Bearish News

Ok, so that might be an exaggeration/lie. But I was flattered when I first read Who cares if Wall Street ‘talent’ leaves?. It looked an awful lot like something I wrote in April, Don’t Fear the Brain Drain. The dozen or so readers I had at the time may remember it.

Actually, the CNN/Fortune article is quite good. And it warms my heart to see an outlet like CNN publishing rabble-rousing stuff like this. The fact that the piece is spreading like wildfire is good news. It means more people are waking up to the fact that our finance sector needs to be downsized.

The editorial focuses on exec pay caps; whereas mine was about how the “brain drain” is a necessary part of rebalancing our economy. And that many of these executives are essentially glorified salesmen, rather than the financial geniuses they are often portrayed as. (I wonder…. does a statement like that hurt my chances at landing a 7-figure job on Wall Street one day?)

Anyway, here are excerpts from Fortune/CNN’s piece:

There’s no need to fear a Wall Street brain drain — despite the crackdown on pay by Washington…

Critics warn that reining in pay makes it hard to keep talented employees. Hemmed in, institutions like AIG, Bank of America and Citigroup could lose their best people.

Still, we say Godspeed to this ‘talent.’ After all, the traders and suits in the corner offices don’t exactly have an unblemished track record. In 2008, Citigroup, BofA and Merrill Lynch (since acquired by BofA) 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.

I would add that America’s leaders are not allowing finance to heal itself. Orderly bankruptcies would cure the brain drain naturally. We need to press them to do so, but it’s probably already too late.

I’m a free-market guy, so it pains me to say the following. But if they don’t put these zombie banks out of their misery, we need to force them to at least break up the TBTF institutions (or SDIs, systemically dangerous institutions, as William Black calls them).

Share and bondholders need to be wiped-out at insolvent firms. Moral hazard is one of the most pressing issues we face. In many cases, boards and upper management also need to be replaced. You can be sure that if the shareholders were wiped, this would happen naturally.

I’m torn on pay caps for financial firms, but am coming down on the pro-side. Those who say that this is socialist are misguided. Every big bank (and quasi-bank) is essentially a government-backed entity. They are huge beneficiaries of public support.

It is unacceptable to have bonuses like we’re seeing at Goldman Sachs and others. These “banks” depend on the taxpayer in many ways. I’ll list a few:

• FDIC Debt Guarantees, TLGP
• TARP, direct bailouts
• Artificially low interest rates, which benefit banks while punishing savers and retirees. Also forces people into riskier asset classes
• Selling garbage mortgage-backed securities to the Fed
• Transferring mortgage risk to Freddie, Fannie, and the FHA

It’s been 80 years since Black Thursday. On that day in 1929 stocks plummeted on record volume. Big banks got together and propped up the market by buying huge blocks of shares. That only delayed the pain, of course. It reminds me of our current short-sighted attempts to prop up the markets. More info.

In the spirit of “those who don’t learn from history…” I suggest watching The Crash of 1929, a great documentary from PBS. There are some fascinating first-hand accounts from the people who lived through it. Ignore the fuzzy image, that’s just Google Video being wonky. It’s a full 53 minutes long, and the picture isn’t bad. (For more historical perspective, see these cartoons from the Great Depression.)

h/t Jesse.

We have to tolerate the [pay] inequality as a way to achieve greater prosperity and opportunity for all -Brian Griffiths, Goldman Sachs International Adviser

Griffiths made the remarks while arguing that outsized banker pay will boost the economy, via increased spending. Bloomberg is the source, and unfortunately they didn’t provide too much more info. Lord Griffiths made the statement during a panel titled “What is the price of morality in the marketplace?”.

“Smartest Guys in the Room” Defense Not Working Anymore

Looks like now everyone realizes Goldman is getting tremendous benefits from the Feds, they’ve been forced to switch-up their defense tactics. They can’t use the old “hey, we’re awesome at what we do” defense anymore.

But I don’t think the trickle-down argument is fly either. Too much populist outrage for the “We pay taxes on our Porsches, and that helps everybody” case to work.

Alms For the Poor

The charitable-giving angle isn’t working either. Goldman recently pledged $200m to charity in an attempt to generate some good PR. Doesn’t look like it was successful so far, and it may even be fueling the Goldman-haters’ fire. But Mr. Griffiths mentioned the “alms for the poor” message too:

To whom much is given much is expected. There is a sense that if you make money you are expected to give.

There is a sense?! These guys are ripping off the world, and there’s only a sense they should give something back? How about everything? All bonuses from the last 5 years clawed back? That would be a good starting point for negotiations.

When a bank has access to the discount window, has raised $50b in taxpayer-guaranteed debt, and benefits in other ways from the Feds’ actions, it’s ridiculous that they’re handing out record bonuses. They shouldn’t be getting bonuses at all. The balls of a guy like Griffith are mind-boggling.

Related:

Letting Goldman Roll The Dice