new capital, according to people familiar with the matter. Thursday morning, the Fed informed PNC that it had a $600 million shortfall.
So, does PNC really need $600 million to make it through a really bad time (worse than what we’ve just gone through)? Does Fifth Third need $1.1 billion or $2.6 billion? Will the $1.5 billion difference make then more or less competitive? How did competitiveness figure into the estimation of their survivability? Somehow, I doubt that the central planners come up with a better answer than doing nothing. But doing nothing is clearly not an option for the central planners.
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