"Why are we supposed to hate Elizabeth Warren?"

That's the question Rod Dreher asks after reading this Vanity Fair profile.

The Woman Who Knew Too Much

My suggestion: libertarians and libertarian conservatives are ""uneducated, and easy to command."

The (conservative) case for financial reform

Matthew Continetti:

Because the Republicans have paid no cost for opposing this president, they may be tempted to stand athwart any financial reform bill that comes up for a vote, no matter how sensible some of its ideas may be. That would be misguided. The public may not like the solutions the Democrats have put forward to address America's problems, but that does not mean it suddenly has fallen in love with Vikram Pandit, Jamie Dimon, and Lloyd Blankfein.

When Joe Six Pack reads the paper, he learns about a group of insiders at one end of the DC-NYC megalopolis bailing out insiders at the other end. He has little affection for both. If the GOP is serious about becoming the party of the people, serious about shifting power from Washington and New York, serious about unleashing competition and favoring the innovator over the incumbent, why not back free-market measures against an entrenched financial elite?

Arnold Kling:

Big banks are bad for free markets. Far from being engines of free enterprise, they are conducive to what might be called “crony capitalism,” “corporatism,” or, in Jonah Goldberg’s provocative phrase, “liberal fascism.” There is a free-market case for breaking up large financial institutions: that our big banks are the product, not of economics, but of politics.

Too big to fail means big enough to bully

Jamie Dimon and JP Morgan on the Dole

How the bank puts politicians and taxpayers over a barrel

It's a must read.

Unbelievably good

Matt Taibbi takes down David Brooks:

Populism: Just Like Racism!

And even if I were to accept the Brooksian view of an upper class that must be looked to to fix things and take care of the lower classes and create the needed wealth to help us escape our economic crisis, the whole point is that this upper class he is talking about has abdicated that very responsibility — and, perhaps having reached the cynical conclusion that our society is not worth saving, has taken on a new mission that involves not creating wealth for all but simply absconding with whatever wealth is remaining.

It’s not pessimism or “combative divisiveness” to talk about these problems and insist that they get fixed. On the contrary, it’s a very positive view of what citizenship is to believe that everyone has a real role in fixing his country’s problems, and that when we identify problems, we should try to do something about them because we might actually succeed.

On the other hand, telling oneself that when powerful people “rig the game” one should just tolerate it, because one’s best hope for seeing the situation fixed rests in hoping those same powerful people fix it themselves — I would describe that as pessimism, or something worse than pessimism. The whole point of America is that we are all supposed to be our own masters, never viewing anyone as being by birth or situation inherently better or more capable than ourselves, and so the notion of relying upon some nebulous class of investment bankers to “channel opportunity” from on high strikes me as being un-American.

If there is a Republican who aspires to be Reagan 2.0, the best thing they can do is read Taibbi's reporting on the Bubble and Crash. The game-changing candidate will be the one who combines an intelligent appreciation of Hayek with a clear-eyed willingness to address the need for financial reform.

Hint-- Jamie Gorelick, Larry Summers, and Barney Frank are gifts that keep on giving.,

Note that Ann Coulter gets it.

Executive compensation and the financial crash

Cashing in Before the Music Stopped


According to the standard narrative, the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives. Many – in the media, academia and the financial sector – have used this account to dismiss the view that pay structures caused excessive risk-taking and that reforming such structures is important. That standard narrative, however, turns out to be incorrect.

It is true that the top executives at both banks suffered significant losses on shares they held when their companies collapsed. But our analysis, using data from Securities and Exchange Commission filings, shows the banks’ top five executives had cashed out such large amounts since the beginning of this decade that, even after the losses, their net pay-offs during this period were substantially positive.

In 2000-07, the top five executives at Bear and Lehman pocketed cash bonuses exceeding $300m and $150m respectively (adjusted to 2009 dollars). Although the financial results on which bonus payments were based were sharply reversed in 2008, pay arrangements allowed executives to keep past bonuses.

Fairly important in light of this:

Is the Global Financial System in a “Doom Loop”?

Sheila Bair: Our modern Cassandra

The New Yorker has an interesting article on the head of the FCIC.

Sheila Bair and the White House financial debate

It says something disturbing about the culture in Washington. Here we have a woman who tried to prevent the Enron disaster (in 1993!) and who raised red flags about the subprime market in March of 2007.

Yet, she now finds herself on the outside as we toy with regulatory reform in financial services.

A sensible and informed outsider on the problems in the credit card industry

In their own interest

The author points out that the beggar thy neighbor strategy of rate hikes has risks that card issuers are ignoring in their desperation to prop up quarterly earnings.

One reason that banks find themselves in this mess is that the "moralization of credit" i've discussed before. Banks are run by transactors (people who pay off their card every month). Their best customers are revolvers (people who carry a balance and pay interest.) Many (perhaps most) transactors view revolvers as stupid and/or immoral.

Thus, the people making the decisions at banks look at their best customers with an arrogant contempt.

That is a bad starting point for making decisions.

And BTW, Allahpundit is an idiot

But first, some smart ideas on reforming the banking system.

We Need Smaller Banks Now

If conservatives had their act together, they could seize the issue of financial reform and craft a market-friendly solution that addressed the key factors that drove us off the precipice last fall.

Instead we get bilge like this from Allahpundit at Hot Air:

Good news: Responsible credit-card users to “subsidize” deadbeats now

So much idiocy packed into such a short post.

1. Note the tone of moral outrage and angry condescension. This is the "moralization of credit" in action

2. There are none so blind as those who will not see. Allahpundit shows us what ideology-fueled naivete looks like. The starting point for his "argument" is a statement from a paid industry flack. Rightwing bloggers never trust politicians and their PR mouthpieces. When it suits their purposes, however, they will swallow whatever swill the private sector churns out.

3. Points 1 and 2 lead to the most egregious error. Allahpundit gets it wrong about who is subsidizing whom.

For twenty years, credit card borrowers have paid for the free riders who pay off their full balances each month.

I should know, i worked in the industry for 10 years at two very large issuer/banks. We scrutinized customer profitiability from every angle. Those people who paid interest (Allahpundit's "deadbeats") generated the profits. "Responsible credit card users" lost money for the bank.

See also:

Diseconomies of scale

Hard truths that rarely get mentioned

A very good case can be made that California's developers, mortgage lenders and house-hungry but income- deficient residents, with state and local officials as enablers, created an unsustainable housing bubble. And when that bubble burst, leaving holders of mortgage bundles – many of them overseas banks – with little more than toilet paper, it created a banking crisis that spread to virtually every other segment of the global economy.

No, it was not confined to California. It happened in a few other high-growth states such as Florida, Arizona and Nevada. But nine of the 10 top issuers of subprime and no-documentation mortgages were headquartered in California, and the state has been ground zero for the collapse of those mortgages as adjustable interest rates "reset" upward, having recorded more than a half-million foreclosures and other symbols of distress.

Currently, another 400,000 home loans in the state are delinquent because the economic crisis that was spawned by the banking crisis means hundreds of thousands of California families have lost their incomes – folks who were reasonably good credit risks originally – and cannot make their mortgage payments.

RTWT

This doesn't seem right

American taxpayers shell out trillions to save big banks.

Banks then layoff American taxpayers in order to hire cheaper workers brought over from India.

I thought the H-1B visas were supposed to be used to fix local labor shortages in critical skill positions.

There is no way that banking, with all the layoffs, has a labor shortage.

And people wonder why voters support limits on executive compensation.

Remember children, it is hypocrisy that makes a story big news

You know, like the Larry Craig scandal or Mark Foley.

That's why you can expect this story to lead the evening news for days on end.

Maxine Waters: Banking on Hypocrisy

A solution for the banking crisis

David Warsh outlines a surprisingly workable solution:

Late Starter

What role did RE-regulation play in the banking meltdown?

Regulation and “Mark to Market” Accounting Rules

Few people realize how much of the present damage to markets is caused by the new regulations imposed by Sabannes Oxley and the “mark to market” rules imposed by FASB. How do you mark to market when there is no market? The market for troubled loans has dissolved for two reasons: no one knows what they are worth, and if an investment bank takes the loans into its portfolio it must mark them at the market price. The market is illiquid and facing not mere risk. They are facing uncertainty. No one knows what the values are or what the probabilities are.

Notes on the current crisis


Jamies Gorelick is emblematic of a large part of the problem.

Mistress of Disaster: Jamie Gorelick

Making sense of the economic crisis

It is bad enough that insiders like her bounce from failure to failure while collecting huge paychecks. What is really galling is the lack of scrutiny people like Gorelick receive from the “watchdog press”.

No surprise. When her conflict of interest on the 9-11 Commission came to light, she did not lack for defenders. Establishment pundit David Ignatius raced forward to denounce criticism of his “friend” as partisan smears. In such an environment, you cannot expect the MSM to look into the actions of sharp operators like Gorelick, Raines, or Johnson.

The greater sin of the elite media is the fairy tale version of Washington they foist upon their readers/viewers. In their telling of the story, the Party of Free Enterprise wages a vicious, partisan war against the Party Opposed to Big Business.

The reality is something far different. Liberal Democrats like Chris Dodd, Barack Obama, and Barney Frank received huge sums of campaign cash from Freddie and Fanny. Joe Biden watches out for the interest of credit card giant MBNA while his family dabbles in running hedge funds.

The fairy tale has been obsolete for decades. The Democrats made their peace with Big Business in 1975 when Phil Burton and Tip O’Neil realized that they could use corporate money to preserve their post-Watergate majorities.

The Beltway and Wall Street seem so connected that the ethos of crony capitalism prevails. The Republican Secretary of the Treasury, a former chairman of Goldman Sachs, crafts bailouts with the input of the current chairman of Goldman Sachs. Should anyone raise questions about the propriety of this cozy deal-making, both men can count on a ringing defense from a past Democratic Treasury Secretary and the Democratic Governor of New Jersey. Oddly enough, both men are Goldman alums.

The fairy tale conflict and cozy bipartisan reality is a negative by-product of the “mediated democracy” Powerline discussed.


There seems to be a fatal contradiction in free market theory when it comes to financial services. On one hand, “too big to fail” is cold unpleasant reality. The terrible thing is that it encourages big firms to take too much risk because the Feds will have to save their bacon to avoid a financial meltdown. Right-wingers hate this.

At the same time, they hate anti-trust action. Therefore, they permit more and more financial services companies to reach that “too big to fail” threshhold.

‘Tis a puzzlement.

In our market research in consumer banking we ran into a concept called “the moralization of credit.” A certain segment of the population looks at how their neighbors manage their money through a prism of “right and wrong” not “prudent or unwise”. I hear echoes of that in many conservative commentators.

Frequently, these moralists seem most offended by the borrower who cannot pay, not the banks who encourage the borrowing (and turned a tidy profit for a time.)

Yet these same conservatives recognize that the drug dealer is a bigger villain than the addict. How is credit different from dope?

I think a sensible conservative has to add a little Niebuhr to his Hayek. We cannot expect men in groups to behave as morally and as responsibly as men will as individuals. That does not change just because the group is a for-profit corporation.

A sad quirk of fate is that McCain did more than most senators to address these problems before they became a crisis. Yet, he does not get credit for his foresight. Instead, the economic bad news will probably cost him the election.

In the aftermath of this crisis, many companies will fail, or merge, or be taken over in a shotgun marriage. Nearly everyone will blame the unforeseen credit crunch, market meltdowns, etc., etc. in many cases this is just a new form of failure laundering. The true cause of their problems are bad strategies or poor management. The broader economic problems just provide a convenient fig leaf to hide these executive failures.

There is a special class of market victims in these sorts of bubbles and they get almost not attention. These are businesses who tried to manage prudently while the irrational exuberance was rising toward flood tide. In the Hayekian/Darwinian fairy tales of the Right, these firms will step forward to pick up the pieces. The reality is that many of these firms have disappeared. What now looks like prudence was formerly condemned as stodgy, unimaginative, and out of touch. Their lagging stock price made them takeover bait for the glamorous high rollers who then crashed and burned. Other once prudent businesses replaced their “underperforming” executives with aggressive charismatic executives who drank freely of the bubble Koolaid.

The Bush-Cheney administration has worked assiduously to restore the power and prerogatives of the executive branch. They have been curiously loath to wield those powers at critical times. We saw it first in their lackadaisical efforts to win the Iraq War. We saw it again in the present economic mess.

Hmmm, jealous of its prerogatives yet indolent in governing. That sounds more like a decadent monarchy than a vigorous Jacksonian chief executive. I think the Right got Bush wrong. Today, he seems more like G.W. Bush II of Connecticut than he does the forceful W from west Texas.

Bankruptcy Reform

One of the reasons the "bankruptcy reform" effort was successful is that Americans have a deep uneasiness about the use of unsecured credit.

I've spent most of my career in banking and actually worked for two large credit card companies. The uneasiness showed up all the time in our consumer research. A large proportion of transactors (those people who did not pay finance charges) believed that people who did borrow on credit cards were lazy, feckless, and stupid. This attitude was widespread and persistent. Researchers dubbed it the "moralization of credit."

Revolvers (those who did pay finance charges) were a lot like cigarette smokers. They were aware of others's disapproval and would often lie about their behavior. No surprise that no one could organize them to oppose the bill.


This moralizing seems only to apply to individuals. Corporations do not face thee same obloquy. Donald Trump has used the threat of bankruptcy to restructure his corporate debt several times, but few think that this disqualifies him from playing the savvy business titan on TV.

Winner’s Curse

Synergy Fest has a series of interesting posts on Winner's Curse. I especially liked this one that relates the author's first hand experience with the phenomenon and its causes.

The commercial banking sector bought itself an expensive dose of the curse in the 1990s. As the industry consolidated, banks overbid for acquisition targets and hurt their balance sheets and stock prices. Exhibit A is usually First Union and Corestates, but there were many others.

What is interesting is that the banks who were hurt by overpaying in 1997-2000, were those who had been successful with an acquisition strategy from 1985-97: First Union, Bank One, NationsBank, etc.

I can think of several reasons why these banks stumbled:

1. Business as usual at an inflection point. In the late 80s, the bank acquisition market was not an auction. There were only a handful of regional banks doing the buying and numerous attractive targets. Under these conditions, winner's curse does not apply.

When conditions changed-- more bidders, fewer targets-- not many executives noticed. Growth by acquisition was still the strategy.

It's hard for any organization to reject a successful strategy based on the hypothesis that conditions have changed.

2. Go fever. Once top executives set their sights on an acquisition target, it is hard to hit the brakes. There is a powerful temptation to torture the numbers and make the pro formas support a higher price.

3. Grow or be eaten. When the assumption is that the industry is destined to have 3 or 4 megabanks, executives fear that standing pat means they will eventually become prey. This is a powerful incentive to justify a high bid for an acquisition which greatly enlarges their company.

While it is easy to see the problems today, most journalists and stock analysts promoted the acquisitions until the unfortunate results were manifest. One brave exceptions was Tom Brown who actually got fired because he spoke out against several expensive mergers. His company has a blog which makes for interesting reading for anyone interested in the financial services industry.

Side bar: Winner's Curse can also apply to the job market-- especially when firms hire outside executives for senior positions. The most enthusiastic candidates with the biggest promises is probably not the one with the best appraisal of the realities.